Britain's Credit Crunch

Abstract: Many British banks are in crisis. Some have already collapsed. Four of Britain's largest banks are asking the Bank of England to bail them out. The problems these banks face stem from speculative investments. As a result of the losses on these investments, British banks have tightened their lending programs. This has led to a credit crunch, and as a result companies and individuals are finding it difficult to borrow money. This lack of credit availability is hurting the economy. The question is how best to work through this problem. British legislators are also considering the role the government can and should play in addressing this financial crisis.

Context: According to an essay by Andrew Stead published online on the ABCMoney website, in December of 2006 the United Kingdom was already in the throes of a massive debt crisis which had forced creditors to write off more than 1.4 billion pounds of bad debts. In 2006, individual debtors were only able to pay about 39 percent of the outstanding debt they incurred prior to their bankruptcy filing. According to Stead, part of the problem involved the fact that there was very little government regulation over consumer debt. Several steps have been proposed to ensure that Britain's form of personal bankruptcy does not become a panacea for individuals seeking to avoid their financial obligations.

Until the scope of the current credit crunch was fully understood, British banks were issuing bil

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ely short periods of unemployment. This makes banks more reluctant to lend money, especially higher risk and more speculative loans such as creative mortgages that require little or no down payment. Gumbel speculates that the combination of these factors almost guarantees that Britain's housing prices are going to fall, and when they do, British banks will be in serious trouble (Gumbel, 2008). An essay published in September of 2007 in Economist notes that the Monetary Policy Committee (MPC) of the Bank of England is making every effort to soften or avoid a financial crisis. The MPC is aware that so-called cheap money opened the door in Britain to risky lending and speculative investments as evidenced by investments in the U.S. subprime mortgage market. The MPC is facing criticism from bankers for not doing enough or not doing more to restore confidence in banks and the stock market. The Bank of England has been reluctant to intervene. It did not take emergency measures in August 2008 to provide additional liquidity to banks. Instead, it relied on a mechanism in which commercial banks that run short on cash can borrow cash from other banks at a so-called penalty rate of one percentage point above the base rate for short-te

Category: Economics - B