Henry Kravis said that economic strategies spread through universities like any other intellectual virus. In the case of our current global economic meltdown, there was an unrestrained presumption that anything that John Maynard Keynes said was automatically correct. This lead central banks on low interest rate growth policies that were unprecedented.
However, other schools of economics have posited that excessive credit expansion causes malinvestment. Essentially, if a central bank decides to create an incentive for cheap debt by lowering interest rates, there will be lots of false credit issued to companies and consumers. When interest rates are low, credit card debt elimination itself becomes easy. This is something which is purchased by speculators and sold for profit. This encourages consumers to go into more debt than they can actually afford when interest rates are higher. This causes banks to lend to companies who provide goods that no one needs. When the economic environment changes, banks realize their lending practices are not profitable. This has caused a credit crunch. Essentially, capital investors do not understand where to put their money. When you have major financial institutions and industrial manufacturers going upside down, nothing seems safe.
However, this is a natural market phenomena. When central banks seek to distort the value of money and debt through credit expansion, the market will use busts to reset everything. Central banks would do well to not cause these expansions, as economic crashes are hard on the consumer and worker. In fact, it is supposed to be the purpose of a central bank to ensure that the monetary policy is steady and safe.
The credit crunch is a sane reaction by banks to an insane policy. They have realized that they can not necessarily trust the interest rate decisions passed down by central banks. They are being more careful about which businesses need loans. They are also being stingier with debt to the consumer, which is good. Of course, you can always try to find some cheap home loans offer, something like offer that Honeyhomeloans.com.au has. They helping you find the cheapest home loans deal in Australia. Capital investment should be the purpose of debt, not the purchase of consumer products. The global credit crunch is trying to fix the money supply where the policies of central banks can not.
We’d like to thank Miss Sue Lang VEC on this contribution to our web page.