ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Surviving The Credit Crunch: Credit In Chaos, How Did It Happen? (Illustrated Guide To The Credit Crisis)

Updated on February 6, 2008

Globally a 'credit crunch' is beginning to take place. This has been seen in the sub prime mortgage arena in the USA, and its effect is likely to continue across the globe in 2008. More and more homeowners are defaulting on their mortgage payments, and eventually going into foreclosure. This is equally as bad for individuals as it is for the global economy as a whole.

But what do all these fancy terms mean? And how is all this going down? Why did this happen? This is a very simplified look into the processes that caused the current financial crisis that is sweeping America and the globe. To answer the questions posed at the outset, let's look at the way the economy has been operating over the past few years.

People had been earning money, but not enough money to buy the things they really wanted, like houses and cars, and fancy televisions and other sweet toys.

In the past people would have had to have made do with saving the money they had and buying what they could afford, when they could afford it.

However, as the economy is a consumer driven beast, (consumer driven meaning that it relies on people to consume ie, buy things) it was considered better for the economy if people could consume more.

This is where the notion of credit evolved in the form of credit cards and mortgages. Banks would lend money at an agreed rate of interest to people who wanted to have the things that they couldn't afford yet . The idea was that people would borrow enough to get the things they wanted, and then have enough money in their earnings to pay back the loan.

However things very quickly soured when people began to see credit as a viable means of getting whatever they wanted whenever they wanted. People started buying groceries on credit, and putting things that they normally wouldn't have thought of purchasing on their credit cards. Banks would lend hundreds, oftentimes thousands of dollars to people who would go out to the stores and come back with high end consumer goods. The economy was booming. Everyone was happy because the consumption fueled more production, which fueled more jobs, which fueled more money, which fueled more credit (more credit than money).

People had not one, but 4 or 5 credit cards. In some cases people were paying off credit cards with other credit cards.

The problem was somewhat relatively isolated to consumer goods at first, but it soon spread to the housing market. Mortgages had almost always been a means to buying a house, after all, very few people could save up enough for such a large investment, but where mortgages were once strictly assessed and tightly controlled to make sure that people could really afford the homes they were purchasing, the consumer frenzy drove people to apply for larger and larger loans on larger and larger houses.

People began living outside their means in every way possible, and as the debt mounted, it became clear that there was not enough real money in the economy to make up all this debt. People had literally borrowed not just more than they had, but more than anyone had.

Banks tried to disguise this debt by selling it to offshore markets as investments, but soon it became clear that the people who had done all this lovely consuming couldn't pay off the debts, making the investments bad.

As more and more people began to default on their mortgage payments, a crisis arose. Not only could people not afford the homes they were in, but they couldn't sell them either, as there were so many other people in a similar situation. Where housing prices had always been on the increase, they began to fall in many areas, leaving the both the mortgage sector, and the economy crumbling.

Thus cameth the credit crunch.


    0 of 8192 characters used
    Post Comment

    • Property-Invest profile image


      8 years ago from London

      Great hub about the credit crunch and why it happened. Do you think people will learn their lesson?

    • nikkiu profile image

      Nikki Uglow 

      10 years ago from Coventry

      Great overview of the reasons why!

      The credit crunch is actually a great opportunity to make money, not at other people's expense but by saving them money on essentials - please see my hub


    • moneymatters101 profile image


      10 years ago

      very good. I think it is important to understand credit basics. I offer tips in my hubs as well. Your information was very useful.

    • huba7 profile image


      10 years ago from Uganda

      Very informative hub, and for sure it comes at the right time given the existence of mini recession being talked about now in the US economy!


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)