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The Credit Cruncher was conceived to help you to keep up to date with credit crunch and recession developments, it provides some helpful credit crunch advice and it addresses personal debt. The Credit Cruncher also seeks to explain how the credit crunch started and shed some light on the worldwide recession. Recently, we have begun to look at how BREXIT will affect the UK economy. Please feel free to leave comments where relevant.

10 Jul 2008

Is the Credit Crunch the new Great Depression?

Are things going to get as bad as they were in the 1930's? Well no because living conditions nowadays are nowhere near as dire as when the poor had the queue for bread in the depression following the Wall Street Crash of 1929.
There are of course similarities that serve to illustrate the weaknesses of a market-driven economy.

'Black Thursday' followed a speculative rise in the markets due in part, to the introduction of new technologies which did not live up to market expectations. The new technologies of the nineteen thirties were the motor car and broadcasting. The new technologies which have caused excitement, then cold-feet in more recent financial history were related to the 'Dot Com' boom and the new optimism that accompanied it. We know now that many of these companies were fatally over-valued, and the resulting decline in the market caused a huge crash in 2000. There were no great scenes of poverty across the western world as a result on this crash, but is any of this related to our current crisis?

Much was done to stimulate the market following the Dot Com boom and bust and some of this over-inflating of the economy could be at the root of our current credit crunch. This time, the trend was to buy buy buy property whatever the price, many people capitalising by investing in properties that they would rent out, the 'buy-to-let' market is one of the most talked about phenomenons. Properties aimed at the rental market have been popping up everywhere in the sure hope that buy-to-let investors would buy them. Along with this came the 100% mortgages and to top it all the '12months free mortgage' where the buy-to-let'ers had 12 months to get someone in to rent their property before they had to even pay a penny off the mortgage. the resulting 'boom' in mortgaging let to a corresponding 'bust' when the 12 month old chickens came home to roost...

The reality was that there was never the demand to meet the supply. Market prices of property had been driven up by the over eager buy-to-let entrepreneurs. Many potential first time buyers have been hit with high prices at a time when wages are not rising and where banks are getting nervous about lending. Those that want to rent have so much choice that they can name their own price, typically far lower than the mortgage payments that their landlords are obliged to pay. Buy to let is virtually dead, first time buyers cannot afford the over-inflated prices, the only good thing that can happen is that property prices must fall, and for those who over-stretched themselves and maybe foolishly took the 12 months free 100% mortgage deal are the ones who will pay.
The effect should be in these areas:
There will be some negative equity issues where those that bought at the peak cannot now afford to pay their mortgage. This could also have an impact where re-mortgaging seemed like a good idea... Those who looked to make a living from renting out properties might have to re-evaluate their position. General spending on 'luxuries' will decrease, we may keep the car that we were going to part-exchange or holiday at home rather than abroad. Some jobs will be lost as a result of the spending slow-down, but I don't see general despair and gnashing of teeth - just a little belt-tightening and a reality check.

Related posts:
Government Intervention
Credit Crunch News
The Multiplier

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