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Wednesday, 9 November 2011

The Credit Crunch

For those of you who are unsure what the 'credit crunch' is, and how it started, watch this simplified, but concise video that explains it.

http://www.youtube.com/watch?v=wGxmgwUWNr0&feature=related

To summarise, occurring in 2008, the credit crunch was the result of over lending to people who are high risk and thus the inability of debtors to pay back their loans. In a simplified version, banks make money through a process called credit creation, lending more than is initially deposited. They know that people will deposit money back into the bank that they borrowed from and so can afford to lend more than they have (given a low liquidity ratio: the proportion of their assets - savers' money - that they keep).

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