When we talk about Credit Crunch we are referring to a contraction credit due to a financial crisis, in which severe restrictions are placed on bank credit. It can also be the tightening of the conditions that clients have to access new loans offered by the corresponding entities.
In order to put this in motion, the Central Banks try to lower the interest rates to be able to control the economic and monetary policy and face the proposed objective.
Credit crunch example
Briefly, we are going to comment on an example of this credit restriction: the 2008 crisis. An attempt was made to restrict the credit in an environment with high risk, preventing it from spreading to other countries that had bought packages of securities that backed subprime mortgages and the rising interest rates that were causing unemployment to rise.
As a result, consumption and investment contract, indebtedness rises, and unemployment rates in some countries rise. Central Banks begin to raise interest rates and reduce the money supply, banks stop lending loans having an impact on families and companies. To this, we must add the high unemployment rates that followed the 2008 crisis, which implemented the economic and social malaise that was experienced.
Both the US and Europe took very different measures: the US injected liquidity to build confidence and for banks to lend money again, thus lowering official interest rates; for its part, Europe leaned towards monetary policies contractionary spending contraction to sustain inflation and neglecting employment and an improvement in access to credit to generate confidence. The latter caused the interest rate to fall later, having an impact on the economy and the variables that shape it.