Credit crunch timeline – Major changes in the US finance industry

Few years back, not many people were aware of the term ‘Credit crunch’, as it is now. Credit crunch can be defined as severe shortage of credit and money. Nearly the whole world experienced economic depression and credit crunch from mid of 2007 to the mid of 2009. Go through this article to get a brief overview of the credit crunch timeline.

Credit crunch – What it means

Credit crunch is a period when the banks and other lending institutions are too nervous to lend money; even if they lend, they charge much higher interest rates in order to cover the risks involved with it. This means, you have to pay higher interest rates on mortgages, and credit cards, if you plan to take out one during the credit crunch period. A credit crunch can be either a part of or separate from recession, which is considered to be negative economic growth for two successive quarters.

Credit crunch timeline (2007-2009)

The primary reason for economic recession and credit crunch (2007-2009) was housing bubble that was followed by high default rates. Read this section to know about other factors responsible for it and the credit crunch timeline.

2007

In 2006, subprime mortgage market was at its peak. People could take out home loans with bad credit record; however, they had to pay high interest rates for it. In 2007, these borrowers started experiencing problems in paying back these home loans. The borrowers could not refinance the properties as the housing bubble came to an end. The property price also declined. So, the lenders could not get back the money that they had invested on the properties. The US bank sector packaged subprime mortgages into mortgage backed securities (known as collateralized debt obligations) and sold them to investment banks that decided to generate high returns from them.

Some other major events in 2007 are given below.

  • Companies like, New Century Financial that specialized in subprime mortgages, filed for Chapter 11 Bankruptcy and cut about 50% of its workforce.
  • The Federal Government cut the rate at which it used to lend the banks.
  • The rate at which the banks used to lend to each other reached its highest level.
  • Swiss bank UBS announced losses of about $3.4 billion.
  • George Bush, the US President outlined plans to help homeowners facing foreclosure.
  • The Federal Reserve co-ordinated with 5 central banks all over the world to offer loans (of about billions of dollars) to banks.
  • The World Bank predicted that there world be a slow economic growth in 2008.

2008

  • The US Federal Reserve cut rates to 3.5%, the highest reduction in 25 years.
  • The IMF (International Monetary Fund) warned that potential losses from credit crunch could reach about $1 trillion or more.
  • There was a record fall in housing prices.
  • The financial authorities stepped in to assist Fannie Mae and Freddie Mac (the two large investors in USA) and they’re rescued by the US Govt.
  • Unemployment rate rose to about 6.1%.
  • Washington Mutual, one of the largest mortgage lenders in US, was closed down by regulators and sold to JPMorgan Chase.
  • The US House of Representatives passed a government plan in order to rescue the US financial sector.
  • The Federal Reserve cut its key interest from 1.5% to 1% in the month of October. The US Federal Reserve also announced that it would provide $800 billion so as to stabilize the financial system as well as to encourage lending.
  • The US Govt. announced a $20 billion rescue plan for Citigroup.
  • The Bank of America announced 35,000 job losses.
  • George W. Bush announced US Govt. would help General Motors, Chrysler and Ford, the three big US car makers to overcome the crisis situation.

2009

  • Barack Obama, the US President described that the American economy was weak and the condition was worsening even more.
  • The US Govt. reached an agreement to provide $20 billion to the Bank of America.
  • Obama proposed economic recovery package and signed Economic Stimulus Plan in February, 2009. The plan aimed at creating 305 million jobs and to boost consumer spending.
  • The US Federal Reserve decided to purchase about $1.2 trillion debt in order to promote economic recovery.

Finally, in June 2010, the US Govt. announced major reforms in the banking regulation in order to prevent financial crisis in future.

Related reading:

Credit Card Credit- Credit guide that offers impartial information, articles and tips on every aspect of credit card credit borrowing. Information on making credit card applications, using credit cards, credit score rating, credit reports, balance transfers and how to minimize the risk of credit card debt.

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