Credit Squeeze And Its Implications
When it comes to discussion bout important segments covered under the sphere of credit, the implication of credit squeeze in the economy can’t be overlooked. Credit squeeze happens to be a fiscal policy undertaken by the Federal Reserve from time to time so as to restrict the inflationary trends of the economy.
The government usually a number measures to put it into effect. In the first place, the government restricts bank lending and credit. Thus it becomes difficult for entrepreneurs and investors to avail further credit and this retards further investments and subsequent growth. However, in a situation of credit squeeze, credit is available to individuals with reasonably sound credit report. However, in situations like credit crunch, borrowings are curtailed drastically. However restricting money supply is not the only reason behind it. Sometimes when the value of the collateral is substantially lower than the amount borrowed, this method is resorted to by bankers. Credit squeeze has far reaching consequences in the economy of a nation. It puts a check on consumerism and instigates savings. Increased savings can definitely turn the retarded wheels of the economy and put the same back on track. Though credit squeeze standout to be an effective weapon of combating harmful inflationary trends, one can’t overlook its drawbacks. Credit squeeze results in reduction of the value of assets purchased by most investors at previously inflated prices. This leads to massive foreclosure and bankruptcy cases. Even financial institutions are unable to extend loans either to bank or credit worthy individuals leading to massive bankruptcy of the entire banking system. The dyer consequences of credit squeeze has its effects on students as well. It becomes difficult for students with bad credit history to get further loans and their aspiration for further education is blocked. The negative effects of credit squeeze are commonly felt in real estate markets. The home owners who had purchased homes sometimes earlier would not be privileged to generate any home equity benefit. Worse, they may get a negative equity due to depreciation in the value of their asset. Credit squeeze is a tool that has to be used for restricting the inflationary tendencies of the economy and to ensure reduced growth. If not handled carefully, credit squeeze may turn out to be counter productive. It may retard the growth of the national economy and augment recession. (:html:)
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