It is credit crunch that denotes an economic condition where it is difficult to gain capital investment. Credit crunch refers to a particular type of economic situation wherein it becomes very difficult to obtain investment capital. In this type of financial situation, lending institutions as well as the investors become very much skeptical about investing funds to the corporations and the firms. They become scared that the borrowers may go into bankruptcy or they may default. In other words, the lenders lose confidence about the repayment capacity of the borrowers.

Credit crunch situation may arise due to the natural fallout of economic recession. To tackle this kind of situation, the central banking authorities resort to cheap monetary policy by lowering down the rates to as to arrange more funds for the corporations. The shortage of credit to the various sectors to the economy does not do any good to the overall economy. In other words, credit crunch along with recession dampens economic recovery and prolongs economic recession.

The world economy witnessed this kind of economic recession along with credit crunch during the 1930, which is known as the Great Depression. The Great Depression of the 1930 resulted into the emergence of Keynesianism who preached for massive government investment to tide over the recession. In recent times also, the world economy has been engulfed into such type of economic recession. The crisis first emerged out in the housing sector of the United States. The sub prime mortgage loan that the US lending agencies granted mindlessly had actually backfired. During 2007 and early 2008, the US authorities suddenly realized that it was a grave mistake to offer housing loans to the individuals without judging their repayment capacity. Quite naturally, rising cases of default were being reported to the lending agencies. This resulted into housing market collapse. The effects in the housing market soon spreaded to the real sectors of the economy and finally the whole economy was caught into deep recessionary situation. And the economic recession in the US also adversely affected many other economies in the world.

Whatsoever, 1930-like economic recession in the country negatively affected the credit situation in the country. The lending agencies in the country became increasingly reluctant to offers funds to different sectors of the economy. Inadequacy of funds also affected the different sectors in the economy negatively with employment situation in the country being hit badly. The US Federal Bank came to the fore front monetary policy to boost the economy by generating more demand in the economy. And, it was somewhat successful in bringing the economy back to recovery.