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Title: Why will the credit crisis events in America affect the UK credit situation?
It seems that the credit crisis or credit crunch, however way you wish to call it, is affecting every single global country, whether they have strong economies or not, whether they can boast of a flourishing sock market like the United Kingdom and France or have barely just set it up, like Russia. The harshness with which we feel the restriction of bank lending is a relatively recent phenomenon here in the United Kingdom (starting approximately in September 2007 with the collapse of Northern Rock), but it has been brewing for longer than that in America. Indeed, many experts are stating that the US Real Estate Crisis, which is though to have started the entire meltdown, began as early as April 2006. It is therefore understandable that bankers and stock-brokers alike link the fall of share prices and property prices to the same phenomenons which began in the US nearly two years earlier, setting-off what we now know as the credit crunch.
What we are asking ourselves here is why the credit crisis or credit crunch events in American are affecting the UK credit situation in such a dramatic way, and there are many theories to answer this question.
The first theory as to why the credit crisis in America has affect our banks and us personally so much is the most commonly-held one that all stock markets are financially inextricably linked, and a fluctuation in one inevitably affects the goings-on of another. When, for example, traders and the general public who own and manage their own shares get frightened when they see what is happening in other stock markets, they panic, sell, and therefore cause a worldwide sharp decrease in share prices not only in their own market but in others where they also hold shares. Globalism has been wonderful for the common man in that it is possible to own shares of a company in India, a country who has had a wonderful average growth rather of 13 percent a year for the past twelve years, but it also means that if something happens to that company to reduce it's share price, or even worse it goes bust, you loose money all the same.
This also means that your shares in India, to continue with this example, are not regulated by any financial body in your own country, and your money is subsequently even less protected. For this reason, it is unlikely the UK stock market will regain vigour while the American one is still recovering from the shock, and even less likely to make a quick recovery now that the US Congress has rejected George Bush's multi million dollar rescue plan.
- The Snowball Effect
There is another theory as to why the American credit crisis has spilled-over onto the power of UK citizen credit, and that is the 'snowball effect'. To make a complicated phenomenon simple, we shall vulgarise thus: American banks lent colossal amounts of money to the American people to buy homes. Banks from around the world lend money to each other all the time, and that includes UK banks lending to US banks. UK banks lend money to the UK population. Therefore, if the US tax payers, who are at the top of the chain, cannot repay for one reason or another, this affects the chain all the way through to us, creating a credit loop. The banks are counting on most of their borrowers being able to re-pay their loans, and not defaulting on them or going bankrupt. When most cannot because of an increase in interest rates and food prices, banks go bust. If a US bank, which a UK bank has lent substantial amount of money to, is suddenly incapable of repaying that money, the UK bank is in trouble and subsequently refuses credit to its clients. If, in addition to this repayment problem, the UK bank sees it's investment shares in the UK or US stock market drop dramatically, and it makes no profit for a long-enough amount of time, it now has two major problems on it's hands. If the combined problems are large enough, this can lead to the UK bank declaring bankruptcy and/or being rescued by the government, however big and powerful it is.
- A Special Relationship
It can also be argued that the credit crisis is affecting UK citizens more than any other citizens of the European Union, such as France, because we are more directly linked politically, socially, culturally and of course economically to the United States than any other country. This special relationship between the United States and the United Kingdom is thought by many to be the root of the reason by the credit crisis across the Atlantic is having such an effect on us.
We can combine the two above theories with this one, and arrive at a reasonable explanation as to why the credit crunch is so severe in both countries. An economical relationship might not even be the root of the problem; a controversial theory stating that an emotional relationship between UK and US banks, UK and US stockbrokers and the UK and US taxpayer is at the root of the credit crunch here and abroad is indeed a likely one. How difficult is it, after all, not to become frightened when your closest present and historical ally is seen floundering with an out of control economy?
In conclusion, even though there are many theories as to how and why the US credit crisis has affected us in the UK, only one thing is certain; we do not know how or when the credit crunch will resolve itself, if ever, and there is very little we can do to stop it from happening again. They bets we can hope is that banks and financial institutions from both countries will be more reasonable in future, less greedy, and attempt to make more reasonable loans so that we do not all have to suffer in the long-run.