Credit Crunch Explained!
The current credit crunch originates back to the problems with the implementation of the TARP (Troubled Asset Relief Program).
The U.S. Treasury, under the direction of Secretary Paulson, asked for and received permission from Congress to bail out financial institutions to the tune of $700 billion dollars. Initially, the first $250 billion dollars was given those institutions that had lost billions of dollars due to the sub-prime mortgage crisis.
As stated by Bloomberg, “The point of injecting money into banks was to improve their capital cushions, which had been eroded by all the losses, so they could increase their lending to each other, to businesses and to consumers.”
However, that has not occurred. Instead, the banks are not lending and businesses cannot obtain credit. Thus, unemployment is on the rise and the economy is in dire straits.
In January of this year, the Senate approved the second installment of $350 billion dollars to be given to the new administration in order to help stimulate the economy and, as part of the package, infuse $100 billion dollars into helping homeowners in foreclosure.
In addition, President Obama is requesting an additional $800 billion dollars in a new Stimulus Package that is meant to boost the economy by creating jobs through rebuilding the infrastructure, imposing new regulations in the financial market, tax cuts, and other immediate measures that can put the economy back on track.
The credit crunch has had a terrible impact on businesses in general and the automobile industry in particular. Since auto dealers cannot access credit, they cannot increase their inventory. Moreover, because the economy has had such a negative impact on consumers, the auto industry has seen a decrease in sales of as much as 44%.
To this end, some auto dealerships have lowered the required FICO score from 720 to 620 to enable consumers to purchase cars. But this has had little effect on the overall purchasing power of the consumer.
There is no way of knowing how long this credit crunch will remain in effect. Since last year, many financial institutions have merged or closed, some have changed their status to commercial banks, and others still lack the confidence to loan money to consumers for fear they will be left holding the proverbial bag.