What caused it?

The credit crunch actually had its roots in a credit binge, an unprecedented borrowing spree in the US and Western Europe from 2003-7. In 2001, interest rates were set low to let the markets recover from the effects of two disasters: 9/11, and the

bursting of the dotcom bubble (a financial crash caused by overheated speculation in internet and technology companies). Low interest rates made it very cheap to borrow money, and the US and UK in particular borrowed record amounts during this period (it was estimated in 2009 that the total debts of the US and the UK were three times as large as their combined GDP, or annual economic output). The money came from the growing economies of China, Russia and the Middle East, where people were saving instead of spending, and it filtered through the global banking system and ended up in the West as loans. Businesses and private equity firms borrowed money to expand or buy up other companies, and individuals used it to take out mortgages or buy consumer goods. The biggest borrowers were the banks themselves (in particular the investment banks of New York and London), which borrowed—or ‘leveraged’ themselves—on a massive scale. But the influx of all this money resulted in a bull market; businesses were performing well and their shares collectively rose. This put pressure on companies to continue borrowing, as their shareholders expected them to keep up with or outperform their rivals to maintain their high share prices. Meanwhile, house prices were rising, which created a property bubble; easy access to cheap credit kept driving prices up and encouraging yet more borrowing. Those already repaying mortgages also borrowed money in the knowledge that the value of their house was rising above its mortgage value. Everything was rosy, as long as it all kept going up.

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