Philip Barton's Property Blog

Unless you have been living in a cave for the last few months you will be all too aware of the so-called ‘credit crunch’. Despite what you might be led to believe by the press the mechanics behind this is not a new phenomenon – indeed it is all part and parcel of how a free credit market works. Lenders normally act fairly rationally by lending only to those they believe represent a reasonable risk, but what is different in this instance is the depth of the swing (more of a lurch really) in the perception of risk by the whole market of lenders. It is this sudden change that is at the heart of the problem.
Lending is essentially a game of ‘pass the parcel’ and lenders are paralysed by the fear that when the music stops (i.e. the real bad debt figures become clear) – that they may be the ones holding the problem parcel. It’s a simplistic view, but sums up what the real problem is – fear. The practical upshot is that whilst this level of paranoia persists then no amount of government or central bank intervention will make any significant difference. Essentially we are stuck with high rates until the lender’s collective hunger for profit overcomes their fear of making a mistake.