page_title: Credit crunch
section_title: Bubble formation
hierarchical_section_title: Credit crunch / Causes / Bubble formation
caption_attribution_description: English: Graph of the Case-Shiller index values through 2008
context_page_description: A credit crunch is a sudden reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates changes. Credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability. Many times, a credit crunch is accompanied by a flight to quality by lenders and investors, as they seek less risky investments.
context_section_description: In a credit bubble, lending standards become less stringent. Easy credit drives up prices within a class of assets, usually 
  real estate or equities. These increased asset values then become the collateral for further borrowing.
  During the upward phase in the credit cycle, asset prices may experience bouts of frenzied competitive, leveraged bidding, inducing inflation in a particular asset market. This can then cause a speculative price "bubble" to develop.  As this upswing in new debt creation also increases the money supply and stimulates economic activity, this also tends to temporarily raise economic growth and employment.
  Economist Hyman Minsky described the types of borrowing and lending that contribute to a bubble. The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments.  This borrower is not taking significant risk. However, the next type, the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.
  Often it is only in retrospect that participants in an economic bubble realize that the point of collapse was obvious. In this respect, economic bubbles can have dynamic characteristics not unlike Ponzi schemes or Pyramid schemes.
caption: U.S. house price trend (1987–2008) as measured by the Case-Shiller index. Between 2000 and 2006 housing prices nearly doubled, rising from 100 to nearly 200 on the index.
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