Credit-curtailing carousel (merry-go-round in credit limitations)

A wave of bankruptcies – in one industry – gives banks a lot of bad loans (bad debts) or stock prices suddenly fall very sharply, so that the banks’ credit collateral is worth less. – As a result, banks hold back on lending. – The refusal to grant additional loans drives more companies into bankruptcy. – The situation described in is worsening. – Some economic researchers believe that this cycle marks the beginning of a general crisis and refer to it as a “cyclical slump”. They therefore call for government credit guarantees at this stage. The counterargument is that in every crisis there have always been companies which, thanks to various circumstances, hardly got into difficulties and did not lose their creditworthiness. Government intervention, however, would support non-viable companies, which actually have to disappear from the market because – for whatever reason – they offer their product at too high a price compared with other firms. – See accelerator, financial, bear market, cyclical, hedge fund dangers, credit crunch, credit gap, credit risk, market shakeout, banking, value, cyclical. – See Deutsche Bundesbank Monthly Report of July 2002, pp. 47 ff; Deutsche Bundesbank Monthly Report of March 2005, pp. 16 ff (with empirical studies); ECB Monthly Report of May 2013, pp. 44 ff (detailed statistics).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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