Phrases such as ‘credit crunch’ and ‘sub-prime lending crisis’ may be the bread and butter of financial analysts, but others may well be excused for not knowing what on earth they are talking about or, more importantly, the effect that these economic phenomena could have on ordinary, day-to-day life. This, therefore, is a short summary of the financial situation, and why it might well have an adverse affect on the British graduate’s chances of landing that dream job.

Prior to 2007, the Western world was in a period of almost dream-like prosperity, with huge amounts of money being willingly lent and borrowed at every level of the economy. Central banks lowered interest rates to help recuperate the economy following 9/11, and banks took advantage of this by lending money at extremely low rates.

The American mortgage crisis essentially occurred due to this prolific lending. The term ‘sub-prime’ really means high risk – banks were loaning mortgages to people who had low income, and no way of paying back the mortgage if something went wrong and they lost their job.

Banks assumed that they were relatively safe – if the loan repayments were not met, they could just repossess the house and sell it off again, and the rising US house prices would ensure they would not lose money. Loans would also be sold to other banks or loan companies, packaged with other loans and mortgages (ones that were not risky or ‘sub-prime’) so that no-one really knew which debts were ones that could never be repaid, or who they were owed to.

As house prices were no longer rising quickly, simply repossessing the houses to get back the loans would not work. Because bad loans had been sold and passed on in great quantities, no-one really knew which banks would be hit hard when risky loans fell through.

It was basically the fear of these bad loans that caused the ‘credit crunch’ – a term which really refers to lending being tightened up. Banks would not lend to each other, afraid that they would not get their money back if the receiver was hit by the sub-prime crisis. Because they would not lend to each other, banks would not lend to other companies either. It is a simple way of describing it, but it is basically the reason why liquidity (actual available funds) is so much tighter than it was two years ago.