A credit crunch does not have just one cause. Instead, credit crunches tend to arise from a “perfect storm” in the marketplace, where several factors work together to make banks leery, or incapable, of lending money. The credit crunch which occurred in 2008, though far from the only example of a credit crunch in the world, is a perfect example of several economic factors working together to lead to tight credit.

The economy started to decline in the summer of 2008 when gas prices increased sharply. The price of many consumer goods skyrocketed, thereby reducing demand. The heavily cut demand for traditional American automobiles produced several low-gas-mileage vehicles. As United States consumers spent less, corporations around the world lost money, and job cuts ensued.

With the economy already weakened, only one more blow was needed to bring about a credit crunch. That blow would come in the form of the subprime mortgage crisis, which, according to the United States Treasury, was caused by under-regulation of financial markets. The crisis occurred because lenders made loans to borrowers who could not pay them back. When these loans defaulted, banks lost their investments and could no longer make new loans.

At the same time, the value of many mortgages was overstated, and banks were lending out more money than the homes were worth. As the economy worsened and homes were seized, the foreclosed homes could not be resold for anything near their original loan amount. This situation meant that banks could not hope to earn back their original loan amount.

Events then began to spiral. As banks lost money in their mortgage divisions, they could no longer afford to make car or boat loans. This further tightened credit, making it harder for anyone to obtain a loan to make any type of purchase; the credit crunch was then in full force.