So we have had the credit crunch and now we are expecting an economic recovery but is this realistic and what caused the credit crunch in the first place?

In recent times, the amount of debt for the average consumer in the UK has been on the increase.  So why has debt risen to over the past ten years? There is no single answer. However there are some trends on both the side of borrowers and lenders which can help us understand what has happened.

Today’s UK is driven by consumer marketing. Every day we are bombarded with advertising for many goods and services. This advertising frenzy seems to lure us into the knowledge that anything can be ours even if we can’t pay for it up front.

Now it seems perfectly reasonable for a family to own 2 cars and go on two or three foreign holidays a year. Gone are the days of moving into a new house and then saving for a new sofa TV or washing machine. Today we will take everything out on credit and they worry about paying for it a year or two down the line

We have adopted a have now and pay later mentality funded by easy credit. Today, instead of debt being frowned upon, we now seem to be perfectly at ease to use credit to supplement our standard of living.

The act of accumulating debt is arguably not a problem as long as the person can afford to cover the repayments. However, in a period of economic downturn, the risk is that consumers will suffer a decrease in income. If this happens, consumers are left unable to repay their loans leaving finance houses with debts which are unlikely to be repaid.

This is a worry for banks and the government as the underlying reason for the credit crunch is the fact that banks are unwilling to lend because of the current level of bad debts they are dealing with.

The government in the UK is currently trying to restart bank lending and the economy through the process of quantitative easing.   Quantitative easing means artificially pumping money into the economy through the purchasing of bonds.

However if consumer defaults continue this will result in the dampening of any positive effect that putting additional money into the economy is currently having.  As such, the level of UK debt and the risk that it will not be repaid is worrying as this may adversely affect the overall economic recovery.