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The world is in the grip of a credit crunch. As economic slowdowns hit around the world — already Japan and parts of Europe are formally in recession, and the conventional wisdom is that the United States is either in the same boat or not too far behind — the amount of available money is drying up. Compounding, and to some degree triggering, the problem are the mounds of subprime assets forcing banks to adjust their balance sheets to the degree that the bulk of major Wall Street institutions have crumbled under the strain. The net effect is that a reduced pool of capital is being hoarded. That is driving up the cost for any type of borrowing, with many of the more speculative projects or borrowers simply being unable to attract money at all. Credit crunches almost invariably trigger recessions (assuming recessions are not in effect already) because they greatly degrade the ability of firms, individuals and governments alike to engage in economic activity.
In time, this will work through the system, as in the many recessions of the past. For some time, credit will be extended only to obviously profitable ventures and to deeply qualified borrowers, while questionable firms are crunched out of business. As efficiency improves, lenders will become more willing to extend credit to less-than-sure things. And a recovery will be under way.
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