heir lending. The rate at which banks lend to each other rose to its highest level since December 1998.The so-called Libor rate is 6.7975%, way above the Bank of England's base rate; banks either worry whether other banks will survive, or urgently need the money themselves(BBC 2009). As the link between the financial crisis and a possible economic downturn became more apparent, central banks around the world slashed interest rates very quickly. The Bank of England cuts interest rates to 0.5%, the lowest level in its 315-year history and in U.S. interest rate fell to 0.25%, the lowest since the records started,as central banks continues efforts to aid an economic recovery in the UK same is followed by different central banks around the world, see graph below.
Since, the credit crunch consumers have found it nearly impossible to get any form of credit from the banks. This is due to the actions taken by the banks to safeguard themselves from a 'run on the bank'. Like in case of Northern rock where depositors withdrew ￡1bn in what is the biggest run on a British bank for more than a century (BBC 2009). Lenders have also raised interest rates on various financial products, including mortgages, loans, and credit cards, and have also tightened up on their lending criteria, leaving many consumers with no prospect of getting a finance. Even established businesses like British Petroleum; a company with multi billion pound assets, was unable to acquire funds in the money markets for cleaning up the oil spill. Another effect of this credit crunch has shown an unprecedented rise in bankruptcies in U.K. There were 33,935 individual insolvencies across England and Wales just during the third quarter of 2010.(King 2010). Also there was a sharp decline is the house prices since the crisis. The first annual fall in house prices for 12 years is recorded by Nationwide, see figure below.
According to the Global Stability Report by the International Monetary Fund, it blames lax regulations by governments and poor supervision by banks for allowing the current financial crisis to develop. The report also accuses banks and other financial institutions, of "excessive risk-taking" and "weak underwriting". It says they were "too complacent" about liquidity and relied heavily on wholesale money markets and central banks to aid them if they got into trouble (IMF Global Stability Report 2008). There was failure of various international watchdog organisations such as United Nations as stated in Economic survey of Europe report. They said, the United States real GDP is forecasted to increase on average by 3.5%. With the United States acting as "locomotive" for the world economy, the large current account deficit is set to deteriorate further. (Economic Commission For Europe 2005:51)
In a bid to ease the global credit squeeze, central banks unleashed the monetary policy and fiscal policy tools available to them. One of the measure that governments around the world took was to provide loans or make direct purchases to support these very large and extremely complex capital markets (Brighouse and Hontoir 2002:184). In the United States, the government set up a $700bn TRAP which was swiftly passed through the Congress in an attempt to use complex auctions to buy back mortgage securities and provide short term stability
