Murillo Campello says a survey of corporate executives found that many small and mid-sized firms survived the economic storm by tapping easy, low-cost lines of credit locked in ahead of the downturn, during an era of loose lending that also included sub-prime home mortgages.
“These lines of credit were so liquid and so accessible that it made this recession far less acute than it would have been otherwise,” he said.
In hindsight, Campello says the economy-sparing credit was likely ill advised, similar to the risky mortgages doled out to under-qualified homebuyers that contributed to an economic collapse now dubbed the Great Recession.
Extended amid a robust economy, the credit became potentially toxic for banks when the downturn hit, he said. Interest rates were not adequately risk-adjusted, and banks gave themselves no outlet to deny firms that needed money just to survive, rather than for business-building projects the credit is designed to finance.
“Some bankers made mistakes by authorizing these lines of credit and we’re lucky they made those mistakes,” Campello said.
“It saved those firms’ skin during this recession, but probably won’t be as easy to access next time. There will be stricter terms and, of course, higher interest rates.”
The research illustrates the value of easing rather than tightening credit during bad times, said Campello, who co-wrote two earlier studies on the perils of financial constraints that were cited this year in a report by President Obama on the state of the economy.
He says lines of credit not only spared small and mid-sized firms from bankruptcy, but also let them emerge from the recession on more solid financial ground. As a result, those firms may now be poised hire and spend, providing a needed jolt as the economy rebounds.
“These companies have more cash, more profits and it may be nearing the point where they will start to hire,” said Campello, a U. of I. finance professor and faculty research fellow with the National Bureau of Economic Research.
The nation’s unemployment rate remained flat at 9.7 percent in February after peaking at 10.1 percent in October, but analysts say the job market is beginning to show signs of recovery.
Campello says the February jobless report offers promise, including stable manufacturing employment and a 30,000 increase in temporary workers who sometimes move up to full-time in the aftermath of recessions.
How quickly hiring escalates depends on when consumer confidence rebounds and whether the government pumps money into job-creating programs, he said.
“A wild guess would be that employment will stay roughly where it is for six months, then pick up in the third quarter,” Campello said. “But everything is still uncertain now. Obama calls this the recession of our lifetime and it is. It’s a unique situation, even the recovery we may be looking at.”
The earlier research by Campello that was cited in the presidential report also stemmed from surveys of top executives to gauge how corporate spending is affected by a credit crisis.
One, co-written by U. of I. finance professors Heitor Almeida and Scott Weisbenner, showed that firms curbed investment when long-term debt came due amid the latest crisis, which increased refinancing costs.
Another study found that firms facing financial constraints trimmed employment, investment and other spending sharply during the recession compared with companies with access to credit.
Jan Dennis | EurekAlert!
Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO
Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik
Staphylococcus aureus is a feared pathogen (MRSA, multi-resistant S. aureus) due to frequent resistances against many antibiotics, especially in hospital infections. Researchers at the Paul-Ehrlich-Institut have identified immunological processes that prevent a successful immune response directed against the pathogenic agent. The delivery of bacterial proteins with RNA adjuvant or messenger RNA (mRNA) into immune cells allows the re-direction of the immune response towards an active defense against S. aureus. This could be of significant importance for the development of an effective vaccine. PLOS Pathogens has published these research results online on 25 May 2017.
Staphylococcus aureus (S. aureus) is a bacterium that colonizes by far more than half of the skin and the mucosa of adults, usually without causing infections....
Physicists from the University of Würzburg are capable of generating identical looking single light particles at the push of a button. Two new studies now demonstrate the potential this method holds.
The quantum computer has fuelled the imagination of scientists for decades: It is based on fundamentally different phenomena than a conventional computer....
An international team of physicists has monitored the scattering behaviour of electrons in a non-conducting material in real-time. Their insights could be beneficial for radiotherapy.
We can refer to electrons in non-conducting materials as ‘sluggish’. Typically, they remain fixed in a location, deep inside an atomic composite. It is hence...
Two-dimensional magnetic structures are regarded as a promising material for new types of data storage, since the magnetic properties of individual molecular building blocks can be investigated and modified. For the first time, researchers have now produced a wafer-thin ferrimagnet, in which molecules with different magnetic centers arrange themselves on a gold surface to form a checkerboard pattern. Scientists at the Swiss Nanoscience Institute at the University of Basel and the Paul Scherrer Institute published their findings in the journal Nature Communications.
Ferrimagnets are composed of two centers which are magnetized at different strengths and point in opposing directions. Two-dimensional, quasi-flat ferrimagnets...
An Australian-Chinese research team has created the world's thinnest hologram, paving the way towards the integration of 3D holography into everyday...
24.05.2017 | Event News
23.05.2017 | Event News
22.05.2017 | Event News
26.05.2017 | Life Sciences
26.05.2017 | Life Sciences
26.05.2017 | Physics and Astronomy