Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Potentially risky loans helped ease recession, new research shows

17.03.2010
Questionable lending helped sink the U.S. economy, but also provided a lifeline that kept countless firms afloat and averted an even deeper recession, according to research by a University of Illinois finance expert.

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!
Further information:
http://www.illinois.edu

More articles from Business and Finance:

nachricht How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung

nachricht Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Shape matters when light meets atom

Mapping the interaction of a single atom with a single photon may inform design of quantum devices

Have you ever wondered how you see the world? Vision is about photons of light, which are packets of energy, interacting with the atoms or molecules in what...

Im Focus: Novel silicon etching technique crafts 3-D gradient refractive index micro-optics

A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.

Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...

Im Focus: Quantum Particles Form Droplets

In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.

“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...

Im Focus: MADMAX: Max Planck Institute for Physics takes up axion research

The Max Planck Institute for Physics (MPP) is opening up a new research field. A workshop from November 21 - 22, 2016 will mark the start of activities for an innovative axion experiment. Axions are still only purely hypothetical particles. Their detection could solve two fundamental problems in particle physics: What dark matter consists of and why it has not yet been possible to directly observe a CP violation for the strong interaction.

The “MADMAX” project is the MPP’s commitment to axion research. Axions are so far only a theoretical prediction and are difficult to detect: on the one hand,...

Im Focus: Molecules change shape when wet

Broadband rotational spectroscopy unravels structural reshaping of isolated molecules in the gas phase to accommodate water

In two recent publications in the Journal of Chemical Physics and in the Journal of Physical Chemistry Letters, researchers around Melanie Schnell from the Max...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ICTM Conference 2017: Production technology for turbomachine manufacturing of the future

16.11.2016 | Event News

Innovation Day Laser Technology – Laser Additive Manufacturing

01.11.2016 | Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

 
Latest News

IHP presents the fastest silicon-based transistor in the world

05.12.2016 | Power and Electrical Engineering

InLight study: insights into chemical processes using light

05.12.2016 | Materials Sciences

High-precision magnetic field sensing

05.12.2016 | Power and Electrical Engineering

VideoLinks
B2B-VideoLinks
More VideoLinks >>>