Featured Research

from universities, journals, and other organizations

Potentially risky loans helped ease recession, new research shows

Date:
March 16, 2010
Source:
University of Illinois at Urbana-Champaign
Summary:
Questionable lending helped sink the US economy, but also provided a lifeline that kept countless firms afloat and averted an even deeper recession, according to new research.

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.


Story Source:

The above story is based on materials provided by University of Illinois at Urbana-Champaign. Note: Materials may be edited for content and length.


Cite This Page:

University of Illinois at Urbana-Champaign. "Potentially risky loans helped ease recession, new research shows." ScienceDaily. ScienceDaily, 16 March 2010. <www.sciencedaily.com/releases/2010/03/100316124237.htm>.
University of Illinois at Urbana-Champaign. (2010, March 16). Potentially risky loans helped ease recession, new research shows. ScienceDaily. Retrieved July 22, 2014 from www.sciencedaily.com/releases/2010/03/100316124237.htm
University of Illinois at Urbana-Champaign. "Potentially risky loans helped ease recession, new research shows." ScienceDaily. www.sciencedaily.com/releases/2010/03/100316124237.htm (accessed July 22, 2014).

Share This




More Computers & Math News

Tuesday, July 22, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Google Plans To Speed Up Web Pages With New Image Format

Google Plans To Speed Up Web Pages With New Image Format

Newsy (July 21, 2014) Google is using compressed images in WebP format to help boost page loading times. The files are 25-to-34 percent smaller than PNGs and JPEGs. Video provided by Newsy
Powered by NewsLook.com
Uruguayan Creates Chess Game for Multiple Opponents

Uruguayan Creates Chess Game for Multiple Opponents

AFP (July 19, 2014) It no longer takes two to play chess – or at least according to a new version of the game invented by Uruguayan Gabriel Baldi, where up to four opponents can play. Duration: 00:31 Video provided by AFP
Powered by NewsLook.com
Clock Ticks Down on Internet Speed Debate

Clock Ticks Down on Internet Speed Debate

Reuters - US Online Video (July 18, 2014) The FCC received more than 800,000 comments on whether and how internet speeds should be regulated, even crashing its system. Lily Jamali reports. Video provided by Reuters
Powered by NewsLook.com
Google Won't Call Games With In-App Add-Ons Free, Apple Will

Google Won't Call Games With In-App Add-Ons Free, Apple Will

Newsy (July 18, 2014) The European Commission asked Google and Apple not to label apps "free" if they include in-app purchases. Google has complied; Apple has resisted. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins