The current global financial crisis and the sharp reduction in trade flows have raised questions about the extent to which access to capital affects the ability of companies to produce and sell exports and to buy imports. There is a clearly identified channel between a crisis and a fall in export and import volumes, namely the concurrent impact on foreign and domestic output. This paper looks at whether banking and financing crises have an additional impact over and above the impact of output.
Although trade credits are self-liquidating, typically backed by receivables, with low transfer and convertibility risks, they often collapse during banking crises. One reason may be that trade credits often involve only a limited relationship between the company and the bank. In the height of a crisis, banks typically reduce overall country exposure following a decision to cap an institution’s country limit.2 Since trade credit lines are usually short-term, can be redeemed at par, and involve limited reputational risks, they are an easy asset class to cut in times of crisis. Indeed, trade credits declined by as much as 50 percent during the peak of the recent crises in Argentina and Brazil, and fell by a comparable magnitude during the Korean crisis of 1997–98.
Observing how a firm adjusts its personnel policies in response to a large shock can yield vital insights about the nature of adjustment processes in labor markets. We analyze a rich personnel data set from a Russian firm for a period (1997 to 2002) that spans the Russian financial crisis in 1998, in order to shed light on crucial, but largely unresolved questions about the functioning of labor markets in general. For example, do firms adapt their wage policy to changes in labor market conditions? And if so, are all workers affected in the same way, or are incumbent workers shielded from external labor market shocks as early theoretical work on internal labor markets suggests (see Doeringer and Piore, 1971)?
In particular, we investigate how the firm adjusts employment, wages and other components of pay in response to the crisis, and study how the burden of the crisis is spread across the workforce. The very detailed information on employee remuneration and wage arrears enables us to provide a much clearer and more complete description of the mechanisms that are used to adjust earnings at the firm level than is typically possible. Such an analysis is important for at least two reasons: First, despite some attempts in the literature to assess the costs of economic crises on the workforce and on households (see, for example, Fallon and Lucas, 2002), we know virtually nothing of how these costs are distributed among employees inside firms during such dramatic macroeconomic upheavals. Second, although several studies have explored to what extent internal labor markets cushion incumbent workers from external labor market shocks (e.g., Baker et al., 1994, Lazear, 1999; Lazear and Oyer, 2004), it is still not well understood how workers’ welfare is affected by firm performance over the business cycle.
For the past ten years, unscrupulous, silver-tongued mortgage brokers and lenders have successfully induced financially unsophisticated borrowers to enter into “predatory loans” secured by their homes. Not only have such victims of predatory lending been deceived into paying tens of thousands of dollars more for credit than they should have, but a substantial number of these victims are eventually unable to continue to make these payments and have lost their homes at foreclosure sales.
Whole communities have been adversely affected by the phenomenon of predatory lending because aggressive mortgage brokers target specific neighborhoods within which to market these high-cost home loans, and the subsequent foreclosures in these areas have led to rows of boarded up homes being inhabited by gangs and drug dealers. While the problem of predatory lending has received widespread local, state, and federal attention over the past ten years, unfortunately, the laws enacted so far have been ineffective at substantially preventing the problem. The failure to adequately address the problem is due in large part to the unresolved and heated debate between consumer advocates and lenders over how to curb the activities of predatory mortgage brokers and lenders without adversely affecting the robust legitimate sub-prime market.
