In the testimony of William M Isaac before the US sub-committee on Capital Markets, Insurance and Government Sponsored Enterprises dated March 12, 2009 it was pointed out that “…MtM losses destroyed $ 500 billion of capital in the financial system. Because banks can lend 10 times of capital, MtM losses destroyed $ 5 trillion of lending capacity”, leading to a severe credit squeeze.
So, rather than picking up during a recession, when the opportunity cost of innovation is lower – as a number of theories have suggested in the past – R&D investment tends to fall dramatically when demand is low.27 If the market allocates an inefficiently low fraction of innovation-promoting activities to recessions, then there is a clear role for policy in the form of countercyclical R&D subsidies.