https://docs.google.com/document/d/1YbtJGn7ida2IYNgwCFk3Sjhs...
First, the situation is not that dire to start with, most people and businesses can meet their obligations. We don't have anything remotely close to a financial crisis. It makes no sense to effectively turn the entire economy into a command economy and effectively declare a default to save what appears to be a fairly small part of the economy that will have trouble. You can have targeted intervention and get most of the benefit without dragging the rest of the economy into this.
Second, you can't just remove credit from the system. Credit is fundamental to nearly all transactions at scale - transactions in the real world aren't atomic, which means businesses are always dealing with receivables and payables, not to mention lines of credit that are designed to help businesses manage them.
There are tons of offsetting contracts, whether in terms of derivatives or insurance, and no one is going to be able to figure out which side of each contract is covered and which isn't and how to price anything given the uncertainty. Do health insurance companies have to pay hospitals? Do car insurance companies have to pay? These are all payments. Nothing happens in an economy without a payment. Do you have to pay insurance premiums? The effective result of this would be all financial markets not functioning and nearly all real markets too, since they are tied to the financial markets for pricing, settlement and credit.
It would be like the global financial crisis but a substantially worse version where every company becomes the Lehman Brothers. You'd have to basically nationalize everything across the entire world and run a command economy because the markets simply won't function at all even on a purely basic level.
76% of americans live paycheck-to-paycheck. Regardless of if you like it or not, a time will come when massive amounts of rents aren't paid. It can either fully immiserate the economy (most likely course of action), or it can be paused.
> the markets simply won't function at all even on a purely basic level
Can we please stop pretending that this zombie market we've propped up since 2008 works? If you like markets, then you shouldn't agree with the fact that the government can effectively be held hostage every decade or so due to "too big to fail."
I am very thankful to still be working.
And not all of these 76% of Americans are going to lose their jobs. Many people will, many others will have benefits, some others will be able to tighten their belts to make it work. And we can also just give everyone $$$ to ease the transition..
> Can we please stop pretending that this zombie market we've propped up since 2008 works? If you like markets, then you shouldn't agree with the fact that the government can effectively be held hostage every decade or so due to "too big to fail."
My definition of not working here isn't about some people getting unfairly rich at the expense of others. Literally people won't be able to get basic stuff at all. Entire supply chains will collapse since they are based on credit. You can't buy and sell at scale - these all involve contracts and payments. Credit isn't just about lending money for interest.
Let's also not forget that what's being proposed here is a TBTF argument. The argument here is that letting a bunch of small businesses that don't have enough saved up to survive a few months of no revenue go under is going to be so bad for the economy that we have to literally suspend the enforcement of contracts more generally to save them. Of course, if this is actually the case, we could just bail out the affected businesses instead of saying goodbye to the system of contracts more generally. And I don't believe we in such a situation yet either. We can probably just let them fail. Most small businesses are very replaceable and failure rates are very high to begin with.
No they can't, for some it is that dire. 1/5th of Americans are unemployed as of last week - how many of them were living paycheck to paycheck?
And you don't have a command economy. Net 30 terms become Net 90 for a while. That's not a world-shattering explosion. Everyone who buys something has to pay -- they just have the option to pay a little bit later. Everyone who borrows something gets it free for a short while.
And there are two pieces that really make this work:
1. Much of that is offset by the current ~0% interest from the fed. Ultimately, if the 60 day gap kills you, then you chains (ultimately landing with banks) can borrow money with effectively zero interest.
2) Relationships matter. I don't think businesses will do douchebaggy things: Most want to keep employees, customers, and partners.
And policy decisions cannot be made instantly. The moment something like this is close to being implemented, this will freeze the credit system entirely. And there goes the economy.
We got a global financial crisis last time due to a small number of actors becoming less creditworthy and it being unclear whether they could pay their obligations. That slight change in expectations threatened to freeze the entire economy. To do this on purpose for every entity such that no one is creditworthy? That's insanity.
Who would you rather have: a pile of debtors in your portfolio who have a 50/50 shot of going under in the next few weeks (where a lot of Americans and small businesses are today)? Or a pile of debtors who will pay you with 95% odds in 3 months, and in the meantime, a no-interest loan from the government to provide short-term liquidity until they do pay you?
And you can't actually lengthen payments for everything - some businesses and people with important resources will simply demand an up-front payment. Which will worsen the crunch for those that are stuck in the middle - some businesses will have to pay upfront, but get paid 3 months later. And no, banks won't want to lend to these businesses and if they can't determine whether you're one of those businesses or not, they will tighten credit on most businesses. Not to do so puts their own creditworthiness at risk.
This is all assuming you have perfect execution too - in reality, there will literally be millions of lawsuits since no one will be able to actually define what you're saying precisely enough to make the implied alterations to existing contracts unambiguous. It's also important to understand that most payments aren't interest payments - some of these cover actual costs.
Edit: consider what every company in the world will do in response to do this - they will review every contract they have to see if there's an angle that will help them optimize for this situation, and what kinds of addendum that they can force on others would put them in a more advantageous situation. No one will just sit and work according the spirit of the new rule, any ambiguities and angles will be exploited and lots of businesses and people will go end up on the wrong end of this.
And to flip it around, if 50% of small businesses go under, banks will be left holding a lot of bad debt. Banks will go under. Landlords won't have renters, and will be left holding mortgages. Without action, the whole system collapses.
You're assuming the economy is humming along right now. It isn't. Large parts are shut down. Some parts aren't. Those frictions are causing massive structural collapse as we debate.
Also: In most cases, up-front payment is fine while everything else is shut down. I understand the importance of credit. But the alternative is worse. If this continues for 18 months, virtually all mortgages, private and commercial, will be under water. Virtually all renters will be evicted, or rents will have gone down many-fold. Etc.
Why would they? And who's creditworthy in your world? Are banks going to be able untangle every single contract you have to see how this affects you? Especially in a world where every single customer and every single supplier is going to look at renegotiating contracts with you? The general notion of creditworthiness implies a relatively static world - changing everything is going to make everyone questionable from a credit perspective.
> Less credit-worthy businesses can get loans through the SBA through the stimulus. The government's existing programs (assuming the stimulus passes) will breach the extra 90 day gap for most.
Then why do we need this at all? Why can't we just have the affected businesses borrow from the government? Instead of A not paying B and B borrowing from the government to cover for not being paid, why not just have A borrow from the government so that we don't have to modify every single contract in the world in a highly unpredictable manner and freezing the entire economy?
> You're assuming the economy is humming along right now. It isn't. Large parts are shut down. Some parts aren't.
Most parts aren't shut down. No one is predicting a GDP decline of over 50% or an unemployment rate above 50%. Some parts are shut down, others are doing okay.
> Those frictions are causing massive structural collapse as we debate.
And this proposal literally is the massive structural collapse - it's the equivalent of eradicating COVID-19 by killing everyone.
> Also: In most cases, up-front payment is fine while everything else is shut down. I understand the importance of credit. But the alternative is worse. If this continues for 18 months, virtually all mortgages, private and commercial, will be under water. Virtually all renters will be evicted, or rents will have gone down many-fold. Etc.
Everything isn't shut down and again your business is toast if you're forced to make up-front payments while you're not getting paid. This is silly considering that there's a perfectly reasonable alternative of bailing out from the bottom up.
And no, this isn't continuing for 18 months, that's completely absurd. The economy will simply have to go on if an extended shutdown fails to work and the economic pains reach a certain threshold. Also, it's not honest to compare the impact of a shutdown without your proposal for 18 months with the impact of removing credit from the system for a couple of months. The economy as we know it is completely done if you freeze credit for 18 months.
A lot of businesses are going to go under no matter what and this isn't directly preventable. I don't think exposure to "small businesses" is large enough to cause a systematic failure and in any case, delaying payments doesn't solve the problem, if the small businesses themselves are insolvent. What systematically delaying payments does in this case is that you're turning everyone else into a bank. In that world, a lot more entities are left holding questionable debt and you significantly increase the systematic risk this poses, as no one will be able to trust anyone.
What you want to protect are the ordinary people, not businesses and this can be done through direct payments. Business owners are on average wealthier than others - it makes no sense to try to turn the entire system upside down to help them. Keep in mind, under your proposal, most people will lose their income, since income for most people is a payment that I suppose can now be deferred.
1) Businesses going under is preventable. If a lot of businesses go under, so will banks when those businesses default on debts.
2) Direct payments would need to be astronomical to protect ordinary people for this duration.
3) Loans from the government directly to people and businesses might work if we had the apparatus for it. The critical thing, though, would be to freeze rents and interest if we did that. It'd be a much more complex scheme to implement. If I have a 10 years left on my mortgage, I could get a 10 year loan from the government for the principal, while the bank would lose out on 3 months' interest.
And more businesses will go under with your system. Most businesses that are losing most of their revenue can and have planned for losing revenue for a few months. Businesses can't realistically plan for the kinds of changes you're proposing because in a world where the government can modify by fiat every single contract in the whole world, nothing can realistically be planned. It's a total, forced default. And the specific scheme you're proposing turns every business into a bank - any time anyone owes a payment, you become a lender. This magnifies the effect of all insolvencies - now every business is tangled in a web of credit. It literally is the worst of both worlds - you introduce a shock the same way a large default would and ensure that no one could trust anyone, while also actually adding to the systematic risk by entangling every business in the system of credit. At least mass bankruptcies lead to deleveraging.
This is even if you assume that some sort of super AI can magically modify every contract in the world in such a way to best follow the spirit of what you want and have every party somehow agree with this. In reality, contracts are complicated beasts and you can't just modify one aspect of every contract in the world and expect things to be fine. Contracts are going to have all sorts of contingencies that are going to be highly ambiguous in a world where the government steps in and says certain obligations can be deferred. Again, people not being able to meet their obligations is absolutely nothing new in this world and the system is already designed to deal with this.
> 2) Direct payments would need to be astronomical to protect ordinary people for this duration.
No it doesn't. Keep in mind, it doesn't have to protect everyone from everything. $2000 a month for everyone for 2 months is $4000 * 300,000,000 or roughly 1.2 trillion dollars. This isn't much in the grand scheme of things and you're proposing an intervention of substantially larger magnitude. You can also effectively structure this as a loan for most of the people who don't need it by adding a deferred progressive tax on top of it.
> 3) Loans from the government directly to people and businesses might work if we had the apparatus for it. The critical thing, though, would be to freeze rents and interest if we did that. It'd be a much more complex scheme to implement. If I have a 10 years left on my mortgage, I could get a 10 year loan from the government for the principal, while the bank would lose out on 3 months' interest.
This doesn't make any sense - you're the one who proposed that businesses that are screwed by your scheme could survive by borrowing from the government. Why would that work in your scheme but not here? I don't understand the bit about your mortgage - why would you need to borrow (and why would anyone lend you) more than the payments you need to make for the next couple of months? Any sort of emergency government funding would be a credit line akin to extending payments, not a long fixed-term loan.
Again, I don't see any kind of realistic proposal here - it feels like a word game to come up with a vaguely workable-sounding (to people who don't understand how the economy works) plan that helps specific classes of people at the expense of everyone else.
And conversely, the current bailout, as proposed, doesn't come anywhere close to stopping mortgage defaults, layoffs, and the slew of other issues.
Now, this plan basically means you don't buy new things (cars, laptops) for 3 months, but I think that's okay. But yes, it only covers 95% of the problem. Companies might need help with, for example, restarting production lines, maintenance costs, supply chain delays, or other issues. All that is pocket change compared to what we're looking at spending right now.
I'm joking, well put, thanks.
Pumping money in ETFs and real estate (aka passive income) can’t enrich everybody, productive output is required.
Also, general hate of landlords only hurts tenants because there are actually quite a lot of very forgiving landlords. My mother owns property and when her tenant couldn't pay she offered the tenant the option to remodel the apartment (she paid for the materials) while the tenant was looking for a new job. Well, 3 months/missed payments later the tenant just disappeared and didn't do any remodeling at all. Needless to say, my mother won't make this mistake twice.
I've met some landlords that are willing to offer special discounts to families instead of just renting the 100m² apartment out to some single tech dude who is guaranteed to pay rent. (in rent controlled markets like Berlin the tech guy always wins)
And those were just the private landlords. Housing association here are municipal and they basically offer you 10+ year leases where you do everything yourself, including the floors and kitchen and in exchange the rents are very low.
Hating landlords and abusing goodwill just makes that goodwill disappear.
Do you see the problem? You forgot to pause "everyone else". You'll have to add millions of special case laws to pause everything. That guy with his gym membership who can't use it? Pause it! ISP subscription? Pause it! Mom's knitting club membership fee? Pause it! ... million pauses later you're done.
It's like having 1 million bolts each with a different size. You'll need a different wrench for each bolt. Why not just standardize on a single screw head? Sure screws aren't exactly bolts but anyone who wants a screw can get it. If you're handing out bolts and wrenches then you're picking winners. This is known as a bailout for special interests by only pausing certain hand picked industries.
Meanwhile, a loan works for anyone who wants one. It still means that the economic machine is empty but at least it keeps running and doesn't need to be restarted from scratch.
Mortgage-backed securities generate no income for a couple of months.