I saw a proposal recently that suggested the government mandate that existing loans (mortgages and business loans primarily) add the deferred period to the back of the loan, interest free. So if the lockdown is 3 months long, then your 72 month loan becomes a 75 month loan with an internal interest free 3-month period. This feels like a reasonable compromise to just nullifying the debts altogether, considering what an accounting nightmare that would be.
I have been thinking about these issues since the beginning of the crisis, and the two big questions I have are:
1) What do you do about bonds? A very large proportion of all debt is packaged into bonds, and reducing their yield will have a substantial effect on many pensions
2) Who is going to pay the wages of the people paid to administer these loans? Are they going to accept a deferral of their wages?
I am not trying to dismiss your idea; I had many similar ones early on, but I couldn't figure out how to square the circle.
> 1) What do you do about bonds? A very large proportion of all debt is packaged into bonds, and reducing their yield will have a substantial effect on many pensions
US Treasury pays bondholders some, but not all, of the interest income due. Shared haircut between bondholders and the taxpayers. This is a catastrophic loss with a nation state providing what amounts to insurance, and incredibly cheaper not only economically, but from the struggle and hardship many would face from foreclosure and relocation.
> 2) Who is going to pay the wages of the people paid to administer these loans? Are they going to accept a deferral of their wages?
PPP loans (forgiven when used for payroll) for mortgage servicers. Those folks are still going to be needed to account for bondholder payments, with the Treasury picking up the tab instead of homeowners.
A taxpayer bailout solves a bunch of problems, at the expense of non-mortgage holders (AKA renters). It seems unjust to take from renters and give to property-holders, given that the latter are generally more affluent, and knowingly took a risk (by taking out a loan).
If anything, given the last crisis, we should be focusing on how to address this crisis in a way that helps renters. After all, the average homeowner who can't pay their mortgage becomes a renter.
Thanks for pointing out the big elefant in the room.
It looks like this is the ‘new normal’ though. Pushing people to take on debt as it’s almost interest-free and you might even get help from the government paying it back, all to double up on past mistakes and sustain the current asset valuations.
We're probably going to have to just give most-to-all renters a few months of free rent here pretty soon anyway.
At least bailing out mortgage-holders has zero real world cost. Bailing out renters costs actual real money (since it doesn't just defer a loan, but actually prints new money to cover it).
> It seems unjust to take from renters and give to property-holders, given that the latter are generally more affluent, and knowingly took a risk (by taking out a loan).
Life isn't fair. Renters have landlords with mortgages also, and renters are just as challenged as homeowners currently (30+ million unemployed, 1/5th of the US working population). Broad policy decisions have some moral hazard to be deprioritized.
The goal isn't fairness, it is to return to economical equilibrium as rapidly as possible.
Your proposal would stabilize the situation, but I am not sure why this bailout is better or worse than other proposed bailouts. We can't go bail everyone out, unless we want to go into hyperinflation.
I am not saying I have an answer, I just think there are deep problems with these ideas.
There are always deep problems when the problems are complex. This does not mean you take your time. Just as the Obama administration quickly moved GM through a Chapter 11 reorganization [1] despite objections by free market proponents and shareholders (to save GM workers' jobs), and drastic actions was taken by the Treasury and the Fed to save certain financial services firms (merging them into stronger entities) after the failure of Lehman Brothers during the 2008 GFC [2], complaints can saved for the history book on the topic. In the meantime, move fast to avoid suffering at scale.
I'm not saying you're wrong, by any means, but that you have to be comfortable with your solution being unfair and suboptimal. It is not the best course of action, but the least worst course of action.
As a renter and voter, my preferred policy solution is to suspend rental evictions, let the foreclosures go forward as mortgages are a risky asset, then let the market sort it out at auction. That sounds like a more market-oriented solution to me.
Not sure if you'd feel the same if the building you're renting in ended up in the foreclosure bucket, then bought by someone who wants to kick everyone out of the building and raze it.
> That sounds like a more market-oriented solution to me.
Market-oriented solutions in times like these tend to (continue to) optimize for profit and fail to consider the humans involved. No thank you.
Over 62.5 percent of American homeowners have a mortgage, worth collectively over $10 trillion dollars (total equity is ~$18 trillion). You are entitled to your opinion, but are in the minority.
How many homeowners also rent? I have a mortgage on a cabin in Idaho, but rent in California. I would vote to support the renters, because although I'm practically neutral, homeowners have at least 1 asset and are generally better off in wealth and savings.
Also, majority rule is probably not the relevant metric here (even if renters + owners were mutually exclusive sets). We have a long history of not going strictly with the majority.
I'd noted it was higher so that would follow, yes. I left out the precise number because I saw some variation in the across sources and couldn't be bothered to dig into the details as it didn't make a difference anyway.
Based on Japan, this does not appear to be the case (Bank of Japan holdings are ~110% of GDP). We can print until we can't, and from economic indicators, we have a ways to go before inflation (hyper or otherwise) is going to be cause for concern (education and healthcare aren't inflating because of currency devaluation, but because of regulatory capture).
The economy isn't actually money. The economy is really stuff; money is just a mechanism for moving the stuff around.
The problem is, if we want stuff (food and cars and electricity and software), someone has to make the stuff. We can print money until the cows come home, but that still fails if there aren't any cows.
Japan has managed to keep producing enough to run the actual economy, and has shuffled paper around to keep the books from breaking. The US can do that, too, for a while. But the economy that produces stuff has to come back before too long, or we're going to have actual shortages in a way that printing more money cannot solve.
Those indicators are provided by the government itself. And even if you believe those clearly doctored numbers, there is a cause for concern. Particularly with the amount that’s being added to the money supply daily. It’s not sustainable.
Let's pretend that government statistics are wildly manipulated, and that your thesis is sound. I ask the following:
1. Reliable rebuttal data sources to government inflation statistics.
2. Proof that it isn't sustainable besides conjecture (as I mentioned, Japan is economically stable and a first world country with an enormous amount of debt that will never get paid back, while parts of Europe have negative interest rates and still have a relatively high standard of living).
Yes, if you’re not first world (Venezuela, Zimbabwe) this doesn’t work. But the US dollar is a reserve currency and US treasuries are the safest asset in the world. When you need to spend good will in currency value form, you spend it.
Not everyone has lost their jobs. Folks that still have an income should be paying their mortgages/rent on schedule. Those who can’t can defer. This way there’s a reduction in income but not a total collapse.
You'd be a fool not to defer, if the deferral is at almost no cost. We have seen that people will take the financial path of least resistance (as happened with non-recourse loans in the financial crisis), so I wouldn't depend on payment by those who can.
Means testing would cause more problems than it can solve. A somewhat fair compromise would be to increase the amount owed a tiny bit to encourage those who can pay to continue paying.
That's the big problem for me; I would like for nobody to get hurt, but it seems that the holder of the secured debt has some contractual rights. Given the situation, I don't see how a third party has the right to step in and take from one party to give to the other.
Ideally we'd have debt-holders negotiating solutions with their counter-parties, but that seems difficult with securitized loans.
Well... "a contract is a contract", but there's some recognition that extraordinary circumstances can need special treatment. My home insurance, for example, has clauses about "acts of God" and "acts of war". (Specifically, earthquakes are included in "acts of God" - or maybe they're specifically excluded, in any event, the policy doesn't cover them. Tornadoes and hurricanes might also be excluded. But I don't live in tornado country; I do live in an area that can have earthquakes.)
That's what we've been doing with our clients who can't afford it right now. We just extend their licence 3 months when they've already paid us. They're happy, we don't get a meaningless churn and it slows us down only 25%.
That's how it works in the UK. Mortgages that are paused are either extended (rare) or have the interest and additional principal rolled into future payments. It doesn't work so well for shorter loans though because the payments get very high.
Add the deferred payment to the back of the loan at the current Fed funds rate. That's currently 0.25%. Banks can borrow at that rate, so they don't lose money on this.
Cheaper than processing a default. Banks don't want to foreclose; unloading the real estate is a huge money-loser.
I'm not sure if that's really simpler. I don't know enough accounting to say for sure, but I wouldn't expect the effects of lengthening all loans 3 months to be particularly easy to calculate.
This is an excellent demonstration of one of the reasons the politics of economic policy is so difficult: so many people think that financial crises are caused and averted by magic, and "math" is simply some detached-from-reality thought exercise. It's the modern version of an ancient villager sacrificing goats to ensure a good harvest and sneering at good irrigation practices or crop rotation.
Paying attention to the economic effects of a policy as it ripples through the financial system isn't taking a position on who should be protected or prioritized between (eg) capital and labor. Economic outcomes for labor are downstream of the financial system too, which is why the effects of the 2008 GFC didn't play out as simply "the richest people get slightly poorer". Someone 100% interested in outcomes for the poor and middle-class (employment, income, etc) still needs to understand the "math" of how proposed policy will play out in the real world.
You may think you're on the side of the rights of labor/the masses against the rich, but you're actually just standing up for ignorance and blind superstition over reality, an approach which hurts rich and poor alike. (Unless, of course, your only goal is to get high on your own misinformed outrage, in which case, congrats)
Other than misinterpreting an (obviously?) sarcastic comment I'm not sure what point you're trying to make.
By all means let's not duck into any blind alleys. But decisions need to be made in a relatively short timeframe, and a lot of investigation itself is typically waved off as "can't replicate, wont fix", simply because it's perceived as difficult.
Calculating what? you cancel payments due for the next 3 months and then change the last payment date to 3 months later. Doesn't sound all that difficult to me...
You and I can just informally say "oh, you know, it's just shifted forward 3 months". Corporate accountants are held to a stricter standard than that. They have to estimate the loan's present value, and that value depends on when payments are due.
Ignoring the fact that the Contracts Clause binds the states (not the federal government)...
How is this different from Blaisdell, where the court found that Minnesota could extend the time needed to redeem a mortgage from foreclosure, on account of the Great Depression?
Under Kansas Power & Light, there's a three part test:
- extent of the impairment of the contract
- a significant and legitimate purpose behind the regulation, such as the remedying of a broad and general social or economic problem
- reasonable and appropriate for its intended purpose.
Point #2 is a slam dunk, and I think you could make the case, under #1, that the mortgage holder will still get paid slightly later, the time value of that money is very low (the yield on a 3 month T-Bill is a comically low 0.09%), and there are programs to tide over anyone who might be in a bind.
This post piqued my interest so I went and read the two rulings you mentioned, Blaisdell and Kansas Power & Light. These are my (a layman) musings about them in case anyone else is interested:
The Court in Blaisdell basically recognized that passing any law can potentially interfere with a contract and refused to let the state's emergency authority be trumped by the contracts clause. In that case, the law in question extended the time a person has to "redeem" their mortgage but also required the person to pay rent to the bank in the interim, which seemed important as they cited other similar laws that were ruled "repugnant to the constitution" which lacked a similar provision. They also highlight the difference between modifying a contract and modifying your remedies, which applies now to California (and other states) because we've suspended processing of evictions. CA didn't modify anyone's rental agreement to extend the eviction process, they just refuse to give landlords a remedy.
Kansas Power & Light was a lot more straight-forward but it basically brushed away the Contracts Clause forevermore. That case was about a natural gas contract that had been governed by Federal regulation but then the fed said "we don't want to deal with this any more, let the states regulate the price of gas" and the court ruled that Kansas hadn't interfered with the contract because the contract assumed regulation and it didn't matter much who was doing that regulation. I actually thought the court's reasoning here was pretty weak, but I support the outcome. They basically read the Contracts Clause out of the Constitution unless the state itself is party to the contract or has passed something openly nefarious, which should have been done via an amendment to the Constitution, but I have some extreme views around that.
After reading these two cases and considering whether a state government could pause mortgages/rent for a month in light of the contracts clause, I think that mattkrause's opinion is correct, that they could get away with it as long as the banks are made whole in some way.
That depends on what word “unconstitutional” means.
Would people who originally wrote the constitution consider it unconstitutional for federal government to do it? Almost surely, yes: they wrote an explicit list of things the federal government can do, and if something was not on the list, it was understood that the federal government cannot do it.
Of course, in early 20th century this has all been thrown through the window by the Progressive era Supreme Court, and contrary to intent of the framers of the constitution, it became clear that nothing restrains federal government other than what a group of nine says, and even that is not always true.
You missed the point. Of course the Contracts Clause applies to the states and not to the federal government. The point here is that there is no need for Contracts Clause applying to federal government to exist, because the federal government cannot do what the Contracts Clauses forbids the states anyway.
Of course, that's the theory. In practice, the federal government can do literally anything it wants as long as it uses magic incantations of "General Welfare" and "Commerce Clause", and as long as the nine guys in SCOTUS
accept that, regardless of what the authors of constitution meant for federal government to be able to do.
To put it more bluntly, it literally starts with the words "No State shall...."
If you want to go all originalist, the point was to prohibit private bills benefiting a specific person, which is almost the opposite of what's proposed here.
Well, we know the founders were all like, this is final word, we have foreseen all contingencies, if you ever do anything we wouldn’t like we will haunt you from the grave.
As a millennial renter, part of me wants to see lower home prices, but that also means other people being underwater. It's a tough generational predicament we've placed ourselves in. We want to encourage homeownership, but millennials aren't buying. We want homeownership to be profitable, because for most middle class families, the home is the largest financial asset. It's impossible to make all of these promises to people. If a 2008 repeat occurs again, it will only further reduce personal home ownership and increase institutional ownership.
I really wish people would stop thinking of their primary home as an investment. It's not. It's a liability. It requires maintenance and upkeep and does not generate revenue.
Unfortunately, since -- as you point out -- a home is nearly always a family's largest expense and often also largest store of value, people distort what it means to them financially and expect their home to appreciate in value well above and beyond inflation.
When you take out a mortgage to buy a home, you shouldn't have any preconceived notions about whether or not you'll be "underwater" at some point in the future. And really, it does not matter one bit if you're underwater. Unless something has also happened to your income stream, you just keep paying it, as you should. The borrowed money doesn't somehow magically become less money just because conditions have changed and your home's market value has dropped. The downside is, of course, that you may not be able to sell the house and move away until you've paid off more of your mortgage. But that's a risk you take when you sign that paperwork up front.
The home-as-investment thing is fairly uncommon in the world and seems to mainly be a US thing. I wish it would die, as it should. It only serves to distort the market, and fuels ever-increasing home prices, which makes it continually harder for the average family to own their own home, further increasing institutional ownership.
Home prices as a multiple of median income have increased in many cities outside of the US: London, Paris, Berlin, Hong Kong, the financialization of housing is likely driving a house-as-investment ethos beyond US borders. Some nations, like Japan, are notable exceptions due to local preferences.
If housing is profitable, in the sense of offering appreciation above the general rate of inflation, then it becomes less affordable to the next buyer, who has to fork over a larger percentage of their lifetime earnings to live there.
It's unfortunate that this appreciation has progressed to the point where nearly all of a family's wealth is tied up in their home, as it is not a risk-free asset to hold.
The way I like to describe it is that people want home values to go up but home prices to go down, and never seem to realize that this is impossible by definition.
There is no painless way out of this mess. The first option is to inflate housing prices away. A $600k starter home would become reasonable and a loaf of bread would be $8-$10. The second option is to let housing crash and burn. The first option is politically more palatable but pretty hard to do against such powerful deflationary headwinds, so my money is on the second when the boomers dump their real estate.
Anyone who bought at these prices is already underwater. The thing to look at is housing as a multiple of median income. If it looks insane, it is insane.
Given the inflexibility of wages, I question the effectiveness of this potential strategy, but given the problems we face, any possible strategy deserves a thorough review. I certainly agree on the political viability of inflation, since it isn't as perceptible. If someone sells a house 20 years after they bought it for the same nominal value, it doesn't like as much of a loss?
This is why I don't expect a "V" shaped recovery. Consumer spending will be down because a lot of people will be spending their income on paying their past-due bills.
Credit reporting is going to hurt a lot of people too, and that will also decrease consumer spending because people will have less access to credit.
forbearance and tax relief will do wonders for those who own properties however this does nothing for renters or cover the other considerations, food and utilities.
the only solution is to replace lost income with a maximum cap of how much is restored. As in, take the reported income filings or individuals across a set period prior to the nationwide lockdown and use that to determine aid to go to those people. No wholesale just because you are breathing you get money. No bonus on top of it for children. Hence the number will likely need to be larger than $1200 for one month and taxes at all levels need to be forgiven for the air. I am betting on nearly $2000 per income earner up to their income or that cap.
however you will have to accept you will have people who will waste this money as well, you can easily find numerous cases where people treated the last stimulus as a bonus
Part of me has wondered... What if we just went through the motions of the economy? I.e., average everyone's spending over the last year and require everyone to make 1/12 those payments to their recipients per month. Obviously we wouldn't be realizing the benefit of the things we mock buy, but it seems to me like it would largely preserve the economy in the sense that no one would have to face a deficit? Anything still possible to deliver (i.e., food, rent, etc) would be delivered for the money and anything that couldn't would just not be.
Obviously there are many practical issues with this, namely that it would require way more and detailed data on purchases than anyone has and would be completely politically infeasible.
> Obviously there are many practical issues with this, namely that it would require way more and detailed data on purchases than anyone has and would be completely politically infeasible.
And the fact that a lot of people don't have any money right now, and haven't made money since March, and don't know when they will be able to make money again.
Different idea: just hibernate the economy. Completely. No money transfers. Nobody pays rents or food or bills; nobody gets paid either salary or pensions (but still has to show up for work if required/ possibile). This could help preventing businesses or private individuals or families going broke during the lockdown; when it's time, everything can be restarted at once. It might work (or have worked) for a short period of time, though I imagine it's practically inconceivable.
People need food to live. Are grocers expected to hand out food without payment? If everything is priced at $0, I might not make it to the grocery store fast enough before the crowd empties the place.
True. But you could for example say that every citizen has a right to $50 worth of food (at normal prices) per week, and has to pay any excess. Grocers might get partial refund from the government for the food already in stock; new orders going down the supply chain are not paid at all. (Btw, I know this is a crazy idea, but just for the sake of the argument).
Free at walmart's expense (with some refund from the government for products already in stock- and walmarts doesn't have to pay wages or rents either) but new orders towards the supply chain are also free. I understand it's almost ceertainly unfeasible, but the rationale is preventing a situation in which labour and small businesses are bled dry while capital (from rents, etc.) keeps accumulating. Costs should be distributed as evenly as possible across society.
