Financial time-out in a pandemic economy?

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Question: 

What would the impact of a Congressional or Presidential order for a “financial time out” until the virus is brought under control? This would be a closure of the stock market and suspension of all debt and rent. This would be far cheaper than throwing trillions of borrowed dollars at everyone and everything! I believe we are working on the wrong part of the “equation.” People would only have to worry about food, water, and utilities. This is a much smaller problem to solve! When the virus is brought under control, the “time out” can be canceled and the economy can be brought back to life. People will have confidence, in the meantime, that their life savings isn’t going to melt down. It is absurd to allow this virus to destroy our economy! It doesn’t have to!

Answer: 

When banks lend out money, they do so expecting repayment.  If banks are not repaid, the value of the loan decreases.  By law, banks are obligated to value their loans at the fair market value.  Mandating that all repayment stop would mean that every loan would drop in value.  Banks whose assets are lower than their liabilities are ‘bankrupt’ and would be closed.  I suspect that your policy would bankrupt every bank in the United States.

As for rents, people who own property and rent them out are in the business of property management.  They are paid by rents paid by their tenants.  Mandating that property managers as a group get zero income while their tenants are paid the value of their now unpaid rent is not a neutral policy.

Many people have their pensions and savings tied up in the stick market.  They do not have the resources to absorb large losses of asset value.  Others need to transfer illiquid assets such as sticks into cash to meet their obligations.  Preventing individuals from accessing the stock market will prevent individuals from acquiring needed cash for their current needs.

Not all tenants or borrowers are losing income.  In the worst cases, maybe 25% of the workforce will be unemployed.  Following the longest expansion in economic history, our unemployment insurance trust funds are in great shape.  On average, people who qualify for unemployment benefits will get 54% of their previous earnings.  The percentage is highest for low wage workers.  To qualify, workers have to have worked at least one year and there is a minimum earning amount which may mean working hours.  That means that most people can pay their rent and mortgage or debts.  A universal policy such as the one you propose that is not tied to need will inefficiently reward some people who have no financial exigency and will force others to absorb large losses with no help.

The infusion of federal dollars through Congressional or Federal Reserve Action is the most even-handed way to help those in need.  The Fed could agree to buy up loans that are falling in value to help banks adjust terms to help those who need help.  Banks can then ease up on loan payments for landlords who have tenants who need help.  And the Congress can ease up the requirements on unemployment benefit qualifications (prior work requirements or minimum earnings) to help those who most need the help.  Untargeted policies that force some private sector groups to absorb all of the cost of the virus is unfair and unwise.

Answered by:
Dr. Peter Orazem
University Professor
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Last updated on May 1, 2020