Last Train to Fast Recovery

The anticipated evolution of the economic crisis caused by the COVID-19 pandemic is playing out. While the resilience of the US economy has allowed for a bounce from the extreme lows of last spring, the core issues have not been addressed. For entire sectors the situation will get much worse and damage will become permanent unless the right kind of action is taken now!

Prior relief has been exhausted … without providing a structural solution

The near 3-trillion dollar relief package(s) passed since last spring has come and gone. It HAS provided relief but the form in which these relief resources have been given constrained its duration and effectiveness. Understandably, Congress is reluctant to pass another mammoth package — given how little bang has been provided by the huge buck.

The fact is that relief relying primarily on grants or loans is the WRONG kind of government intervention, as they fail to provide a structural solution to the mechanics of the crisis. Therefore, the amounts that can be provided under this form are insufficient to have lasting impact.

For example, the median household rent in the United States is $1,400; therefore a $1,200 check would not even cover rent for a month, forget the nine months that the crisis has claimed to date.

Similarly, the various loans or grants to businesses — while huge in the aggregate — are nevertheless too small to allow them to retain and pay their employees and stay in business in the face of collapsed revenues while still facing huge rental and financial obligations.

The situation is back to critical for many”

Necessity and ingenuity have allowed businesses in many sectors to resume decent economic activity. However, as the medical emergency perdures and confinement measures are extended, households and entire important economic sectors will see the crisis reach breaking levels.

Households: lacking sufficient income, many households are struggling to make ends meet and are unable to fulfill their financial obligations, of which rent is the biggest at an average of 30% of monthly net income. The Aspen Institute estimated that almost 40 million Americans will face evictions in the coming months across the United States[i].

Businesses: Many have tried to hold on for months, cutting down expenses and letting go of employees (contributing to the plight of households). Yet, the structural issue of commercial rents has not been solved. Unable to make rent payments and spiraling deeper and deeper into debt, many businesses are in danger of bankruptcy or closure while some have already permanently closed. As an example, the Restaurants Act of 2020 summary provides details about the decimation of restaurants that is under way (and accelerating) and points out the enormous size, $1 trillion annually, of the boost that the restaurant industry contributes to the US economy.

Landlords and financial stakeholders are the next shoe to drop

So far, most residential and commercial landlords, and holders of financial capital have been only indirectly affected. Many may have hoped to emerge little scathed by the crisis — but reality is about to hit hard — as can be observed by the precipitous decline in commercial rents and the exploding volume of vacancies in the office real estate space.

With a lot of supply and depressed demand, it may be a year or more before new tenants can be found to move in and start paying rent. Even so, significant price reductions are all but assured and may last for several years.

In the worst cases, the landlords themselves and other financial intermediaries along the economic chain may be unable to meet their own financial obligations and suffer bankruptcy or a permanent capital loss.

The only hope to avoid such pain is for them — and everybody — to recognize because of their place in the economic chain, landlords and real capital asset holders are the largest part of the problem. Therefore any structural solution must involve them — if they want to keep “milking the cow and not kill it”.

Rent Relief — a one-legged solution

Rent relief programs that have been suggested take a stab to address the core issue:

Eviction moratoriums only prevent landlords from evicting tenants for not paying rents. This is extremely helpful in a short timeframe — but useless in a longer timeframe, as tenants are required to repay any missed rent payments at a later time: for most, bankruptcies or evictions will be simply moved forward.

Direct payment to landlords has been suggested, but doing it directly would be gargantuanly prohibitive for the government to do on its own.

In contrast, rent cancellation programs would cancel the accrual of rents during the crisis entirely. While this is essential to provide relief to households and tenants, it merely shifts the burden of these payments onto landlords, who still must repay financial intermediaries for their mortgages while facing no or much reduced rental revenues. This inability to pay financial obligations and consequent capital losses or bankruptcies will ricochet up the financial chain, drawing more and more people and businesses into the crisis.

“Time Suspended” — a comprehensive solution

Thus we see that a structural solution is needed to cover all the bases. It must provide rent and interest relief at the end of the chain; but it must also be smart about how the burden is partially shifted onto other economic agents. It can neither absolve landlords and financial agents from shouldering any of the burden, but it also cannot simply shift the burden onto just the next level. The burden needs to be widely shared so that each economic agent only bears the smallest possible fraction of it.

The Time Suspended framework sets ALL interest rates on ALL financial assets, ALL unproductive business real assets, and ALL personal mortgages to 0% on all pre-existing contracts while the crisis lasts; and concomitantly sets a grace period for any installment, and extends all contracts by the same amount of time, as appropriate. (Note that the government is already doing exactly that with student loans: 0% + deferment). The deferments and suspensions are modulated over time in proportion to business or household income contraction.

By making the solution ‘universal’, all economic agents down the chain that see a reduction in their income or revenues reduced, would benefit by a corresponding proportional reduction in their own financial obligations.

As a result, the burden of lost revenue is distributed across all agents in the economy rather than completely obliterating one level (businesses and households, or landlords, or financial intermediaries, or bondholders). The sharing of the burden would give businesses the resilience they need during an unprecedented economic standstill, without simply shifting it onto landlords and financial intermediaries.

While some might be concerned about the legal cost of implementing the Time Suspended solution, a moment of reflection makes it clear that it will in fact save $$$ in both legal litigation and program administration costs as relief flows automatically where it needs to go!

with Prof. Raphael Douady
research Professor at University of Paris I: Pantheon-Sorbonne; mathematician, statistician, extreme risk specialist

Jeremy Dilbeck, MPP, Intl. Trade & Finance



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