The ostensible purpose of the CARES act is to help distressed individuals and small businesses. But much less than half of the spending in the act is directed at those groups. And in practice, the funds are dribbling out, because of poor design and bureaucratic read tape. My credit-line idea could have been implemented with a few lines of computer code at banks.
Meanwhile, the really significant feature of the CARES act is a government takeover of the capital market. The government is authorizing the Fed to lend $5 trillion to businesses, which is more than the entire private-sector lending market in 2019.
If Congress had put President Trump in charge of deciding which businesses get loans and which ones don’t, I assume that more people would agree with me that it is the worst piece of legislation in U.S. history. The only difference now is that instead of replacing the private capital market with a central planner in the Oval Office, the CARES act replaces the private capital market with a central planning bureau at 20th and C Streets, NW.
We now budget on eight year cycles and usually continuing resolutions in between. Why call it stimulus when we do it on a regular basis? The current bailouts are well predicted if one goes back and looks at the recession cycles the last three times. One could see the bailout cost doubling each recession since 2000.
But Garret Jones says that we need 10% Less Democracy, and the Fed running things is GREAT!
1. I read over section 4003 and some of the commentary and explanation of the emergency facilities, though some of the details are unknown and unknowable (things yet to be determined or requirements to be waived, in the discretion of various individuals). My impression is that you couldn’t even pay banks to make a lot of these ‘loans’ right now, if you didn’t also insure them from the huge expected losses, which is probably politically impossible. Banks have their own problems, and probably want nothing to do with rolling over corporate debt right now, even if you gave them cash at -1% interest. I say roll over because there are limits on loans to close to what the businesses have already issued, and they can’t use the money to refinance, that is, to prematurely retire other debt, unless it was already set to expire. There are going to be a lot of bankruptcies, and the total bill is too hard to predict using typical methods, and depending on what happens with the virus and attempts to develop vaccines, and government dictates. Who can take the risk of absorbing those losses right now, without putting their own survival on the line, besides the government?
2. Vladimir earlier made the point about confusing illiquidity from insolvency. A business without customers cannot pay the bills not just because it has trouble getting loans, but because those bills are all straight losses and, to the extent they are out of cash to pay them, they are broke.
Perhaps I am mistaken about this, but I thought that the issue of illiquidity in crisis was one particular to the financial sector, and which resulted from both their high leveraged position and their particular function of maturity transformation of obligations. That’s what allows a ‘run’ on a bank to kill it, even if, without the run, and with access to some short term credit, the bank could survive and make its short term payments and good on all its obligations.
But one doesn’t do a ‘run’ on a shuttered barber shop that can’t pay the rent because it has no customers. What businesses like that do when they don’t have enough cash is to make recourse to “legal credit”, that is, just not paying the bill and daring their billers to not forbear and take them to court or try to evict in the middle of a crisis. Either you’re going bankrupt anyway, in which case those arrears will never be collected, or the biller forbearance will help you survive, and you’ll pay them back later when things get back to normal.
“And in practice, the funds are dribbling out, because of poor design and bureaucratic read tape.”
Here in Canada, we have a similar program that gives $2,000 a month for those who are isolating. After watching the 60 Minutes program about the long delays in the US, we logged into our government’s website for my wife who is isolating expecting something similar. We were done in about two minutes. We applied this Monday and the money arrived this morning (Wednesday).
Canada’s Financial Post reported today that some Canadians thought they were logging into a fake website because they couldn’t believe the process was that easy.
‘So easy I thought it was fake’: CRA’s CERB system gets stellar reviews in first days of operation : https://business.financialpost.com/news/economy/so-easy-i-thought-it-was-fake-cras-cerb-system-gets-stellar-reviews-in-first-days-of-operation?video_autoplay=true
Here’s a comment from someone with the same experience in the article above:
“I started the application at 4 a.m. and finished at approximately 4:02 or 4:03 a.m.” —Courier service worker in Edmonton