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The WSJ Editorial Board has suggested that the Fed create a new facility that gives very cheap loans to businesses that need them. These loans will not need to

The WSJ Editorial Board has suggested that the Fed create a new facility that gives very cheap loans to businesses that need them. These loans will not need to be repaid right away and should sustain any business that needs it during this period. It sounded workable. https://www.wsj.com/articles/financing-an-economic-shutdown-11584399753 https://www.wsj.com/articles/financing-an-economic-shutdown-...

jborichevskiy 7y ago
Not an economist (just trying to understand all this) but wouldn’t this just be kicking the can down the road? I understand how loans and credit works in healthy markets/seasons but to me this feels like making a bet that these businesses would be able to take this infusion, weather out the storm, and then raise profits enough above what they were before to pay it all back. It’s fundamentally different from me starting a small business and going to Chase saying, look here’s a healthy prospect and I’ll be able to pay it back within x years.
- whatshisface 7y ago
  If you can kick the can down the road until the virus goes away, you just saved the whole economy. The ability of my local Chinese place to serve customers is undiminished, my desire to eat Chinese food is undiminished, and all that's in the way is an ultimately temporary law.
  - jborichevskiy 7y ago
    > The ability of my local Chinese place to serve customers is undiminished, my desire to eat Chinese food is undiminished, and all that's in the way is an ultimately temporary law. Agreed on this. But the rent paid out during the period of reduced revenue coming in creates a delta that this loan is filling in. The loan still needs to be paid back (even assuming 0% interest). That extra money needs to come from somewhere: increased prices, increased traffic, or decreased expenditures.
    - markdown 7y ago
      A better way would be to suspend all debt collection and rent collection for x months. That will keep lots of small businesses alive, and employees on reduced salaries will still be able to feed their families if they don't have to worry about rent. Throw in food stamps for the unemployed and you're most of the way to keeping a nation going.
      - GeorgeWBasic 7y ago
        Far, far, far better. In fact, it's the only thing that might actually work. All this talk of loans is just people refusing to admit that a capitalist system (I hate saying that word) simply doesn't function under these conditions. The economy needs to be paused.
        chii 7y ago
        The rental payment from a shop is income for the landlord. The income from the landlord is payment for his/her obligations - all the way up the chain. If you force rental payments to stop, then who gets hit? The landlord is going to default on their obligations. So do you then bail them out? If the landlord defaults, the banks (presumably) will repossess the property. So it's just somebody else suffering, rather than the tenant. The loans work, because the obligation to pay back this loan will come from a future where you have the capability. The govt is the eventual guarentor of this loan, and hence, they take the hit if the eventual future does not come to pass (e.g., the restaurant never regain their full business). The gov't can't take the full hit of all these defaults all at once, but they can if it is spread out. So a loan will spread them out into the future (even perhaps, far future), and the economy survives, even if a lot of the business that took the loan didn't.
        stainforth 7y ago
        I see plenty of places that landlords just sit on waiting for some maximal amount of rent to be agreed to, only for the business to crumble under high rents, rinse, repeat.
  - vkou 7y ago
    > The ability of my local Chinese place to serve customers is undiminished, my desire to eat Chinese food is undiminished, and all that's in the way is an ultimately temporary law. Six months from now, when the quarantine ends, you aren't going to go to your local Teriyaki and Wok, and order six months wroth of Chinese food. The restaurant will never recoup those six lost months of rent. The employees will never recoup those six lost months of wages. These loans will never be repaid.
    - imtringued 7y ago
      That's not how margins work. God didn't descend down to earth and declared all restaurants to be low margin. Margin is a matter of competition. If there is lots of competition then the margin will shrink to barely cover costs of running the business. If suddenly every restaurant has a problem finding customers and a load of debt then restaurants are forced to increase their margins to cover their debt payments. Low margins are the result of heavy competition. If there is less competition margins will be high again.
      - vkou 7y ago
        1. I didn't say one word about margins in my post. 2. The problem is that after the pandemic ends, the margins will remain low. Because new entrants, with no outstanding debts or obligation will eat the lunch of any of the restaurants that remained 'open' during the pandemic.
  - pbourke 7y ago
    > he ability of my local Chinese place to serve customers is undiminished, my desire to eat Chinese food is undiminished, and all that's in the way is an ultimately temporary law. I have thought quite a bit about whether this situation will cause long-term behavioral changes. Do you expect the restaurant business to bounce back to where it was after the crisis ends? I would expect that to happen for a short-duration event. But what if this persists for months, or into next year? I have searched for papers that explore this idea (say after the 1918 Spanish Flu), but haven't found anything relevant.
- chapium 7y ago
  This would introduce liquidity to a struggling category.
bjourne 7y ago
How would loans help? A lot of employees aren't currently needed so they will be laid off regardless of whether the business owner can take out cheap loans. I don't see how loans can make up for the much reduced economic activity.
- rosybox 7y ago
  I imagine the WSJ Editorial Board is focusing on a solution to keep businesses surviving, not employment. They may have other ideas to help with that later. Without businesses, there will be no employment.
- imtringued 7y ago
  The economy is an engine that isn't allowed to stop or it will break. The idea behind loans is that you force the engine to keep turning through external support. Yes this is obviously a money losing strategy but the value of the engine is much higher than the cost of keeping it running during the pandemic.
charwalker 7y ago
Loans may already be super cheap and expanding that option further will extend the current run but lead to a bigger crash once those loans come due given the economy continues to flat line after the pandemic ends.

jborichevskiy 7y ago

Not an economist (just trying to understand all this) but wouldn’t this just be kicking the can down the road? I understand how loans and credit works in healthy markets/seasons but to me this feels like making a bet that these businesses would be able to take this infusion, weather out the storm, and then raise profits enough above what they were before to pay it all back. It’s fundamentally different from me starting a small business and going to Chase saying, look here’s a healthy prospect and I’ll be able to pay it back within x years.

whatshisface 7y ago
If you can kick the can down the road until the virus goes away, you just saved the whole economy. The ability of my local Chinese place to serve customers is undiminished, my desire to eat Chinese food is undiminished, and all that's in the way is an ultimately temporary law.
- jborichevskiy 7y ago
  > The ability of my local Chinese place to serve customers is undiminished, my desire to eat Chinese food is undiminished, and all that's in the way is an ultimately temporary law. Agreed on this. But the rent paid out during the period of reduced revenue coming in creates a delta that this loan is filling in. The loan still needs to be paid back (even assuming 0% interest). That extra money needs to come from somewhere: increased prices, increased traffic, or decreased expenditures.
  - markdown 7y ago
    A better way would be to suspend all debt collection and rent collection for x months. That will keep lots of small businesses alive, and employees on reduced salaries will still be able to feed their families if they don't have to worry about rent. Throw in food stamps for the unemployed and you're most of the way to keeping a nation going.
    - GeorgeWBasic 7y ago
      Far, far, far better. In fact, it's the only thing that might actually work. All this talk of loans is just people refusing to admit that a capitalist system (I hate saying that word) simply doesn't function under these conditions. The economy needs to be paused.
      - chii 7y ago
        The rental payment from a shop is income for the landlord. The income from the landlord is payment for his/her obligations - all the way up the chain. If you force rental payments to stop, then who gets hit? The landlord is going to default on their obligations. So do you then bail them out? If the landlord defaults, the banks (presumably) will repossess the property. So it's just somebody else suffering, rather than the tenant. The loans work, because the obligation to pay back this loan will come from a future where you have the capability. The govt is the eventual guarentor of this loan, and hence, they take the hit if the eventual future does not come to pass (e.g., the restaurant never regain their full business). The gov't can't take the full hit of all these defaults all at once, but they can if it is spread out. So a loan will spread them out into the future (even perhaps, far future), and the economy survives, even if a lot of the business that took the loan didn't.
        stainforth 7y ago
        I see plenty of places that landlords just sit on waiting for some maximal amount of rent to be agreed to, only for the business to crumble under high rents, rinse, repeat.
- vkou 7y ago
  > The ability of my local Chinese place to serve customers is undiminished, my desire to eat Chinese food is undiminished, and all that's in the way is an ultimately temporary law. Six months from now, when the quarantine ends, you aren't going to go to your local Teriyaki and Wok, and order six months wroth of Chinese food. The restaurant will never recoup those six lost months of rent. The employees will never recoup those six lost months of wages. These loans will never be repaid.
  - imtringued 7y ago
    That's not how margins work. God didn't descend down to earth and declared all restaurants to be low margin. Margin is a matter of competition. If there is lots of competition then the margin will shrink to barely cover costs of running the business. If suddenly every restaurant has a problem finding customers and a load of debt then restaurants are forced to increase their margins to cover their debt payments. Low margins are the result of heavy competition. If there is less competition margins will be high again.
    - vkou 7y ago
      1. I didn't say one word about margins in my post. 2. The problem is that after the pandemic ends, the margins will remain low. Because new entrants, with no outstanding debts or obligation will eat the lunch of any of the restaurants that remained 'open' during the pandemic.
- pbourke 7y ago
  > he ability of my local Chinese place to serve customers is undiminished, my desire to eat Chinese food is undiminished, and all that's in the way is an ultimately temporary law. I have thought quite a bit about whether this situation will cause long-term behavioral changes. Do you expect the restaurant business to bounce back to where it was after the crisis ends? I would expect that to happen for a short-duration event. But what if this persists for months, or into next year? I have searched for papers that explore this idea (say after the 1918 Spanish Flu), but haven't found anything relevant.
chapium 7y ago
This would introduce liquidity to a struggling category.

bjourne 7y ago

How would loans help? A lot of employees aren't currently needed so they will be laid off regardless of whether the business owner can take out cheap loans. I don't see how loans can make up for the much reduced economic activity.

rosybox 7y ago
I imagine the WSJ Editorial Board is focusing on a solution to keep businesses surviving, not employment. They may have other ideas to help with that later. Without businesses, there will be no employment.
imtringued 7y ago
The economy is an engine that isn't allowed to stop or it will break. The idea behind loans is that you force the engine to keep turning through external support. Yes this is obviously a money losing strategy but the value of the engine is much higher than the cost of keeping it running during the pandemic.

charwalker 7y ago

Loans may already be super cheap and expanding that option further will extend the current run but lead to a bigger crash once those loans come due given the economy continues to flat line after the pandemic ends.