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Credit is something entities are willing to extend because they expect to get paid. Once you break this expectation, no one's going to lend. People and busine

Credit is something entities are willing to extend because they expect to get paid. Once you break this expectation, no one's going to lend. People and businesses have to borrow, explicitly or implicitly on an ongoing basis. Credit makes the world go around. No one is going to lend if the government makes it possible not to pay and still keep the other side of the transactions. This completely breaks the economy. And policy decisions cannot be made instantly. The moment something like this is close to being implemented, this will freeze the credit system entirely. And there goes the economy. We got a global financial crisis last time due to a small number of actors becoming less creditworthy and it being unclear whether they could pay their obligations. That slight change in expectations threatened to freeze the entire economy. To do this on purpose for every entity such that no one is creditworthy? That's insanity.

wegs 7y ago
Don't dramatize. You do get paid. You (potentially) get paid a few months later, and in the meantime, the Fed provides loans at effectively 0% interest. Who would you rather have: a pile of debtors in your portfolio who have a 50/50 shot of going under in the next few weeks (where a lot of Americans and small businesses are today)? Or a pile of debtors who will pay you with 95% odds in 3 months, and in the meantime, a no-interest loan from the government to provide short-term liquidity until they do pay you?
- candybar 7y ago
  This doesn't make any sense - the Fed isn't going to provide loans to everyone, individual and business access to these loans is still gated by their own creditworthiness. And if you can make credit that easy, why do you have to do this at all? Why can't we just lend everyone money and have them pay all existing obligations? Why do you have to turn everyone who's involved in simple transactions into long-term creditors, when they aren't in the business of doing that? And you can't actually lengthen payments for everything - some businesses and people with important resources will simply demand an up-front payment. Which will worsen the crunch for those that are stuck in the middle - some businesses will have to pay upfront, but get paid 3 months later. And no, banks won't want to lend to these businesses and if they can't determine whether you're one of those businesses or not, they will tighten credit on most businesses. Not to do so puts their own creditworthiness at risk. This is all assuming you have perfect execution too - in reality, there will literally be millions of lawsuits since no one will be able to actually define what you're saying precisely enough to make the implied alterations to existing contracts unambiguous. It's also important to understand that most payments aren't interest payments - some of these cover actual costs. Edit: consider what every company in the world will do in response to do this - they will review every contract they have to see if there's an angle that will help them optimize for this situation, and what kinds of addendum that they can force on others would put them in a more advantageous situation. No one will just sit and work according the spirit of the new rule, any ambiguities and angles will be exploited and lots of businesses and people will go end up on the wrong end of this.
  - wegs 7y ago
    Banks can get loans for free, and pass that onto credit-worthy businesses. Less credit-worthy businesses can get loans through the SBA through the stimulus. The government's existing programs (assuming the stimulus passes) will breach the extra 90 day gap for most. And to flip it around, if 50% of small businesses go under, banks will be left holding a lot of bad debt. Banks will go under. Landlords won't have renters, and will be left holding mortgages. Without action, the whole system collapses. You're assuming the economy is humming along right now. It isn't. Large parts are shut down. Some parts aren't. Those frictions are causing massive structural collapse as we debate. Also: In most cases, up-front payment is fine while everything else is shut down. I understand the importance of credit. But the alternative is worse. If this continues for 18 months, virtually all mortgages, private and commercial, will be under water. Virtually all renters will be evicted, or rents will have gone down many-fold. Etc.
    - candybar 7y ago
      > Banks can get loans for free, and pass that onto credit-worthy businesses. Why would they? And who's creditworthy in your world? Are banks going to be able untangle every single contract you have to see how this affects you? Especially in a world where every single customer and every single supplier is going to look at renegotiating contracts with you? The general notion of creditworthiness implies a relatively static world - changing everything is going to make everyone questionable from a credit perspective. > Less credit-worthy businesses can get loans through the SBA through the stimulus. The government's existing programs (assuming the stimulus passes) will breach the extra 90 day gap for most. Then why do we need this at all? Why can't we just have the affected businesses borrow from the government? Instead of A not paying B and B borrowing from the government to cover for not being paid, why not just have A borrow from the government so that we don't have to modify every single contract in the world in a highly unpredictable manner and freezing the entire economy? > You're assuming the economy is humming along right now. It isn't. Large parts are shut down. Some parts aren't. Most parts aren't shut down. No one is predicting a GDP decline of over 50% or an unemployment rate above 50%. Some parts are shut down, others are doing okay. > Those frictions are causing massive structural collapse as we debate. And this proposal literally is the massive structural collapse - it's the equivalent of eradicating COVID-19 by killing everyone. > Also: In most cases, up-front payment is fine while everything else is shut down. I understand the importance of credit. But the alternative is worse. If this continues for 18 months, virtually all mortgages, private and commercial, will be under water. Virtually all renters will be evicted, or rents will have gone down many-fold. Etc. Everything isn't shut down and again your business is toast if you're forced to make up-front payments while you're not getting paid. This is silly considering that there's a perfectly reasonable alternative of bailing out from the bottom up. And no, this isn't continuing for 18 months, that's completely absurd. The economy will simply have to go on if an extended shutdown fails to work and the economic pains reach a certain threshold. Also, it's not honest to compare the impact of a shutdown without your proposal for 18 months with the impact of removing credit from the system for a couple of months. The economy as we know it is completely done if you freeze credit for 18 months.

wegs 7y ago

Don't dramatize. You do get paid. You (potentially) get paid a few months later, and in the meantime, the Fed provides loans at effectively 0% interest. Who would you rather have: a pile of debtors in your portfolio who have a 50/50 shot of going under in the next few weeks (where a lot of Americans and small businesses are today)? Or a pile of debtors who will pay you with 95% odds in 3 months, and in the meantime, a no-interest loan from the government to provide short-term liquidity until they do pay you?

candybar 7y ago
This doesn't make any sense - the Fed isn't going to provide loans to everyone, individual and business access to these loans is still gated by their own creditworthiness. And if you can make credit that easy, why do you have to do this at all? Why can't we just lend everyone money and have them pay all existing obligations? Why do you have to turn everyone who's involved in simple transactions into long-term creditors, when they aren't in the business of doing that? And you can't actually lengthen payments for everything - some businesses and people with important resources will simply demand an up-front payment. Which will worsen the crunch for those that are stuck in the middle - some businesses will have to pay upfront, but get paid 3 months later. And no, banks won't want to lend to these businesses and if they can't determine whether you're one of those businesses or not, they will tighten credit on most businesses. Not to do so puts their own creditworthiness at risk. This is all assuming you have perfect execution too - in reality, there will literally be millions of lawsuits since no one will be able to actually define what you're saying precisely enough to make the implied alterations to existing contracts unambiguous. It's also important to understand that most payments aren't interest payments - some of these cover actual costs. Edit: consider what every company in the world will do in response to do this - they will review every contract they have to see if there's an angle that will help them optimize for this situation, and what kinds of addendum that they can force on others would put them in a more advantageous situation. No one will just sit and work according the spirit of the new rule, any ambiguities and angles will be exploited and lots of businesses and people will go end up on the wrong end of this.
- wegs 7y ago
  Banks can get loans for free, and pass that onto credit-worthy businesses. Less credit-worthy businesses can get loans through the SBA through the stimulus. The government's existing programs (assuming the stimulus passes) will breach the extra 90 day gap for most. And to flip it around, if 50% of small businesses go under, banks will be left holding a lot of bad debt. Banks will go under. Landlords won't have renters, and will be left holding mortgages. Without action, the whole system collapses. You're assuming the economy is humming along right now. It isn't. Large parts are shut down. Some parts aren't. Those frictions are causing massive structural collapse as we debate. Also: In most cases, up-front payment is fine while everything else is shut down. I understand the importance of credit. But the alternative is worse. If this continues for 18 months, virtually all mortgages, private and commercial, will be under water. Virtually all renters will be evicted, or rents will have gone down many-fold. Etc.
  - candybar 7y ago
    > Banks can get loans for free, and pass that onto credit-worthy businesses. Why would they? And who's creditworthy in your world? Are banks going to be able untangle every single contract you have to see how this affects you? Especially in a world where every single customer and every single supplier is going to look at renegotiating contracts with you? The general notion of creditworthiness implies a relatively static world - changing everything is going to make everyone questionable from a credit perspective. > Less credit-worthy businesses can get loans through the SBA through the stimulus. The government's existing programs (assuming the stimulus passes) will breach the extra 90 day gap for most. Then why do we need this at all? Why can't we just have the affected businesses borrow from the government? Instead of A not paying B and B borrowing from the government to cover for not being paid, why not just have A borrow from the government so that we don't have to modify every single contract in the world in a highly unpredictable manner and freezing the entire economy? > You're assuming the economy is humming along right now. It isn't. Large parts are shut down. Some parts aren't. Most parts aren't shut down. No one is predicting a GDP decline of over 50% or an unemployment rate above 50%. Some parts are shut down, others are doing okay. > Those frictions are causing massive structural collapse as we debate. And this proposal literally is the massive structural collapse - it's the equivalent of eradicating COVID-19 by killing everyone. > Also: In most cases, up-front payment is fine while everything else is shut down. I understand the importance of credit. But the alternative is worse. If this continues for 18 months, virtually all mortgages, private and commercial, will be under water. Virtually all renters will be evicted, or rents will have gone down many-fold. Etc. Everything isn't shut down and again your business is toast if you're forced to make up-front payments while you're not getting paid. This is silly considering that there's a perfectly reasonable alternative of bailing out from the bottom up. And no, this isn't continuing for 18 months, that's completely absurd. The economy will simply have to go on if an extended shutdown fails to work and the economic pains reach a certain threshold. Also, it's not honest to compare the impact of a shutdown without your proposal for 18 months with the impact of removing credit from the system for a couple of months. The economy as we know it is completely done if you freeze credit for 18 months.