4 ms·

I have been thinking about these issues since the beginning of the crisis, and the two big questions I have are: 1) What do you do about bonds? A very large pr

by nickff 7y ago

I have been thinking about these issues since the beginning of the crisis, and the two big questions I have are: 1) What do you do about bonds? A very large proportion of all debt is packaged into bonds, and reducing their yield will have a substantial effect on many pensions 2) Who is going to pay the wages of the people paid to administer these loans? Are they going to accept a deferral of their wages? I am not trying to dismiss your idea; I had many similar ones early on, but I couldn't figure out how to square the circle.

toomuchtodo 7y ago
> 1) What do you do about bonds? A very large proportion of all debt is packaged into bonds, and reducing their yield will have a substantial effect on many pensions US Treasury pays bondholders some, but not all, of the interest income due. Shared haircut between bondholders and the taxpayers. This is a catastrophic loss with a nation state providing what amounts to insurance, and incredibly cheaper not only economically, but from the struggle and hardship many would face from foreclosure and relocation. > 2) Who is going to pay the wages of the people paid to administer these loans? Are they going to accept a deferral of their wages? PPP loans (forgiven when used for payroll) for mortgage servicers. Those folks are still going to be needed to account for bondholder payments, with the Treasury picking up the tab instead of homeowners.
- nickff 7y ago
  A taxpayer bailout solves a bunch of problems, at the expense of non-mortgage holders (AKA renters). It seems unjust to take from renters and give to property-holders, given that the latter are generally more affluent, and knowingly took a risk (by taking out a loan).
  - toomuchtodo 7y ago
    > It seems unjust to take from renters and give to property-holders, given that the latter are generally more affluent, and knowingly took a risk (by taking out a loan). Life isn't fair. Renters have landlords with mortgages also, and renters are just as challenged as homeowners currently (30+ million unemployed, 1/5th of the US working population). Broad policy decisions have some moral hazard to be deprioritized. The goal isn't fairness, it is to return to economical equilibrium as rapidly as possible.
    - nickff 7y ago
      Your proposal would stabilize the situation, but I am not sure why this bailout is better or worse than other proposed bailouts. We can't go bail everyone out, unless we want to go into hyperinflation. I am not saying I have an answer, I just think there are deep problems with these ideas.
      - toomuchtodo 7y ago
        There are always deep problems when the problems are complex. This does not mean you take your time. Just as the Obama administration quickly moved GM through a Chapter 11 reorganization [1] despite objections by free market proponents and shareholders (to save GM workers' jobs), and drastic actions was taken by the Treasury and the Fed to save certain financial services firms (merging them into stronger entities) after the failure of Lehman Brothers during the 2008 GFC [2], complaints can saved for the history book on the topic. In the meantime, move fast to avoid suffering at scale. I'm not saying you're wrong, by any means, but that you have to be comfortable with your solution being unfair and suboptimal. It is not the best course of action, but the least worst course of action. [1] https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reor... [2] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308 https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...
        nickff 7y ago
        I would be comfortable advocating for an intervention if it were a Pareto improvement. Unfortunately, such an alternative is not readily apparent.
    - cadlin 7y ago
      As a renter and voter, my preferred policy solution is to suspend rental evictions, let the foreclosures go forward as mortgages are a risky asset, then let the market sort it out at auction. That sounds like a more market-oriented solution to me.
      - 7y ago
  - samsonradu 7y ago
    Thanks for pointing out the big elefant in the room. It looks like this is the ‘new normal’ though. Pushing people to take on debt as it’s almost interest-free and you might even get help from the government paying it back, all to double up on past mistakes and sustain the current asset valuations.
  - eli_gottlieb 7y ago
    If anything, given the last crisis, we should be focusing on how to address this crisis in a way that helps renters. After all, the average homeowner who can't pay their mortgage becomes a renter.
  - maxsilver 7y ago
    We can just bail them out too. We're probably going to have to just give most-to-all renters a few months of free rent here pretty soon anyway. At least bailing out mortgage-holders has zero real world cost. Bailing out renters costs actual real money (since it doesn't just defer a loan, but actually prints new money to cover it).
- 0x8BADF00D 7y ago
  The Fed can’t keep money printing forever. You’ll see.
  - toomuchtodo 7y ago
    > The Fed can’t keep money printing forever. Based on Japan, this does not appear to be the case (Bank of Japan holdings are ~110% of GDP). We can print until we can't, and from economic indicators, we have a ways to go before inflation (hyper or otherwise) is going to be cause for concern (education and healthcare aren't inflating because of currency devaluation, but because of regulatory capture).
    - 0x8BADF00D 7y ago
      Those indicators are provided by the government itself. And even if you believe those clearly doctored numbers, there is a cause for concern. Particularly with the amount that’s being added to the money supply daily. It’s not sustainable.
      - toomuchtodo 7y ago
        Let's pretend that government statistics are wildly manipulated, and that your thesis is sound. I ask the following: 1. Reliable rebuttal data sources to government inflation statistics. 2. Proof that it isn't sustainable besides conjecture (as I mentioned, Japan is economically stable and a first world country with an enormous amount of debt that will never get paid back, while parts of Europe have negative interest rates and still have a relatively high standard of living). Yes, if you’re not first world (Venezuela, Zimbabwe) this doesn’t work. But the US dollar is a reserve currency and US treasuries are the safest asset in the world. When you need to spend good will in currency value form, you spend it.
    - AnimalMuppet 7y ago
      The economy isn't actually money. The economy is really stuff; money is just a mechanism for moving the stuff around. The problem is, if we want stuff (food and cars and electricity and software), someone has to make the stuff. We can print money until the cows come home, but that still fails if there aren't any cows. Japan has managed to keep producing enough to run the actual economy, and has shuffled paper around to keep the books from breaking. The US can do that, too, for a while. But the economy that produces stuff has to come back before too long, or we're going to have actual shortages in a way that printing more money cannot solve.
jerf 7y ago
You speak as if you're hunting for an option where nothing bad happens to anyone? The bonds are going to fail somehow; the question is in the allocation of that failure, not whether they fail. (Partial failure, not total failure.)
- nickff 7y ago
  That's the big problem for me; I would like for nobody to get hurt, but it seems that the holder of the secured debt has some contractual rights. Given the situation, I don't see how a third party has the right to step in and take from one party to give to the other. Ideally we'd have debt-holders negotiating solutions with their counter-parties, but that seems difficult with securitized loans.
  - AnimalMuppet 7y ago
    Well... "a contract is a contract", but there's some recognition that extraordinary circumstances can need special treatment. My home insurance, for example, has clauses about "acts of God" and "acts of war". (Specifically, earthquakes are included in "acts of God" - or maybe they're specifically excluded, in any event, the policy doesn't cover them. Tornadoes and hurricanes might also be excluded. But I don't live in tornado country; I do live in an area that can have earthquakes.)
pm90 7y ago
Not everyone has lost their jobs. Folks that still have an income should be paying their mortgages/rent on schedule. Those who can’t can defer. This way there’s a reduction in income but not a total collapse.
- nickff 7y ago
  You'd be a fool not to defer, if the deferral is at almost no cost. We have seen that people will take the financial path of least resistance (as happened with non-recourse loans in the financial crisis), so I wouldn't depend on payment by those who can.
  - kelnos 7y ago
    Is everyone eligible for deferment, regardless of their financial or employment situation? If so, that seems incredibly short-sighted policy-wise.
    - pm90 7y ago
      Means testing would cause more problems than it can solve. A somewhat fair compromise would be to increase the amount owed a tiny bit to encourage those who can pay to continue paying.

by nickff 7y ago

toomuchtodo 7y ago

> 1) What do you do about bonds? A very large proportion of all debt is packaged into bonds, and reducing their yield will have a substantial effect on many pensions US Treasury pays bondholders some, but not all, of the interest income due. Shared haircut between bondholders and the taxpayers. This is a catastrophic loss with a nation state providing what amounts to insurance, and incredibly cheaper not only economically, but from the struggle and hardship many would face from foreclosure and relocation. > 2) Who is going to pay the wages of the people paid to administer these loans? Are they going to accept a deferral of their wages? PPP loans (forgiven when used for payroll) for mortgage servicers. Those folks are still going to be needed to account for bondholder payments, with the Treasury picking up the tab instead of homeowners.

nickff 7y ago
A taxpayer bailout solves a bunch of problems, at the expense of non-mortgage holders (AKA renters). It seems unjust to take from renters and give to property-holders, given that the latter are generally more affluent, and knowingly took a risk (by taking out a loan).
- toomuchtodo 7y ago
  > It seems unjust to take from renters and give to property-holders, given that the latter are generally more affluent, and knowingly took a risk (by taking out a loan). Life isn't fair. Renters have landlords with mortgages also, and renters are just as challenged as homeowners currently (30+ million unemployed, 1/5th of the US working population). Broad policy decisions have some moral hazard to be deprioritized. The goal isn't fairness, it is to return to economical equilibrium as rapidly as possible.
  - nickff 7y ago
    Your proposal would stabilize the situation, but I am not sure why this bailout is better or worse than other proposed bailouts. We can't go bail everyone out, unless we want to go into hyperinflation. I am not saying I have an answer, I just think there are deep problems with these ideas.
    - toomuchtodo 7y ago
      There are always deep problems when the problems are complex. This does not mean you take your time. Just as the Obama administration quickly moved GM through a Chapter 11 reorganization [1] despite objections by free market proponents and shareholders (to save GM workers' jobs), and drastic actions was taken by the Treasury and the Fed to save certain financial services firms (merging them into stronger entities) after the failure of Lehman Brothers during the 2008 GFC [2], complaints can saved for the history book on the topic. In the meantime, move fast to avoid suffering at scale. I'm not saying you're wrong, by any means, but that you have to be comfortable with your solution being unfair and suboptimal. It is not the best course of action, but the least worst course of action. [1] https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization https://en.wikipedia.org/wiki/General_Motors_Chapter_11_reor... [2] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308 https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...
      - nickff 7y ago
        I would be comfortable advocating for an intervention if it were a Pareto improvement. Unfortunately, such an alternative is not readily apparent.
  - cadlin 7y ago
    As a renter and voter, my preferred policy solution is to suspend rental evictions, let the foreclosures go forward as mortgages are a risky asset, then let the market sort it out at auction. That sounds like a more market-oriented solution to me.
    - 7y ago
- samsonradu 7y ago
  Thanks for pointing out the big elefant in the room. It looks like this is the ‘new normal’ though. Pushing people to take on debt as it’s almost interest-free and you might even get help from the government paying it back, all to double up on past mistakes and sustain the current asset valuations.
- eli_gottlieb 7y ago
  If anything, given the last crisis, we should be focusing on how to address this crisis in a way that helps renters. After all, the average homeowner who can't pay their mortgage becomes a renter.
- maxsilver 7y ago
  We can just bail them out too. We're probably going to have to just give most-to-all renters a few months of free rent here pretty soon anyway. At least bailing out mortgage-holders has zero real world cost. Bailing out renters costs actual real money (since it doesn't just defer a loan, but actually prints new money to cover it).
0x8BADF00D 7y ago
The Fed can’t keep money printing forever. You’ll see.
- toomuchtodo 7y ago
  > The Fed can’t keep money printing forever. Based on Japan, this does not appear to be the case (Bank of Japan holdings are ~110% of GDP). We can print until we can't, and from economic indicators, we have a ways to go before inflation (hyper or otherwise) is going to be cause for concern (education and healthcare aren't inflating because of currency devaluation, but because of regulatory capture).
  - 0x8BADF00D 7y ago
    Those indicators are provided by the government itself. And even if you believe those clearly doctored numbers, there is a cause for concern. Particularly with the amount that’s being added to the money supply daily. It’s not sustainable.
    - toomuchtodo 7y ago
      Let's pretend that government statistics are wildly manipulated, and that your thesis is sound. I ask the following: 1. Reliable rebuttal data sources to government inflation statistics. 2. Proof that it isn't sustainable besides conjecture (as I mentioned, Japan is economically stable and a first world country with an enormous amount of debt that will never get paid back, while parts of Europe have negative interest rates and still have a relatively high standard of living). Yes, if you’re not first world (Venezuela, Zimbabwe) this doesn’t work. But the US dollar is a reserve currency and US treasuries are the safest asset in the world. When you need to spend good will in currency value form, you spend it.
  - AnimalMuppet 7y ago
    The economy isn't actually money. The economy is really stuff; money is just a mechanism for moving the stuff around. The problem is, if we want stuff (food and cars and electricity and software), someone has to make the stuff. We can print money until the cows come home, but that still fails if there aren't any cows. Japan has managed to keep producing enough to run the actual economy, and has shuffled paper around to keep the books from breaking. The US can do that, too, for a while. But the economy that produces stuff has to come back before too long, or we're going to have actual shortages in a way that printing more money cannot solve.

jerf 7y ago

You speak as if you're hunting for an option where nothing bad happens to anyone? The bonds are going to fail somehow; the question is in the allocation of that failure, not whether they fail. (Partial failure, not total failure.)

nickff 7y ago
That's the big problem for me; I would like for nobody to get hurt, but it seems that the holder of the secured debt has some contractual rights. Given the situation, I don't see how a third party has the right to step in and take from one party to give to the other. Ideally we'd have debt-holders negotiating solutions with their counter-parties, but that seems difficult with securitized loans.
- AnimalMuppet 7y ago
  Well... "a contract is a contract", but there's some recognition that extraordinary circumstances can need special treatment. My home insurance, for example, has clauses about "acts of God" and "acts of war". (Specifically, earthquakes are included in "acts of God" - or maybe they're specifically excluded, in any event, the policy doesn't cover them. Tornadoes and hurricanes might also be excluded. But I don't live in tornado country; I do live in an area that can have earthquakes.)

pm90 7y ago

Not everyone has lost their jobs. Folks that still have an income should be paying their mortgages/rent on schedule. Those who can’t can defer. This way there’s a reduction in income but not a total collapse.

nickff 7y ago
You'd be a fool not to defer, if the deferral is at almost no cost. We have seen that people will take the financial path of least resistance (as happened with non-recourse loans in the financial crisis), so I wouldn't depend on payment by those who can.
- kelnos 7y ago
  Is everyone eligible for deferment, regardless of their financial or employment situation? If so, that seems incredibly short-sighted policy-wise.
  - pm90 7y ago
    Means testing would cause more problems than it can solve. A somewhat fair compromise would be to increase the amount owed a tiny bit to encourage those who can pay to continue paying.