I am going to elaborate on the idea I first proposed as nationwide overdraft protection. Here I will offer more arguments in favor of the proposal and add some more details. I think I will take a suggestion from a commenter and call it a credit line instead of overdraft protection. The credit line is something that is clearly limited.
1. We face a liquidity crisis, but it is in some ways the opposite of the 2008 financial crisis. 2008 was what I would call an “inside” financial crisis–the center of the crisis was the financial sector. The 2020 liquidity crisis is an “outside” financial crisis. The center of this crisis is the nonfinancial sector, including small business and individuals who are missing out on paychecks.
2. So if we focus on banks now, we are not putting relief where it is most directly needed.
3. Even forbearance, which is an idea that I have endorsed, is an inside-out approach to trying to solve the problem. But we need outside-in liquidity. We should guarantee liquidity for the nonfinancial sector, and trust that this will take care of the banks, rather than try to do it the other way around. The other way around would consist of backstopping banks and hoping that they relieve the nonfinancial sector. That would at best be fighting the last war.
4. Implement the idea for every bank account in the country. For each account, add up all the money deposited into that account in January and February of this year. We are not referring to the bank balance at any one time. Instead, we are measuring the revenue stream going into the account as deposits. For an ordinary worker, it might be $10,000, consisting of four paychecks for $2500 each. For a small business, it might be $200,000, consisting of receipts deposited. Have the government guarantee a credit line for each account’s revenue stream.
5. People and businesses that need to draw on the credit line can do so. Make the incentive to repay the loan very strong. For example, an individual would lose rights to some future government benefits if the individual does not repay the loan.
6. There would be a self-triage with using the credit line. People and businesses with no need for it will not use it. People and businesses that cannot hope to repay a loan if they use it will not draw on it, either. They will have to raise money from other sources, which might be charity or investors or outright grants from the government. The users of the credit line will be temporarily strapped individuals and businesses who expect to get back on their feet once things return to normal.
7. Use of the credit line will limit the adverse feedback effects of a few weeks of reduced economic activity. In theory, you might add to the credit line if economic activity is going to be curtailed for a longer period. But honestly, I don’t think anyone has a good policy for the scenario in which we keep the economy in a coma for months. So focus on this as an approach for dealing with a short period of sharply curtailed economic activity.
8. One advantage of this approach is that the government won’t have to write regulations for forbearance for all types of contracts. The government doesn’t have to impose mortgage forgiveness, utility bill forgiveness, car payment forgiveness, and so on. People can use their credit lines to pay their bills.
9. Another advantage is that the cost to the future taxpayers will be low. Taxpayers only have to make good on defaulted loans. The government is not obligated to bail out every single person or every single business.
10. Another advantage is that there will be less incentive for individual sectors to lobby for more. In this case, “more” would be a larger credit line. Since you have to pay back what you borrow using the credit line, it is not like you want to spend a fortune on K street lawyers trying to get it, the way you would if there were government grants up for grabs.
I am going to keep pushing this idea, because I think that we have an outside-in liquidity problem, and so far this seems like the best solution for it.
the Fed (& every gov institute) is an inside out, top down, collectively designed and operated bureaucracy. The best case scenario is stagflation. The worst (ie best?) is biz no longer depends on the USD for transactions and payrolls
I like the way you’ve expanded on your initial post. Good stuff! I very much would like this to be the way forward. I fully expect the ridiculous promises already uttered to be ‘made good’ on. But this, for future considerations, is so much better. I hope that many others in your circle who also blog frequently will pick-up on this (if they agree with it) — Prof. Caplan, Boudreaux, Cowen…maybe get Mungowitz out of hiding because his ability to make these more understandable for people like me is always appreciated.
I like this idea a lot. I hope someone in the Trump administration is paying attention.
As far as penalties/enforcement — if the line of credit is not paid off by the end of the year, why not just tack the balance onto federal income taxes owed next April? Regular penalties, interest, etc. enforced for failing to pay taxes.
Keeps it pretty simple.
This auto-credit line is a GREAT idea – voluntary, but a loan. It’s March now. Call this a 2-month credit line (Jan & Feb) available.
5b) Set an interest rate to be quite high . Like 12%, 1% per month – still less than credit card 1.5% month. Or, 2% per month. Pay this one back, first.
If, after a month, it is seen to need more, add another month (Dec 2019).
Every bank account makes it easy for the banks.
Those just opened with a new balance, get the extra balance.
Those just closed, maybe some special review available is better than just No. Can’t quite be just Yes, because the account is closed.
6) …People and businesses that cannot hope to repay a loan if they use it will not draw on it, either. This seems very unlikely – desperate people WILL use it, hoping to get thru or get started somewhere else. Not allow this credit line to be discharged in bankruptcy – it requires a personal guarantee. With quick auto wage garnishment if not paid back (in 12 months? On a minimum monthly plan, just like a gov’t credit card?) after the payment period.
Very important to note that this crisis affects all the people losing wages.
This is not too different from my own personal idea – a Tax Loan, where all those who paid income taxes can borrow the amount of taxes they paid last year. Or 2-5 years.
Compare with an example of two airlines, each with $10 billion in revenue. One has paid almost no taxes, 0.1% of revenue ($10 million), the other paid 2% of revenue ($200 million). Under this credit line plan, each has $10/6 billion in in a credit line.
Under a tax loan plan, the one has only $10 million, the other $200 million — in both cases, exactly the amount of previously paid taxes. (Which both were trying to minimize).
Perhaps those firms which paid less in taxes actually should be the ones that don’t survive this coming adjustment.
Giving loans to people who can be productive and run into a temporary issue with no fault of their own makes sense. You would expect a relatively short loan duration, but relatively high rate (since many potential borrowers in dire need).
Why is this not happening already and organically?
I suspect the answer is simple: we’ve been short on savers for a while.
So the solution you suggest doesn’t seem to address the root problem. Without useful saved resources, we just can’t go far with drastically reduced production. Issuing more loans out of thin air is part of the problem 🙁
Some great ideas there, but… the main problem I see is the indiscriminate starting point of implementing the idea, “for every bank account in the country” (personal or business). Given that it’s an an “outside” financial crisis and that “we should guarantee liquidity for the nonfinancial sector, and trust that this will take care of the banks”, we need to draw some lines – where does the nonfinancial sector begin and end? Would laid off bank employees be excluded? What about hedge funds’ own business accounts?
Secondly, even within the “nonfinancial sector”, the personal bank accounts should only include people who have actually lost their jobs – not those still employed (gigsters could be included). Afterall, we’re trying to be targeted and precise here. And, btw, “those still working” includes most if not all government workers – Federal, state, municipal, police and fire-fighters, etc! Exclude them. Similarly, what about retirees collecting social security and fixed pension payments? The viral crisis hasn’t impeded their “revenue”. So we’d need some restrictions! Hold down the cost!
As for businesses, how are they going to earn the money to pay back the loans? When is the recovery coming? They’re still basically out all the revenue they lost in March & April, and it certainly adds another liability to what they were looking at before the crisis. How about that idea of forgiving the loan if they hold onto their employees for 6 months? Or did that already pass?! Is this already water under the bridge?
Finally, I agree with Tom G – desperate people WILL use it, hoping to get thru or get started somewhere else!