Debt Takes a Holiday

(Image by TheDigitalWay from Pixabay.)

How far will $1,200 take you? How much can you do for your kid with $500? By the time you take care of the mortgage or the rent, the car payment, and whatever it is you need to pay on your credit cards, the stingy “stimulus” from Congress won’t do very much for most families. If the reports are true, you and yours will have to wait at least two weeks for the money to arrive, but maybe much longer. Treasury Secretary Steven Mnuchin said on Thursday that many Americans can expect to see their one-time stimulus checks show up in their bank accounts in about two weeks — but that’s only for people who already have direct deposit set up with the IRS. Mnuchin said physical checks will start going out “in weeks,” but that’s as specific as he got. That’s not much relief for anxious Americans looking at the unpaid bills stacking up.

But what to do? There’s a pandemic for which we have far too few testing kits, and until we are able to test tens of millions more people, government at all levels is going to continue relying on mandatory shut-ins to stem the rate of infection. I don’t like it, but that’s the way the political situation is.

We can’t move. But with all those debts we’ve accumulated, we have to move.

We have a situation perhaps unique in American history, and getting over the hump of it might require something a little more creative out of Washington than writing checks because stipend payments won’t cure what ails the economy.

The U.S. economy is based largely on credit, which is mostly a good thing. Credit allows people to buy houses without socking away low-to-mid-six-figures in savings, it encourages risk-taking and innovation, and also the rapid expansion of business and jobs. So long as credit is issued realistically, and not under government-encouraged false pretenses (like the 2007-08 financial panic), it can do a lot of good for the economy, business, and individuals. (Like any other good thing, credit can be abused but that’s beside the point for this column.)

The weak spot of a credit-based economy is that when the economy stops moving, the whole credit structure can collapse.

Pretend for a moment, since COVID-19 is hitting New York City particularly hard, that you are a typical NYC apartment-dweller. The shut-in order has forced you and your neighbors out of work, so none of you have enough money to make the rent. The owner of the building can’t collect rents, which means he can’t make his monthly payment to the bank that lent him the money to buy the building. Enough broke tenants lead to broke landlords, and enough broke landlords can break a bank. Out in the burbs where people are more likely to own their homes, it’s the exact same story minus the middleman landlord. Apply the logic to credit card debt, auto loans, and things start to break down quickly.

All that is just the consumer side. It’s arguably worse on the commercial side. Your favorite local restaurant doesn’t just lease the building, they probably lease much of their heavy kitchen equipment, too — to the tune of thousands of dollars every month. Since restaurants operate on slim one- or two-percent profit margins, they can’t stay solvent very long paying out many thousands of dollars each month for floorspace with no customers and kitchen equipment that sits idle.

Contractors, repair shops, etc… it’s all the same. If the customers stop coming in, the lease/credit/debt payments stack up quickly. The frightening part is, the more business that fail, the more consumers who lose their homes or cars, then the more difficult it’s going to become to jumpstart the economy once the pandemic has passed.

If we do nothing, we risk sentencing the entire economy to a debtor’s prison. I probably don’t have to tell you that debtor’s prison is a stupid system and it’s good that we abolished it. Prison neither discharges debts in an orderly way like bankruptcy does, nor does it allow the debtor the freedom to repay his debts. Debtor’s prison is a grim stasis — and our credit-based economy cannot function in stasis.

So while we’re on this forced vacation, what we really need is a moratorium on debt payments. A little cash goes a lot further — like, all the way to the grocery store and back — when the car, house, and credit card payments aren’t blocking the way.

Let me sketch out how this might work.

• An 8/12/16-week (whatever ends up fitting the bill, so to speak) moratorium on payments for mortgage, lease, rents, and other debts.

• No additional interest/late fees/etc would accumulate during the moratorium.

• Loan end-dates would be extended by the same number of weeks as the moratorium lasts.

• Credit scores frozen for the duration.

• Federal Reserve to keep the banks pumped full with enough liquidity to make up the difference.

• An application process, abbreviated to the fullest extent possible, for Fed-like liquidity to private lenders not part of the banking system.

Essentially, as long as we’re stuck at home, debt takes a holiday, too. There would simply be a period of weeks that just won’t exist, so far as the credit-based economy is concerned.

Homeowners might have to wait a couple extra months before they finish paying their mortgage, but that’s a helluva lot better than sitting on late fees or getting foreclosed on. With a moratorium, a restaurant owner is going to be more able to re-open and much more willing to re-hire the staff when this is all over. But if they’re stuck with a weeks-long hole in their income, but no relief from their fixed expenses, they’ll probably just close up shop. Then the landlord has a vacant property with no takers, the bank isn’t getting paid, etc.

A Debt Holiday isn’t a bailout, like keeping corrupt banks afloat — the very people who helped create the 2007-08 crisis — with TARP all those years ago. It’s more of a gentleman’s agreement to put everything on hold at a time when almost everything is already on hold. Perhaps the most important result would be to give people and businesses and banks the confidence needed for the economy to come roaring back the way it should, instead of treading water in an Olympic-sized pool of red ink.

Something along these lines could be a bipartisan no-brainer on Capitol Hill, so please consider sending your congresscritter and your senators a note encouraging a debt moratorium.