[rosybox]

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-...

[jborichevskiy]

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]

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]

> 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]

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.

[fraudsyndrome]

> A better way would be to suspend all debt collection and rent collection for x months.

I know this would help for people I personally know in this industry.

Dine in has been reduced almost entirely but takeaway orders hasn't deviated too much from the standard.

The reality here is that a lot of small hospitality businesses don't actually make much profit at all so it's unlikely that they'd survive too long with this forced reduced business. And it's always unhelpful to hear (in general not from you) comments like "maybe they should have saved up more earlier" or "they shouldn't be opening up a restaurant then" because a lot of times they can't work in any other industry - this is all they know.

Imagine having reduced business through no fault of your own yet you're still liable for paying the commercial rent of $1.2k per week. You can't sell the business because no one is buying. You can't sell it because you lose all the goodwill which is bad especially if you've spent any money renovating the place up to standard.

[GeorgeWBasic]

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]

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.

[DoreenMichele]

You might want to read up on The Irish Potato Famine.

Some landlords were letting people stay rent free out of compassion because no one had money and it was tough all over and no one else was going to rent it. Then the government decided to bleed the landlords and insist it get paid if the unit was occupied, even if no rent was being paid.

Landlords had no choice but to begin evicting people. Things got ugly fast.

[wyattpeak]

That was a fairly unusual scenario though, where the government actively disliked their citizens, many politicians explicitly happy to see the Irish suffer, others viewing it as the will of God, and none of them dependent on Irish votes.

It's an indication of how things can go wrong with the government working against you, but I don't know that it maps well to the current pandemic.

[biztos]

If by “suspend” you mean cancel the debt due in the quarantine months than I definitely agree: in both moral and economic terms it would be best for the rent-seekers to take as much of the hit as possible.

But if it’s just a pause in collection, and you still owe that money, then it’s the same old margin problem: very few restaurants make enough money to repay that loan no matter who it comes from.

[markdown]

A business that was going to fail due to low margins without COVID19 shouldn't suddenly get to live because COVID19 destroyed the world economy.

It has to be a pause in collection (and interest), but at the end of the day the lender also has to get their money back.

[vkou]

> 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]

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]

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]

> 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]

This would introduce liquidity to a struggling category.

[bjourne]

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]

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]

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]

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.