Andrew Ross Sorkin explains (NYT):
The fix: The government could offer every American business, large and small, and every self-employed — and gig — worker a no-interest “bridge loan” guaranteed for the duration of the crisis to be paid back over a five-year period. The only condition of the loan to businesses would be that companies continue to employ at least 90 percent of their work force at the same wage that they did before the crisis. And it would be retroactive, so any workers who have been laid off in the past two weeks because of the crisis would be reinstated.
Strain and Hubbard call for $1.2 trillion in lending to smaller businesses (Bloomberg). John Cochrane considers a version of the plan. Here is Brunnermeier, Landau, Pagano, and Reis. I have been pondering the following points:
1. If you are an optimist about the cycle of recovery, this is very likely a good idea. If you let those companies fall apart, there is a significant loss of organizational capital and the matching problems in the labor markets have to be solved all over again. Recent experience on that front is not so encouraging.
2. If you are a pessimist about the cycle of recovery, I am less sure how well this will work. Let’s say a vaccine is difficult and there a few waves of the virus. Many of the smaller or even larger businesses may be going under anyway, as they cannot live off aid forever. In the meantime, you might actually want those resources to be reallocated to good transport, biomedical testing, and so on. If the wartime analogy is apt, you don’t want to freeze the previous capital structure into place, unless of course you get lucky and win the war early.
3. If you a pessimist about the solvency of banks (have you ever seen a stress test for 30% unemployment?), you have not gotten the government out of the business of capital allocation.
4. The bridge loans might work especially poorly for start-ups. Yes, StubHub or some company like that is around for the long run, and if the bridge loans can keep them up and running until concerts return, so much the better. But what about the eighty wanna-bees next in line, most of whom are likely to fail? Do they too get bridge loans? (Do note the ecosystem as a whole is yielding positive value.) The market itself chose the venture capital financing form for those entities, not debt. And yet now the government is stepping in and propping them up with debt, even though we know virtually all of them are likely to fail (even pre-coronavirus that was the case). You might think “well, we will know not to do that.” But on what legal basis would those other “likely to fail start-ups” be excluded from the bridge loans?
4b. Is it all about “banks decide”? How do we stop banks from simply hoarding the new money? (The Fed already has flooded the banking system with liquidity.) Just loaning the money to super-safe firms for de facto negative rates? What exactly are the regulatory requirements here? To the extent the loans are de facto guaranteed, won’t banks lend to a large number of lemons? What do the interest rates and collateral requirements look like on these loans and how are those set in what is now a non-competitive setting?
5. Overall my sense is that American policy, if only for cultural reasons, has to proceed on an optimistic basis. It is not clear what the relevant alternative is, and I do not oppose bridge loans. Nonetheless I am seeing too many people jump uncritically at bridge loans with a “throw everything at the wall” approach and not thinking hard enough about their possible downsides. At the very least, being critical about bridge loans will help us make bridge loans better.
6. No, I don’t favor governmental bridge loans for non-profits. De facto, that this means this is a huge relative shift of resources away from non-profits and toward businesses. YMMV.
7. I have received numerous reader emails telling me how bad, slow, and cumbersome is the Small Business Administration process for getting loans. Will this new regime do better?
8. It is the same government that could not organize testing and mask production that we are expecting to run what might amount to a $1 trillion plus bridge loans program.
Have a nice day.