IMMEDIATE RELEASE 20 March 2020
Today’s Events in Historical Perspective
America’s Longest-Running Column Founded 1932
Where money intersects pandemic
By Douglas Cohn and Eleanor Clift
WASHINGTON – Unemployment is soaring. People need financial help now, and there is a no- to low-cost immediate way to provide it through the intersection of money and virus. Until a coronavirus vaccine is developed – and we are told that is likely a year away – social distancing is the primary method of combating the spread of the disease. But social distancing entails closure or avoidance of schools, restaurants, theaters, business offices, manufacturing plants, and other crowd-gathering places, and all these closures and avoidances put people out of work.
How, then, are people going to feed, clothe, and house themselves in such an environment? With a one-time $1,000 payment? A payroll tax holiday? No. A one-year problem requires a one-year solution.
Housing poses the greatest economic problem for people out of work. People cannot pay mortgages and rents without income, and unemployment insurance is insufficient to the task.
Here is where money intersects pandemic. The government cannot pay for the housing of 350 million people, but there is a solution: mortgages. The development of reverse mortgages has allowed senior citizens to defer principal and interest payments until the end of life or until their property is sold. This works because interest continues to accrue, making the mortgage a negotiable instrument on the open market not unlike a Treasury bill.
Apply this concept to the current crisis. Waive principal and interest payments on all mortgages for a year and tack the accrued interest on to the principal balance. Financial institutions are not adversely impacted by such instruments because these mortgages, like reverse mortgages, continue to be fully marketable. Banks can sell them. Removing the weight of mortgage payments for a limited period can only enhance the practice of social distancing, whether by choice or compulsion when incomes are reduced or eliminated.
Likewise, defer property taxes and utility bills for a year, tacking them on the property as liens due upon the sale of the property. Such liens, like the mortgages, would also become negotiable instruments that local jurisdictions could sell or trade in the open market.
And what about people who keep their jobs? The mortgage deferral plan would be a windfall for them, but that windfall could only help the economy through continued consumer spending.
There is a risk. A future reduction in real estate prices might cause some combined mortgages to exceed home values, in which event the government would play a role by ensuring that financial institutions are compensated for the deferred mortgages.
Americans live in nearly 80 million owner-occupied houses and approximately 43 million renter-occupied apartments or homes, but renters need a different solution. The government cannot and should not attempt to pay full rents that could range from $500 to $10,000 or more per month. The government can and should lend the money.
In this scenario, renters pay nothing for a year, and landlords receive a low-interest mortgage due in 30 years as compensation. Instead of dispensing money, the mortgages are funded through the issuance of 30-year T-bills, which landlords could keep or, in the alternative, sell in the open market or to the Federal Reserve. This would require the independent Federal Reserve’s agreement to participate in what amounts to prearranged quantitative easing (the Fed’s method of injecting money into the economy through T-bill purchasing).
True, this places a future burden on landlords, but with 30-year T-bills currently trading near one percent interest, the burden would not be onerous. Further, these mortgages, by design, would be subordinate to any future indebtedness on the property, a mechanism that allows a landlord to pass through the mortgage to a new owner when the property is sold. Additionally, there is always the possibility that the debt might be forgiven in the future depending upon the state of the economy and the federal budget at that time.
Douglas Cohn’s latest books are World War 4: Nine Scenarios (endorsed by seven flag officers) and The President’s First Year: The Only School for Presidents Is the Presidency.
© 2020 U.S. News Syndicate, Inc.
Distributed by U.S. News Syndicate, Inc.
END WASHINGTON MERRY-GO-ROUND
IMMEDIATE RELEASE 20 March 2020