COVID-19: Who Bears the Losses?

By James Kwak

Our business and household sectors are losing lots of money every day, and will continue to lose money for the foreseeable future. People no longer spend money at restaurants. Restaurant owners can no longer pay the rent or pay back their business loans. Restaurants fire their workers, who lose their paychecks and can no longer pay their rent, or their credit card bills, or their student debt. In an economic crisis like this, the overriding question is: who ultimately bears the losses?

Photo by skeeze from Pixabay

We’ve been through this before. In the 2008 financial crisis, we applied the usual rules of capitalism—unless you were a large bank. Businesses failed and their owners (including shareholders, for corporations) were wiped out. Renters were evicted. Homeowners lost their houses. Investment funds that had bought mortgage-backed securities and collateralized debt obligations lost their money. Workers lost their pensions. Small banks were shut down by the FDIC. Big banks, however, got unlimited cheap credit from the Federal Reserve to stay afloat, thanks the the people we all know.

Will things be different this time? Perhaps. The Trump administration seems more willing than the Obama administration to relax the rules of capitalism—which should not be too surprising with a president who flaunts any and all rules, is more than happy to dole out goodies to his friends, and is unable to add numbers together. I think the megabanks can rest assured that they are still too big to fail and can count on unlimited support from their friends at the Federal Reserve and Treasury—Title II of the Dodd-Frank Act notwithstanding.

The surprise so far as been the decision to suspend foreclosures and evictions of anyone with a federally-backed mortgage for at least sixty days. Fannie and Freddie also are suspending mortgage payments for up to a year. This, as far as I can recall, is more than the Obama administration ever did for ordinary people hit by the collapse of the housing bubble in 2008 and 2009. Again, it shouldn’t be that surprising that Donald Trump is willing to take losses onto the federal balance sheet—it’s not his money, after all. This time, though, it happens to be the right thing to do.

These rules, of course, don’t apply to the private sector. If you are a small business owner who owes rent to your landlord or interest to your bank, there’s no reason to think you’re going to be let off the hook. The same goes for tenants with private landlords. Which raises the question: When the economy is hit by what is essentially an “act of God,” why is it that the owners of capital are kept whole, and the renters of capital have to bear all the losses? It’s not efficient—the economy would be a whole lot better off if people didn’t have to leave their homes and businesses didn’t have to close—and it certainly isn’t fair. Yet that’s the way our capitalist system works.

There is only one entity in the country—and perhaps the world—that can absorb the losses being generated by this crisis: the federal government, with its unmatched ability to borrow money. This time around, the top priority of the government should be direct assistance to the people who need it most—both workers and business owners who need cash to buy food, stay in their homes, and take care of their families. It should finance that assistance by borrowing money—at record-low interest rates—and by taxing the rich people who can most afford to absorb losses. Landlords and lenders will be made whole because of the money their borrowers are getting from the government, but they or their shareholders, to the extent they are rich, will lose money in the form of taxes.

It’s not that complicated. But I doubt our society and political system are equipped to solve this problem.

This post was largely inspired by a friend who I think prefers to remain anonymous.

8 thoughts on “COVID-19: Who Bears the Losses?

  1. But even after 2008 crisis, regulators kept their risk weighted capital requirements’ incentives based on that perceived EXPECTED credit losses are more dangerous to bank systems, than what could be misperceived as safe, or UNEXPECTED, like coronavirus. Start praying

  2. Assuming the federal govt. decides to provide financial assistance to everyone, could you please write a column on how everyone receives a check & gets it cashed (the latter a problem if bank branches are temporarily closed down or understaffed)? Some have commented that postal savings accounts would be very convenient right about now for accomplishing this. Given our system of private bank accounts (and for many people, no bank accounts), how is the FedGov quickly going to get money into people’s hands? Another (drastic?) solution proposed is to give population-based sums of money directly to cities and counties/towns for quick distribution. Taxation will be used later to recoup money that richer folks receive but don’t need.

  3. Regarding your comment about ‘the federal government, with its unmatched ability to borrow money’, what about its unmatched ability to create money?

  4. “Will things be different this time?” Different from what? The monetary system that supports the class structure that traditionally gives lip service to reforms that don’t touch them directly is now (?) the measure of loss? Externalities once again are the background to the “private sector” losses; while the true burden of the “cost” is now and will ever be placed on the other side of society to suffer. The Buffer Line is the Base Line and the Scenario is a class structured “private” recovery. Not one founded upon a social justice but on a nineteenth century Social Darwinian or Spencerian economic survival. With all the talk of Orwellian deception gaming our cultural fabric, the collapse of economic infrastructure still rests upon the false dichotomy of a pseudo-mythic private sector. But we are entering a new era. One based upon the risk of trusting an absentee network of ownership that has captured the means of subsistence and gamed it over smart phones and technological distances that don’t hold up to the ultimate stress test of our lives. We are in a social and economic area that no one had yet explored,a “Terra Incognita”—that is, “Unknown Territory.”

    But we have long since been in Terra pericolosa – an Italian phrase for “dangerous land.” So again, different from what? The private sector is a wide spectrum domain. It has hijacked the public good and makes us thank them for it, even as they reinforce our dependence upon paying them for a slice of survival needs; rationalized as efficiency. But that in reality is a faulty efficiency that denies and in fact exploit global ecologies which are now blowing back on us internationally as region by region in the world is over exploited to supply market demands created by capital survival, succession, asset seizing and contagions of failure resulting in capital flight preservation of the system .
    A succession that is path dependent upon a “growth” of wealth that has become a game of thrones. A ZERO SUM GAME where losses are routinely externalized. So loss is built into the entire system; and we blind ourselves to where we dispose of it; and give great lip service of lamenting when someone exposes it. From Monopolists to Corporatism to Trump / Putin and the most corrupt crony capitalism in all history.

    So with this in mind, James, where do we start. Let us now ask if ‘things’ will be different or return to an insidious normal that included Dubai instead of Detroit. Return to a mass market dependency that supports an anarchist capitalism that has captured central government to serve wealth in a growth myth that sustains ecological deficiencies that fuel false private sector stealth in the name of some trickle down unregulated prosperity. ARe we to even contemplate going back to a systemic destruction of the climate when, by an act of brute nature, we have the chance to literally restructure the facts of life that rule us? I think not. I think it is time to begin asking what is the authentic private sector serving society and what are the consequences of giving private interests the priority of market forces to simpley gear towards a blank check of profits without thought to the cost. And in that quest, begin to account and hold accountable the true losses that some call creative destruction to our face!

  5. 2017
    Expert: ‘There will be a pandemic’
    Experts predict a dangerous pandemic will occur in the next 20 to 30 years.
    Source: CNN
    It may be difficult for some people to perceive, conceive, accept or acknowledge, especially with Trump nationalizing and politicizing label identities upon Covid-19 as a false consensus, but this pandemonium–this “pandemic” this (to coin a phrase): “ECODEMIC” [FOR A DISEASED RELATIONSHIP BETWEEN ECONOMIC-ECOLOGY], is a consequence of the intensity of economic activity denying and ignoring ecology with Pan-GLOBAL consequences. It is now time we must also honestly acknowledge that the “economy” we tout as our foundation for social survival has now threatened us with ecological consequences at the magnitudes it is currently expanding and intensifying via profit driven nationalism. Economy, whether we acknowledge it or not, has created the circumstances that are responsible for this current pandemic. While this documentary was released in 2017 along with other similar dire warnings, the subplot of this evidence-base is that expanding economies are distressing global environments so tragically that consequences are catastrophic. So while the documentary is pointing to the viruses it depicts as the hidden and unseen enemy; we must raise the question if the real hidden enemy is our own denial. Please Watch

  6. U.S.A.
    “Will things be different this time?”
    Just 12 days before the 2008 economic meltdown, several members of Congress pulled their money out of the stock market. Congress had been forewarned about the impending economic bombshell in secret meetings with the Treasury Department and the Fed, and they used that information to move their personal funds out of the market at lightning speed. Congress Cashes in on Insider Trading | RepresentUs

    President Obama signed the Stop Trading on Congressional Knowledge Act into law at a celebratory ceremony attended by a bipartisan cast of lawmakers.
    The law wouldn’t just outlaw trading on nonpublic information by members of Congress, the executive branch and their staffs. It would greatly expand financial disclosures and make all of the data searchable so insider trading and conflicts of interest would be easier to detect.

    One year later:2013
    …the Senate …then the House passed a bill in largely empty chambers using a fast-track procedure known as unanimous consent.
    In the House, Majority Leader Eric Cantor, R-Va., shepherded the bill through. It was Friday afternoon at 12:52.
    Many members had already left for the weekend or were on their way out.
    The whole process took only 30 seconds.
    There was no debate.
    Mother Jones
    December 2, 2015
    Members of Congress Have $68 Million of Their Own Cash Riding on This Industry
    A classic conflict of interest? No, it’s legal.

    POLITICO Investigation. Reckless stock trading leaves Congress rife with conflicts . After the furor over Tom Price’s investments, four more members quietly bought shares in the same firm.

    2020 Intel comittee sell stock on corona virus inside information News
    Topline: Two Republican Senators sold off millions of dollars worth of stock in the weeks before the coronavirus tanked the market, according to financial disclosures first reported by ProPublica

    Will things be different this time?
    The more things change; the more they stay the same!

  7. The global economy was always a house of cards, just waiting for a hiccup to spread disaster through out the chain of links. If it were not debt based, and were more efficient, (which means taking more time to make certain products and services would pass the test of time), the pain of failure would not be so great and therefore be better able to be absorbed.

    As it stands now, the survival of fittest will be the true test and even god may not pass this test, as life is just an experiment waiting to fail so it can be redone in a different fashion.

  8. We the people always bear the losses. So question is to what extent we suffer. Another great question is whether Trump and his party will pay for his gross failure of leadership resulting in numerous avoidable deaths. Another question — more of a fantasy — is whether people will learn and understand that much, if not most, of the sick and dead result from neoliberal policies which rest on the idea of not wasting a penny to prepare for tomorrow. The great example at the moment is how that mentally inspired the Very Successful Businessman-in-Chief* to act to ensure that the nation would be woefully unprepared for what’s happening now. (*Trump was and is in fact a very unsuccessful businessman, relying on ripping off people, numerous bankruptcies, tax fraud and providing money laundering services — nothing an actual businessman relies on for success.)

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