Thursday, March 19, 2020

Implementing Federal lending

The central problem now is how the Federal government can lend money to businesses that need it -- without a budget blowout. I proposed letting people borrow from the IRS which has a pretty good mechanism for getting repaid. Martin Lowy has a more detailed suggestion along these lines:

  • Credit for any business that needs it, so long as the business’s history suggests that it will have the capacity to repay, given enough time.
  • A simplified underwriting system based solely on filed tax returns. Bank-style underwriting is a cumbersome process that would impede the flow of credit and would tend to make it subjective and political—and therefore a subject of criticism all along the way.
  • A repayment period of something like 36 months that begins a few months after the crisis has passed. A business cannot begin to repay until it has had some time to get back on its feet.
  • Use of the income tax mechanism to enforce repayment so that no new bureaucracy is required and so that the system will be seen as fair, rather than based on subjective criteria.
  • A mechanism to assure that recipients of these loans will continue to use them in part to continue to pay their employees.
The devil is always in the details. Just what rules are overstressed IRS employees supposed to implement to judge if a "business’s history suggests that it will have the capacity to repay, given enough time?" Just what is the final "mechanism?" Once again, that we have entered this crisis so unprepared means it is unlikely a measure like this can be rolled out in the needed days, let alone weeks or months. Still, it starts to flesh out a good idea -- or at least a better idea than enormous stimulus checks and bailouts all around.

Update: Lowy responds by email:

  • Who may get credit? Loans would be extended to any business that filed an application, but limited in amount by the business’s historical sales and profits as reported to the IRS.
  • In what amount? The size of advances would be a percentage of the revenue and taxable income of the applicant. The lesser of one twenty-fourth of gross sales or one-sixth of taxable income. No subjective criteria.
  • Period for repayment. Depends on the length of the crisis. If the crisis/credit advances last 4 months or less, 36-months; longer crisis, longer period for repayment.
  • Application process. Electronic only. Simple facts. Promise to repay. TIN. Account to send advances to. Amount requested per month. All based on last annual tax filing.
  • Employee compensation certification. Certify that in each pay period after receiving a credit, applicant would pay every employee who was on the payroll on February 15, 2020 at least 75% of the average amount paid to that employee in the last four pay periods before that date.
  • Interest rates. 5% per annum, except if the business was borrowing at a higher rate—then that higher rate.
  • Collateral. None.

I (Lowry) welcome additional questions about the details.


  1. Consumers are always more important than suppliers, because the only reason for suppliers to supply is for consumers to consume.

    The IRS should not loan businesses at all, but focus on loaning consumers. If consumers have money, the business will not suffer. If the business is suffering because people don't want the business' products, than the IRS should not bother helping.

    Another reason not to lend businesses is because the US is already providing bankruptcy protection that would enable the business to fold to avoid paying taxes. Individuals do not have that luxury, meaning that there's less risk in loaning individuals than businesses.

    The loan should not be tethered to a national crisis. An individual in crisis is in crisis independent of whatever his neighbor is going through or not. Instead, simply charge an interest rate that would be high enough so that someone with net equity would pay it off and someone in crisis would pay it off.

    A repayment period is not necessary, as the interest rate would enable each person to decide when is best to pay off the loan.

    The mechanism to make sure they pay employees is laughably inefficient. If the government wants to help employees it should loan the employees, not their boss. In times of massive unemployment, employees are actually not the people you need to help anyway. Rather than helping business to help employees help their families, just help poor individuals directly.

  2. "so long as the business’s history suggests that it will have the capacity to repay, given enough time"

    This one of those "charity for rich people only" policies. People that will be able to repay don't need a government loan. They should be able to get one privately.

  3. I prefer standard bankruptcy procedures.

    Businesses that can't survive go bust. Shareholders and bond holders take a hit or are wiped out. Then (assuming a business looks like a good long term bet) those with cash to spare (Warren Buffet, Apple, Bill Gates, etc etc) pick up the business at a bargain basement price, and two or three years down the road, when the Corona virus crisis is over, they make a killing.

    Long live free markets and capitalism!

  4. The government is not capable of sensibly deciding to which businesses to lend. Instead, the government should put money into the hands of potential private lenders, and let *them* decide to whom to lend. These potential private lenders are the present holders of Treasury securities: the government should buy back lots of these securities, thus putting money into private hands. This money will be newly created, by the Fed. In other words, the Fed should engage in (massive) quantitative easing.

  5. There are really only two possibilities admissible: (1) capital loss from a business is converted into a transferrable credit that can be sold for cash to an investor who seeks to offset a current capital gain; and (2) income tax deferral for up to n months without penalty or interest charges. A third option is possible, namely, the monetization of a current operating loss that is transferable to another business that has a current operating profit which it would offset in exchange for a cash payment from the profitable business to the unprofitable business. The exchanges would be permissible for a limited time, say, the current tax year 2020 or the following tax year, i.e., 2021. These alternatives would not require the IRS to alter or modify its modus operandi.

    In the case of a swap of a taxable capital or operating loss for cash, the counterparty establishes the discount rate ('market rate') without intermediation by the IRS. In the case of deferral of an income tax liability, a zero penalty, zero interest rate policy would be an administrative action by the federal government (in conjunction with Congress). The alternatives can be implemented separately or together.

    No loans, no credit-worthiness determination, no significant disruption in IRS operating procedure. The time delay in implementing the policies would be limited to the time required to effect publication in the Federal Register.

  6. John: misspelled "Lowy" as "Lowry"

  7. KISS.

    Declare a payroll tax holiday, and radically reduce withholding schedules on income taxes.

    Let people keep the money they earned, instead of confiscating it.

    Finance the tax cuts through helicopter drops, that is have the Fed print up money and send it over to the Treasury.

    I can't say creating more debt is the solution, in fact it strikes me as administering poison to a sick patient.

  8. The UK will allow businesses to defer payment of the value-added tax collected by the business until March 2021. Finance minister Mr. Rishi Sunak estimated that up to 30 billion UK pounds will be deferred.

    Reuters reports here:

  9. I’m not sure that these sorts of financing schemes will be of that much interest to the businesses suffering the downturn. The pandemic is leading to a huge reduction in wealth. Equity owners are going to take a big part of the hit. (That sucks, but that’s what equity is all about.) These ad hoc financing schemes give another way to take the loss but I’m not sure how many equity owners will prefer to do it this way.

    A couple of examples.

    First, imagine a neighborhood bar that has to shut down (if you’re of a certain age to remember, think about Cheers). This might seem like the just the kind of place that needs financing. They have lots of organizational specific capital—everybody knows your name—and the owners and employees don’t have much of a financial cushion. If I’m the owner, though, I’m not at all interested in taking on more debt. Instead, I’m going to encourage my employees to take care of themselves and collect as much unemployment as they can. If the business comes back, they’ll come back (organizational specific capital raises their income too.) I’m not paying rent and my landlord will threaten to evict me, but that’s an empty threat. He doesn’t have any alternatives right now and once normality resumes, I’m the best tenant for this location. (This does suggest that the banks lending to the landlords may need help but that’s not what this is about.)

    Now think about a business that’s about as different as we can imagine, airlines. If I’m running a big airline, I’m going try to make an absolutely credible commitment not to borrow. If I do that, there’s an excellent chance that the Feds will cave in and just give us cash. If that doesn’t happen, I’ll have to go through bankruptcy. But airlines are good at bankruptcy. When American went under in 2011, the shareholders ended up with an equity claim in the reconstituted AA that was quite valuable. As compared with holding on to shares in a company that has taken on massive debt, the thought of holding shares in whatever emerges from bankruptcy seems very attractive.

    One thing that will change these calculations, of course, is the promise of no questions asked forbearance. If these “loans” are just ways of shoveling out cash, then they’ll get snapped up. We all like free money.


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