I wrote this tweet yesterday:
Three things will bring businesses down next year.
Interest payments.
Loan repayments.
And rent payments.
It is the rentier economy that will bring us to our knees.
We’d survive if financial capital was stopped from extracting value it has not earned.
— Richard Murphy (@RichardJMurphy) November 1, 2020
It was not the first time I had expressed such sentiments, of course. In early March - well before the first lockdown and and when the government was still in denial that such a thing would happen - I wrote this:
We will have an economic crisis in 2020 as a result of coronavirus. There can now be no doubt of that; the likelihood that this epidemic can now be contained seems to be very low indeed. The evidence from China is that the impact on productivity and the economy at large is enormous. Whether we can survive the impact of this epidemic without major economic consequences arising is largely dependent upon the effectiveness of the planning that the government undertakes now. What is apparent is that at present there are a few signs that this planning is taking place. We can hope for it in the forthcoming budget, but the signs are, so far, not good.
The key issue that the government has to decide upon is who will bear the economic consequences of what is to happen. I have already indicated in my first post on this issue that I think that the consequences of this epidemic will fall upon three clearly identifiable groups, which are individuals, businesses and government. However, when appraising who will bear the cost the criteria are slightly different.
It is unacceptable that individuals bear the cost of this crisis. There is simply too little economic resilience within the population as a whole for that to be the case. Far too many people have too few savings to survive major periods of economic inactivity without massive prejudice to their short-term and long-term well-being.
In addition, it is unacceptable that many businesses should fail through no fault of their own but that is what will happen unless the government steps in to prevent the major economic downturn that might happen this year. Cash flow issues will cripple many companies.
In that case it would seem that consequences of what might happen will fall, in the first instance, on the government.
As I explained in my previous post, the government can afford to bear a substantial cost from this epidemic precisely because it alone in the economy can suffer a cash flow crisis without risk arising. That is because the government of a country like the UK which has its own central bank and its own currency always has the means to create as much cash as their economy needs. This is, if ever there was a time to do so, the moment to appreciate that fact and use that ability.
But that is not to say that there are no costs to an epidemic: clearly there are. In that case the question has to be asked as to who should bear that cost. There are three groups who should.
Firstly, landlords should. I have already suggested that should the epidemic spread then as a matter of statutory right any tenant should be provided with a minimum three-month rent-free period to ease the stress upon them whilst this crisis last. I would suggest that the grant of that extension should be automatic to anyone who does not make a due payment of rent on the required date during the period of the epidemic. They should be automatically granted this extension by the landlord without having to make any further application or to complete any additional paperwork.
I stress that the cost of this will fall directly upon the landlords in question. I am quite deliberately suggesting that they should bear the heaviest burden of dealing with the epidemic. The reason is simple and is that whatever happens they will still have an asset at the end of this period, and no other sector can guarantee that at present. As a consequence they have the greatest capacity to bear this cost. And, if it so happens that some landlords do fail as a consequence, the assets that they have owned will still exist after this failure and so the economy can manage the consequences of this.
Second, I suggest that the costs of this crisis fall upon the finance sector. This is because, as I have also noted in my previous post, I think that anyone who has a mortgage or loan (including a lease) that they cannot afford to meet during the course of the epidemic period should be granted an automatic three-month extension to their loan period, which period might again be extended if the epidemic lasts longer than is expected. Once more I suggest that there should be no need to apply for this extension: simple default should be enough to trigger it. I am not in this case suggesting that the interest owing not be due though: it could be settled at the end of the loan. What I am saying is that cash flow must be eased.
What these two, straightforward, recommendations suggest is that it is those with wealth, and not those with low incomes or tight cash flows who should bear the burden of this crisis. That meets any definition of justice that I know of. But in both cases I am also being realistic: the value of financial assets of banks and other lenders is being preserved by this recommendation when if loan waivers were not in place it is likely that they would be prejudiced, whilst the value of land assets is not in any way diminished as a result of there being a rent-free period imposed for an external reason. To be blunt, given the risk that both the financial and rental sectors face as a result of an epidemic the proposed automatic waivers leave them in a better position than they would be in without them.
And what of government, which is the third party to suffer a loss? Its risk can be covered by coronavirus quantitative easing.
A plan of this sort is urgently needed, and now.
Three days later, because of adverse commentary from landlords, I wrote a further explanation, because they apparently needed it.
Nothing has changed. Except we now know I as right. We were facing a massive economic risk at that time the scale of which the government was not appreciating.
And it is still the case that bankers and landlords are not taking their share of the burden in this crisis. Indeed, banking profits have gone up because many of their SME sector loan risks have now been passed to the government, which has effectively refinanced this entire sector now.
I correctly forecast massive QE in March.
I suggest that it will now be required again.
Bit I stand by my point: rentiers should not be reaping the rewards. This is not a moment to bail out landlords, in particular. This is a moment for people, employers and jobs to take priority.
And I still struggle to believe that the government has really taken that message on board
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Landlords already are bearing a burden in that tens of thousands of tenants are not paying rent. Plus banks are bearing a burden in that tens of thousands of people and firms to which they have granted loans are not paying interest on those loans.
Obviously that burden could be increased, but I suggest that would involve getting into a legalistic quagmire, and government has enough on its plate at the moment, what which Brexit and the virus.
This can be legislated, easily
But to be clear, they will demand every penny owed be paid at some point.
I’ve been reading that they’re training people to chase these specific debts. Still, no doubt counter-advice will soon be making itself apparent. Expect a Facebook group to arise and also a section to appear on the CAG forums https://www.consumeractiongroup.co.uk/
Banks are where politicians retire to. ‘Nuff said.
I saw on twitter recently that the collective name for a group of bankers is a “wunch”. It’s starting to make sense now.
I agree that a “jubilee” is required to relieve people of the unbearable burden of interest and rent.
The choice is not whether it happens but whether it happens in an orderly or disorderly fashion.
Interest payments are relatively easy to deal with since they are overwhelmingly dominated by banks….. although dealing with bonds is more problematic.
Rents are more difficult as things are so fragmented. What do you propose?
Let me come back to you on that
A post that is easy to agree with.
However, on the banks there is the issue of seigniorage from their right, granted by us, to create money from nothing. This is a difficult subject to research as all of the “official” explanations (BoE etc) state that the money created by the banks disappears when the loan is repaid. This seemed to me to be smoke and mirrors because loan repayments are made into a bank’s reserve account from which no new loans can be issued. However, the money there eventually finds its way into the bank’s assets and so its reserve requirement is raised and more loans are possible.
This paper:
https://neweconomics.org/uploads/files/NEF_MAKING-MONEY-OUT-OF-MONEY_amendment_E.pdf
confirms my views and points to a £23 billion grant we make to the commercial banks. A sum which generally exceeds their total profits and so calls into question what they are doing with the rest of their business.
I am not suggesting that the BoE should be responsible for commercial loans but I do think that we should be taking a slice of the £23 billion seigniorage, starting at, say, 50%.
Perhaps it is time also for a change in the way mortgage defaults are dealt with. The current system heavily favours the lender who can take possession of the property whilst still requiring the loan to be honoured. Repossessed properties often end up going for very low figures at auctions leaving defaulters with a substantial mortgage still owed. What this very neatly does is allow cash/resource rich entities/persons to further hoover up housing stock to the rent out. The kicker here, although I have no data, is that the resulting rents are higher than the mortgages on the property in the first place.
This seems to me to be a progression of the transfer of housing stock from public assets to individual private assets and eventually on to business assets.
Agreed
Repossession should wipe debt
‘Non recourse’ loans they’re called if I remember. And usual in many US states:
http://www.progressivepulse.org/economics/non-recourse-loans
Indeed
Agreed.
But then you get Radio 4 programmes highlighting hard cases – pensioners who put their savings into a property .and rely on the rent for their pension
and tenants who earn good money but don’t pay etc etc.
Many private rented dwelling were originally sold to council tenants under Thatcher’s right to buy..only to end up adding to rentier assets ..so much for the property owning democracy.
Is there a way of tapping the banks and large landlords most, while still satisfying your criterion that wealth owners in general and not cash strapped income earners should bear the burden? Maybe it could be done like the furlough payments so that a rent-dependent pensioner could apply for a monthly rent replacement -subsidy upto a modest maximum using last year’s tax return, with the banks tapped to finance it? (Or maybe simpler to put a public charge on the the value of the asset?)
Worth thinking about
What the current crisis has highlighted is how unsustainable the Housing Market is.
Allowing ‘Buy to Let’ loans to be treated as a business rather than a ‘financial’ transaction has resulted in large numbers of amateur landlords without the income to withstand a bad patch or any understanding of their responsibilities.
How do the cash strapped pensioner landlords deal with major repairs to their properties?
I suspect that 2/3 of rent for landlords of both domestic and commercial properties would cover financing costs in many cases. Some firms will have used the furlough scheme to pay a proportion of their staff and reduce their outgoings.
How about Government support for tenants this year (to 50% rent? 75% rent?) and a windfall tax next year to reduce the gains of those landlords whose tenants didn’t suffer much, or who played hardball leaving their tenants in fear of eviction?
50% rent is fine
And a statutory right to extend loans to cover income not earned, added to the end of the loan period
I winder if it might be worth the Government offering to buy both domestic & commercial property at a percentage of the current market valuation?
I suggest in the case of residential property that there might be a stick of some much tougher rules for rented property ‘Post Covid’ eg mandatory landlord licencing and stricter enforcement of standards?
Stricter enforcement of reasonable standards should always have been the case and it’s thanks to the Tories that it currently isn’t as they voted down the suggestion in recent years. People need to remember, you get who you vote for, and be a whole lot more careful with their choice. Such concepts however seem beyond the understanding of many. I call again for an end to universal voting as many, the majority it seems, just can’t grasp the issues involved in running a country.
An end to universal voting?
Pardon?
I’ve said this before 🙂 You can’t have democracy without informed voters who can understand the issues so we need to limit voting to those who can grasp the issues which leaves out whole swathes of the population. They only think they can understand it as they’re lied to, routinely flattered, by an unscupulous and manipulative media. I suspect if the vote were removed from a great part of the population tabloids like the Sun, the Express and the Mail would simply cease to be, there’d be no reason for them any more.
I do not agree
SUCH AIR-HEADED THINKING !!
If I take the ‘raw materials’ of a broken down abode (previously fit for no one), then invest my own capital and labour to create a product fit for sale (the sale of rented space to a willing buyer in an open market), then why on earth should I not be eligible to profit from such endeavour (and risk) ??!!
To follow your line of thinking, then why should people who invest their money in shares of a listed company, for example, who then merely sit back and do absolutely nothing, but are then rewarded with ‘rent on their capital’ in the form of Dividends ??
No Sir, I do not know how you hold your position with your grade of thinking, but thankfully it is not in a position that in any way can bring effect to your daft notions.
Perhaps we should just have done with commerce, and simply ban all ‘profit’ entirely ?
(Whilst an admirable aim philosophically, we are a few centuries early in the evolution of mankind to make such deserving, let alone beneficial)
I post this, for amusement, mainly