When businesses fail and employees are fired real value is destroyed: working relationships are severed & institutional knowledge lost.
It is in all of our interests to do what we can to preserve these businesses until the external shock ends.
Strip the equity, give the assets to someone who can properly manage the business.
I hate this idea that the taxpayer needs to subsidize risk for corporations. It creates a huge moral hazard where companies are incentivized to act as irresponsibly as possible. There are no consequences.
There are many words I might use to describe this policy. Libertarian is not one of them.
In reality, there are very few economists who believe that a company should have 6 months of expenses in the bank for emergencies. I realize you are probably about to explain to me how those economists are wrong and companies are wasteful and whatnot. Frankly, they have their reasons and their reasons aren't do bad.
More importantly, most companies are not spending their money on frivolous things, like avocado toast. This isn't an HBO shocking sitcom/drama. Do companies make mistakes with their money, of course. But in my experience working with VC's, most companies are using all of their money on either marketing and sales, or R&D. Period. Maybe a bit on parties and morale but by percentage, 99% goes to sales and marketing or R&D. Large companies, on the other hand, spend their cash on all sorts of other things. Huge amounts of cash have still gone into sales and marketing, R&D, but also stock buy back, and investment.
Economics is largely a study of game theory. When The Federal Reserve and Congress throw money at all companies, no matter the risk, doesn't this erode the future incentive for companies to be self-reliant and increase the expectation of similar monetary policy in the future?
Also, I read your comment's parent as if it was on The Colbert Report, dripping with sarcasm.
Plus, this virus is likely going to last more than six months - even if some businesses did have 6 month savings, what happens after?
[1] https://www.nytimes.com./2020/04/26/business/coronavirus-sma...
Well, many /most don't. Now what do we do?
This would incentivize future companies to operate a bit more conservatively. The pattern of corporate irresponsibility followed by taxpayer-funded bailouts is a moral hazard.
Also, should we let people that have no 6-months reserve starve? Others will learn
On your second point, no we should not. Do you think it's hypocritical to give humans government benefits that companies don't get?
Small business: Have you ever actually run a small business, or even known anyone who did? Do you understand how ridiculous it is to tell a local coffeeshop "Oh, just have six months of payroll and rent in a safe"? These business contribute a lot to communities, and telling them "oh, you don't deserve to exist unless you are capable of withstanding once-in-a-lifetime pandemics" is asinine.
The US GDP last year was $21 Trillion dollars. The gross revenue was about $2.1 Trillion dollars. This is all back of the envelope math but imagine if 50% of the difference between those numbers was the operating cost in the US of 6 months, or about $9.5 Trillion dollars. If we take that money out of the market and put it into a bank for a rain day fund, imagine all of the people not receiving that money. Imagine how many consumers would go down. This is all just an estimation but we are talking huge amounts of money not being put into the economy and frankly, our economy runs on consumption. Consumption doesn't happen without capital.
People should definitely safe. Have a 6 month personal supply. But companies need to spend.
That's exactly what we're suggesting. Rather than going through this whole song and dance at least once a decade where the public has to bail out private business ventures, those private businesses should be able to fend for themselves against regular economic disruptions. This bailout and QE money isn't free and it comes with costs of its own. It would be better for the stability of the whole system if these companies could fund their own operations the next time there is a disruption.
Companies and the economy cannot handle having a 6 month reserve of cash, that is the assumption and there are plenty of economic theories that show that doesn't work.
Bailing out with taxpayer dollars is one solution and it's the easiest dial to turn. It will bail out a lot of companies that aren't "shitty" and are just handling a time that is unprecedented and needs to be handled. As with most things, it will also bail out some "shitty" companies. We don't have a great metric for "shitty" vs "non-shitty". Those taxpayer dollars to companies are not free (though with inflation they basically are free). They have to be paid back with a minor amount of interest over a 2 year period. Will everyone pay it back? Nope. But many will.
The point to remember here is this is unprecedented and we are attempting to solve a future problem. Let's imagine we don't bail anyone out with very cheap loans. A bunch of "shitty" companies go out of business. A WHOLE bunch of "non-shitty" businesses go out of business. When the world opens up again the people who have lost their job have no where to go. There are no "shitty" or "non-shitty" companies to go back to. They went out of business. Unemployment stays at record highs for as long as is necessary for new companies, both "shitty" and "non-shitty" to come back and start hiring. A bailout allows companies to hang on and then bring back employees ASAP after the virus situation stabilizes.
Are there better ways? Probably. Will be find them? Probably. We can learn from this situation and become better. It will require a set of new methods and economic tools to get through in the future.
But my point is the way our economy currently works doesn't handle a 6 month reserve well. We don't incentive companies to hold on to cash like that. We need to come up with the incentive to do something different, whether it is save cash or "something else". But right now, the incentive is to spend cash and allow for a bailout.
Additionally, we don't think in the future very much. We think about this quarters earnings. So again, we need to incentive long term thinking and resiliency as you suggest. Unfortunately, I am not sure how to do that.
This isn't some novel problem that we don't understand, but rather the direct result of decades of economic policy. The solution is called raising interest rates.
The problem is we do know we need to increase the interest rate. But no one wants to do that now. "We're in a bad economic time and we need rapid growth! We'll raise it later." Later comes and we say "We can't do it now! We're growing! That will slow things down. We'll raise it later." No one wants to bite the bullet and do that. Again, we need to think long term and not so short term. I don't know how to solve that.
Politically what needs to happen is that everybody who is not Wall Street or the 1% needs to realize that ZIRP is a direct attack on their economic power, to benefit the central government/bankers who dole out the piles of the newly printed money. Obviously discussion of this remains well outside the Overton Window of mass media.
Given how ever-increasing government debt itself discourages rates going up, the buy in of the middle class (retirement number gets bigger, so it is good), and how deftly the fake political duopoly divides the plebs even as they know they're being had (here we go again with dueling "presidential" dumpster fires!) I doubt this will happen any time soon. And so what will happen is eventual societal and currency collapse, either when the foreign markets route around USD or when the People finally reach our breaking point. I just hope it happens slow enough to be less of a catastrophe.
People optimize for health, happiness, and personal utility.
(1) It's reasonable for us to guide society towards different financial goals for people vs businesses. Business failure is part of life (not that we should try to make it happen). Personal failure is catastrophic. The risk/reward tradeoff is different.
(2) You'll notice I'm also not advocating for letting people starve in the streets, if they don't have savings. Help people. Help businesses. We're adults, we can do both.
I generally agree that we should guard against privatizing profit and socializing losses, but I don't think it applies here. The point is to get all businesses and people back to the point they were before.
[0]: https://www.marketwatch.com/story/feds-balance-sheet-tops-7-...
[1]: https://www.federalreserve.gov/releases/h41/current/h41.htm#...