By Kevin D. Williamson
Tuesday, November 03, 2020
Anti-capitalist rhetoric has always relied on artificial
oppositions: labor vs. capital, consumers vs. producers, renters vs. landlords.
But in a modern economy, we are all in the same boat — even if it sometimes
takes us a while to figure that out.
Consider the COVID-19 economic downturn. For the highly
educated and the skilled, who at the beginning of the crisis already enjoyed
relatively high incomes, COVID-19 has been an economic inconvenience:
Vacations were canceled and business trips became online chats, but most
workers at the high end were able to make the transition to working remotely
relatively easily. Some even took the opportunity to combine working from home
with an extended vacation, and the New York Times is here to provide
them with advice
for sojourning abroad while working remotely.
(The upshot is that the only thing more distressing than
the bane of economic inequality is trying to get a reliable high-speed Internet
connection in Tulum.)
For low-skilled workers, the past year has been an
economic catastrophe. As the Financial Times reports, about one-third of
U.S. households are currently facing the possibility of being evicted or having
their homes foreclosed on.
Some of this breaks down along familiar sociopolitical
cleavages, with the poor and the nonwhite generally getting the worst of it.
About one in ten white households missed last month’s mortgage payments, while
about one in five black or Latino households did. Poor people often rent from
relatively poor landlords. The same FT report finds that while landlord
households earning more than $200,000 a year generally get only about 5 percent
of their income from residential rents, landlord households with incomes of
$89,000 or less get three or four times as much of their income from that
source. Peter Spiegel, the Financial Times’ U.S. managing editor,
worries that missed rental and mortgage payments could “infect the financial
system.”
When renters fail to pay their rent — and those who rent
to low-income tenants see more defaults even in the best of times — landlords
lose that income. Sometimes, they’ll get some of it back, but, often, they
won’t. Normally, they evict non-paying tenants (you
can read more about that dreadful and unhappy process here) and replace
them with new tenants who will, they hope, pay the rent. But most landlords
have not been able to evict nonpaying tenants for months and months because of
the eviction moratorium enacted as part of the COVID-19 response. The landlords
affected by that moratorium are not all wearing top hats and monocles — many of
them are families of relatively modest means. And many of those landlords have
only one rental property, and often have a mortgage on that property: When
tenants don’t pay the rent, landlords can’t pay that mortgage.
That moratorium may be good policy as a short-term
emergency measure, but as the short term lengthens into a year or more, the
consequences of those missed rental and mortgage payments eventually must be felt.
Citigroup, JPMorgan, and Wells Fargo already have seen loan-loss charges in
excess of what they experienced during the 2008–09 financial crisis.
And what is happening in the mortgage world? An IPO boom,
of course.
Mortgage originators are having a banner year. They
expect to write $3.2
trillion in new mortgages this year, according to the Wall Street
Journal, an increase of more than 40 percent over 2019. But most of that
business is not for new homeowners: 55 percent is refinancing driven by basement-dwelling
interest rates. So they are having a good year, and they are eager to sell that
story to investors as quickly as they can — Mammon only knows what the
Democrats will do with capital-gains taxes if they hold all the cards in
January. John Dizard of the Financial Times writes:
For a crowd of clerks,
mass-production lawyers and server farm techs the mortgage industry comeback
was impressive.
How? Basically, by doing all the
good stuff (house building, cheap mortgages) now and putting off the bad stuff
(evictions, foreclosures, job losses from industry consolidation) for later.
Genius.
Thanks to the miracle of election
year politics, Democrats and Republicans united around
good-stuff-now-bad-stuff-later. Cheap Fed money, “forbearance” for distressed
voters, any reforms to be arranged after . . . after . . . by the next
Congress.
. . . The mortgage banking
entrepreneurs who had survived the great financial crisis, and their private
equity backers, saw a once-a-cycle chance to move product and cash out before
the Democrats got to rewrite Trump-era capital gains and estate tax laws. They
took it.
But putting off the bad stuff doesn’t mean that it goes
away. As Dizard puts it, “mortgage banks have booked enormous six-month
profits, but could have many months, or even years, of drains on cash.”
And that is why the low-income tenant, his landlord, the
landlord’s creditors, and the Wall Street giants are all, to an unappreciated
extent, in the same pickle. And the rest of us are in that same apparently capacious
economic gherkin.
(And, yes, I saw Capacious Gherkins open for Hüsker Dü.)
This has political implications and policy implications,
because debt is risk. We hear a lot of moralistic language about the federal
debt and what we’re “leaving to our kids and grandkids,” and that line of
argument is important. But another possibly more useful way to think about that
debt is as a burden of risk. Here I do not really mean the risk of U.S.
sovereign-debt default in the near term (a risk that the bond markets currently
calculate at approximately 0.00 percent, though they have been wrong before)
but the way in which that debt constrains the U.S. government in the face of
unexpected challenges, say a worldwide viral epidemic. If you are a thrifty
Nordic country (high taxes and high spending, sure, but high sobriety,
too) with a debt-to-GDP ratio of 33 percent (Denmark) or 35 percent (Norway),
or a very squared-away country with an even lower level of debt (New Zealand at
26 percent debt-to-GDP), then you have a lot of room to take on short-term debt
to deal with a crisis. If you are the United States, with a debt-to-GDP ratio
of more than 100 percent, you have to take that debt into consideration. The
size and robustness of the U.S. economy, the strength of the dollar, and the
longstanding stability and credibility of the U.S. government mean that
Washington can still get its money for nothing (the chicks for free ended in
the Clinton era) but that is a party that is not going to last forever. A spike
in interest rates could drive up the cost of federal debt service in the blink
of an eye and blow a Pentagon-sized hole in the federal budget. That would be
an enormous challenge in the best of times — and these are not those times.
We probably are not facing another financial crisis like
the one of 2008–09. But our situation is a lot like it was in 2008 in one way:
We are carrying a lot of risks that we do not understand very well. The crisis
doesn’t have to look like 2009 — it can be its own thing. Driving a few million
small-time residential landlords into foreclosure and penury is going to ripple
throughout the economy for the simple reason that they owe a lot of money to
banks and other creditors, and the current relationship between Washington and
Wall Street means that we all carry that risk together, whether we want to or
not. We have had for a generation a bipartisan consensus against serious action
on either the taxing or spending side of the ledger, and the Trump-era
Republican Party is at least as hostile to entitlement reform as the
Democrats are. But: More than half of federal spending is Social
Security and medical entitlements, another 20 percent or so is national
security, and the next biggest chunk is interest on the debt we’ve already
piled up. That adds up to something just short of the whole federal enchilada,
more than 80 percent of spending. Even if we froze everything else in place,
there would be no way to put our country on a sustainable fiscal path without
touching those sensitive interests and/or substantially raising taxes — and we
can’t keep everything else frozen in place. We have an unpredictable epidemic
on our hands, a financial system still in need of wide-ranging reform, and a
fiscal time bomb ticking away in Washington.
And no matter how hard you look at your ballot today, you
will not see on it a solution for that compound mess of messes.
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