What’s Coming?

Robin’s Book Report #68
A reading list by Robin Kaiser-Schatzlein
Agenda
-Catastrophe preview: what might happen to the economy in the coming months.
-Letters from You
-Reading List


First of all, this is week is the 3 year anniversary of this newsletter. Thanks to everyone who reads and also to the people who respond, that’s what makes it fun.


 
Hello everyone,   As the economic shutdown continues, I wanted to highlight a couple of economic issues that I am watching. A lot is uncertain, because, if government intervention is smart and active, the global economic recovery could be quick. I doubt that will happen, first because the recovery after the financial crisis in 2008 was slow for everyone who wasn’t a bank or automakers, and second because the scale and complexity of the recovery probably outpaces our federal government’s competency and capacity. As many are aware, there simply isn’t a good system for getting people money. Cash transfer programs (that is, welfare and tax refunds), are so punitively complicated and threadbare that it is uncertain whether cash will even get to the people who need it. If the cash does not make it to people, there will be an epic wave of defaults on mortgages, auto loans, and credit cards could spark a financial crisis. Hopefully this won’t happen, but it requires coordinated action on the part of state and federal governments, lenders, and borrowers. However, this, as I said, seems unlikely.   

The effects of mass unemployment is also uncertain. While it’s a tasty bit of schadenfreude to watch unemployment skyrocket on Trump’s watch, the numbers that will matter most will be after the shutdown is over. Millions will immediately go back to work, which is different from the 1930s or the 1980s when workers were unemployed because businesses failed and sacked their workers. Surely, many businesses already have failed or will fail, but we will have to assess unemployment at the point when the economic activity resumes. The numbers today are crazy high, but less meaningful. Also, just a reminder that unemployment is a bad metric. The figure underestimates the true number of people out of work, because it doesn’t count people we have stopped looking for work and it doesn’t count contractors, gig workers, and freelancers (typically, though today it *kind of* does).   

The real pain of this moment will likely come in two to four months, when debt comes due for a number of companies and they can’t pay their lenders back. When these companies default, it could ripple quickly through the country. Same with consumer debt. Many people will be able to afford their rent and other essential payments, but they may decide to default on their other obligations which could have widespread impacts. Like their auto loans, which I’ll mention below.   So there are only a few immediate economic problems, but there are issues on the horizon that I am watching. Here is an annotated list.  

People might begin to default on their predatory subprime auto loans. These auto loans (often over a seven year term instead of a five year term) have increased in use by almost 60 percent since 2008. Many people are rolling over the balance from their last loan into their new, more expensive subprime loan, which means that they didn’t have the money to pay their car loans in the first place. They were relying on future incomes to keep rolling in.   

-Businesses that were already struggling before the shutdown are vulnerable. One example is brick and mortar retailers like Macy’s and JC Penney. Many retailers (like JC Penney, Neiman Marcus, and J Crew) were using junk-bonds to finance operations, which are extremely expensive loans that give a business almost no flexibility if demand crashes. Wouldn’t be surprised if many close and never reopen.   

-This leads to a second problem: the leases on brick and mortar retailers are repackaged in commercial mortgage backed securities. You may remember mortgage backed securities as being a culprit behind the 2008 crash. If these retailers fail en masse, the CMBS market would likely fail too.   

-In general, WeWork and other junk-bonded funded companies are vulnerable too. Softbank actually just refused to buy outstanding share in WeWork, suggesting it might be on the verge of dissolution. Low interest rates for the last ten years has made debt easy to get, but leaves us vulnerable to a economic shock.   From the New York Times: “easy money for companies came with a downside. The dependence on debt created what has been described as an “unexploded bomb” — a precariously balanced powder keg that could be set off by the coronavirus outbreak.”  

Energy companies could fail. Fracking, an industry that lives on strict junk-bond diet, is already seeing failures. (“Energy Companies Strange on Debt”). Whiting Petroleum, a Denver based fracker of the Bakken in North Dakota, already filed for bankruptcy. I could go on and on about how stupid fracking is, but I will wait to see how it unfolds. Also, a price war between Saudi Arabia and Russia has driven the price of oil down past $30 a barrel. This makes me think about the Dust Bowl, an environmental catastrophe that happened to strike in the midst of a financial crisis. Economic problems compound when they overlap with other problems. Coronavirus combined with an oil shock could be a serious problem.  

Credit is drying up, right at the moment when people need it most. This leaves small businesses that are otherwise financially healthy, stranded. Credit could easily allow a business to borrow against future profits to survive a dramatic loss of demand, but credit is becoming more expensive. Definitely Exhibit (a) of how the financial system is incredibly stupid.    

-Last, I am watching the calls for austerity. Many cities are facing a financial crisis, including Las Vegas. Government officials, especially Cuoma, call for budget cuts to deal with the crisis. Since the 1970s, this has been the approach of almost every city, state, and nation. But I blame low taxes. So before we enact a single budget cut or ask workers to take a pay cut, let’s enact a tax on wealth, financial transactions, corporate profits, and salaries over $200k. If that doesn’t shore up the budget, then maybe workers can begin to pitch in.  

-Do you have good ideas for donating money or time to something? I’ve been donating money to local food banks. This article about Hmong elders stockpiling rice in Minnesota, was a good example of how important access to food is, especially people who have experienced crisis before.  

Letters from You  

Lolly:   I just had MBS by Ben Hubbard delivered. Will read next, after I finish Gabriel Bump’s Everywhere You Don’t Belong.    I enjoyed The New Yorker short story Out There by Kate Folk.    Stay well, safe, and sane.  

Matt:  

I was reading about low-interest disaster loans in the Times this morning and started wondering about some things—some very broad Corona-related economic questions, the kind you might write large on a blackboard…   At the moment, our government’s reported plan to save small businesses during the pandemic is to provide loans at 3.75% interest to keep them afloat until society gets off “pause.” These loans would require collateral. So, once things are up and running again, business owners are stuck with new loans in addition to whatever loans they presumably already had, and if they can’t pay them off the government comes and repossesses their building (or gym equipment, or ovens, etc.).  

Yikes! This seems worse than nothing—how can owners make their new double loan payments if nobody’s spending money at their restaurant or gym or bookstore because they don’t have any money because they didn’t work for a month, or two, or six, or nine…  So what, are we just not going to have any restaurants or bookstores anymore? The recovery model as currently proposed seems to be based mainly on incurring debts which will likely never be repaid. Is our economy all illusory anyway, as you’ve suggested before? You can’t eat a hologram.  

Rob, is there something I am not understanding here? I keep wondering how many people in NYC have less than $300 in their bank account. A million? 2 million? What are those people going to do next week when they run out of money and need to get some groceries? Rioters looting Key Foods is a best-case scenario? Even if the government cuts everyone a check for a thousand dollars (an idea that is, incredibly, under consideration), how long does that money last?   The only solution I can imagine is an immediate freeze on any rent, mortgage, and loan payments, including credit card payments—everything.   

But maybe we don’t need permission. Rent Strike! I braved the subway to go see my psychiatrist last Tuesday.  He was all fired up, said this is a political crisis, not a health crisis, and as I was walking out the door he said, “if you want to cure your depression, join the revolution!”  Just might take the good doctor’s advice.  

My response to Matt:  

I think your questions are all valid. I have a feeling that if we do nothing, a lot of people will come out of the crisis with more debt. That rate for small businesses (3.75 percent) is way too high.    In my estimation the best course of action probably isn’t a rent strike, but a general debt strike. A rent strike might be necessary for people who can’t pay, but without some kind of bargaining power to cancel the rent, it just delays the pain until later. And with people’s homes at stake, I feel like cancelling rent is more difficult than cancelling student loans or medical debt, a lot of which is owned by the government. 
 
Reading List  

The Education of a Prince By Alva Johnston (The New Yorker)   This is a profile of a scam artist from 1932. It is notable that the scam in this case is all about credit. If you act rich, or like an exiled Russian prince, you can demand services on credit, for at least a little while. Paying cash is so vulgar!  

Why Preppers Weren’t Really Prepared For The Pandemic” By Michael Federer (On The Media)   This segment was really good. One suggestion is that the preppers weren’t prepared because they live in a fantasy. Coronavirus has “rattled the prepper world to the very core.” Preppers weren’t really interested in the apocalypse but instead “looking for something missing in their lives.” One of the experts in the segment quips that “no survivalist ever did any survivalism,” which may or may not be true, but exposes the real mission of prepping. Preppers want to act like they are in control of their own lives.  

Waiting for the End of the World Apocalypse camp at the dawn of the Great Extinction
By Lauren Groff (Harpers)   Another aspect of prepping, argues Groff, is that they are romantics, people ready to defend white supremacy against logic. They are pining for the collapse, a sentiment which the author foolishly shares with the survivalists. It’s the idea that only a major dissolution of the society will make way for a better world. This isn’t really true–collective action will be effective even in the face of no collapse–but I agree with the Groff that it will require a certain type of preparation on the part of people on the left. Both the survivalist kind and the imaginative kind. Both emergency medical training and the sketches of a more just political order, one in which all shades of preppers can come together against billionaires.  

Prophets of InstabilityHow finance broke the modern corporation.   
By Rick Perlstein (The Nation)  

Perlstein reviews a book on how the modern corporation changed from being a steward of societal progress to being an extractive burden on the nation.   Around the 1970s, theorists encouraged corporations to be crazier:  

To encourage [managers] to behave as full-time profit maximizers and nothing but, [theorists thought] companies should take on much more debt. They should, in other words, be much, much more unstable, for well-funded corporate treasuries “permitted chief executives to relax,” Lemann writes, “rather than being incessantly, almost desperately worried, as they should be, about making the company more profitable.”

Funny line about the deranged neoliberal economist Michael Jensen:  

Jensen’s most influential statement of this idea was a 1976 paper, “Theory of the Firm.” Lemann describes it as “long, detailed, [and] formula-filled,” which gave it the appropriately cool aura of science, even if it was also a work of moral dementia.

 
Good observation about the true function of venture capital investing, where 3/4s of investments fail:  

The only possible way such investing could make sense is if the venture capitalists are placing bets that they will someday buy into a monopoly; indeed, it is only at a monopoly-like scale of market domination that a social network company can hope to make money at all.”  

Pushing Paper
Paperwork has never fit comfortably into our idea of what work means—it has no heroes and few sympathies.
By Ben Kafka (Lapham’s Quarterly)

 Who are the literary heroes of paperwork? Bartleby? Kafka? Fun essay.  

Shell Is Looking ForwardThe fossil-fuel companies expect to profit from climate change. I went to a private planning meeting and took notes.
By Malcolm Harris  

Sort of depressing, but an important window into how energy companies are rationalizing their continued existence.   Why energy companies often encourage government spending:  

Government spending is fine with capitalists as long as it ends up in their pockets, so that’s the type of spending we’re likely to see. It’s the only care they can afford to offer, not because we’re too expensive to keep alive, but because the American system only functions if workers are living on the brink of disaster.

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