Open Letter to Secretary Mnuchin and Chairman Powell

July 24, 202

The Honorable Steven T. Mnuchin
Secretary
Department of the Treasury

The Honorable Jerome H. Powell
Chairman
Board of Governors of the Federal Reserve

Dear Secretary Mnuchin and Chairman Powell;

While we have spent an unprecedented $2.2T so far in support payments and loans to individuals and businesses, and are debating the size (in trillions) of a 2nd relief package, what return have we seen for this intervention?

We submit that most of the actions being implemented or suggested will fail to reduce the length of severity of the crisis — making the path to full recovery much longer and harder than necessary. This is because the mere throwing forth of trillions of dollars without any assurance that they will reach the multiplier levers of the economy is, by its nature, extremely expensive, highly wasteful, and inefficient. It will achieve very little in spite of its massive size.

A careful analysis of the cost structures of businesses that are the productive engines of the economy and, similarly, of the income statements of households makes it clear that another round of loans and grants won’t work, not in the long run, and not without continued enormous and unsustainable government outlays.

This is because most of the grant money and bridge loans simply flows through the businesses or the households, accomplishing little other than preserving the revenues of financial and capital asset owners. We might as well give the stimulus money to the landlords and passive holders of financial assets directly!

It is clear that to actually “stimulate” anything, stimulus money must do much more than just zip through small businesses, but must remain there as long as possible and be used to pay employees and for essential operational business expenses (such as utilities, maintenance…).

The only measures that will provide stimulus are those that remove this flow-through aspect and put the money where it can do work (in the physical sense). At the same time, the burden of the crisis needs to be spread on the largest possible base in order to protect the weak links in the economic chains. Such a targeted and purposeful approach will also enable the total government outlays to be greatly reduced, yet be significantly more targeted and efficient.

Rather than providing humongous flow-through financing to the landlords and asset holders, we need to get them involved as part of the solution — where they share some of the burden and contribute to the relief of households and financing of the productive businesses during and exiting the crisis.

We propose a solution, which we call “Time Suspended”, which has these objectives in mind and is meant to permanently stave off any tsunami of evictions and bankruptcies — ensuring minimal business destruction and employment layoffs on the path to the fastest possible recovery.

The Time Suspended Proposal

We advocate setting ALL preexisting interest rates on ALL financial assets, ALL unproductive business real assets, and ALL personal mortgages to 0% while the crisis lasts, and concomitantly setting a grace period for any installment, and extending all contracts by the same amount of time, as appropriate.

Not only are we proposing a postponement of most payments and installments, but that all rents and interest expenses should be canceled (or proportionally reduced) during the crisis. In contrast, bridge loans merely shift money flows temporally. Similarly, moratoriums on evictions and foreclosures, which the CARES act and many state and local governments are already implementing, are but a necessary component of the whole solution. All of these measures, without the proportional cancellation of the time-based expenses, in the end just protect the eventual revenues of the owners of financial and capital assets and do nothing for the long-term benefit of the businesses and households — landlords and asset owners are kept “whole” while everybody else suffers extended damage.

Also, crucially different and the cornerstone of the proposal is that this freeze must be applied throughout the entire economic chain in order to spread out the burden across the much larger base of the entire economy.

This creates a flow-through effect down the economic chain where any intermediate link in the chain, (say a landlord), may see its rental revenue reduced, but in turn will itself be proportionately relieved of its own time-based expense obligations.

The flow-through effect continues all the way down to the end-of-the-chain holders of debts. The government may choose to compensate these individual holders (on some sliding scale) — where indicated by fairness considerations. Regardless, the total size of the required government outlay will be drastically reduced compared to bailing out businesses all along the chain.

This solution may appear “radical” but a moment’s reflection makes it clear that it mimics the perfectly natural and straightforward “freezing of time”. The crisis has essentially stopped economic time and during this freeze no time-based revenue or expense should accrue.

Naturally, there will be opposition from those who are being asked to assume some of the burden currently carried by others. However, this burden-sharing is not only fair, but relieving the financially weaker segments from a lot of the pressure is crucial to prevent a snowball of foreclosures, bankruptcies and legal expenses.

If capital asset owners myopically insist on extracting every dime now, many businesses will fail and default on their financial debt and rental obligations; financial capital will be lost and real capital will sit empty, or idle for months past the crisis. On the other hand, if they are mandated to forego a few months of interest or rents, the businesses will be much more likely to survive and resume operating profitably with the ability to resume making payments after the crisis. The creditors themselves will also have their obligations suspended.

This flow-through effect of sharing the burden and having the relief flow where it has the most impact applies to all sectors of the economy: businesses but also households and local governments.

A complete explanation of the reasons for the Time Suspended solution and why it works is in the attached study/proposal and also available on the Social Science Research Network (SSRN) https://ssrn.com/abstract=3635812.

We remain available for any request of clarification

Respectfully,

Luca Donà, PhD
mathematician: Economics, Finance, Game Theory, Risk
– www.lucadona.com; @LucaDonaV

Prof. Raphael Douady
research Professor at University of Paris I: Pantheon-Sorbonne;mathematician, statistician, extreme risk specialist

Jeremy Dilbeck, MPP