The Great Bailout - how it works?

[FinnFox]

Current coronavirus crisis is relatively long lasting problem and we don't even know how far it will have effect.

So how long this bailout is going to help people? And how? Is there any downside by doing so? (like long term havoc to economy later on?) I'm really bad at economics and maybe I'm asking wrong questions, but here is some well educated people who can explain things to me. Please do so and school me on this - I wanna learn something about this.

 

[Felis Leo]

Current coronavirus crisis is relatively long lasting problem and we don't even know how far it will have effect.

So how long this bailout is going to help people? And how? Is there any downside by doing so? (like long term havoc to economy later on?) I'm really bad at economics and maybe I'm asking wrong questions, but here is some well educated people who can explain things to me. Please do so and school me on this - I wanna learn something about this.

If the bailout actually goes through, it would be like putting a small bandaid upon a gush knife wound. Here is why, at least from an American perspective: So many entities and individuals are over-leveraged with borrowed money.

To draw it crudely: You have an ever-worsening domino effect. If you suddenly have tens of millions of people who, in the blink of an eye are out of work and cannot pay back their credit cards, the lending institutions lose money, and cannot pay the banks which they borrowed the money from in the first place. Then the banks crash, or, those that do not go under choose to invest their money in things that are "sure fire" investments, such as government bonds rather than risk lending it out. When banks do this, people cannot borrow money for home mortgages, car loans, small business loans, etc. Then those markets crash. More people are laid off. These layoffs in turn lead to less money being spent in other industries, so there are even more lay offs in those industries. It becomes an ever-worsening nightmare that takes years to recover from, just like our last Great Recession.

Here are a couple videos by someone who can explain the problem a bit better than me, the first to explain how bailouts work, and the second is how we got here and what bailouts can help and hurt:

 

[Buck Naked]

Current coronavirus crisis is relatively long lasting problem and we don't even know how far it will have effect.

So how long this bailout is going to help people? And how? Is there any downside by doing so? (like long term havoc to economy later on?) I'm really bad at economics and maybe I'm asking wrong questions, but here is some well educated people who can explain things to me. Please do so and school me on this - I wanna learn something about this.

I would like to hear The Economist's viewpoint if he wouldn't mind.

 

[humbolt]

There is no bailout at present. Pelosi didn't deem it important enough to convene the House today for a vote.

 

[Rexedgar]

There is no bailout at present. Pelosi didn't deem it important enough to convene the House today for a vote.

You’re forgetting the three-day week-end the Senate just took.....your slip is showing!

 

[Mycroft]

You’re forgetting the three-day week-end the Senate just took.....your slip is showing!

That was actually more than a week ago. Last weekend was Nancy's three-day weekend and yesterday, she opened the House for business and then immediately closed it. Today, she didn't even bother to open the House.

What's she waiting for? Her Senate Dem buddies all voted for the bill. Why won't she?

 

[humbolt]

You’re forgetting the three-day week-end the Senate just took.....your slip is showing!

I'm not in drag today. Cheer up. There's $25 million in there for the Kennedy Center. That'll save a lot of lives, right there. Nancy wanted $35 million, but only got the 25. No telling how many lives went down the drain with that cut. You should be proud at what she got to help in the fight.

 

[humbolt]

That was actually more than a week ago. Last weekend was Nancy's three-day weekend and yesterday, she opened the House for business and then immediately closed it. Today, she didn't even bother to open the House.

What's she waiting for? Her Senate Dem buddies all voted for the bill. Why won't she?

It's just not urgent for her. There's no political upside.

 

[Rexedgar]

I'm not in drag today. Cheer up. There's $25 million in there for the Kennedy Center. That'll save a lot of lives, right there. Nancy wanted $35 million, but only got the 25. No telling how many lives went down the drain with that cut. You should be proud at what she got to help in the fight.

Your boy was on board with this....... The initial proposal had set aside $35 million for the Kennedy Center, but the amount was later negotiated down to $25 million, a move approved by President Donald Trump.

 

[OrphanSlug]

Current coronavirus crisis is relatively long lasting problem and we don't even know how far it will have effect.

So how long this bailout is going to help people? And how? Is there any downside by doing so? (like long term havoc to economy later on?) I'm really bad at economics and maybe I'm asking wrong questions, but here is some well educated people who can explain things to me. Please do so and school me on this - I wanna learn something about this.

In intentionally overly simplistic terms... this is not a bailout exclusively.

Passed by the Senate yesterday was H.R. 748, Coronavirus Aid, Relief, and Economic Security Act (or the ‘‘CARES Act’’.)

At its core the bill is an economic stimulus act, and the intention is just that.

Through a combination of new loans, grants, other loan forgiveness and temporary suspensions, boost for unemployment benefits, and direct payments to individuals the idea is for government spending to make up the difference for the loss in this nation's aggregate demand because of coronavirus slowing down some of and outright shutting down other parts of our economy.

The economic principles that apply here is how a nation's GDP is calculated.

GDP, Gross Domestic Product, is the sum of CS + GI + GS + (X – M) or consumer spending (CS) + gross investment(GI) + government spending (GS) + Net Exports (exports or X – imports or M). Note that in our case Net Exports is usually a negative number as we import more than we export.

The point is when gross investment from business and consumer spending all fall because of some aggregate demand fault (in this case coronavirus impacting so much of our economy) then the only entity left that can step up to the plate is government spending.

So, in economic hard times the government should increase spending in an effort to keep afloat the nation's total economic condition.

All modern economic principles are based on the idea that fiscal policy (government spending,) monetary policy (Fed action,) and to some extent trade policy (exports - imports) should all be in concert to reduce the amplification of the economic cycle. So the booms (as in economic bubbles) are not so big and the troughs (as in economic messes) are not so bad, in order to have a more sustainable and reasonable economic growth trend line over the longer period.

To avoid a complete economic free fall because of what coronavirus is doing to the economy the government has to step in and mitigate the mess. If the government did absolutely nothing the economy would collapse to a point that any natural recovery would take much longer and hurt far more people along the way.

A stimulus bill through multiple means of aiding core economic function (business investment, employment, people buying things, etc.) is the right call.

Now the amount, and how much businesses vs. people benefit, is always under debate.

https://www.appropriations.senate.gov/imo/media/doc/FINAL FINAL CARES ACT.pdf

 

[VanceMack]

The long and short of it is that as a 1 time stop gap temp fix it MIGHT be a little bit beneficial but this measure is NOT a long term fix to the problem. A long term fix will require suspension of loan payments without penalty, increased EBT benefits, better unemployment benefits, suspension of utility payments (negotiated by the states). It might well involve consideration of student loan forgiveness. It shouldnt involve corporate bailouts OR, if it does, then the money going to corporations should go to their employees and their employees shouldnt get the additional worker relief.

Until there are reliable cures and the economy can be fired up again on continuing stable basis, there is going to be a need for continued financial support. These one time payments and corporate/program bailouts are not the answer.

 

[Rogue Valley]

I'm not in drag today. Cheer up. There's $25 million in there for the Kennedy Center. That'll save a lot of lives, right there. Nancy wanted $35 million, but only got the 25. No telling how many lives went down the drain with that cut. You should be proud at what she got to help in the fight.

Practically all American dead stem from Trump disbanding the Pandemic Response Team and firing our pandemic expert in China.

Trump removed our defenses.

 

[humbolt]

Your boy was on board with this....... The initial proposal had set aside $35 million for the Kennedy Center, but the amount was later negotiated down to $25 million, a move approved by President Donald Trump.

My boy? I do support the peanut butter and jelly sandwich as opposed to a **** sandwich, if that's what you mean.

It's not my fault - or Trump's - that Pelosi decided, while people are sick and dying, to toss in unrelated pork for no particular reason other than to delay passage. Of course Trump signed it. Time is critical here, and no one with any sense is gping to allow $25 million hold up $2 trillion.

 

[Rexedgar]

My boy? I do support the peanut butter and jelly sandwich as opposed to a **** sandwich, if that's what you mean.

It's not my fault - or Trump's - that Pelosi decided, while people are sick and dying, to toss in unrelated pork for no particular reason other than to delay passage. Of course Trump signed it. Time is critical here, and no one with any sense is gping to allow $25 million hold up $2 trillion.

Are you of the opinion that there are not similar unrelated markers in the Republican portion of the bill?

 

[humbolt]

Are you of the opinion that there are not similar unrelated markers in the Republican portion of the bill?

Are you of the opinion that delaying the aid is beneficial?

 

[Rexedgar]

Are you of the opinion that delaying the aid is beneficial?

The Senate went on holiday a few weeks ago and Trump thinks governors are over requesting supplies. The time that help arrives is expected to be sometime in May. I have not seen any thing like this in my long time here on the planet. I don’t have the answers; if we just continue to print money, the value has to go down, right?

 

[humbolt]

The Senate went on holiday a few weeks ago and Trump thinks governors are over requesting supplies. The time that help arrives is expected to be sometime in May. I have not seen any thing like this in my long time here on the planet. I don’t have the answers; if we just continue to print money, the value has to go down, right?

I agree that this is inflationary. Three weeks ago the size of this iceberg wasn't as apparent as it is now. Given Pelosi's delays - noted by the urgency of the governor's calls - I think it's safe to say Nancy doesn't share their sense of urgency.

 

[JohnfrmClevelan]

The Senate went on holiday a few weeks ago and Trump thinks governors are over requesting supplies. The time that help arrives is expected to be sometime in May. I have not seen any thing like this in my long time here on the planet. I don’t have the answers; if we just continue to print money, the value has to go down, right?

Not necessarily. In most recessions/depressions, you are fighting to keep prices from falling, due to the lost demand.

When we suffer recessions/depressions, it's normally because of a larger-than-normal failure of private sector debt, and debt failures tend to spider out into more debt failures, markets are affected, jobs are lost, etc. In 2008, there were larger-than-expected failures from a lump of super-high risk mortgages; those losses affected bank capitalization, people lost homes, home values dropped, people lost jobs, etc. In 1929, it was, I believe, excessive trading on margin that grew into a giant problem.

This one started for different reasons, but the result will be the same. A few sectors went from 100 to zero overnight, while other sectors remain in business at pretty much normal levels. Either way, a large number of people won't be able to pay rent, and a large number of businesses won't be able to service their debt, so debt failures will again spider out and cause havoc.

The lesson (hopefully) learned from 2008 is that it is cheaper, more effective, and also more humane if the government just steps in and pays the bills for a while, rather than trying to rebuild wrecked sectors later. If an employee is paid to stay home, and a business (say, a restaurant) is given money that it would have earned in normal times, then the only thing missing is people sitting down to eat. If I normally pay you to mow my lawn, then I pay you even when you don't, it's all the same to the economy - as long as you don't take another job in the meantime. The grass can be cut later.

Bank-created money is going to decrease, as fewer loans are taken out and other loans fail, so government-created money is going to fill a void. When this is all over, I expect that banks will have less debt and more reserves on their asset side. It will be a bit of a debt jubilee, if the government does this correctly, and keeps people afloat, instead of concentrating on paying businesses. That was the mistake made in 2008.

 

[TheEconomist]

I would like to hear The Economist's viewpoint if he wouldn't mind.

This is a bit of a late response, but I can try to provide some thoughts on the subject.

At a general level, there is little reason to doubt that government spending can have a stimulating impact on economic activity. Although this should be blatantly obvious, I feel forced to remind people that this is a comment about the distance between alternative outcomes. It means I'd expect production to be higher than it otherwise would have been. This could be softening the blow of a recession that might nonetheless be pretty bad. Just to be clear, that part of the statement isn't controversial. If I gave libertarians the most forgiving theoretical environment imaginable (one where all markets are efficient absent taxes), deficit spending would be expansionary. It's as true in hyper-sophisticated New Keynesian models as in the barest Real Business cycle models. Moreover, structural vector autoregressions would agree, so it's not just a theoretical fantasy. The dispute lies with the size of the impact, not with the sign of the impact.

Now, how much can I say about this? Unfortunately, the size of the fiscal multiplier is very sensitive to model specification, so it's going to be rather tightly wed to the assumptions you make. And if it wasn't enough, some of the results regarding the size of the multiplier at the ZLB come from models that are known to be very problematic for various reasons, used approximations to model dynamics that have been shown to be poor later on and imposed the complete inefficacy of unconventional monetary policy instruments to derive the results. The larger-than-life multipliers at the ZLB melt away as soon as you start addressing one or many of those concerns. I really don't have a lot of theoretical ground to make general, convincing statements about how big the size of the multiplier should be in current events. At an empirical level, a stroke of luck would allow you to say something meaningful about the multiplier on tax cuts (understood as broadly as possible), but it wouldn't allow you to single out a value for the fiscal multiplier without further assumptions... and, guess what? Depending on what you want you assume, it can either be taken to be pretty large or pretty small. So, for how much this will help curb the crisis in terms of depth or duration is very unclear.

Some people have mentionned that crises can have long term impacts on economic growth. I am not very well acquainted with the literature on endogenous growth, but I am aware that you can make sense of this intuition in an internally consistent maner. The story goes something like failures to invest in various forms of capital (human and physical) can have both short and long term impacts, if only because these are useful for generating technological progress. It's not crazy to think that it's a nontrivial aspect of the situation.


There is however some concern on my part over how some people frame the issue in deeply moralized term. It's not a political opportunity that should be exploited to further our preferred agenda with regards to welfare programs. Turning the discussion into an heavily politicized dispute over, e.g., whether and how to handle potential issues pertaining to discrimination isn't helpful. It's exactly how you prime people to make them absurdly dumb and unable to think things through.

 

[imagep]

My boy? I do support the peanut butter and jelly sandwich as opposed to a **** sandwich, if that's what you mean.

It's not my fault - or Trump's - that Pelosi decided, while people are sick and dying, to toss in unrelated pork for no particular reason other than to delay passage. Of course Trump signed it. Time is critical here, and no one with any sense is gping to allow $25 million hold up $2 trillion.

yet none of that happened. The bill was written by Senate republicans, not Nancy Pelosi in the House. It was republicans trying to delay the bill in the Senate, they wanted days more of floor debate, dems said that they could resolve the issues faster in conference. Dems were successful.

 

[imagep]

I agree that this is inflationary. Three weeks ago the size of this iceberg wasn't as apparent as it is now. Given Pelosi's delays - noted by the urgency of the governor's calls - I think it's safe to say Nancy doesn't share their sense of urgency.

How is it inflationary?

My concern is that we may have some inflation, but that is due to manufacturing plants shutting down, making supply tighter.

 

[humbolt]

yet none of that happened. The bill was written by Senate republicans, not Nancy Pelosi in the House. It was republicans trying to delay the bill in the Senate, they wanted days more of floor debate, dems said that they could resolve the issues faster in conference. Dems were successful.

I think my version is closer to correct. The Kennedy Center did get $25 million - to fight the coronavirus, I'm sure. Refresh my memory. Was that in the original Senate bill? Oh, wait. No, it wasn't. Remind me who added that.

 

[humbolt]

How is it inflationary?

My concern is that we may have some inflation, but that is due to manufacturing plants shutting down, making supply tighter.

Ask yourself how much a Chevy would cost if everybody in the country had at least a million dollars, and Chevy's were in short supply. That's an extreme example, but the principle is the same. Of course, if we're out of work long enough, that problem goes away, and a whole new, much more serious bunch of problems will be front and center.

 

[JohnfrmClevelan]

Ask yourself how much a Chevy would cost if everybody in the country had at least a million dollars, and Chevy's were in short supply. That's an extreme example, but the principle is the same. Of course, if we're out of work long enough, that problem goes away, and a whole new, much more serious bunch of problems will be front and center.

Recessions are the result of a lack of demand. You won't find one where prices went up, except possibly for imported oil.

 

[humbolt]

Recessions are the result of a lack of demand. You won't find one where prices went up, except possibly for imported oil.

Right, but I'm mentioning inflation, and not a recession. I don't think any inflation matters at all right now, but the relief package may cause some of it, depending on how long the economy is dormant.