Suppose that we think that many otherwise economically-viable households and businesses will not be able to pay their bills over the next few weeks, and this will produce a domino effect. Could we stem this liquidity crisis by allowing folks to overdraw their checking accounts temporarily, with the government promising the banks to make up any losses that result?
My thinking is to have the government provide overdraft protection for any individual or business. You can write a check, and if you don’t have the funds to cover it, you pay no penalty while the policy is in place.
The overdraft protection would last from the date that it is announced to, say, six months after the government declares that it is safe and acceptable for people to resume normal economic activities. Six months after normal economic activity is allowed, your checking account has to be back in the black or else you pay a penalty.
The goal is to enable individuals and firms to pay their routine bills. If an individual or business uses overdraft protection frivolously and cannot pay back the loan, then when the protection ends they will face a penalty. Perhaps the penalty needs to be severe in the case of flagrant abuse of the overdraft protection.
If we have a lockdown that lasts only a few weeks and then gets lifted, then overdraft protection might be sufficient for the vast majority of individuals and businesses. No need for the government to give everyone a check. If the lockdown lasts longer, or subsequent lockdowns are needed, then we have something much more than a liquidity crisis. In that case, you have to go about figuring out who needs/deserves a subsidy.
I am sure that this idea is not perfect, but what are the big holes that you see in it?
Money is fungible. Would this be the equivalent of giving anyone who wants one (assuming they have a checking account) a 6 month interest free loan for an unlimited amount of money?
yes, overdraft protection is like an interest-free credit line. That is why it is important to design the penalty structure so that people who indulge in frivolous spending and then don’t repay are made to suffer for it.
Without any defined credit limit, somebody somewhere is going to use it to buy a yacht (or something else unreasonable that they clearly can’t afford).
Also, the working class often don’t have bank accounts. Since they’re probably the ones you want to target, that’s an issue.
Crowding out?
No one would use ordinary sources of credit, if everyone had a source of infinite credit at 0%. There would be a lot of ‘refinancing’ via this method too. Can I borrow the outstanding balance on my mortgage, credit card debts, auto loans, etc. so I can pay them all off and hold everything in overdraft debt for the duration?
The creditors would see a lot of their portfolios and ordinary business disappear for the duration. Either they’d have to live with that, or offer to match the 0% suspension for the duration. A lot of loans don’t have big prepayment fees or penalties like they used to.
Decisions will depend a lot on the nature of the penalty and the overdraft interest rate after the return to normalcy.
A lot of people who can’t make the transition or make bad decisions enabled by all that “Don’t ask, don’t tell” credit will have to go into collections, and as I understand it the collections process is quite burdensome, not to mention a lot of people are going to take big hits to their credit scores by succumbing to the temptation of unlimited purchase power, which may create a long-term impairment of their ability to participate and contribute to any recovery.
I don’t see people kiting their mortgage: they may get a six month reprieve or so, but the refi at the end could well be more than what they have now.
Maybe limit the overdraft to $1000 dollar a month or so.
Enforcing the payback will be sticky: a flurry of bankruptcies?
What if I just don’t pay my mortgage for six months. That’s ‘delinquency’, but what’s the difference between not making payments on a loan on schedule, and an ‘overdraft’?
Do I get to make a zero-interest, no-penalties balloon payment after the six months? Can all the big banks make zero interest overdrafts at the Fed? (Wait a minute …)
What if I don’t pay my rent? Same deal? But if I pay my rent with overdrafts, what different does it make? If I don’t pay my rent, my landlord can make up the difference with his own overdrafts.
Is the goal to give people free credit? Or is the goal to keep people from accidentally racking up overdraft fees in an uncertain time where they are short on funds.
Seems you would limit the overdraft fee to 5% of the amount taken out. So when I got a bunch of fees for a recurring monthly charge I won’t have to pay $35 for each $5 charge.
I think this idea is much more sensible than having the same banking system fund the Treasury payments which could potentially be much more dubiously allocated. Individual banks can cap the amount to extend this interest & penalty free credit line to something like 75% of the normal monthly deposit(s) to the account. Most account holders would understand that a 20% conservation [transportation, food, and leisure expense cuts], is very do-able given the circumstances.