Just this last week, a number of interesting news stories crossed my desk. Two in particular stood out – the Trump administration’s newest moratorium on evictions, and the Federal Reserve’s purchasing $1 trillion worth of mortgage bonds. Now, I don’t think there is any question as to why the feds have chosen this path; times are hard for some people and the feds don’t want them to get harder. The question is, what problem does this solve? The answer: it doesn’t solve any problems. As Thomas Sowell was quoted recently, “There are no solutions, there are only trade-offs; and you try to get the best trade-off you can get, that’s all you can hope for.”
The real question is, then, “what are the trade-offs for these policies?”
Well first, the administration’s moratorium certainly provides some much sought after breathing room for America’s renting population. The Aspen Institute estimates that between 30 and 40 million people are at risk of being evicted: that is quite the number. What happens, however, to the landlords when their troubled but legally protected tenants stop paying rent until the end of the year?
Consider the following: a reasonable percentage of at-risk renters cease paying rent for the next 4 months. Due to this, the less financially prepared property owners must choose to foreclose rather than to continue to deal with the mortgage that many are using the rent to pay. January 2021 comes along, renters are no longer protected, and the houses they live in are now bank-owned assets which will undoubtedly be sold at auction after the tenants are evicted en masse. Potentially millions of rental properties may end up in just such a circumstance, and the potential of a sudden decrease in rental supply could very well mean higher rents in 2021. Will this policy truly help America’s renters, or will the trade-offs come back to bite even those that are not currently “at risk”?
Beyond this, what happens to all those mortgage-backed bonds that are being held by the Federal Reserve if mortgages go belly-up like they did after the 2008 recession? Mortgage delinquency peaked in 2010 at 9.3% as we began the agonizing process of digging ourselves out of a politically driven recession with the same political burdens slowing down our efforts. This last August, mortgage delinquency had reached 8.2% at the same time that the Fed was approaching $1 trillion in what some might consider toxic securities; incidentally, that is approximately 30% of the American housing market. I can only imagine that among the threats of continued lockdowns, a flagging service industry, and the administration’s short-run compassion, we may see considerable difficulties in the new year vis a vis 2008.
This does not address all of the potential trade-off for these policies, but this is what you need to be thinking about when you read the news on new economic programs, public welfare spending, and public policy more generally. It should always be your very first question: “what are the trade-offs?”