Unsanitized: The COVID-19 Report for June 24, 2020

Another Reason for Massive State and Local Government Relief.
Plus, more case spikes and dodgy statistics.

 

A commercial property in Orlando, Florida, for lease, which is likely to
be a permanent condition, as commercial real estate demand slips. (John
Raoux/AP Photo)

First Response

One of these days, either the horrors of the economy we're hurtling
toward without more federal relief will dawn on policymakers ("it's
a shock unlike anything we've ever seen," said outgoing White House
economist

Kevin Hassett) or enough Americans will have trouble breathing (see
below for the mass herd immunity experiment we're undertaking) that
Congress and the administration will get around to setting a commission
to consider the study of doing something.

Sometimes news of those talks filter out. Jeff Stein reported yesterday
that Trump likes the idea of another round of Trump checks
,
but some of his advisers want it to be smaller and more targeted. (see
Dean Baker

on how the economic stimulus effect of the checks is muted.) The
unemployment insurance boost is worth about 9 times more than the
one-time check to anyone on it for the full four months, but that
accidentally bold policy
is
so loathed by Republicans that it needed to have been put in with an
automatic trigger to preserve, and that wasn't on the table. I fear
it's been written off despite continued need.

As long as stocks and investments are relatively stable, there's not
going to be pressure on the kind of people who own stocks and
investments to tell Congress to do something. That's fatalistic but
also the way Washington works. However, there is one investment about to
completely collapse, not just now but in an enduring, forever fashion.
That would be commercial real estate. And sure enough, that's what our
bipartisan coalitions are busy writing letters about.

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This letter
,
signed by 105 House members of both parties, spans the ideological gamut
from Devin Nunes and chair of the House Republican campaign arm Tom
Emmer to vice presidential hopeful Val Demings and co-chair of the
Congressional Progressive Caucus Pramila Jayapal. This is not a
naturally forming group on just about anything.

They write to Treasury Secretary Mnuchin and Jerome Powell about the
$540 billion commercial mortgage backed security (CMBS) market. For
context, just the subprime portion of the residential mortgage backed
security (RMBS) market was several trillion dollars, adding $1 trillion
per year in the peak bubble years of 2005 and 2006, but anyone rich
losing money anywhere is a problem, apparently. The argument is that the
CMBS structure prevents loan modifications (we heard this with
residential mortgages in the financial crisis and it wasn't really
true then), making default the only option.

The CMBS delinquency rate was 7.15 percent in May; in April it was only
2.29 percent. For "lodging" like hotels and motels it's up to
19.13 percent. For the moment, temporary supports are preventing large
numbers of people from skipping out on their rent (although David
Silberman at the Prospect today explains that there's plenty of
expectation

of a no-money-for-the-rent future). But retailers and shop owners are
skipping rent left and right.

We're likely to see a permanent contraction of commercial real estate,
in fact. A shift to working from home will not only close offices, but
be a major problem for the sandwich shop by the office and all the other
businesses that serve commuters. The accelerated rise of e-commerce will
force further shrinkage of the commercial real estate sector. Maybe
one-third of the nation's malls

could be closed by next year, according to one report.

So requesting that "the Federal Reserve devise a relief plan for these
borrowers," the ask from these bipartisan lawmakers, doesn't make
much sense to me. There just isn't going to be as much commercial real
estate. Some of these CMBS are going to fail; for the investors those
are the risks they signed up to take. And the Fed is primarily
interested in liquidity; loans aren't going to pay the rent.

This is a huge problem for one bystander, the congressmembers point out.
"Surrounding property values and state and local tax revenues will
plummet, worsening the recession, and removing critical revenue from
local communities." That's true and it's likely to be permanent.
This structure that helps fund government services is being undercut,
probably permanently. It's the ultimate stranded asset
,
and cities are holding it.

Fortunately the Fed already has a program set up for that: the Municipal
Liquidity Facility. The help needed here is for local and state
governments deprived of tax revenue. They need most of the money cannon
aimed at them, with long-maturity or endless-rollover bonds that are
theoretically "loans" but functionally grants. Or Congress needs to
awake from its slumber and provide the grants themselves
.
I don't care how it's done, but having the Fed give loans to
commercial real estate holders so they pay their property taxes isn't
sustainable amid permanent revenue loss and an economic shift.

The letter talks about "temporary liquidity deficiencies." They're
not temporary. And until cities and states figure out a new model,
they're going to feel the greatest pain here. The answer to the
commercial real estate crash is to fill local budgets with lots of
money.

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South by Southwest

Trigger warning: if you don't want to hear a pessimistic Dr. Fauci
skip this section. "The virus is not going to disappear," he said in
testimony

before the House Energy and Commerce Committee on Tuesday, and the main
epicenters of the spread right now are dead-set on proving him right.

Case counts hit a daily high in Arizona

and California
,
with Los Angeles' top health official saying that it's "highly
likely" that mass protests are responsible for at least some of the
spike. The virus doesn't account for your gathering being righteous as
it hops from host to host. The government, in one of those "big brain
guy tapping his temples" meme moments, is poised to pull funding for
testing sites in troubled states like Texas, following the Trump credo
of "no tests, no positive cases." Unfortunately for Trump, Arizona,
Arkansas, California, North Carolina, South Carolina, Tennessee and
Texas saw record highs in hospitalizations-the bodies showing up
unable to breathe are harder to falsify. Houston's Childrens Hospital
is now accepting adult patients

to keep up with demand.

Florida is an innovator in juking the stats, with the former lead COVID
data scientist alleging
that the
state will soon begin to slowly drop cases and deaths. I've said
repeatedly that the statistics are at best conjectural.  We could get
a vaccine by the end of the year
.
It's going to be an awful ride until then.

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Days Without a Bailout Oversight Chair

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89
.
The junk bond market is rising at its fastest rate ever
,
with $200 billion sold to date in 2020. "You get an invitation to a
party from the Fed, Treasury and Congress -- they offer to pick you up,
take you home and bring you breakfast in bed the next morning," said
one bond portfolio manager.

Total corporate bond issuance could double last year's total
,
and concerns of an asset bubble are rising. One-third of companies have
debt service costs larger than annual revenues. There's a cluster of
these zombie companies in the fossil fuel industry
,
which looks to be in drastic decline.

This is something the bailout oversight chair could hold a hearing
about!

We Can't Do This Without You

Today I Learned

* Far from just not stopping hospital mergers, the pandemic is
facilitating them
,
as dominant networks scoop up struggling rivals. (Axios)

* We completely deserve to have an EU travel ban

thrown at us, Americans are unsafe right now. (New York Times)

* The Center for American Progress tacks left with a proposal for
emergency Medicaid

for the unemployed and uninsured. (CAP)

* Black Americans are four times likelier
to be hospitalized
for COVID-19 as whites. (Associated Press)

* The disproportionate sickness rate among Blacks could have something
to do with mass transit
.
(Mother Jones)

* Barcelona opera house reopens to a packed house of plants
.
(CNN)

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