econlife - What Happens When Landlords Don’t Receive the Rent by Elaine Schwartz

Our story starts with Emily. After the Philadelphia restaurant where she works laid her off, she had to cut her rent payment in half. Jobless, she could not afford the whole amount.

That takes us to Emily’s landlord, to his mortgages, and eventually to the Fed.

The Rent Nonpayment Path

Because an estimated 40 percent of all apartment dwellers in New York City cannot afford the rent, there could be two million unsent or diminished checks. Like Ed Edge, Emily’s landlord, the city’s building owners are small businesspeople. Ed said he had 14 tenants in four buildings that normally send him $9,300 a month. However, after the pandemic layoffs, at $4500, his first checks were close to half of what was due.

Ed owes $8,000 each month for the mortgages that finance his rental units and some renovation debt. Here, as the source of his mortgages, Wells Fargo and a company called New Rez enter the picture.

But this is just the beginning.

Mortgage Securities

Next, we need “mortgage servicers” to collect the payments from people like Ed. At the same time, groups of mortgages are combined in (what I call) “packages.” They then are bought by investors whose return is based on the mortgage payments.

Oversimplifying, let’s just say that our path took us from…

• Emily the renter,
• to Ed the landlord,
• to Wells Fargo the mortgage provider,
• to mortgage servicers that collect payments from homeowners and landlords,
• to investors buying “packages” of mortgage securities that pay interest.

Now, because of the pandemic, there might be one last step along our path.

Our Bottom Line: The Federal Reserve

Knowing that investors would not get paid because people like Ed canceled autopay to mortgage servicers, the Federal Reserve has said it will purchase mortgage securities. Through the Fed’s CMBS (commercial mortgage-backed securities) Program, they are buying bond “packages” worth billions in the open market.

During the week of March 30, the New York Fed bought commercial mortgage-backed securities worth $1.03 billion. The Fed said that their purchases would continue.

So, we have Emily who could be eligible for unemployment money through the CARES Act and the owners of commercial mortgage-backed securities getting Federal Reserve dollars. We could say that the beginning and end of our path are rather similar.

My sources and more: For the pathway that links the renter to the mortgage security, Planet Money, this NPR newscast, and City Lab had the details. Next, do read this Reuters article for how the Federal Reserve is stepping in. (Our featured image is from Bloomberg via City Lab.)

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - What You Might Not Know About Debt by Elaine Schwartz

Comparing $1.48 trillion to $1.46 trillion, student loan debt is more now than last year:

But we shouldn’t necessarily be worried.

In one experiment, community college students who were encouraged to borrow fared better academically than their debtless peers and those with smaller loans. The reason? The people who borrowed took more courses and got higher grades. Some could transfer to four-year colleges.

Scholars have hypothesized that larger loans led to more learning, better jobs, and the ability to repay debt.

Where are we going? To other consumer debt facts.

Little Known Debt Facts

How we borrow has changed a bit.

The credit products we use have shifted slightly during the past 19 years. Looking at the proportion of the population with a credit product, we see that auto loans display the biggest increase in consumer debt while mortgages are on the way down:

Our ages have changed too.

Particularly from 2008 to 2012, the proportion of people aged 20 to 29 who had credit card accounts dipped precipitously to 41%. One reason was 2009 Credit Card legislation that targeted abusive credit card practices. Now though the trend has reversed:

In the student category of consumer debt, women owe more than men.


Whether looking at the total or specific groups, women with bachelor’s degrees borrowed more than their male counterparts:

Compared to other kinds of consumer debt, student loan delinquencies are most noticeably up.

We are looking below at loans that transitioned into delinquencies that could be as long as 90 days:

Our Bottom Line: Consumer Spending

A loan represents the extra money that we have for consumption. When economists consider how we spend any extra money, they say they are looking at our marginal propensity to consume (MPC). Really though, we are asking what we tend to do when we have extra income.

Whether looking at our credit cards or what we borrow for school, for autos, and for our homes, it all tells us how we spend our extra money. It provides some insight about our MPC.

My sources and more: My go-to website for debt facts is the NY Federal Reserve’s Liberty Street blog. However, this summary from NBC also came in handy. After that, I recommend this paper from the NY Fed on the marginal propensity to consume an extra $500 to $5,000. And lastly (but actually initially), this NY Times Upshot column was the perfect intro for an overview of our response to student debt.

Our featured image is from Pixabay.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Celebrating Alexander Hamilton’s Economic Independence by Elaine Schwartz

The United States declared independence from Great Britain on July 4, 1776 and won the American Revolutionary War. But still, we were not truly independent. Our agrarian economy depended on Great Britain. They had the banking system, they had the factories, they had the knowhow.

But we had Alexander Hamilton.

Alexander Hamilton’s Development Plan

As Secretary of theTreasury, Alexander Hamilton’s goal was to expand the U.S. banking system, our transportation infrastructure, and technological innovation. He wanted factories that would process what our farms and plantations grew. So, he explained to the Congress what they had to do.

1. Establish Public Credit

• Hamilton said a national debt is a blessing if it’s not too large. Borrowed money had helped the U.S. finance the Revolutionary War. Also, though, those lenders had to know we would pay them back. With European creditors, the U.S. had to pay back the money that was due them while domestic creditors needed to know we had a viable plan. Only then could Hamilton establish the good credit that was necessary for a government to borrow the money it needed.
• Since then, the U.S. has been borrowing money and paying it back. However, some of us are worried that the debt is becoming too large. Just like your own income determines the wise amount for you to borrow, so too does the GDP for our nation. Below you can see that recently the debt is a bigger proportion of the GDP:

 

2. Create a Banking System

• Composed of financial intermediaries that connect savers to borrowers, a banking system “pumps” money around the economy. Banks loan money to business start-ups and help firms finance inventory. They expand and contract the money supply and purchase the bonds that nations sell to raise money. By establishing the First Bank of the United States, Hamilton generated the beginning of a banking system that pumped money around the U.S. economy.
• Now, while there are close to 5000 banks in the U.S., the large ones dominate. Below, you can see how the system has consolidated. The four with the most assets are Citi, JP Morgan Chase, BOA and Wells Fargo.

Consolidation of U.S. banks:



Declining number of U.S. commercial banks:

3. Encourage Economic Diversity

• Economic growth through diversity was the third leg of Alexander Hamilton’s plan for independence. Recognizing that the U.S. in 1790 was a farming economy, he sought tariffs and subsidies to protect a young manufacturing sector. He supported a system of tariffs to encourage innovation. Correct again, Hamilton knew that the combination of agriculture, manufacturing, and invention could form an economic foundation from which we could build.
• Looking back, we can say that Hamilton created our springboard. About a different kind of independence, Hamilton’s foundation facilitated the leap beyond our borders to globalization. It let us evolve from an agricultural economy to a productive behemoth that participates in the world markets and global supply chains that feed our growth.

You can see that the U.S. is very much a part of the world economy:

Exporters



Importers

Our Bottom Line: Déjà Vu

Hamilton’s goals are timeless. We still need to manage sovereign debt wisely, support a vibrant banking system, and encourage economic growth.

My sources and more: This Fortune article sums up the Hamiltonian legacy ideally.
Please note that this post is an updated version of what we have published on past Independence Days.


Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

From the Homeschool Front...Frederic Bastiat by Colleen Hroncich

One of the perks of homeschooling is that I get to learn alongside my children. Not long ago we studied Frederic Bastiat, a French economist and statesman who lived from 1801-1850. He had a tremendous ability to use analogies from daily life to explain economic phenomena.

One of his most important essays was “That Which is Seen, and That Which is Not Seen.” Here Bastiat explains that we must evaluate an action not just by looking at the immediate – or seen – effects. We must also examine the subsequent – or unseen – effects from the action.

This, he notes, is the difference between a good economist and a bad economist: “the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.” We witness this frequently in the political world. Politicians love to gain votes by supporting laws that seem to be beneficial one group or another. They rarely worry about the future consequences of their actions, knowing they’ll be gone when it comes time to pay the piper.

Let’s face it, though, we can see the same thing right within our own homes. If we use a credit card to go on a fantastic family vacation, we might be paying for it for years to come. Every year millions of people take on a huge debt burden buying Christmas gifts for everyone on their lists. Some are probably still paying it off when the next Christmas comes around. It can be easy to whip out a credit card in the heat of the moment, but we need to look ahead and see what the long term effects of that swipe will be.

When it comes to raising children, the same principle applies. Sometimes it is easier for me to just clean up a mess than to corral my kids and get them to finish the job. The seen effect of me doing the work is that the mess gets cleaned up more quickly. The unseen effect is that I’ve missed the chance to teach my children to clean up after themselves … thus ensuring future messes left for me.


Whether dealing with economics, politics, or home life, considering the unseen effects of an action can save a lot of problems down the road.

Colleen Hroncich loves that homeschooling allows her to learn right alongside her children. A published author and former policy analyst, Colleen’s favorite subjects are economics/public policy and history. She has been active in several homeschool co-ops and is a speech and debate coach.