Fried Rice Illustrated

Enver Hoxha says it's fried rice time! Enver Hoxha says it's fried rice time!

First let's gather our ingredients.

Now we heat up some oil in a large pan.

Time to fry the onions! [Turns out I can't upload a video of the frying onions. Trust me, the sound and smell were intoxicating.]

Look how nice and brown they are!

Time to add the peppers!

When those have cooked a bit, we add the rice.

Time for the eggs.

Hollow out a little home for them.

In they go.

Don't forget the garlic.

Ketchup.

This is also when I added the chili paste. The rice is looking pinker now.

Cheese is optional.

The final result was disappointing, and I had to add Cholula to make it tasty.

Every good boy deserves a treat for making a home-cooked meal.

But the cider was not actually very good.

Cat Bonds for Everything

This is the galaxy brain version of my previous post.

Imagine that the government gives a small tax break to people who obtain income from "conforming leases," "conforming mortgages," and so forth. What is a conforming lease? A conforming lease is a lease that has a special clause whereby the government can impose a rent holiday for up to 3 months (or whatever) in specified circumstances.

So if you're a landlord, what you do is either sign a conforming lease and obtain a conforming mortgage, or you pay a little extra tax and get non-conforming leases and mortgages. And if you're a mortgage lender, you either buy conforming mortgages and issue conforming notes (saving a little on taxes) or you buy non-conforming mortgages and issue non-conforming notes. You get the idea.

Then when necessary, the government triggers its rights under the conforming contracts. Say a hurricane hits Miami. The government might immediately give tenants a 3-month break on rent (in addition to whatever other break they might be entitled to under Florida law). Likewise, their landlords get a 3-month break on their mortgages. And whoever holds the mortgages gets a 3-month break on its debt.

There may be logistical difficulties in tracing the contracts up the chain. Suddenly it matters to me, as a noteholder under a conforming bond indenture, whether my notes are secured by Florida mortgages or Texas mortgages. But that's the risk I take. The landlord certifies to the government that its certified lease been triggered, and then it doesn't have to pay its certified mortgage. The mortgage holder certifies to the government that x% of its certified mortgages have been triggered, and then it only has to pay (100 - x)% of its bond payment. The government can audit all of this.

Of course in a situation like the present pandemic, all conforming leases everywhere in the country would be triggered at once. Then in turn, pretty much every conforming mortgage would be triggered. The result would be a lot of missed payments on conforming bonds. You would have to have rules about who could hold those bonds and in what concentration. (E.g. a money market mutual fund obviously wouldn't be allowed to invest more than a tiny fraction of its assets in conforming bonds.) But basically you would have a pre-arranged system for allocating losses in catastrophic situations.

By the way, all of this has been done at small scale. This is what a catastrophe bond is. But catastrophe bonds are narrowly tailored instruments and can't be used to protect, for instance, ordinary tenants.

You could bootstrap off of this. The Treasury could issue bonds that actually pay extra when a catastrophe is called on conforming contracts. States would hold the bonds and would get an automatic infusion of cash when a catastrophe hits. There could be a whole formal system to invoke the bonds (like a declaration of emergency) and other legal arrangements (not just conforming contracts) could use an invocation of the system as a triggering mechanism.

This is not a perfect solution of course. It would be difficult to trigger the conforming leases and mortgages in a particularly targeted way. (For instance, some homeowners and renters might not be affected by the catastrophe at all, while others would need more than 3 months of relief.) But it would give the government a tool to help people at relatively little cost, effectively allocating the risk of catastrophe to investors compensated to bear it. (Ultimately I would expect conforming notes to be held by investors who either lay the risk off to insurance companies or simply accept the risk in exchange for a higher yield. Recall that this is somewhat subsidized by the tax treatment of conforming contracts.)

[Update: I guess you'd have to consider making all residential mortgages conforming, otherwise a lot of poor people will end up in non-conforming leases, defeating the purpose. Commercial leases, I don't know, I can see it both ways.]

Coordinated Business Rescue

My previous post is superficially about Daylight Saving Time, but the bigger point is that there are times when universal, off-the-shelf solutions are better than millions of individual negotiations.

Consider our present economic situation. The basic problem is that a lot of people and businesses have suddenly lost income. This has been somewhat offset by government action, but not entirely. There are still large losses to be borne by the private sector, and the question is who will bear them.

To see what I mean, consider a restaurant that has lost most or all of its revenue as a result of the pandemic. The restaurant must still pay rent to its landlord. The landlord, in turn, must still make payments on its mortgage. The holder of the mortgage might have financed it by issuing notes (that is, bonds sold to investors), which must be paid. In each case, there is a legally binding agreement to pay a specified amount of money on a periodic basis. And in each case, the payment of those amounts may depend on receiving a corresponding payment. All along this chain, there are losses to be borne, and the question is how they should be allocated. In the worst-case scenario, the restaurant goes out of business completely because it can't afford the rent. The landlord then has no revenue to pay the mortgage, so the mortgage holder forecloses. But the building isn't worth much with no paying tenant (plus there are a lot of other properties being foreclosed on, so there's a glut and prices plummet). So ultimately the mortgage holder's own creditors, the noteholders, don't get paid in full. The bonds are downgraded, and now you've got a full-blown financial crisis brewing.

This can be avoided, but someone has to bear the cost, and who will it be? The answer, in the absence of a governmental mandate, is that it is a matter of individual negotiation. The tenant can go to the landlord and ask for a break on the rent. The landlord can agree, or it can stand on its legal rights and evict the tenant. Likewise, the landlord can ask the mortgage holder for a break, and again, the mortgage holder can agree or it can stand on its legal rights and foreclose on the property. Finally, the mortgage holder can ask its noteholders for some kind of consensual arrangement, which may be harder or easier to accomplish depending on the terms in the indenture.

It's important to note that standing on your legal rights in this scenario may be very stupid. Sure, the contract says what it says, but it may be better to get 80% of the usual rent rather than 0%. But negotiations are tricky things because it's often difficult to know whether your counterparty is telling the truth, is willing to be rational, etc. For instance, perhaps the restaurant is doing good delivery business and only needs a small, temporary rent reduction to make it through (or doesn't need a break at all). The restaurant owner might still claim that business is way down and that a major rent concession is necessary. The landlord prefers to have a paying tenant and doesn't want to risk driving the restaurant out of business, but doesn't want to give up more rent than it has to. And so on up the chain. A tremendous amount of lawyer time will have to be paid for, and the least sophisticated and poorest parties will tend to bear the brunt of these bare-knuckle negotiations.

Now consider how the government might intervene. The government could do something like this: pay 50% of the rent for any qualifying commercial tenant, on the condition that the landlord waives at least another 25% of the rent. This means that any business that can survive while paying 1/4 the normal rent should make it. Meanwhile it shores up landlords by protecting them from catastrophic losses. A landlord should be able to make ends meet with 75% of the usual rent.

If you're still worried about landlords, though, you could do the same thing at the next level, but less generously. You could pay 5% of all commercial mortgage payments, contingent on the mortgage holder deferring another 5% until the end of the mortgage. The landlord is getting 75% of the usual rent but is also getting a 10% break on the mortgage, so it is only being squeezed a little.

At that point, the mortgage holder should be able to pay its notes without incident. Or if not, it is certainly better than the widespread defaults that would otherwise likely occur. This means that the noteholders, who buy notes (rather than stocks) precisely because they don't want to bear a lot of risk, should get their expected payments, or close to it, and everything downstream from them should function normally.

Now this is far from a perfect solution. (This is also, to be clear, just an illustrative example, the numbers may be unrealistic.) Some tenants who don't need much of a break (e.g. pizza delivery places that never had any significant dine-in business) will get unneeded rent relief, while other tenants who need a bigger break might not get it. (However, note that nothing precludes the landlord from giving extra concessions. The 25% rent reduction is simply the minimum required to get the guaranteed government money.)

But it sure makes things simple! When you go to your landlord, you don't have to haggle over whether you need a 25% break or a 40% break or a 10% break on the rent. You simply get a 25% break as of right (unless your landlord wants to turn down the guaranteed 50% rent payment from the government, which would be a pretty foolhardy thing to do). And likewise at the next level. It's an off-the-rack solution that won't fit everyone perfectly, but it pretty much eliminates the cost and unfairness of doing individual negotiations. And crucially it spreads out the losses in such a way that they are absorbed before they snowball and start spreading to other sectors (for instance, this scheme protects the financial system, and it should help prevent property tax receipts from plummeting).

Now this would be, of course, hugely expensive. But when you consider all of the costs that are avoided, on a net basis it is probably not a terrible deal.

And I want to emphasize the point about fairness. A lot of times there is help available but you have to know to ask for it. That is, one restaurant owner will know to bring a bottle of bourbon when he asks for a break on the rent, and another restaurant owner won't even know to ask. When the landlord threatens legal action, a certain kind of restaurant owner will simply laugh ("What are you going to do, evict me and just let it sit empty, earning you nothing?") while another restaurant owner may be cowed. A uniform system of loss-sharing, generously subsidized with federal dollars, may be the best approach.

Daylight Saving Time

Twice a year my Twitter feed is full of people complaining about Daylight Saving Time. Actually, most of them don't object to DST, they object to Standard Time. They would prefer (they believe) for DST to be adopted on a year-round basis so that clocks never need to be changed.

I think this is wrong because it implies a sunrise after 8 a.m. in much of the country, meaning that school children would be walking to school, or waiting for the bus, in the dark. Year-round DST proponents respond in one of two ways:

1. Some of them bite the bullet and say that whatever deaths are caused by DST are worth it because sunset is later, and they are more likely to be awake at sunset than at sunrise.

2. Some of them propose shifting school hours so that children are still able to walk to school when it's light out.

The first answer is superficially less reasonable, but in a way I think it's much more reasonable than the second. Take a minute to think about how the second argument works. The idea is that institutions will simply shift their hours during the winter to take account of reduced sunlight in the morning hours. Schools, for instance, will start an hour later. In turn, employers will start an hour later to allow parents to drop children off at school. Stores, taking account of people's daily routines and the needs of their own employees, will shift their hours later by an hour.

Pretty soon you are back where you started, except that the costs of the annual shift are greatly increased. Imagine that your school switches to winter hours a week later than your employer. What are you going to do during that week? And think about shopping, or going to museums, or whatever. Having to remember when each institution switches to winter hours is needlessly burdensome.

I think that kind of world is attractive only to extreme libertarians. Most people don't want the freedom to decide when winter hours will go into effect. They wouldn't enjoy the costs of coordinating that kind of thing without government intervention.

Maybe the government should simply specify when winter hours go into effect, rather than making it legally mandatory. But of course business hours are generally not legally mandatory anyway, so a business could always offset the switch to Standard Time by shifting its hours in the opposite direction. Now you're just quibbling about who should have to change their clocks vs. their hours.

Anyway long story short, either you think the coordination would happen even without government intervention, or you don't. If you don't think it would happen, then you have to address the costs of morning darkness, but you can perhaps make your case. If you think coordination would happen anyway, then it seems very silly to oppose by far the lowest cost way to implement it.