> But Palihapitiya argued that rather giving workers relatively small $1,200 checks, the U.S. would be better off giving everyone larger payments directly, and skip businesses entirely.
> “It would be better for the Fed to have given half a million to every man, woman and child in the United States,” he said.
Yes, we can definitely spend checks notes 150 trillion dollars on that. How do people keep making the exact same arithmetic mistake? And why are we expected to listen to people who can't do simple arithmetic?
> Palihapitiya’s argument, basically, is: Let those businesses fail, but without layoffs, and let the rich stakeholders absorb the pain.
> When a business typically fails, Palihapitiya said, “it does not fire their employees,” instead going though a bankruptcy process that often preserves pensions, and employees end up owning more of the company in the end.
Sometimes bankruptcy works out the way he's describing. Sometimes the assets get sold for scrap and the workers are all out of a job. I'm less sanguine than this guy is that letting a whole bunch of companies fail all at once would be a windfall for workers (not to mention everyone else.)
Mind you, I do think that equity holders should be taking a big hit. (That's what equity holders are for.) I just think the details would be a lot messier than he's imagining.
He made the same mistake on the "Pomp" podcast the other day too. He was saying we send 50k to every person in the USA for the stimulus.
Well, no. 2 trillion divided by by 327 million is $6,116 dollars. So yeah maybe we should divide the 2 trillion up between the people but he got a decimal point wrong.
Personally it seems more effective to send most of the money to hospitals and medical organizations because people wouldn't necessarily be able to use stimulus money for anything now anyway.
Seems like it makes sense to prop up businesses since you can't build a business overnight and most people would not be able to start one easily.
I like some of his arguments but basically give them any real thought and this guy is just trying to get attention by saying shocking things.
People aren't going to be buying stuff with this. They will be paying rent, other bills, and debts, because a lot of people have been laid off already with more layoffs coming every week. These people are going to be in a world of hurt without any intervention; 4 in 10 americans can't come up with $400.
I think it's more likely that he's being provocative instead of getting the math wrong. If we're willing to print money and give it to people, where's the limit? What is the right amount?
Airline assets are only worth putting into service when there is demand. If there is demand from travelers, then -- bankruptcy or not -- aircraft, crew, and support staff will find jobs as assets change hands. If there is no demand from travelers, then -- again, bankruptcy or not -- those employees will be out of a job.
Remember during the Financial Crisis when Lehman Bros went under and Barclay's swooped in to buy a large chunk of their real estate and trading operations.
Makes way more sense to pay employees directly than to give money to their corporate overlords.
Btw-- Don't focus on the arithmetic. His main point is correct.
"The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover was an engineer. He knew that water trickled down. Put it uphill and let it go and it will reach the dryest little spot. But he dident know that money trickled up. Give it to the people at the bottom and the people at the top will have it before night anyhow. But it will at least have passed through the poor fellow’s hands."
I know that inflation (exclusive of higher education and housing) has been pretty low for a while. But I feel pretty confident in saying that if you just airdropped $1M or so into each household, that would cause significant inflation in ~whatever~ people decided to spend the money on.
Not necessarily the worst thing in the world, as long as wage growth keeps up with inflation. (Huge caveat, I know.)
Inflation is both criticized as a wealth-transfer from savers to borrowers, and praised as a wealth-transfer from the rich to poor (or the old to the young, etc). But there's also a time element to it, so in reality it's a release valve that causes idle wealth to slowly evaporate, and overly burdensome debt to slowly become more manageable with time, and it's why most economists agree that a bit of inflation is healthy to encourage the productive use of assets.
Some inflation is fine, and good. Giving the median American money equivalent to a decade of their income is not going to cause just some inflation, though. I'm talking about instantly doubling the price of housing in many cities. Instantly doubling the price of college, etc. It would be extremely disruptive.
He's spot on. Equity risk is for people who want risk. Even risks they hadn't thought of like a virus shutting down the economy.
Corporate bankruptcy is a reasonable way to redistribute claims, and we should use it. Not even every business in trouble will go under, a lot will simply be bought by someone wanting to take over the risk at a sensible price. No jobs need to be lost.
I'm all in favour of bailing out real people though.
He's spot on that equity risk should actually have downside. But the idea that a whole bunch of massive corporations can fail and no jobs would be lost seems like a real stretch to me. In fact, it's strange to think that a company wouldn't have fewer employees coming out of bankruptcy if one of the causes was being overextended.
Companies can't "learn not to overextend" for things this rare. If they spend a bunch of resources making sure they can weather sufficiently infrequent storms, they'll be out competed in the shorter term by companies that refuse to.
If we need companies to prepare for this kind of thing, we need to somehow test their readiness more frequently.
Yeah, my point was just that "make them hurt so they learn" doesn't really make sense here. There may be plenty of reasons to allow companies to fail, in particular instances or in general.
I don't recall multiple month suspension of broad categories of business in the last 20 years.
But yes, probably even more frequently than every 10 years - it's too easy to cut corners, so someone will, and the businesses behaving "correctly" need to compete against that.
That's if we want companies to be prepared for this.
Counterpoint. We will have less innovation and tech advancement if companies will have to spend more to prepare for disasters like this virus. If new businesses have to do that then we will have a lot tougher barrier entry meaning old fish will prevail.
You should be more concerned about the workers than you are about the jobs.
Give 60k to every family in America, and let the corporations that mis-managed their assets bite the dust.
When there's demand for the services those corporations provided, someone will step up, buy the equipment and other assets, and do it better next time.
I see no wisdom in resisting the nature of our economy, its booms and busts pruning away the bad growth so that better ones have room to develop.
Fair enough, but at any given company it's not the case that all the employees must lose their jobs. I worded that badly. Even so, the collapse is a signal that should not be ignored that the economy ought to be organised differently, basically some people should be doing other things than previously thought.
I think this is a very dangerous sentiment. Incumbents often have an advantage that keeps them alive from foreign companies and leaner tech players.
If you're in a stable, single country then I would agree that letting companies fail is likely the healthiest option. But in a global world, you might find that bailing out companies is a prisoners dilemma. If you let your companies die, but your neighbor doesn't, your neighbor's companies might soon capture your market and cost your community a lot of economic activity in the long term. Or, you let your companies die, and they get replaced by a new, smarter business that employs 10% of the original workforce to get the same amount of work done.
There's upsides to both (perhaps net positive even) but the problems are potentially significant. I think framing the survival of companies as merely a favor to wealthy people's portfolios is naive.
The downside risk here is that nobody wants to take any of these businesses over because it doesn't make financial sense anymore in the post COVID era, and then the economy spirals and we're all screwed. The economy is built on aspirations, and right now, there aren't a whole lot beyond a short term cash infusion from the Fed.
If nobody wants to buy those businesses, what does that tell you about them and the professional investors who chose to own hundreds of billions of dollars of their equity?
What does it tell you about the executives who chose to buy back shares rather than paying down debt?
What does it tell you about the idea that cash and other liquid assets on the balance sheet are detrimental to a company's value because of their impact on fundamental ratios?
I dispute your assertion, though. Boeing will be Boeing no matter what. GE will be GE no matter what. They build technology that would have been viewed as miraculous not too long ago.
Southwest Airlines, on the other hand, is just a bus company.
So all these businesses should go bankrupt on principle? Even if that ends up being most businesses in America? That's going to have an even worse impact on everyday people than not being able to make rent or pay bills, as hard as that is to imagine.
I get that it's a clickbait headline, but he doesn't seem to be making any coherent point.
Somehow billionaires, debt holders, etc will get wiped out, companies will go bankrupt and protect their employee pensions (what are those?), and then they will reemerge being partially owned by their employees.
> "“It would be better for the Fed to have given half a million to every man, woman and child in the United States,” he said."
The number is off, but it doesn't matter. I think he was being hyperbolical, but we can consider the idea of bailout to people vs bailout to corporations anyway.
Give each family 60k, and you cover them for a year at the same cost of the bailout that actually occurred.
In that scenario....
Groceries get bought. Bills get paid. Essential businesses make money, which means they get compensated for being useful. That's a good thing.
Elderly employees who don't feel comfortable working, can quit their jobs.
We have grown so accustomed to rampant corporate feudalism that it almost feels un-American to question the collapse of companies that are not essential to the health and well-being of our citizens or our government. It feels wrong to allow the financial losses of a billionaire who knowingly bought a risk asset, only because we have been told for years that normal people need billionaires to create our jobs for us.
Let them take it in the face for once. Risks have a downside factor. We shouldn't eliminate that just because rich people want to maintain their riches.
Why not give everyone a UBI and let things shift towards strengthening necessities all the time? People who make less money have a higher Marginal Propensity to Consume necessities. That would correctly distribute what’s needed in society by actual level of need. It would also automatically adjust to shortages etc.
I think as entrepreneurs we can all say that investors put in $$ when they see demand for your products and services, and not because they got a tax break!
I think you're the ones letting emotions get in your way. The whole point is to dilute the wealth in this country to bring million/billionaires down to the commoner's level. Then let society build its way back up, because you'll end up with something much different when the average American has the same purchasing power as the wealthiest American.
Right now if you want to start a business, you have to get "approval" from a wealthy American in the form of an investment or loan. If you remove this "approval" process, you will end up with a true free marketplace of ideas, where everyone can try something out without needing to ask someone's permission first. More importantly, demand won't only be coming from the top down. Instead of billions of dollars going into acquisitions of valueless corporations like WeWork, billions will be spent on making American's lives better.
A dollar is a coupon you can use to redeem for some amount of human productive output. Instead of letting 1% of society decide how we use this productive output, it should be a decision for all Americans to make (by spending dollars, which they haven't had the opportunity to do in the last 2 decades).
Pensions are Federally insured (PBGC). As for 401ks -- the custodians aren't at risk. So are you asking, "What if I make a bad investment in my 401k?". You lose money. Investing in a bankrupt company would be a bad investment.
More like "What if people told me to put my 401k in index funds then half the companies on the index get wiped out due to a sudden policy 180?" At this point the bailouts have already been priced in for a decade and it isn't even politically possible to say "this will be the last bailout but next time there will be bankruptcy".
>"What if people told me to put my 401k in index funds then half the companies on the index get wiped out due to a sudden policy 180?"
Maybe it is time people paying into pensions and 401k's begin to understand they are scams enshrined in law to prop up the financial industry.
Maybe if mainstreet stopped giving their money to wallstreet to mismanage in the first place there would be no need for future bailouts to begin with as wallstreet runs a muck with pension and 401k funds. These are the very same bankers who continued to buy toxic mortgages in 2008 with Client funds as the banks were selling off any positions they had in the very same assets.
I think it would be interesting to see a tabulation of all the implied government guaranties compared to the practical limits of the government to generate money by "printing" dollars. The first category is practically unbounded and dynamic, I think. I wonder under what circumstances it could swamp the second category.
Then you'd take a deep breath, pull up a chart from any other recession in history, and see that you and the market index will be back to where you were in 2-5 years. This would be a good time to buy, and average down your positions.
There's a slippery slope between "I saved hard and I don't want to lose the money I was recommended to invest in the stockmarket" and "I have a billion dollars in stock and I want to remain completely whole".
It is possible to achieve the first without the second. You can have federal insurance (like FDIC/SIPC) that fades out rather than has a strict cutoff (you get 100% of the first 100k, 80% of the next 400k etc etc).
There's some boundary where you "should" have been sophisticated and deserve to lose some money (probably near the point where you have a high end accountant look for deductions or are an accredited investor).
Yes, this is "unfair" to people who had very high paying jobs. But it's easy to argue that the current tax code is also "unfair". It's a question of "how unfair, and unfair to whom" not "we need this to be completely fair / preserve the status quo".
You can hack around that with policy. Think of SIPC insurance: in the event something crazy goes on with your brokerage, they step in and provide cash value of the equities at the time the insurable event took place.
I've provided the below link as an example; ignore the limits, they would not be adhered to for my example due to extraordinary circumstances.
Disclaimer: Huge fan of Chamath coming out and telling it how it is on CNBC.
I think it’s reasonable to protect retirement assets if means tested, yes.
It’d be an entirely different story if pensions hadn’t been gutted and everyone tossed to the wolves with 401ks over the last 40 years.
If you want to wipe out retirement assets and top it up with social security instead, again means tested, that’d be a reasonable approach. But you can’t tell folks their only option is 401ks and to be diligent savers, and then burn them to the ground out of moral hazard.
The goal is to wipe out investors to whom hundreds of millions of dollars means nothing to their quality of life.
So if I've been working 40 years, have a strong 401k, and am doing fine now I should get my savings wiped out?
You're arguing all sides now. I didn't propose a policy that would greatly harm retirement savings, you did. You proposed protecting 401ks with government backing. I stated that doing so would be a boon to the top 20% at the expense of everyone else.
It seems I might not be communicating my thoughts on the topic coherently. My apologies! I felt that I have, but I think I’ll have to come back with a blog post instead of ad hoc thread comments. I appreciate the rebuttals for helping me refine my arguments!
EDIT: /u/HarryHirsch's comment here [1] explains succinctly what I intended to explain but did so poorly.
[1] https://news.ycombinator.com/item?id=22835580 ("You could nationalize the pension system. Considering the fact that on average the 401(k) balance is a few tens of thousands and that there is a retirement catastrophe coming, that wouldn't be the bad idea. The downside is that the stock market would be affected negatively since demand for stock would drop.")
Actually SIPC doesn’t provide the cash value for equities. They provide you with the original shares which will be worthless if the company goes bankrupt. Its in the third paragraph of your link.
Maybe it would be better to require retirement accounts to be invested in broad indexes to be eligible for a insure for a certain amount of money value. I don’t see how it could be done fairly on single stock base without having big discussions about what kind of events will be covered.
You could nationalize the pension system. Considering the fact that on average the 401(k) balance is a few tens of thousands and that there is a retirement catastrophe coming, that wouldn't be the bad idea. The downside is that the stock market would be affected negatively since demand for stock would drop.
Title differs from source. Original title: "Fed should pay every American more, let hedge funds and billionaires ‘get wiped out,’ says Social Capital CEO"
As workers, we get the downside, but not the upside. We are peasants like all of those in times past. Only difference is standard of living is higher now, so we should be so happy to get the scraps.
Too many large American companies have no buffer because they've been distributing all their cash to shareholders as dividends and stock buybacks, all the while using credit to fund operations. When a rare risk materializes, sales suddenly stop and lenders get antsy, these companies find themselves in trouble.
Their primary recourse should be to ask shareholders for money — that's where the cash was drained over the years, after all. If these businesses are so great, shouldn't shareholders be happy to buy newly issued stock at these prices? Yet I don't see anyone doing stock offerings. That seems like a sign that the whole thing is a house of cards: nobody actually has liquidity until Fed injects it into the system.
Interestingly, there are two very different kind of companies that have been hoarding cash through the years. There's the SV giants (FAMAA collectively held $570 billion at the end of 2019), and then there are extremely conservative Japanese industrial companies. Some of these have enough cash to operate for decades with zero revenue.
The Fed should give every American $1 million and every other country should follow suit and turn all their citizens into USD-equivalent millionaires. That would create an exciting competitive economy!
Think about the excitement of everyone having 1 million dollars and trying to figure out what they want to invest in!
I was kind of joking around. That said, I don't think it would create as much inflation as it may seem. A carton of milk would still cost about the same maybe only 2x the price?
I think most of the money would end up in stocks, gambling, speculative investments, luxury goods and real estate (especially in big cities) so that's where the inflation would show up... Which is fine. So long as the cost of basic commodities don't explode, then we can afford it as a society.
It's a somewhat noble sentiment, but an absolutely terrible idea in practice.
Letting large businesses (airlines etc.) go bankrupt isn't just a disaster for the rich -- it's a disaster for retirees who hold a majority of savings in equities (index funds etc.), as they've been told is the responsible thing to do.
Don't throw the baby out with the bathwater -- or grandma out with the billionaires.
We want to reduce inequality? Great. But do it in a targeted way, through taxation that takes into account people's income and overall wealth. Not in a blunt-instrument way that harms middle-class savers along with hedge funds.
And not through letting a host of major corporations go bankrupt through zero fault of their management/board.
(Remember, it's not like an airline can buy insurance against a months-long pandemic, nor are public companies supposed to retain unnecessary cash in times of profit -- the IRS virtually requires them to distribute it to shareholders either through dividends or buybacks.)
EDIT (in response to comments): OK, I exaggerated a little -- retirees shouldn't be holding a majority of savings in stock. But since one common rule of thumb is to hold a percentage in equities that is 100 minus your age, a 70-year-old still has 30% in equities. And your 50-year-old saving up for retirement has half. The main point still stands: normal middle-class folks hold equities as a significant part of their savings. It's not just billionaires who own equities.
> it's a disaster for retirees who hold a majority of savings in equities
This is somewhat of a red herring, often used to deflect from the fact that the top 1% of the wealthy own about 50% of all equities, and the top 10% own about 80%. The top 20% own more than 90%.
We can do things to address people's retirement savings without giving trillions of dollars to the richest people in the world.
It does matter. We can easily repair retirement programs without enriching the rentier class.
If we don’t allow the funds and enterprises to go bankrupt we are damaging capitalism and just running socialism for the rich. We have to allow these enterprises to fail and have their equity be wiped out to have a functioning capitalist economy.
Again, fixing the lower 80% of America’s retirement programs directly, without bailing out enterprises they hold capital in, would be far cheaper than giving trillions to millionaires.
> We have to allow these enterprises to fail and have their equity be wiped out to have a functioning capitalist economy.
That is utterly absurd.
COVID-19 isn't the fault of an airline or hotel company. There is zero reason these enterprises need to fail, any more than your local restaurant ought to go out of business and be replaced by another in a few months.
And people's savings for retirement aren't part of any "program". They're spread over all sorts of investments. Trying to let corporations go bankrupt yet somehow "make up the different" in a fair way to individuals would be convoluted and frankly impossible.
So no. Punishing corporations is the wrong target. Corporations aren't rich people. Keep the corporations going together with the corner restaurant... and tax the rich.
Seeing COVID-19 as some kind of solution to economic inequality is dangerous confusion, and frankly bizarre. You want to lessen inequality? Bankrupting companies is one of the absolute dumbest ways to do it. Just tax the rich directly. Institute a wealth tax. It's simple, targeted, effective, and doesn't have the horrible side effects that bankrupting major corporations has.
> COVID-19 isn't the fault of an airline or hotel company
Airlines spent a decade doing stock buybacks, some with past bailout money. The amount they spent on buybacks is just about exactly how much they want from the US bailout.
SXSW didn't buy pandemic insurance. They'll be asking for a bailout.
These companies need to go through bankruptcy and loss of equity so that they can behave as properly functioning entities in a capitalist system. Anything else is -again- socialism for the rich.
Yes, corporations are rich people. Undisputably so. We should not bail them out. Let them go into receivership. If they aren't liquid, let the US re-capitalize them in return for equity, and then sell the shares over 5-10 years to return it to the public market.
Make capitalism work and get rid of the enormously unjust moral hazard that is a lot of why capitalism is so broken right now.
Buybacks are returning money to investors, same as dividends. When companies make profits that's literally what they're supposed to do. Look up the Accumulated Earnings Tax -- the IRS will actually tax companies to penalize them from holding onto profits. They're not supposed to hold on to profits, and no company is expected to set aside a year's worth of revenue in case of a global pandemic. That money is the shareholders', which is why buybacks return it to them as soon as it's made.
And you can't buy pandemic insurance generally, because no insurance company can cover "Acts of God" at a scale that will bankrupt the insurance company.
It is absolutely dumb and counterproductive policy to let companies, no matter if they employ 10,000 people or 10, to go bankrupt because of a global pandemic no business could or should reasonably foresee.
"Moral hazard" is a very specific term you are using incorrectly here. It refers to exceptionally and intentionally risky behavior by banks (usually) that the government deems "too big to fail". But airlines and other companies did not take overly risky behavior. So there's no moral hazard in this case.
There is zero evidence that companies like airlines, hotels or cruise ships were not "properly functioning". I don't know why you think they were improper or deserve to be punished. But there's no basis for it.
Wimbledon has been buying pandemic insurance for 24 years. $2 million per year. They're going to be paid by their insurer about $141 million.[1] There is a whole industry of re-insurance that exists to insure high-consequence, low-probability events, such as natural disasters, war, and pandemic.
SXSW didn't buy pandemic insurance. Why on earth should they be made whole for their bad decisions?
The airlines made bad decisions that put their stockholder's equity at risk. There is no reason that now, having received $50 billion or so in profit from buybacks we should give them another $50 billion, while leaving their employees penniless.
Moral hazard is exactly the right term. It describes a perverse incentive to cause someone else to incur expense for your benefit without any benefit to them in return.
Improperly planning for pandemic, when everyone, and I do mean everyone who does risk analysis believed that one was inevitable, particularly after SARS, MERS, and Ebola, is BAD PLANNING that equity holders should bear the responsibility for. They took the risk, reaped some profits, now it's time to take the losses.
Anything else is simply socialism for the rich, and something worse than laissez-faire capitalism for everyone else.
> as they've been told is the responsible thing to do.
This is absolutely NOT the responsible thing to do. Every retirement fund, target date fund etc. constantly rebalances your portfolio so that as you get closer to retirement your holdings shift to bonds and other low-risk securities. Retirees should be holding little to no stock.
>> And not through letting a host of major corporations go bankrupt through zero fault of their management/board.
I cant not wrap my head around this. How is it NOT their fault? If you are the one at the wheel, you are in charge, thus you are fault. They could have been planing for a rainy day instead of spending the capital, its entirely their fault! I keep 6 months wages in a savings account because its smart... Corporations can do the same, and many do. The ones that refused, should be left to dry and are entirely at fault.
If your profits are 5% then for a year-long "rainy day" you'd need to make profit for 20 years and keep it in the bank without ever returning it to investors. That's ludicrous.
Look up the "Accumulated Earnings Tax". The IRS essentially requires companies to return their profits to their shareholders each year and not save it, or else face a tax penalty.
In the case of something unforeseeable like a global pandemic, both corporations and individuals need to be helped out alike. Companies large or small shouldn't go bankrupt because of something so unforeseeable, and neither should individuals.
Aren't retirees told that the sensible thing to do is to have a lot of bonds and relatively few equities? Also why hold your savings concentrated in a single company, even if you worked for it years ago?
Yes to all the points below about bonds at stuff, but let's get to the deeper point.
When push comes to shove in a crazy post Covid-19 world, we can care for them without financial gimmicks.
You might have saved up abstract papers and computer database entries your entire career, but what you consume is physical goods made recent to your consuming them. We can ration out those goods to retirees (or bump up social security).
Grandma should have thought twice before investing in an evil corporation which took loans to evade taxes and screwed over other people's grandchildren.
All depends on your spending flexibility, time horizon, etc. If you can comfortably drop to half of your steady state spending for a couple of years, or if you do something like a CD ladder, it can make sense to have >50% of your retirement assets in stock.
If you want to see a true windfall for hedge funds and billionaires let every business in America fail simultaneously and see the sharpest and best positioned in finance scoop up assets in the BK process for pennies on the dollar. Distressed operators like Apollo etc... could only dream for a shot like that.
This is an important point, and we need to realize that it's not just the rich guys (e.g., most of you) that will be hurt--most holders of retirement savings accounts are not rich.
I've personally had my net worth zeroed (in a bad divorce). The effects are quite life-changing, and I think many would not survive it. If nothing else, you begin to wonder why--if it can all be so easily lost--you should bother to work at all.
I do think the government "stay alive" payments are critical, and it looks like a lot more will be needed. But this is a very complex problem, and I distrust anyone who waves it away with a "simple" solution.
I would prefer my savings to not be inflated away to preserve the valuations of the zombie businesses in your retirement portfolio... But the fed seems to disagree with me in this, and will prop both those businesses, and their valuations up with a firehouse of money.
At the expense of everyone who owns USD, of course.
> “It would be better for the Fed to have given half a million to every man, woman and child in the United States,” he said.
Yes, we can definitely spend checks notes 150 trillion dollars on that. How do people keep making the exact same arithmetic mistake? And why are we expected to listen to people who can't do simple arithmetic?
> Palihapitiya’s argument, basically, is: Let those businesses fail, but without layoffs, and let the rich stakeholders absorb the pain.
> When a business typically fails, Palihapitiya said, “it does not fire their employees,” instead going though a bankruptcy process that often preserves pensions, and employees end up owning more of the company in the end.
Sometimes bankruptcy works out the way he's describing. Sometimes the assets get sold for scrap and the workers are all out of a job. I'm less sanguine than this guy is that letting a whole bunch of companies fail all at once would be a windfall for workers (not to mention everyone else.)
Mind you, I do think that equity holders should be taking a big hit. (That's what equity holders are for.) I just think the details would be a lot messier than he's imagining.