Given the limits of federal action thus far, Sacramento must do everything within its power to help our economy as it sinks under the weight of COVID-19. In particular, Gov. Gavin Newsom can and should modify existing contracts, within the limits of the Constitution, to provide residents with financial breathing room.
Start with consumer debt, 97% of which is in the form of housing, automobile, credit card, and student loans. The governor should declare a temporary moratorium on all nonpayment actions for these categories of debt. He should also offer temporary forbearance on all such debt payments. Borrowers could delay payments, but no debt would be forgiven. Instead, any missed payments would be refinanced on terms no worse than the original loan.
Lenders can efficiently absorb a payment delay because this debt, where private, is held by large financial institutions with access to Federal Reserve liquidity. To date, Newsom has only negotiated a temporary reprieve from mortgage foreclosure from five major banks and most state banks. He can do more.
Other categories of debt will burden cash-strapped consumers as the economy goes into deep freeze. In particular, lower-income consumers are likely to face pressure from small-dollar loans. Newsom should suspend new and existing debt-collection claims against consumers by financial institutions and debt collectors and suspend the enforcement of civil judgments — such as wage garnishments and bank levies — by these parties. Admittedly, pay day lenders and debt collectors are not Citibank. But as long as they have a line of credit with a lender, they are in a better position than debtors to finance a temporary shortage of cash.
Of course, households face many recurring expenses besides debt payments. The most important of these is rent. Unfortunately, Newsom’s actions to date on eviction do not go far enough. Tenants only receive protection from eviction if their inability to pay is linked to COVID-19. As a result, tenants facing financial hardship, injury, or illness unrelated to COVID-19 receive no protection, even though the private and public consequences of their eviction are no less dire. In fact, all tenants may be subject to lawsuits and forced to prove in court that they qualify for relief. Finally, there is little protection against an immediate filing for nonpayment by a landlord once the governor’s eviction stay is lifted.
Finally, consider the case of utilities. It goes without saying that water, power, heat, and phone service should not be shut off in the middle of a pandemic and that any missed payments should be rescheduled with no penalty. But it’s also fair to say the concept of a utility expands when we are all forced to stay at home.
At a minimum, cell phones, internet, and cable/satellite fall into these categories. In a pandemic, it takes telecommunication and digital entertainment to keep us, and our children, marginally sane. Utilities, device manufacturers, and telecom and cable companies have access to the banking system and the capital markets. Let them use it. Newsom has rightly protected basic utilities, but he has largely left expanded utilities to fashion policy subject to oversight by the Public Utility Commission. He should force their hand.
The expansive pay for delay policies advocated here could be criticized for kicking the can down the road. But that is precisely the point. Moving our collective obligations from a time and place of weakness to one of greater strength makes us better off, even if it does not solve all our problems. Down the road, the path will be clearer and our footing surer.
Prasad Krishnamurthy is a professor of law at the UC Berkeley School of Law, where he teaches and writes in the area of financial regulation.
