Playing our parts

Dear ,

It's business more or less as usual here, except we've had to suspend all of our face to face functions, although...if you are in the vicinity and want to come in for a coffee I think that is still allowed, with appropriate hygiene.

COVID-19 is going to change things for a long time to come. So we've started thinking about it and released our first paper two days ago detailing a solution for those who have temporary trouble paying home mortgages.

How long is it going to run? I doubt even the government knows. If you want a good view of how sketchy the data is that we have to work with, read this article "A fiasco in the making? As the coronavirus pandemic takes hold, we are making decisions without reliable data" by Professor John Ioannidis, the man who first blew the whistle on the reproducibility crisis.

There are two views. One that it will run until we acquire a vaccine. The other that it will burn itself out within months of its first appearance in each country. There is a third factor which impacts on both, and that is the possibility that some existing drugs we have, such as hydroxychloroquine, which is used as an anti-malarial, might be effective against COVID-19, which would significantly affect fatality rates, and therefore shorten the period under either scenario.

As it could be 18 months until we acquire a vaccine the first scenario would be very debilitating, even if the virus is slow to mutate and a vaccine works for more than a short period. Researchers who adhere to this model also see repeated outbreaks leading to episodic applications of suppression techniques, such as we are experiencing at the moment.

Even if it's a short run disruption and peters out in say two months after we obtain herd immunity and the virus runs out of people to infect, countless businesses will have disappeared, and international supply lines will have been significantly disrupted.

The government's strategy appears to be to try to slow the spread of the disease so the demand on the health system doesn't rise above its capacity at any one time, and allowing them time to ramp up that capacity with more ICU beds and more respirators.

However at the same time they are giving the impression the virus might be able to be contained. For most people that is probably a less panicky idea than the thought that the government plans for most of us to get the virus, and it might be what is giving rise to "confusion" in the minds of some.

Spreading the infections over a longer period of time will improve the fatality rate. If the health infrastructure is overwhelmed, then people who could have been saved will die because doctors will have to choose between competing patients for access to the facilities.

Of course there may be nothing to worry about. Some academics are questioning the models and suggesting that infection might be orders of magnitude lower due to sampling errors, bringing it more into line with flu fatality rates.

I'm taking the position of having an open mind and trying to steer clear of criticizing governments. They are doing the best they can (even when they do silly things like closing a state border which runs straight through dense urban communities).

While I can understand the statistical arguments, given the general state of panic, now is not the time to be undermining the decision makers.

However, there are areas where we do have expertise, which is where, as a think tank, we should be applying ourselves.

I've already heard the collectivist/pro-Big Government lobby positioning itself to try to encourage the government to maintain many of the interventions it is currently implementing. (Don't be surprised if it has a lot of trouble reducing the unemployment benefit after the crisis, now that it has doubled it).

The principles that will underpin our position are that:

• This is a supply-side shock brought on by a government health measure. The typical Keynesian expenditure policies will be even less effective than usual and they should be resisted.
  
• The major priority needs to be to preserve productive capacity so that it can be switched on again when lockdown measures are relaxed.
• Human capital needs to be conserved first.
  
• Government has to be prepared to look at supporting individuals, but businesses will have to look after themselves.
• Government assistance is really taxpayer assistance. We should be expected to self-insure to a large extent. Afterall, that is what the point of personal saving is – to provide for retirement and also for emergencies.
• All human life is valuable, but it doesn't make sense to save it "at any cost", especially as that cost may involve the loss of human life somewhere else. Triage isn't just something that happens in a hospital.

In accordance with those principles yesterday we suggested that banks should be prepared to give a payment holiday for up to 12 months to homeowners who suffered financial problems, and capitalise the interest into the loan.

We modelled the case of a first home buyer purchasing the average house and found their loan-to-value ratio would blow out from 80% to 83%, and payments would be 3.3% higher when they resumed in 12 months.

There is a credit risk to the bank, but it is minor, and the regulator might need to relax its guidelines. There is also an affordability risk to the owner, but payments would still be in a range that was at the more affordable end of housing payments for the last 25 years (and our model used interest rates from the December quarter 2019, rather than the lower ones now obtaining).

As the government guarantees bank deposits, it should need no more than a whisper for this to be the rule. You can view our media release and download the report by clicking here.

There are any other number of private arrangements that businesses and individuals should be able to arrange that will tide them over the present blip.

I like the one my gym has come up with. They can't give me any service at the moment, but they are proposing to charge me $3.50 a week anyway. It's the price of a cup of coffee and they reckon it will allow them to pay their staff and keep the gym afloat. Once they get back to work they propose discounting my membership fee by the same amount.

So I take a small credit risk, but at the moment I think I can afford it, and assuming they do come back, I'm not out of pocket, because they pay me back. In the process they've given me a reason to maintain membership, because I now have a stake in the gym. The psychology looks good to me, so I assume lots of others will take up the offer, which enhances the chances that they will still be there after this is all over.

This looks to me to be a much better way for them to survive than the big government alternative, which would be a one-size-fits-all program involving government payments or loans.

This won't be the last time I write to you during this crisis. As a think tank we should be coming up with other ideas as to how we can cope with this crisis – ideas that are within our areas of expertise. As a free market think tank, those solutions will revolve around trust in individuals to work out their own solutions to their own personal situations.

If you have any ideas, let me know. Perhaps I've missed a principle. Let me know of examples of individuals showing leadership. As I say, we can still do cups of coffee, but I'm only a phone call away in any case – 0411 104 801.

Regards,



GRAHAM YOUNG
EXECUTIVE DIRECTOR
AUSTRALIAN INSTITUTE FOR PROGRESS