In its most basic form, the PPP loans made to businesses were intended to keep them operating in some capacity while the novel coronavirus caused unexpected shutdowns and delays across the world. 

Beyond that, the PPP loans hoped to guarantee a minimum level of spending and economic activity in order to keep the monetary system flowing. 

After all, the cycle of businesses failing and workers losing their jobs because no one is spending money becomes self-perpetuating at a point and this kind of race to the bottom is something lawmakers and financial institutions wanted to avoid if at all possible. 

Of course, no program is perfect, and the PPP loans are probably one of the better programs to launch in the middle of a crisis, but some bad actors have overshadowed the vast amounts of good that the program helped create. 

We’ll go over what the basic concept behind PPP loans is, how they are intended to function in the broader economy from a business and consumer perspective, and why accounts of fraud and misuse are more common than stories of success and overcoming in the media. 

The Basic Concept Behind a PPP Loan

Passed as part of the CARES Act, the PPP loan program was intended to help keep businesses afloat during economically uncertain times. 

The basic concept behind a PPP loan, as outlined above, was to keep businesses operating on as normal a basis as possible while the novel conditions of the COVID-19 pandemic raged. 

In essence, it was like providing business insurance on a broad level to companies that would otherwise have had to utilize other credit lines or left with spending whatever cash they had on hand. 

Keeping people on the payroll, meanwhile, was seen as a more effective way to stimulate the economy in the short term and jumpstart it once the pandemic had subsided. 

The thinking along these lines goes that it would be much more difficult for businesses to hire workers back than it would be for them to just keep them on the payroll even at a reduced rate if necessary. Given the myriad difficulties businesses are now facing in trying to procure employees, this aspect of the PPP loan program not only seems prescient but also robustly planned. The only real drawback to the PPP loan program is that it did have a definite end date or, in other words, the government expected the pandemic to be a relatively short-lived crisis with one year at most allotted in the funding for the program. 

Had the economy experienced a more prolonged shutdown and subsequent downturn, the PPP loan program possibly would not have sufficed and a more comprehensive program with a greater vision along the lines of Franklin Roosevelt’s New Deal would have become necessary. 

How PPP Loans Work in the Broader Economy

Underpinning all of these real-world goals of the PPP loan program is a mechanical function of the economy that, if placed into abeyance, had the potential to throw the entire global financial system into a tailspin. 

What is this mechanism? 

Nothing more complicated than the simple contractual agreements that govern business relationships between parties. Think of loans, rental agreements, leases, options, and service agreements, among other things. These are the building blocks and the sinews of the global financial system and they are the bedrock upon which everything is placed. Should a crack form here, it could prove more than catastrophic. Beyond that, regulators and legislators could enter into a situation wherein all of their tools and legislative might is unable to stave off a collapse that gains more momentum as it gets worse.   

Essentially, the brick and mortar of the economy, the expectation that the other party will come through on their end of a bargain and, if not, you will have some sort of way to pursue redress was being fundamentally challenged by a new world reality wherein no one could pay their bills. Again, like the self-perpetuating cycle of unemployment leading to a lack of consumer spending thus leading to a lack of jobs, the default of one borrower leads to that of another and another. 

This can be across economic areas such as in rental agreements failing, mortgages going bad, and leases getting canceled. Homelessness, bankruptcy, and indigency are sure to follow for both employees and businesses. It is no mistake that, among the many actions taken by the federal government, a nationwide eviction moratorium was among them and specifically for the vicious cycle feedback loop outlined above. We don’t have to look too far in history for a precedent for this, either, as the Great Depression in the United States displaced more people than any other event since the Civil War.  

From a Business Perspective

Businesses that utilized PPP loans did so with the hope of keeping the above contractual obligations current as well as providing a platform from which the business could launch its recovery once the economy reopened. PPP loans were not intended for capital expenditures, such as building out a new part of the business or buying new equipment but rather aimed at preserving jobs to the greatest extent possible. This had the added benefit of keeping essential industries open during the pandemic and thus guaranteed some semblance of the supply chain was functioning. 

Imagine a world in which authorities have to figure out not only how to vaccinate everyone but how to do so when much of the supply chain for goods and services are shut down. Providing easy loans at low rates also helped get more businesses on board with the program because it minimized the direct risks to their bottom line. 

From a Consumer Perspective

When you look at PPP loans from the perspective of an employee or consumer, this same contractual mechanism comes into place albeit on a smaller scale. 

Beyond making sure that people can pay their rent, mortgages, car loans, and beyond, you want them to also be able to stimulate economic activity on some level with their excess cash. 

Again, we have to remember that officials were dealing with a situation in which vast swathes of the economy were shut down yet they still needed economic activity to avoid total collapse. The PPP loan program was a great way to keep everything on some form of life support. 

PPP Loans and the Finance Industry

None of this would have happened without the efficient cooperation of the finance industry. 

Probably the single segment with the most to lose during the COVID-19 shutdown, the financial industry was buoyed by the fact that the government largely eliminated most of the risks for them in issuing PPP loans.

Facing a range of defaults from mortgages to consumer credit to business loans and beyond, the financial sector was also facing the increased pressures of paying firms who were beginning to leverage their credit lines, withdraw their funds, sell their holdings, and otherwise move massive amounts of liquid and illiquid funds to stave off collapse in their core business. Here, the PPP loans provided the breathing room banks needed to accommodate the new needs of the pandemic economy. 

Naturally, making a loan easier to obtain can also lead to some problems down the road, many of which we are just now starting to see. Prominent among these issues are PPP loan fraud and the abuse of funds. Yet, as attractive as this is as a headline, it is much rarer in practice than the media would have the public believe. 

PPP Loans and Fraud: Rarer Than You Would Believe

The first thing to keep in mind about PPP loan fraud is that the program is not unique in its ability to attract fraudsters nor is it more prone than most to abuse. 

Where the real tale of the tape comes in with PPP loan fraud is how many people are being prosecuted for it and the numbers here are quite staggering indeed. Essentially, if you want to steal money from the program, you better be prepared to hire a lawyer. 

From accepting citizen tips on PPP fraud to investigating it themselves, the government is taking a vigorous approach to punishing fraud where it occurs. Several prominent examples include jail time such as in the case of a Florida man who borrowed $3.9 million from the program, bought a Lamborghini, got caught, and forfeited the funds, his private property, and is now spending six years in jail. 

There are, in fact, many such examples where the perpetrator was caught misappropriating PPP funds for something like an exotic sports car, among other things. 

The PPP Program: Looking Ahead

As the pandemic wanes, more attention is being turned to the failures of the PPP loan program though its many successes will also become the subject of study and scrutiny in the coming years. 

While it was far from perfect, the PPP loan program did provide the federal and state governments with an interesting template on how to deal with economic crises on a more micro level than had ever happened before; thus, we expect more novel approaches like this to occur in future crises and the government’s involvement in the economy during these times will likely be expected and anticipated as a result. 

RESEARCH LINKS: 

• https://www.jdsupra.com/legalnews/update-the-growing-wave-of-ppp-loan-4854683/

• https://www.forbes.com/sites/brockblake/2020/07/01/ppp-loans-help-small-business/?sh=3beb44192793

• https://www.latimes.com/politics/story/2021-04-01/taxpayers-may-never-know-how-many-jobs-the-1-trillion-ppp-saved-the-government-didnt-keep-count

Further, suppose that your neighbors from a couple of streets away really like your home security system and they all want one for their own homes.  At your neighborhood block watch meeting they all propose also getting their own security systems, but they’d really like you to chip in as, you know, the one you have is really expensive and, well, it’s hard to afford that with their kids in private school and then there’s that new Ford Bronco in the garage, not to mention alimony for the first wife.  Suffice to say, things are a bit tight right now.

Naturally, because you want to be a good neighbor and keep the neighborhood free of crime, you agree to subsidize in a small way the home security systems of your neighbors.  Then when you get the bills you realize you are paying for almost all of it.  You try to explain that while you want to be a good neighbor, your first priority is to you and your family. Yet, when you point that out to your neighbors, they become indignant and accuse you of letting the neighborhood run down and burglars run rampant.

Okay, but what does any of this have to do with Donald Trump and Joe Biden?  After Joe Biden’s performance at the recent G-7 conference it should be evident.  Trump promoted an America First agenda – we will do what is in America’s interest first and we’ll pay for our own security.  We will even help pay for your security, but you’ve got to chip in a bit more, like what you actually agreed to contribute.  Biden not only doesn’t promote America first, he wonders, “What’s America?”  After all, he has said that he sometimes forgets he is president.  It’s not the only thing he forgets, but we’ll hold off discussing his waning cognitive abilities for another day.

Whereas Trump demanded NATO countries pay more for their own security, Biden acts like the weird kid from your fourth grade class who had to pay kids to be his friends.

The G-7 leaders complained that Trump wasn’t nice enough to them, but Biden is a real sweetheart, easy to get along with, even when he’s not napping.  Whereas Trump appreciated America’s special relationship with Great Britain and even France, Biden really appreciates the French for their onion soup.

We know Joe Biden is no Donald Trump because many G-7 leaders said they appreciated Biden’s conciliatory stance on many issues, unlike Trump who wanted to hold them to standards.  They don’t like standards.  If Biden’s political career says anything about him it’s that he has no standards.

Even though China apparently owns most of Hollywood and LeBron James, Biden tried at least to cajole the other G-7 leaders into taking a tougher stance and to be sort of mean to China.  Of course, he didn’t mean Trump-like mean.  Instead, when referencing the Chinese leadership Biden plans to indiscriminately wave his arms in the air and yell, “C’mon, man!”  

As vice-president, Biden once traveled to China and said he fully understands and doesn’t second-guess China’s then one-child policy. While many were outraged at this statement, given China’s history of human rights abuses, it should be noted that Joe Biden’s second son is…Hunter.

Astute readers may recall that early on during the COVID-19 pandemic Donald Trump suggested that the virus may have originated from China’s Wuhan lab.  Biden, Democrats and the media (but I repeat myself) said such a declaration by Trump was xenophobic.  For the remainder of Trump’s presidency, the Wuhan lab-leak theory was considered by the media as “the theory who’s name we dare not speak.”  Now that Biden has been resting comfortably in the White House for a few months the lab-leak theory is suddenly a lot more plausible.  It’s so plausible now that the New York Times has taken to rewriting headlines from over a year ago debunking its own debunking of the theory.

We know Joe Biden is no Donald Trump because on tax and trade policy Biden appears willing to give away the farm to the rest of the world. (Except the chickens, he says, we may need some eggs.)  He seems to like and wants to emulate much of Europe’s tax policies.  He has always liked things that don’t work.  (Insert your own Hunter Biden joke here.)

When it comes to foreign policy Biden has made a history of being wrong almost every time.  If he were a basketball coach he’d be Red Klotz.   Klotz was the long-time coach (and previous long-time player-coach) of the Washington Generals, who regularly played and lost to the Harlem Globetrotters. And by regularly, we mean all the time.  Dating back to the 1950’s Klotz’s Generals lost to the Globetrotters over 13,000 times.  Biden has a similar record on foreign policy.

Joe Biden is certainly no Donald Trump. We know it because members of the media smile and tell us so.  We know it when we fill up at the gas station. We know it when we try to find a waiter to refill the water glass at a restaurant because, well, there are no waiters – they’re all at home watching Celebrity Family Feud and getting paid by the government.  The show must be a big hit among the news media too because on the rare occasion that Biden answers a question all the media members in the room applaud and yell, “Good answer! Good answer!”

Joe Biden is no Donald Trump.  He is his own man…until he hears from Merkle or Putin or even, God forbid, Trudeau, that he’s not.

Home sales at the start of 2020 reached the highest level since 2008. 

Strong employment and income growth along with low mortgage rates were the main reason for the strength of the housing market.

COVID-19 Changed Everything

And then the pandemic hit.

In the wake of former U.S. president Trump’s March 13 national emergency declaration, most housing market indicators took a turn straightaway.

Americans were advised to stay home and the home-buying market came to a screeching halt.

Pending sales fell by 40 percent by mid-April. New for-sale listings followed a similar trend and quickly started declining. 

At the time, it appeared the housing market was poised for a downturn.

Home Prices Still Stable

While the pandemic severely affected home-buying activity, home price growth has shown relative stability.

The reason for this is simple. Just before the pandemic, there was a scarcity of homes for sale and historically favorable mortgage interest rates enticed many first-time home buyers.

Source: S&P Dow Jones Indices

Despite the housing market cementing its position as one of the most vibrant corners of the pandemic-era economy, a new survey by LendingTree Inc. finds more than half of Americans believe the steady home prices will fall either this year or next year.

The idea that a stable price is a bubble that would burst seems unlikely. The mortgage market is healthier than it was prior to the 2008 financial crisis.

Also, the U.S government has in place interventions like foreclosure and eviction moratorium that are meant to protect homeowners.

The Impact of Local Economies

COVID-19 epicenters such as New York, Philadelphia and Los Angeles have witnessed a decline in mortgage application activity.

Diversification of local economies will play a vital role in the nation’s ability to bounce back going forward. 

Industries such as Education, Retail, Personal Services, Leisure and Entertainment have suffered the largest losses due to the pandemic. Affected industries may be forced to permanently change their operations. 

This will significantly affect the local economies and the people employed in those sectors. As the economy opens and more Americans are vaccinated, local economies could see a rebirth.

Speculations are high that once the U.S. has made it through the pandemic, households will relocate to areas with more open space and away from high-rise residential areas and high-density central business districts. 

The adaptation to working from home may lead to a demand for bigger homes that include a separate office.

Is The U.S. Housing Market Heading For A Crash?

A real estate market crash or collapse typically follows a steep increase in prices.

Strong demand for homes causes this price growth. Builders and developers ramp up production to meet the demand. At some point, demand starts to drop while supply is still going up, leading to a steep drop in home values.

The current rapid upsurge in house values may spark memories of the market conditions that preceded the Great Recession.

Such is the concern that in April, Google searches for “housing bubble” and “when is the housing market going to crash?” reached their peak point in nearly 3 years. Americans want to know why the housing market is so hot and the reason for rising home prices.

These concerns are certainly understandable as the last housing boom triggered a global economic meltdown. But housing experts reassure Americans that they don’t need to get themselves too worked up — yet. 

Prior to the Great Recession, there was a glut of housing inventory. At the same time, construction was booming, leading to extra supply.

That’s not where we are right now. Not even close.

Unlike the loose credit standards in 2004-5, the demand for buying homes today is currently driven by vetted homebuyers locking in traditional, fixed-rate mortgages.

According to the most recent CoreLogic Home Price Insights (HPI®) Report, scarcity of homes for sale (particularly in affordably priced homes) bolstered home price growth, which hit a 4.5 percent year-over-year increase through March 2020.

Source: CoreLogic Home Price Insights (HPI®) Report

Banks and mortgage lenders have very different lending practices compared to the previous housing boom. They offer loans to borrowers with higher credit scores.

All these measures are proof that the demand witnessed in the housing market today is much more organic.

The demand brought by competitive mortgage rates and Millennials’ desire to own homes also triggers a homebuilding boom. 

It is, however, unlikely to meet the market needs due to a decade of slow growth in home construction.

Source: fred.stlouisfed.org 

We currently have too little supply relative to demand. According to the Urban Institute, there were only 2.5 months of supply left of housing by the end of 2020. 

Conditions That Could Cause A Housing Market Crash

The best way to predict a housing market crash is to look for the following warning signs. 

• Increase of unregulated mortgages
• Asset bubble bursts
• Inverted yield curve
• Rapidly rising interest rates 
• Change to the federal tax code 
• Greater number of house flippers
• Return to risky derivatives
• Fewer affordable homes 
• Warnings from officials
• Rising sea levels

While some of these have happened, many haven’t. If all of them occur in a rapid fashion, then a crash is more likely.

Housing Market Expected to Stay Hot

According to Zillow’s latest Market Report, constant demand and low supply are the drivers of a record-breaking upsurge in home values over the past year.

The typical U.S. home value scaled to $281,370 in April 2021, up 11.6 percent in the last 12 months (the highest since 2006).

Source: Zillow April 2021 Market Report

A price collapse in the future is highly unlikely. Current housing market trends simply don’t support that kind of scenario.

Take Mortgage delinquencies, for instance. Cases of homeowners falling behind on their monthly payments have dropped month after month since August 2020.

As distressing and economically detrimental as the pandemic has been, the United States economy will bounce back—and help sustain the recently reinvigorated housing market.

Fannie Mae estimates GDP growth to be approximately 7 percent in 2021, with continued growth expected in 2022 and 2023.

Many economists and housing market analysts predict a continued rise in home prices through 2022, albeit slower than in 2020 and early 2021. As long as new buyers continue entering the market and there is constant demand, the market should stay healthy.

A new long-term housing boom is upon us!

As stated by the Institute on Taxation and Economic Policy, just 0.7 percent of households would face a tax hike, with almost the entire burden being felt by the richest 1 percent.

Raising taxes on the top 1 percent earners is part of Biden’s ambitious plan to reduce income inequality by spending more money to help less affluent Americans.

Breaking Down Biden’s New Capital Gains Tax Increase 

As stipulated under the $1.8 trillion American Families Plan, Biden plans to raise taxes on the richest Americans in the following ways:

• 39.6 percent would be the new top marginal income tax bracket – up from 37 percent. 

This would apply to 2022 income above $509,300 for a married couple and $452,700 for individuals. 

• Americans earning over $1 million would have their long-term capital gains taxed at 39.6 percent as well – up from 20 percent. 

Under the current law, capital gains from the sales of stocks, bonds and other assets are taxed at 0 percent, 15 percent or 20 percent rate. The highest rate (20 percent) is saved for well-off taxpayers, i.e., couples filing a joint return with $501,600+ taxable income, head-of-household filers with $473,750+ taxable income and single filers with $445,850+ taxable income.

Under Biden’s American Families Plan, anyone making more than $1 million per year would have to pay nearly twice as much as the current rate. Doubling the tax rate would impact about 0.3 percent of US households.

• Surtax on Net Investment Income

That rate could soar to 43.4 percent when you include the 3.8 percent net investment income tax (NIIT). 

Net investment income includes taxable interest, passive rents, dividends, gains, royalties and annuities.

This extra tax hits joint filers with a modified adjusted gross income of over $250k and single taxpayers with a modified AGI of over $200k. 

The Biden Administration hasn’t suggested modifying or doing away with this extra tax. 

• Inherited assets that have appreciated by over a million dollars since they were purchased would be taxed when the owner dies.

Why Now?

We’ve just started to recover from the current recession; why propose to raise capital gains taxes now?

Well, there are 2 major reasons for this: the need to increase revenue and a desire to battle income inequality. 

The full plan entails priorities like:

• Greater subsidies for those buying health insurance
• Tax breaks for lower-income families with kids
• Free pre-school and community college
• Scholarships for future teachers
• Limits on child-care costs and much more

The Biden Administration sees the tax hike as a means to end what it believes to be one of the most unfair dynamics of the current tax system. 

Basically, the idea is for the wealthy to pay the same tax on long-term capital gains that they’d pay on normal income, such as wages.

The Impact of The New Capital Gains Tax Increase

According to a recent study from the University of Pennsylvania’s Wharton Business School, increasing the top rate to 39.6 percent will reduce tax revenue between 2022 and 2031 by $33 billion.

If you earn less than $1 million annually, you’re unlikely to feel the direct impact of these proposed changes.

Doubling capital gains taxes for investors earning over $1 million could compel some to sell off assets and max out retirement contributions before the tax hike takes effect. 

Wealthy investors living off investments will look into other tactics to lower their taxes.

What About The Stock Market?

After Biden’s proposal sent a jolt through markets shortly after his address, there has been rising concern about the effects on the stock market. 

According to most financial experts, it’s unlikely that an increase in the capital gains tax rate would affect the stock market. 

If history is anything to go by, the effects of changes in capital gains rates will not endure.

There may be a short-lived downside effect on the market but no real, lasting influence.

In a briefing addressing the tax’s influence, Brian Deese, director of the National Economic Council, said that the market had little to fear.

A research note by UBS Global Wealth Management reiterated that history shows no correlation between changes in capital gains tax rate and stock market performance.

The note also said that only about 25 percent of the United States stock market would fall under the capital gains tax. 

1 in 4 investors holds stock in taxable brokerage accounts that would be subject to this tax.

The other 75 percent is owned in accounts not subject to capital gains taxes, such as endowments held by tax-exempt organizations like colleges, retirement accounts like IRA and 401 (k), and foreign investors.

Does It Have a Chance Politically?

There’s no guarantee that the recommended capital gains tax hike will ever materialize. Proposals like these provide a framework that policymakers can use to design future legislation.

Let’s look at some facts.

Before he can sign it into law, the president’s plan must be passed by Congress. 

The Democrats have a narrow control of both House and Senate. Despite this giving them the power to approve tax raises without the Republican support, to pass this bill will require nearly unanimous support in the party.

Unfortunately, there’s already some skepticism from a section of Democratic Senators. Those not thrilled with the idea claim the bill could hurt stock prices, won’t actually raise that much revenue and may cause economic growth to slow.

The opponents believe that increasing rates on capital gains would incentivize or encourage investors to hold onto assets.

Bob Menendez, the New Jersey Democratic senator who’s a member of the Senate Finance Committee, aired his concerns on how the capital gains hike could hurt “the ability of growth to continue to take place.”

As expected, Republicans are united in opposition to the capital gains changes due to their potential impact on the economy. They have maintained their support for the 2017 tax cuts implemented by former President Donald Trump.

When commenting on Biden’s capital-gains plan, Chuck Grassley, a top Iowa Republican on the Senate Finance Committee, said, “It’s going to cut down on investment and cause unemployment.”

Since Biden’s American Families Plan contains other “tax the rich” provisions, there will probably be lots of back-and-forth in Congress to find the right balance of tax hikes on the rich to pay for the recommended tax breaks and benefits for the lower- and middle-income Americans. 

Whether a capital gains rate change can eventually make it into the final bill remains to be seen.

If the plan passes through Congress, it remains uncertain when the suggested tax hikes would go into effect.