Tag: John Horn



John Horn, professor of practice in economics, wrote this article with contributions from Taylor Begley, assistant professor of finance.

In a well-functioning economy, the bankruptcy process should be able to sort out why a particular company failed. Was the company structurally unable to compete? Did executives make poor choices (like taking on too much debt)? Or were circumstances simply unlucky?

John Horn

But when large swaths of the economy default concurrently, banks shouldn’t hold individual businesses responsible for the disruption. Though the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent bills provide some small business relief, they largely leave the existing bankruptcy process in place.

Unfortunately, that process will take years to sort through the chaos. Unless we take additional action, when the crisis ends small businesses that were perfectly viable will face challenges in accessing the cash they need to start up again.

Cataclysmic events

In contract law, “force majeure” clauses are intended to protect both parties from cataclysmic events beyond their control. But force majeure—in short, an extraordinary, unforeseen event—won’t absolve most current borrowers from default. Few small business loans have such clauses, and, even if they do, courts will have to decide whether the pandemic counts as such an event. This, in turn, will require a lot of one-off decisions from lenders, further clogging the system.

Here’s the bottom line: We are not ready for the economy to come out from under a large number of defaults once the coronavirus is contained sufficiently. We can’t rely on existing contractual clauses to remedy the situation. In an ideal setting, a bank will take into account the business’ situation before the COVID-19 crisis and evaluate it on the pre-crisis fundamentals.

This will work best when the lenders have a more intimate knowledge of the borrower and their history. That’s more likely to occur when the bank is a local entity. However, the banking industry has been closing branches over the past 10 years, and closures appear likely to continue amid this downturn.

The correct action requires coordination: All lenders need to act in a similar fashion at the same time so no one bank feels like it’s the only one taking a risk by doing something different.

Banks’ unwillingness to take risks on their own shouldn’t be surprising; we’ve seen this in the recent past. Since the Great Recession, banks have been holding excess reserves (cash in their vaults that they are allowed to lend out, but don’t) between $685 billion and $2.7 trillion since mid-2009. As comparison, the number averaged $1 billion between 1985 and 2008. Also during the Great Recession, banks tightened standards for small-businesses loans and have not relaxed them significantly since that crisis officially ended.

What can be done?

If we can’t rely on banks to self-start the lending cycle, what can be done? There are a couple of ways the federal government can improve liquidity for small businesses by putting all banks on the same footing with regard to the underlying insolvency risk.

  1. The simplest correction would to be for the government to underwrite the continued financing of small businesses until the crisis has passed. Ensure these businesses have access to funding they need to pay off all of their bills and remain viable. The CARES Act (and second round of Paycheck Protection Program funding) was a good first step, but Congress will need to continue funding small businesses until the crisis ends.
  2. If it doesn’t, then Congress should enact legislation that would count any bankruptcy/default from March 2020 until the end of the crisis as a nondefault event. Sure, some risky borrowers would have defaulted anyway without the coronavirus shutdown, but many of the other conditions (like cash flow, tenure of business) will still be used to underwrite future loans, as will bankruptcies/defaults before March 2020.
  3. Create new investment protection vehicles for banks/lenders to incentivize certain types of loans (modeled on the FDIC insurance—i.e., only for loans up to a certain amount, only for certain types of loans—and the mortgage loan backup created after the Great Recession). This would be similar to the current CARES SBA loans and allow for smaller minimums than the Fed’s Main Street Lending Program (currently $500,000).

Small businesses are hurting. If the current economic crisis doesn’t end in the next few weeks, they face an existential crisis that will be hard to endure—and find it hard to rebuild once the economy starts to rebound.




As President Trump plans to slap steep tariffs on $300 billion in Chinese imports, a uniquely American tradition could come under fire: Fourth of July fireworks.

John Horn

John Horn, a WashU Olin international trade expert, predicts fireworks will light the skies next month because cities and towns placed their orders months ago. But the next Fourth?

“The skies could be empty,” Horn said. That is, if the proposed tariffs are imposed and continue into 2020. China’s likely strategy will be to use fireworks as a “political toy” heading into the election season, Horn says.

How? By completely banning sales of fireworks to the United States, he says.

Horn is a professor of practice in economics who helps companies develop competitive strategies and who leads war game workshops.

The United States hasn’t yet imposed tariffs on fireworks, but fireworks are on a long list of products facing a 25 percent penalty if China doesn’t make a broader trade agreement with the White House soon.

An uproar before the election

To retaliate over US-imposed tariffs, Chinese President Xi Jinping could ban shipments of fireworks to the United States next year to create an uproar before the presidential election, Horn says.

“I wouldn’t be surprised. ‘Oh, you know what? We’re having a shortage of the necessary chemicals, and we need it for other purposes, and we just can’t export it to the United States this year,’” Horn said. “It’s sort of like [Xi] has threatened with rare-earth metals.” 

Manufacturers use those metals as components in smartphones, cameras, flat-screen TVs and a lot of other things, including defense technologies. China dominates the world as the metals’ supplier.

China is the dominant maker of fireworks, too. Last year, the United States imported 277 million pounds of fireworks from China, representing 99 percent of backyard fireworks and 75 percent of professional display fireworks, according to the American Pyrotechnics Association.

Julie Heckman, APA executive director, plans to testify today before US Trade Representative Robert Lighthizer and to request an exclusion for fireworks from the tariffs.

Trying to ‘make people feel threatened’

If the United States excludes fireworks from tariffs, China might mess with the fireworks supply anyway to mess with the US, Horn says.

“I think what China’s trying to do is to make people feel threatened,” he said.

The number of US products on which China could slap tariffs is relatively low compared with the harm US tariffs on Chinese goods can do to China, Horn says. So Chinese officials are targeting what could upset tech companies, farmers and all Americans.

“If you can’t have your iPhone and you can’t sell your crops, that’s going to be significant.”

And if you can’t have your Fourth of July fireworks …

“I can see fireworks being a really big one,” Horn said. “It’s Americana.”




John Horn

Olin professor  John Horn says Missouri exports to Mexico and Canada, its chief international trading partners, could be put at risk if the Trump Administration moves forward with plans to withdraw from NAFTA, the North American Free Trade Agreement.

“This is where Missouri exports. And this is where St. Louis exports,” said Horn, senior lecturer in economics, during an interview this week with St. Louis Public Radio. “So the state will have to replace those exports somewhere.”

In a nearly five-minute segment aired during Morning Edition, Horn addressed the consequences of talks this week in Montreal, where negotiators are gathered to discuss reworking the pact, or the possibility of the United States withdrawing. According to the public radio piece, the U.S. Chamber of Commerce estimates a loss of 250,000 jobs in Missouri if the Trump administration exits the agreement.

Horn addressed the benefits or demerits of NAFTA, whether it has cost jobs in the United States, and the potential benefits of renegotiating the agreement.

The current round of negotiations, Horn said, introduces uncertainty in the business community, which can be unhealthy.

“If businesses don’t know where they should be investing, or how they should be investing, they tend to hold back on investments and that is going to slow growth down,” he said.

Read more about Horn’s interview or listen to the complete piece on St. Louis Public Radio’s website.