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A Novel Way to Fund a Green Economy

Instead of bailing out Exxon and other fossil fuel companies, a National Investment Authority could democratize finance and help ordinary people and their governments fight climate change.

The government has been pretty kind to fossil fuel companies these last few months. Recent disclosures from the Federal Reserve’s secondary bond-buying program show that it has now bought $17 billion worth of ExxonMobil debt and $28.5 million from Energy Transfer Partners, the company behind the Dakota Access Pipeline. Private asset manager Blackrock oversees this purchasing program, among others.

Blackrock, with friends in both parties, is on the verge of becoming a fourth branch of government. Despite its pledge in early 2020 to recalibrate investment practices with climate change in mind, so far on behalf of the Fed it has seemed to offer up nearly unlimited public funds to bail out the world’s biggest polluters. These investments serve as a lifeline to a deeply troubled and increasingly unprofitable industry. Meanwhile, state and local governments—and the millions of people who’ll soon lose their unemployment insurance—have found bailouts much harder to come by. And hopes for a green recovery (which an increasingly large swathe of the Democratic Party supports to stave off depression and climate catastrophe) look alarmingly scarce.

A novel proposal gaining steam in Washington could address all of these problems. In a recent memo for Data for Progress, Cornell University law professor and financial regulation expert Saule Omarova proposed creating a National Investment Authority, or NIA. Modeled loosely off the New Deal-era Reconstruction Finance Corporation, the NIA Omarova outlined would contain two main bodies—a National Infrastructure Bank, or NIB, and a National Management Corporation, or “Nicki Mac”—to provide a lifeline to millions in the current crisis, jumpstart a green transition, and democratize the financial system in the process—a lender, guarantor, venture capitalist, and investment manager all rolled into one.

Democratizing the financial system, Omarova and others believe, is a crucial step toward enabling both the government and ordinary people to invest in a climate-friendly future. “The financial market is such that even if an investor wants to make an investment in the real economy, they frequently don’t even have the chance to do so because they’re only presented with a menu of financial instruments,” Omarova told me by phone, referencing products like Goldman Sachs’s Global Infrastructure Fund. “All they do are things like buying up public highways and turning them into toll roads. Even when investors really want to help to create a clean public transit system, for instance, they simply don’t have the ability to do it on the necessary scale. But they have to put that money somewhere, so they’ll give it to a private equity fund. Instead, the NIA will actually come in and give them a public option, channeling public and private capital into the real economy.”

The lack of these options, currently, is a bigger problem than you might think. Successive rounds of quantitative easing and low-interest rates after the Great Recession have made Treasury bonds a less attractive option in the past decade for big institutional investors like colleges and pension funds, who had previously flocked to their reliable returns. Right now, there is an enormous amount of money sloshing around the global financial system. But it has few places to turn other than big private asset managers like Blackrock, Vanguard, and State Street. Such firms have ballooned since 2008 and today hold enormous sway over the economy as a whole, with the three together owning an estimated 20 percent of all firms on the S&P 500.

Given the way 2020 has gone so far, the next decade is also likely to feature low-interest rates. Under the current structures, that would exacerbate this problem. An institution like the NIA, however, would offer an alternative to asset management giants, promising bonds comparable to the Treasury’s that are also fully backed by the federal government. And whereas Blackrock’s dominance has turned millions of pensioners into unwitting investors in everything from fossil fuels to real estate speculation, entrusting 401Ks to the NIA would enable ordinary workers’ investments to flow toward projects that are firmly in the public interest and subject to democratic governance and oversight. It’d also bring services currently being farmed out to Blackrock, with all of the potential conflicts of interests that entails, in house. 

The United States currently uses public funds to support industry in various ways, whether through military arms purchases, basic research via bodies like the National Institutes of Health, or the tens of billions of subsidies that flow each year to fossil fuel companies. But key investment decisions guiding what sorts of things get built are left almost entirely up to the private sector, whose search for short-term profits can leave massive gaps and spawn speculative bubbles. While such decisions might be rational for individual investors, Omarova wrote in her memo, “the cumulative result is collectively irrational and tragically ironic: many potentially beneficial infrastructure projects simply do not get funded in private markets, while abundant private capital is desperately searching for profitable deployment.”

A lot of money also just doesn’t get spent at all, collecting dust on privately held balance sheets.  Private investors, for instance, started off 2020 with a $1.5 trillion cash pile. “It would be a sea change in the way we do economic management,” Yakov Feygin, an economic historian and associate director of the Berggruen Institute’s Future of Capitalism Program, said of the NIA. “If you do it, what you’ve done is created a jump wire between fiscal and monetary policy.”

When the government does decide to fund a bridge or other infrastructure, the capital to do so tends to flow in some way through private hands, particularly at the state and local levels. Without the ability to deficit spend, cash-strapped municipalities and even utilities that might want to invest in climate mitigation and resiliency projects have to raise money by selling bonds on the secondary market, often with Wall Street banks siphoning off fat underwriting fees for each transaction. Worse still is the problem faced by municipalities with poor credit ratings. Junk-rated Puerto Rican bonds, for instance, have attracted predatory investors who snap up cheap debt only to demand payout through brutal litigation.

This system of public financing leaves a lot of good, job-creating projects unfunded, like transmission lines, public broadband, affordable housing, a national child care infrastructure, or high-speed rail, all of which require patient, long-term investment. But it also leaves municipalities in a downward spiral that the Federal Reserve has so far been mostly unwilling to pull them out of; over the next few years, thanks to the fallout from the coronavirus and other looming disasters, those budget crises will get much worse.

The NIA Omarova proposes can work with the Treasury and Fed to funnel emergency support more readily to struggling governments than they have been either willing or able to on their own. Outside of this immediate crisis, it can purchase municipal bonds and accept less exorbitant returns than those demanded in private bond markets—so long as whatever the city is spending the cash on aligns with a broader set of social and environmental principles. It could play this role for projects under federal jurisdiction, too, of course, including those needed to build a low-carbon economy.

Most climate plans today rely on a bit of alchemy, putting in some amount of public capital intended to “leverage” private financing, usually by shouldering some amount of risk for private sector investments through mechanisms like loan guarantees. The NIA would go beyond that market-tweaking role, marshaling private capital toward public goods to be determined through democratic processes and governance procedures—including independent audits and a Public Interest Council of academic experts and community advocates—outlined at length in Omarova’s memo. In doing so, it could also rehouse several functions currently performed by disparate bodies, from the Department of Agriculture’s Rural Development Programs to the chronically underfunded Small Business Administration, and give them a driving mission. It could also support and complement existing bodies like state-level green banks and bodies like the Appalachian Regional Commission as well as draw on their years of expertise in making investment decisions.

“All of the infrastructure that we need can be financed directly by the federal government,” Omarova told me when asked about an energy transition, adding that the main problem hasn’t been a shortage of funds. Coordination—something the NIA can provide—has been harder to come by. “Just giving agencies extra money doesn’t necessarily solve the problem,” she told me. “They have eligibility requirements that are typically very narrow and have to, through internal federal government processes with the [Office of Management and Budget], produce detailed cost-benefit analyses showing how they’re not going to burden the federal government and so on. All of these institutional organizational issues effectively become the bottleneck. Pumping more gas into that pipeline doesn’t necessarily produce more energy at the end.”

The goal in this proposal would be to sidestep the typical fight for line items in annual appropriation bills: A one-time authorization for the NIA would enable it to set up a permanent and self-sustaining public financial institution.

Nicki Mac—the National Management Corporation element of the NIA proposal—could go a step further, allowing the federal government to see a return on the prodigious amount of start-up funding it already provides to many profitable firms. It’d operate similarly to a traditional private equity firm, with a fund taking on equity stakes in new ventures and reaping returns when they come back. Given private investors’ traditional risk aversion, it can also allow more innovative projects, firms, and industries to get off the ground. This could be done in partnership with private companies, and if a project is ultimately successful, either retain its stake—and decision-making power—or sell that off, generating more funds to furnish future rounds of innovation. “The government always comes in as a lender or gift giver,” Omarova explains. “It’s limited to imposing conditions on how money is going to be used but not able to manage how it’s really used. Why do we give up all the upsides?”

As a home for equity stakes, the NIA could also offer an alternative to what’s become a ubiquitous part of corporate life cycles: getting stripped for parts. Rather than failing firms being snapped up by private equity firms in the vein of Toys “R” Us and other doomed retail giants, Nicki Mac could purchase and restructure them in such a way that pays out full benefits for workers and redeploys remaining assets toward productive and even green ends.

While this whole idea may seem like a distant dream in today’s political climate, it’s already generating buzz on Capitol Hill. Shades of it are captured in Senator Ed Markey and Chris Van Hollen’s proposal for a National Climate Bank, which would similarly create a vehicle for the federal government to take equity stakes in private companies. A recent proposal for a True New Deal from the Roosevelt Institute calls for a Modern Reconstruction Finance Corporation along broadly similar lines to the NIA.

Even with an unprecedented number of tools at its disposal, the Fed has proven unable so far to help out local and state governments or even small and medium-sized businesses, instead showering support—via Blackrock—onto the economy’s biggest and, in some cases, most toxic actors. Its reluctance to treat climate change as a systemic risk is infamous. As multiple crises converge, it may well be time for a new addition to the United States’s economic policy arsenal. “The NIA does good for the real economy by channeling public and private capital into the real economy,” Omarova says, “but it also does a lot of good for the financial system. Once assets are shifted, the entire dynamics of power in the financial market will change.”

Kate Aronoff is a staff writer at The New Republic.