The “Green New Deal” endorsed
by Rep. Alexandria Ocasio-Cortez, D.-N.Y., and more than 40 other House members
has been criticized as
imposing a too-heavy burden on the rich and upper-middle-class taxpayers who
will have to pay for it. However, taxing the rich is not what
the Green New Deal resolution proposes. It says funding would come
primarily from certain public agencies, including the U.S. Federal Reserve and
“a new public bank or system of regional and specialized public banks.”
Funding through the Federal
Reserve may be controversial, but establishing a national public infrastructure
and development bank should be a no-brainer. The real question is why we don’t
already have one, as do China, Germany and other countries that are running
circles around us in infrastructure development. Many European, Asian and Latin
American countries have their own
national development banks, as well as belong to bilateral or multinational
development institutions that are jointly owned by multiple governments. Unlike
the U.S. Federal Reserve, which considers itself “independent” of government,
national development banks are wholly owned by their governments and carry out
public development policies.
China not only has its own
China Infrastructure Bank but has established the Asian Infrastructure
Investment Bank, which counts many Asian and Middle Eastern countries in its
membership, including Australia, New Zealand and Saudi Arabia. Both banks are
helping to fund China’s trillion-dollar “One
Belt One Road” infrastructure initiative. China is so far ahead of the
United States in building infrastructure that Dan Slane, a former adviser on
President Donald Trump’s transition team, has warned,
“If we don’t get our act together very soon, we should all be brushing up on
our Mandarin.”
The leader in renewable
energy, however, is Germany, called “the
world’s first major renewable energy economy.” Germany has a public
sector development bank called KfW (Kreditanstalt für Wiederaufbau or
“Reconstruction Credit Institute”), which is even larger than the World Bank.
Along with Germany’s nonprofit Sparkassen banks, KfW has largely funded
the country’s green energy revolution.
Unlike private commercial
banks, KfW does not have to focus on maximizing short-term profits for its
shareholders while turning a blind eye to external costs, including those
imposed on the environment. The bank has been free to support the energy
revolution by funding major investments in renewable energy and energy
efficiency. Its fossil fuel investments are close to zero. One
of the key features of KfW, as with other development banks, is that much
of its lending is driven in a strategic direction determined by the national
government. Its key role in the green energy revolution has been played within
a public policy framework under Germany’s renewable energy legislation,
including policy measures that have made investment in renewables commercially
attractive.
KfW is one of the world’s
largest development banks, with assets totaling$566.5
billion as of December 2017. Ironically, the initial funding for its
capitalization came from the United States, through
the Marshall Plan in 1948. Why didn’t we fund a similar bank for
ourselves? Simply because powerful Wall Street interests did not want the
competition from a government-owned bank that could make below-market loans for
infrastructure and development. Major U.S. investors today prefer funding
infrastructure through public-private partnerships, in which private partners
can reap the profits while losses are imposed on local governments.
KfW and Germany’s Energy
Revolution
Renewable energy in Germany is
mainly based on wind, solar and biomass. Renewables generated 41 percent of the
country’s electricity in 2017, up from just 6 percent in 2000; and public
banks provided over 72 percent of
the financing for this transition. In 2007-09, KfW
funded all of Germany’s investment in Solar Photovoltaic. After that,
Solar PV was introduced nationwide on a major scale. This is the sort of
catalytic role that development banks can play—kickstarting a major structural
transformation by funding and showcasing new technologies and sectors.
KfW is not only one of the
biggest financial institutions but has been ranked one of the two safest
banks in the world. (The other, Switzerland’s Zurich Cantonal Bank, is also
publicly owned.) KfW sports
triple-A ratings from all three major rating agencies—Fitch, Standard
and Poor’s, and Moody’s. The bank benefits from these top ratings and the
statutory guarantee of the German government, which allow it to issue bonds on
very favorable terms and therefore to lend on favorable terms, backing its
loans with the bonds.
KfW does not work through
public-private partnerships, and it does not trade in derivatives and other
complex financial products. It
relies on traditional lending and grants. The borrower is responsible
for loan repayment. Private investors can participate, but not as shareholders
or public-private partners. Rather, they can invest in “Green Bonds,” which are
as safe and liquid as other government bonds and are prized for their green
earmarking. The first “Green Bond—Made by KfW” was issued in 2014 with a volume
of $1.7 billion and a maturity of five years. It was the largest Green Bond
ever at the time of issuance and generated so much interest that the order book
rapidly grew to $3.02 billion, although the bonds paid an annual coupon of only
0.375 percent. By 2017, the issue volume of KfW
Green Bondsreached $4.21 billion.
Investors benefit from the
high credit and sustainability ratings of KfW, the liquidity of its bonds, and
the opportunity to support climate and environmental protection. For large
institutional investors with funds that exceed the government deposit insurance
limit, Green Bonds are the equivalent of savings accounts—a safe place to park
their money that provides a modest interest. Green Bonds also appeal to
“socially responsible” investors, who have the assurance with these simple and
transparent bonds that their money is going where they want it to. The bonds
are financed by KfW from the proceeds of its loans, which are also in high
demand due to their low interest rates, which the bank can offer because its
high ratings allow it to cheaply mobilize funds from capital markets and its
public policy-oriented loans qualify it for targeted subsidies.
Roosevelt’s Development Bank:
The Reconstruction Finance Corporation
KfW’s role in implementing government
policy parallels that of the Reconstruction Finance Corporation (RFC) in
funding the New Deal in the 1930s. At that time, U.S. banks were bankrupt and
incapable of financing the country’s recovery. President Franklin D. Roosevelt
attempted to set up a system of 12 public “industrial banks” through the
Federal Reserve, but the measure failed. Roosevelt then made an end run around
his opponents by using the RFC that had been set up earlier by President
Herbert Hoover, expanding it to address the nation’s financing needs.
The RFC Act of 1932 provided
the RFC with capital stock of $500 million and the authority to extend credit
up to $1.5 billion (subsequently increased several times). With those
resources, from 1932 to 1957 the RFC loaned or invested more than $40
billion. As with KfW’s loans, its funding source was the sale of bonds, mostly
to the Treasury itself. Proceeds from the loans repaid the bonds, leaving
the RFC with a net profit. The RFC financed roads, bridges, dams, post
offices, universities, electrical power, mortgages, farms and much more; it
funded all of this while generating income for the government.
The RFC was so successful that
it became America’s largest corporation and the world’s largest banking
organization. Its success, however, may have been its nemesis. Without the
emergencies of depression and war, it was a too-powerful competitor of the
private banking establishment; and in 1957, it was disbanded under President
Dwight D. Eisenhower. That’s how the United States was left without a
development bank at the same time Germany and other countries were hitting the
ground running with theirs.
Today some U.S. states have
infrastructure and development banks, including California, but their reach is
very small. One way they could be expanded to meet state infrastructure needs
would be to turn them into depositories for state and municipal revenue. Rather
than lending their capital directly in a revolving fund, this would allow them
to leverage their capital into 10 times that sum in loans, as all depository
banks are able to do, as I’ve previously
explained.
The most profitable and
efficient way for national and local governments to finance public
infrastructure and development is with their own banks, as the impressive track
records of KfW and other national development banks have shown. The RFC showed
what could be done even by a country that was technically bankrupt, simply by
mobilizing its own resources through a publicly owned financial institution. We
need to resurrect that public funding engine today, not only to address the
national and global crises we are facing now but for the ongoing development
the country needs in order to manifest its true potential.
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