state that has one of the largest economies in the world,
has over $700 billion parked in several
private banks earning minimal interest, private equity funds that
contributed to the affordable housing crisis, or shadow banks of the
sort that caused the banking collapse of 2008. These funds, or some
of them, could be transferred to an infrastructure bank that
generated credit for the state – while the funds remained
safely on deposit in the bank.
(NATIONAL) – The state of California
needs over $700
billion in infrastructure during
the next decade. Where will this money come from?
trillion infrastructure initiative unveiled
by President Trump in February 2018 includes only $200 billion in
federal funding, and less than that after factoring in the billions
in tax cuts in infrastructure-related projects. The rest is to come
from cities, states, private investors and public-private
partnerships (PPPs) one. And since city and state coffers are
depleted, that chiefly means private investors and PPPs, which have a
shady history at best.
the Brookings Institution found that “in practice [PPPs] have
been dogged by contract design problems, waste, and unrealistic
expectations.” In their 2015 report “Why
Public-Private Partnerships Don’t Work,”
Public Services International stated that “experience over the
last 15 years shows that PPPs are an expensive and inefficient way of
financing infrastructure and divert government spending away from
other public services. They conceal public borrowing, while providing
long-term state guarantees for profits to private companies.”
also divert public money away from the neediest infrastructure
projects, which may not deliver sizable returns, in favor of those
big-ticket items that will deliver hefty profits to investors. A
March 2017 report by the Economic Policy Institute titled “No
Free Bridge” also highlighted the substantial costs and risks
involved in public-private partnerships and other “innovative”
financing of infrastructure.
California is far from broke. It has over well over $700 billion in
funds of various sorts tucked around the state, including $500
billion in CalPERS and CalSTRS, the state’s massive public
pension funds. These pools of money are restricted in how they can be
spent and are either sitting in banks drawing a modest interest or
invested with Wall Street asset managers and private equity funds
that are not obligated to invest the money in California and are not
safe. For fiscal year 2009, CalPERS and CalSTRS reported
billion in losses from
investments gone awry.
allocated $6.1 billion to private equity funds,
real estate managers, and co-investments, including $400 million to a
real estate fund managed by Blackstone Group, the world’s
largest private equity firm, and $200 million to BlackRock, the
world’s largest “shadow bank.” CalPERS is now in
talks with BlackRock over management
of its $26 billion private equity fund,
with discretion to invest that money as it sees fit.
the term ‘private equity’ really means
equity” is a rebranding of the term “leveraged buyout,”
the purchase of companies with loans which then must be paid back by
the company, typically at the expense of jobs and pensions. Private
equity investments may include real estate, energy, and investment
infrastructure projects as part of a privatization initiative.
is notorious for buying up distressed properties after the housing
market collapsed. It is now the largest owner of single-family rental
homes in the US. Its rental practices have drawn
fire from tenant advocates in
San Francisco and elsewhere, who have called it a Wall Street
absentee slumlord that charges excessive rents, contributing to the
affordable housing crisis; and pension funds largely contributed the
money for Blackstone’s purchases.
an offshoot of Blackstone, now has $6
assets under management, making it larger than the world’s
largest bank (which is in China). Die
Zeit journalist Heike
who has written a book in German on it, calls BlackRock the “most
powerful institution in the financial system” and “the
most powerful company in the world” – the “secret
power.” Yet despite its size and global power, BlackRock, along
with Blackstone and other shadow banking institutions, managed to
escape regulation under the Dodd-Frank Act.
CEO Larry Fink, who has cozy relationships with government
to journalist David Dayen,
pushed hard to successfully resist
the designation of
asset managers as systemically important financial institutions,
which would have subjected them to additional regulation such as
larger capital requirements.
proposed move to hand CalPERS’ private equity fund to BlackRock
is highly controversial, since it would cost the state substantial
sums in fees (management
fees took 14% of
private equity profits in 2016), and BlackRock gives no guarantees.
In 2009, it defaulted on a New York real estate project that left
million in the hole.
are also potential conflicts of interest, since BlackRock or its
managers have controlling interests in companies that could be
steered into deals with the state. In 2015, the company was fined
$12 million by
the SEC for that sort of conflict; and in 2015, it was fined
$3.5 million for
providing flawed data to German regulators. BlackRock also puts
clients’ money into equities, investing it in companies like
oil company Exxon and food and beverage company Nestle, companies
which have been criticized for not serving California’s
interests and exploiting state resources.
public entities also have $2.8
billion in CalTRUST,
a fund managed by BlackRock. The CalTRUST government fund is a money
market fund, of the sort that triggered the 2008 market collapse when
the Reserve Primary Fund “broke the buck” on September
15, 2008. The CalTRUST
could lose money by investing in the Fund. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it cannot
guarantee it will do so. An investment in the Fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The Fund’s sponsor has no legal obligation
to provide financial support to the Fund, and you should not expect
that the sponsor will provide financial support to the Fund at any
is billed as
providing local agencies with “a safe, convenient means of
maintaining liquidity,” but billionaire investor Carl Icahn
says this liquidity is a myth. In a
July 2015 debate with
Larry Fink on FOX Business Network, Icahn called BlackRock “an
extremely dangerous company” because of the prevalence of its
exchange-traded fund (ETF) products, which Icahn deemed illiquid.
“They sell liquidity,” he said. “There is no
liquidity. . . . And that’s what’s going to blow this
up.” His concern was the amount of money BlackRock had invested
in high-yield ETFs, which he called overpriced. When the Federal
Reserve hikes interest rates, investors are likely to rush to sell
these ETFs; but there will be no market for them, he said. The result
could be a run like
that triggering the 2008 market collapse.
Infrastructure Bank Option
is another alternative. California’s pools of idle funds cannot
be spent on infrastructure, but they could be deposited or invested
in a publicly-owned bank, where they could form the deposit base for
infrastructure loans. California is now the fifth
largest economy in
the world, trailing only Germany, Japan, China and the United States.
Germany, China and other Asian countries are addressing their
infrastructure challenges through public infrastructure banks that
leverage pools of funds into loans for needed construction.
the China Infrastructure Bank, China has established the Asian
Infrastructure Investment Bank (AIIB), whose members include many
Asian and Middle Eastern countries, including Australia, New Zealand,
and Saudi Arabia. Both banks are helping to fund China’s
trillion dollar “One
Belt One Road”
has an infrastructure bank called KfW which is larger than the World
Bank, with assets
of $600 billion in
2016. Along with the public Sparkassen banks, KfW has funded
Germany’s green energy revolution.
Renewables generated 41% of the country’s electricity in 2017,
up from 6% in 2000, earning the country the title “the world’s
first major green energy economy.” Public
banks provided over 72% of
the financing for this transition.
for California, it already has an infrastructure bank – the
California Infrastructure and Development Bank (IBank), established
in 1994. But the IBank is a “bank” in name only. It
cannot take deposits or leverage capital into loans. It is also
seriously underfunded, since the California Department of
over half of its allotted funds to
the General Fund to repair the state’s budget after
the dot.com market
the IBank has 20 years’ experience in making prudent
infrastructure loans at below municipal bond rates, and its clients
are limited to municipal governments and other public entities,
making them safe bets underwritten by their local tax bases. The
IBank could be expanded to address California’s infrastructure
needs, drawing deposits and capital from its many pools of idle funds
across the state.
Better Use for Pension Money
an illuminating 2017 paper for UC Berkeley’s Haas Institute
policy consultant Tom Sgouros showed that the push to put pension
fund money into risky high-yield investments comes from a misguided
application of the accounting rules. The error results from treating
governments like private companies that can be liquidated out of
argues that public pension funds can be safely operated on a
pay-as-you-go basis, just
as they were for 50 years before the 1980s.
That accounting change would take the pressure off the pension boards
and free up hundreds of billions of dollars in taxpayer funds. Some
portion of that money could then be deposited in publicly-owned
banks, which in turn could generate the low-cost credit needed to
fund the infrastructure and services that taxpayers expect from their
that these deposits would
not be spent.
Pension funds, rainy day funds and other pools of government money
can provide the liquidity for loans while
remaining on deposit in the bank,
available for withdrawal on demand by the government
mainstream economists now acknowledge that
banks do not lend their deposits but actually create deposits when
they make loans.
bank borrows as needed to cover withdrawals, but not all funds are
withdrawn at once; and a government bank can borrow its own deposits
much more cheaply than local governments can borrow on the bond
market. Through their own public banks, government entities can thus
effectively borrow at bankers’ rates plus operating costs,
cutting out middlemen.
unlike borrowing through bonds, which merely recirculate existing
funds, borrowing from banks creates new money, which will stimulate
economic growth and come back to the state in the form of new taxes
and pension premiums.
paper published by the San Francisco Federal Reserve in
2012 found that one dollar invested in infrastructure generates at
least two dollars in GSP (state GDP), and roughly four times more
than average during economic downturns.
article was originally published on Truthdig.com.
Ellen Brown is an attorney, chairman of the Public
and author of twelve books including Web
of Debt and The
Public Bank Solution.
Her 300+ blog articles are posted at EllenBrown.com.