President Donald J. Trump wants Senate Majority Leader Mitch McConnell to bring a landmark infrastructure bill to the floor in November that would transform the way that public and private infrastructure projects are financed in the United States — including mass transit systems, roads, bridges, airports, seaports, and a slew of other transportation, energy, and telecommunication systems.
The legislation would create a new lending window at the Federal Reserve Bank that would give infrastructure operating companies, energy utilities, municipal housing authorities, and fiber optics networks newfound access to construction capital at better rates than from a traditional investment bank. By offering construction financing to ‘infrastructure entities’ (the definition of which is likely to be a source of debate on Capitol Hill) at slightly negative interest rates, a portion of that construction cost will be monetized over time.
That means the Federal Reserve would print new money to pay for part of the construction cost, at an ‘Infrastructure Funds Rate” that would be set by the Federal Reserve Board.
Currently, only investment banks and major financial institutions are able to borrow money from the Federal Reserve at the Federal Funds Rate. That rate fluctuates and is set by its Board of Governors, in order to loosen and tighten the supply of money in the economy. By tightening the supply of money, the Federal Reserve can slow the economy down if growth is driving up equity valuations or inflation too quickly; and it can loosen the supply of money if private investment becomes too slow and unemployment is too high.
The Federal Reserve must balance that dual mission: a need for low inflation, and a need for job creation. But following the Great Recession of 2008, the Federal Reserve was unable to meet the second objective in that dual mission, and job creation remained lackluster for years. Simply lowering bowering rates for financial institutions to zero percent and increasing the supply of money wasn’t enough to create jobs.
Under current law, the Federal Reserve is out of tools.
By creating a second lending window at the central bank, it would create a new capital market for infrastructure finance that would — using market forces — create new and rational metrics for infrastructure investment. That decentralized approach would depart sharply with the Democratic Party’s highly-centralized and highly-bureaucratic approach to government-managed infrastructure projects.
In the event that the Federal Reserve needs to ensure rapid job creation — in an event like the 2008 collapse of the financial markets — it would be capable of lending money to accredited public and private infrastructure operating companies, and to do so at more advantageous rates during periods of recession. Cheep money would spark construction projects, directly impacting counter-cyclical job creation.
“The problem with Obama’s so-called ‘Stimulus’ was that the government doesn’t spend wisely. Highway 1 in California was freshly paved the year before, but the administration wanted shovel ready projects, so they tore it up and paved it again,” explains one White House aide who asked not to be named.
“Governments can’t do infrastructure competently, by their very nature. We need to create a market that decides to allocate capital investment to the most economically rational and worthwhile projects,” he adds.
“By establishing a fluctuating lending rate for infrastructure operating companies, they can finance projects when new operating revenues from that infrastructure are projected to cover its scheduled debt. A lower cost of capital, or more advantageous monetization rate, makes that happen sooner,” he explains.
The source also explains that taking infrastructure decisions out of the fiscal realm of the Congress depoliticizes infrastructure decisions. It would also allow the Nation to modernize its infrastructure systems without adding to an already bloated federal debt.
Once passed, the new lending program would be expected to spark a generation of infrastructure expansion that would be unlike anything seen since the 1950s post-war era.
Proponents argue that the lending program is a rational, decentralized, fair, and broadly accessible way to rebuild America’s infrastructure systems — whether it’s a public transit operator; a local fiber optics provider; a municipal housing authority; or the Golden Gate Bridge.
“If this new lending window is opened at the Federal Reserve by January, we can have shovels in the ground at hundreds of construction sites across America before election day in November,” the source explains.
That would be an ambitious goal. Such sweeping legislation would typically have to pass several Senate committees of jurisdiction — Finance, Public Works, and Banking — or at least have the tacit private approval of those committee chairmen: Chuck Grassley, John Barrasso, and Mike Crapo. (All are close Trump administration allies).
The central bank could finance more than $3 trillion in infrastructure modernization projects in its first five years without destabilizing the money supply.