There are a number of major issues in the challenge of infrastructure finance and funding. Among them is the scientific accuracy of measuring future profits and increases in productivity that infrastructure projects will generate. Another is whether projects that will definitely lead to major increases in productivity should be able to be financed through the creation of new credit supply and not simply by the investment of existing wealth.
In other words, could infrastructure be financed in a manner similar to the way the Federal Reserve expands its balance sheet when purchasing government securities from banks and dealer banks? When it purchases securities and consequently increases the money supply, the Fed is not doing so based on its capital or previous wealth, it is simply creating a debt. It creates a liability in the form of new reserves credited to the bank who formerly owned the securities. This increases the money supply, as that bank can now make more loans on the basis of its deposit at the Fed (the Fed’s liability). At the same time, it increases its assets by the new holding of the government bond. The Fed did not have capital to do this, it had the authority to do so, an authority which is limited to the central bank. This action is based on the Federal Reserve Act, on the fact that the U.S. government decided that it is best that there be a central agency to help control and regulate the money supply.
If the Fed has determined to buy or sell bonds based on a need for more or less reserves in the system due to an inflation and employment target, the question becomes, is there a corollary that would make an expansion of reserves equally necessary for infrastructure bonds? Of course, the Fed would not have to become involved in picking infrastructure projects for which it would expand its balance sheet. Perhaps there could be the creation of special infrastructure bonds that could circulate as a tradeable security by some other institution.
Could the danger of too many long-term liabilities as occurred with Freddie Mac be decreased by more science put into the funding schemes? Could financial engineers come up with low risk infrastructure securities based on connecting future revenue streams in a dynamic model of interconnected infrastructure projects? If they could, perhaps these bonds could be pledged just as readily as a government security.
What may be required is a sound institution that can safely and scientifically authorize and legitimize these obligations as items of value. The second Bank of the U.S. managed the nation’s credits and debts on its books and ensured that they balanced out for the sake of infrastructure, agricultural, and industrial growth. The Fed controls the economy’s credits and debits less directly, through the management of member banks. At times in the past the Fed dabbled in the area of creating credit for infrastructure and industry, using excess reserves as a source for bank loan insurance for those purposes, as well as joint and direct loans. Something similar might be useful that would allow for the creation of liabilities by institutions that need to build projects and make investments without having to have the capital before hand. I am sure that there are many institutions involved in infrastructure investments with these qualities that I am simply unaware of at present.