How to Structure Green New Deal Finance

a professor at Cornell Law School. His new book is called Financing the Green New Deal, A Plan of Action and Renewal. So, Bob, tell us why you decided to write the book. I've been sort of worried, as I think a lot of people have been worried for at least a decade now, that our financial system has sort of lost touch with its sort of original purposes, at

least with some of them. Right, I mean, the primary purpose of financial system is to enable productive activity, right, And insofar as there's speculative activity in the form of adding on price movements and secondary markets or tertiary derivative markets or the like, that's basically in order to enable capital to be lower priced than the primary markets where

productive investments to take place. And it seems that what's happened in recent techcades in our financial system is that the secondary in tertiary markets have become much more important, much larger in terms of transaction volume or turnover or turn than the primary market cap, which suggests that we're less focused on production and productive activity now and more focused on gambling, basically on speculating as where prices are

going to go. And what's sort of interesting about that fact is if you compare that fact with what the founders of the Federal Reserve seem to have been in mind back in nineteen thirteen, it would suggest that our financial system is really kind of really way out of whack relative to what the FED was originally meant to

be doing. Um. And so, in so far as we see the FED basically back stopping a system that's primarily about speculation, we see a FED that is also in some ways, you know, acting outside of its original sort of mandate, or at least in manners that are not altogether consistent with that original mandate. So what I've done is I've done a bit of back research on sort of what the founders had in mind what was being talked about and discussed when the fact was created, and

it turns out to be quite fascinating. UM, and it kind of it gives us guidance is to how to bring the financial system back into sort of sink with what it's really originally meant to be, and how to bring the FED back into sink with what it was meant to be. And it also sort of explains certain things about the FED that are otherwise puzzling. So some people sort of think, well, what is the FED anyway?

I mean, what is it with those? We seem to have these regional set banks and then there's this fetboard in DC, and what's the relation between them? You know? And people get so confused in some cases that somebody will refer to the Federal Reserve Bank, which you know isn't the thing. There is no the Federaliserve Bank. There's a Federal Reserve Board, and then there are regional federi

reserve banks. Tell us then what the founders had in mind? Well, what the founders see you have had in mind in the first place, Um, with this sort of two tear struff, sure was precisely that the regional Federal Reserve banks would facilitate the free flowing of credit to productive purposes startup companies, small businesses, community banks, all the sorts of things you might expect a growing and newly productive or growingly productive

economy that's divided into various regions of the whole continent to look like, right, And so a big and important activity that those banks did was to what was called discounts commercial paper of various kinds issued by again small, small, small firms, startups and the like. This is why to this day we still call the you know, the discounting operations that are carried out through section thirteen at the Federal Reserve Act discounting and while we refer to a

discount window. But so that was the purpose of those regional dead banks, and then the Federal Reserve Board in DC, as supplemented twenty years later by a newly created f O m C in the thirties, was designed to kind of oversee credit aggregates nationwide to basically prevent there from being an excess of credit money in the economy, which can be inflationary, but also of course to counteract deflationary pressures when there's when there's contractions, which of course, is

what QUI is about. And so what we seem to have right now, as we seem to have retained the sort of aggregative mission the feted board or what I call the credit modulatory mission. If that's pretty good about adjusting the money supply right and counteracting deflations and counteracting inflation for that matter. It's pretty good with that modulatory task, as I call it, but we've completely dropped the allocative task. We're just not doing allocation in the way that the

regional fed banks were meant to do. So. Finally, the final point of the HID and the punchline here is that these new facilities that the FT has just opened up as a april to deal with the pandemic, notably the Municipal Liquidity Facility or m l APP, which is run out of the New York FED, and then the so called main Street Lending program that's run out of

the Boston FED. I think, is this a wonderful opportunity, in effect to rediscover and reinstitute that original mission that the Federal Reserve regional banks had um But we would only be able to do that if we change a couple of things about the way we're running those programs right now. So right now, as you know, MLF is there to help out small towns, cities, and states across the Union that are having difficulty dealing with the pandemic fallout.

It's odd then to be running it out of just the New York FED And I used to work there, and lots of my old friends and colleagues so I used to work with are still there. And I think they're the most brilliant and the most serious public servants

in the country. I mean, they're amazing and wonderful people, but there's a fairly small number of them, and the thought that they should be given are sort of saddled with the responsibility of determining the real credit needs or otherwise of Peoria and Oahu and Billings, Montana from right here in low in Manhattan. Seems a bit much, right.

It doesn't seem good for the program, it doesn't seem good for the cities or states, and it doesn't seem good for the bad personnel themselves or that the FRBN wine similar story when it comes to the Main Street Landing Program, which is a set of several facilities run out of the Boston Debt now Here too, right I mean, again, the Boston bed folk are wonderful. I worked with a good many of them in the past, and there's just this is not meant in any way to kind of

question their capacities or abilities. But why would Boston be handling the financial needs of you know, uh Nick Nails in in Los Angeles or Harriet's attractor Repair in Farco, Dakota. You know, I mean, it doesn't make a lot of sense,

um and what we have here. It seems to me he's a golden opportunity to sort of redistribute um the sort of regional FED banks original functions to the regional Fed banks, Right, so San Francisco FED would handle both main street lending and MLF funding out west in the northwest, and the Dallas FED would handle it in the southwest, and the Atlanta FED would handle it in the southeast and so on. And this, I think would bring the

regional feds back into sync with their original missions. He would demise these programs which we now have but which are not operating very well, presidedly because they're all concentrated

in a couple of bed banks in the northeast. And it would also basically give us an opportunity to sort of re re orient ourselves and our bed, our central things to the task of productive lending and productive investment rather than merely speculative investing in speculative lending, because what happens in New York, which the New York that looks over, is mainly that. And that's fine, that's what's supposed to

happen in New York. But we don't want, you know, all of the credit of the country to be going towards speculative setting in New York when you have real credit needs out in South Dakota or out in Arizona or where have you. So so that's basically what I what I've been sort of putting out there. That's the I've been using a shorthand for as a slogan. I call it spread bed, but we could just well call it respread the FED, because that was sort of the

original purpose in the first place. So let me ask you a basic question. You know, when you talk about the Constitution, you have the originalists or the textualists. So is this sort of an originalist kind of theory You're going to go back to what the FED was? Has

the FED been evolving into what the country needed. So I think in a certain sense both right, My view is that the as far as the modulatory task goes right, in other words, as far as the oversight of national credit aggregates is concerned, the FED has evolved into what has been needed, and furthermore, that was actually foreseen by the framers themselves of the Federal Reserve Act. It's it's it's precisely why they didn't make the FED simply a bunch of regional banks, but they put a single board

on top of the mall right. So if you think of the apex of the system, or say tier one of the systems, the Federal Reserve Board and DC, that is indeed meant to be looking over credit conditions nationwide and modulating our credit aggregates to prevent inflation on the one handed, deflation on the other. And you know, it didn't do that extremely well in the first years after its founding, and indeed kind of spectacular failed in the

twenties and early thirties in doing that. But some additional reforms that we added on, and notably the Federal Open Market Committee in the early nineteen thirties during a new deal, have sort of optimized it. And made the FED board essentially more able to do even what the framers themselves wanted to do. And again I applauded out the wazoo.

And when it comes to that kind of thing, right, I don't applaud Greenspan, but I think Bernanti and Yellen and j. Pale had been absolutely masterful in their use of that functionality. And the same goes for William mc chesney Martin who was the bet chair back in the sixties and fifties. Right. Um, so we've had in Nurner equals of course during the during the Great Depression was

a terrific Beet chair. But but what we lost sight of, well we sort of let disappear, was what what I'm calling Tier two was meant to do, and that's the regional dead banks. Um. My researchers system actually put it really best. Recently. I just I laughed out loud. It was so good. We were talking together about the regional dedbanks and she said, don't they just write papers and stuff? And it burst out laughing. Yeah, that is exactly what they do. They write papers and stuff, unless it's the

New York that which has more operational responsibilities. Um. But the thing is the thing to remember is they write papers and stuff for original purposes that they were created to discharge. And the fact is that not being used to discharge those purposes now. And if they were being used in that way, these research papers that they're pretty together would actually have a great deal of use, right um, and they would actually I think, make the system work better. Right.

Another way to say this that it's sort of keyed to the way that you framed the question, is to say that the things that have changed since the Federal Reserve Acts passage are such that they have made it importance to kind of fine tune and optimize the Federal Reserve Board at the top of the system. And we

have thankfully done that. But things that have changed over the last hundred years since nineteen thirteen also suggests ways that we can optimize two or two of the system, the regional Federal Reserve in A big part of that optimization, I think, is to recover that original vision, sort of speaker, that original mission that they were meant to have, which was to facilitate um actual productive investment in different regions

of the country that have different economies. Tell us about how you got involved and what you've done towards the Green New Deal. Yeah. Sure. So the way that happened, it was kind of fun. UM. When Alexandria kacio Pertz

won her election in November of about two years ago. UM, she had been working with a group called New Consensus that was sort of part of a movement, UH to sort of discover and help bring to national attention really great minds and energetic young political figures like Alex, like like the congresswoman. UM. And the head of this group was married it still is, and his spouse had been

a student of mine in the recent past. UH. And so when it came time to draft the Green New Deal resolution and then to work on other aspects of the Green New Deal, she recommended me to her husband said that, you know, I guess she overestimated me or like the classes or whatever. But in any event, so they reached out and asked if I could help out, UM with the preparation of the resolution that was of

course introduced UH in early February. UH. And then after that early February twenty nineteen, I should say, then it's sort of at the same time, asked me to write up a sort of a light paper explaining the Green New Deal and sort of to make it clear what the resolution was for and what it was about. So I wrote that up as well in December and January UM. And then starting in March of en they asked if I could put together the finance plan for the Green

New Deal UM. So I just basically threw myself into that with pretty much all that I had UH and was able to draft up at least the skeleton of a full finance plan within a few weeks UH and and gave that to them and they liked it. UM. And then before long Paul griff McMillan, the publishing company who, to my joy, happened to be the publishers of all at the works of John Maynard Keynes UM, had apparently got wind of the fact that I had written up this finance plan and they asked me if I'd like

to publish it as a monograph or a book. UH. And I said, oh my god, I'd be totally honored, you know. So UM, I sort of flushed it out a little bit more, added a little bit to it, build it out a bit more UM and turned it

into a monograph and that was happily published. UM. A couple of months ago, I guess, um, just the very beginning of August it sort of came out officially, and that basically lays out a whole plan for how to finance a green new deal, and that in turn includes a great deal of sort of structural tweaking you might say, of our financial system and sort of changes no more and no less than has to be changed. Basically, what it is a sort of adds connecting lines, you might say,

between various public and private financial institutions that we already have. Well, what's your take on the national investment bank proposals? I think one thing that we see going on right now in Congress especially but also more broadly, there's a heightened discussion under way of the problem or the need for

national investment in a big way. And so there are a lot of sort of national investment bank proposals that are now being considered in Congress, probably about ten or twelve of them that I can count that are that have been offered by various members of Congress. The idea would be something kind of like the European investment banks, some kind of a national development that. Um, I think

that if we got the FED right. It could be that development banking that we were meant to have or that we should have, but that would involve having the regional banks again reclaimed that old mission. Um So when I say sort of spread the FED in a way, I'm also addressing, uh, those people who are talking of out the need for national investment. Uh. The other thing kind of collateral to this, are sort of complementing this. It's in the book. Um is something I call for.

So we call for called a National Reconstruction and Development Commission. It's a kind of f stock like body that would basically just combine all of the cabinet level executive agencies of our government into one council that would basically plan national development strategy on a regular basis, and they would regularly update national Development strategy in the same way that the Department of Defense every year updates national Defense strategy.

Because I think we meant the terrible mistake that's actually connected to the mistake of losing the original vision of the regional banks, when we decided that development is something that's like a one off thing. You know, you're undeveloped and then you flip the switch and you're developed, And that's it. I think the development is forever. Development is continuous. Development is perpetual in the same way that technological development

is perpetual, right. I mean, we don't just sort of have no technology and then have technology and that's it. Technology is continually evolved in And it seems that national development, which is sort of short for shorthand for national technological development, should be perpetual too, And so we need some way of I think publicly and comprehensively considering and planning national

development strategy. And so what I call a f sock for continuous public investment or an f sock for continual national investment UM would be a good idea that would be a nice ancillary body to work in tandem with this newly spread FED as I'm calling it. We do that, I think we can really solve pretty much every major problem that we've had of a financial or economic nature

over the last fifty years. And if we do that, I think we'll solve a lot of our social and political problems too, because they're all rooting in the economic ones. That's Robert Hawcket of Cornell Law School. And that's it for this edition of The Bloomberg Law Show. I'm June Grosso. You're listening to Bloomberg