The World’s economy is best described as full of liquid assets ready to fire the furnaces of growth and prosperity but the coals inside are smoldering and refusing to flame. Apparently there is a need for paper fires, “helicopter money” as postulated by the late Nobel Laureate Economist Milton Friedman, to ignite some dry wood to start the furnace. President John F. Kennedy’s goal to be the first on the moon showered cash on start up companies dedicated to develop miniaturized solid state electronic chips to power the moon project’s need for computational power. Today’s Silicon Valley came not even as an afterthought, but nevertheless California has an economic furnace powering it forward in complete defiance of Conservative austerity orthodoxies. The moonshot is an example of funding a hare brained scheme with no foreseeable economic benefit that boosts to a level where the speculative juices of private investors is aroused sufficiently to take it to the next level. So what scheme and how to fund it?
One scheme comes to mind from the U.S. Northeast’s combined need to shore up against the inevitable rise in sea level and for a high speed corridor between Boston and Washington D.C. Build a spine for urban development suitable for the centuries to come. It’s a long view investment that takes the worst case assumptions of the rise in sea level and then secures an accessway along the inland ridge line described by such a study. The cost of a corridor project along this high ground is moderate as it avoids the dense urban areas along the low lying coast as well enhancing the performance of the future trains with straight runs. This corridor project will have cynics commenting that it starts from, goes through and ends nowhere but when hubs and spokes tie it to the old cities it becomes economic. The project’s advantages are that it draws population inland away from vulnerable coastal regions giving urban planners a long term framework using the corridor as a resource. The other advantage is to let planners abandon ideas of remediating dense urban obstacles in future flood zones. California’s high speed rail project is a similar idea already underway but which may stall out from the same future payback problem. So how to fund it?
The Federal Reserve Bank acting as the supra national bank that it is could start a paper fire or two if it had a little imagination. Its dual mandate of maximizing employment and stabilizing prices is one that it finds hard to even attempt to reconcile much less answer. Here is an idea, what if it bought the complete initial bond offering of projects it deems worthy as engines of economic development? What if it bought the offering at a negative yield? In other words initially fund the above example of a Northeast Corridor Authority’s land acquisition and development by paying interest to the Authority instead of the usual vice versa. Madness a Conservative would think but actually it may help in the stabilizing part of the Fed’s mandate as well. There is a concern that today’s extremely low interest rates distort investment activity so that there could be an ugly future reckoning. If the Fed were to fund a few of these negative rate projects then it could feel free to raise rates in general. And by holding a mixed portfolio of bonds yielding positive and negative rates prudently weighed to the positive. Yes, it’s a sketchy proposal, so go ahead and look for the holes in it and comment.
