by Don Washington on 2012/04/23
There are a lot of reasons why this Infrastructure Bank is a terrible idea. Earlier posts have walked you through the straightforward boring ones. That it violates the Tutorial's five rules of good public policy. The fact that it finances commitments that we already don’t have the tax base to fund, meaning we already don't have enough money to properly maintain the crumbling infrastructure the Mayor is using as an excuse to build more infrastructure that will be around to crumble while he takes on more debt to the worst kinds of lenders... his friends. That it was created to be free of both oversight and accountability and that the entities involved are as trustworthy as a shark with a bleeding swimmer. But now it’s time to get wonky and talk about financialization so that you will understand what public-private partnerships are really all about.
Try not to pass out as at the sound of the word! I promise it will be over soon and we did a lot of reading to make it easy to digest. In that we read somewhere north of twenty papers like this and we talked to nine high-powered academics who were really funny. So you're getting the cliffnotes and they are not that bad. This Infrastructure Bank is an extremely localized manifestation of financialization. Do not fall asleep! All it means is that the FIRE sector of the economy becomes more important than the productive part of the economy… say infrastructure creation. The financing then is the reason for building the project, the project is not as important as creating the new financial product. Once that happens a lot of things formerly not possible become… well very possible. Here are some sobering thoughts to wander around with when you think about what this radical new financial product Mayor Rahm Emanuel has cooked up for us to field test.
Financialization has in the past quickly metastasized into a number of legalized Ponzi schemes. A Ponzi scheme has to keep expanding in order function. Financing is the essential ingredient, in creation of a financial bubble like that used to “commodify” real estate or internet companies… sound familiar because it should. The point here is that the Mayor and his friends may be about to start up a financial bubble in the buying and selling of public infrastructure financing to investors of all sorts. I say this because we for certain have no idea how these deals will be structured and we already know that they are doing everything in their power to prevent us from knowing anything about what they are doing or to hold them accountable for any malign activities they undertake in the name of profit.
So now you have to pay a little attention. Corporations love debt financing because the tax code lets them make more money from interest payments as opposed to actual profits and this encourages them to create more leverage, which could raise their rates of return on their capital. In English, we borrow money from them and they make it easy for us to borrow even more money from them, which puts us in more debt to them. If that happens and the stars align just right for them they can use that to increase the return on the money we owe them. It could become like a massive student loan if everything goes right for them and the tax code incentivizes them to try and create this very situation.
I hope you’ve gotten your mind wrapped firmly around the fact that all this is nothing more than a new financial product. This new product, like the last new ones that played spoons on our economy in 2008, is wrapped in secrecy and complexity and all the corporate partners present except two, were directly involved in that massive bailout we all just funded. That said you now also know that the partners have every incentive to make as lucrative as possible for them you are ready for the advanced placement part of the test. You see the real deal is that this entity has very little incentive to look out for say the welfare of the city. So here’s where things get downright five-alarm fire interesting.
The primary motivator for taking on a project for the Mayor’s five appointees and the five initial corporate entities at the table is to find profitable ventures for them to finance. By training and inclination everyone in that room will be all about finance, meaning they’ve made a fortune by moving money around in ways that drive up stock values not looking out for the common public good. They may not even know what all those words; common public good, strung together mean. So we can count on two things. One, it will not occur to anyone in that room how to fund, which means create a tax base capable of maintaining, whatever new infrastructure they come up with via their financing scheme.
Two, any of number of dubious public-private projects are going to come out of this partnership that will serve no public purpose at all. It is only going to be a matter of scale, time and frequency as to when such things will happen. Corruption of such partnerships is rampant where they are already in vogue abroad and there is no reason to believe it will be all that different here if we don’t have adequate safeguards. You see in Third World countries there is little regulation so the Market takes care of things just like it will here. The deal is simple, our corporate partners will not be able to help themselves if they are not carefully watched. They will cheat to enrich themselves as much as they possibly can just like they did when last left unattended with the economy. Now it just be Chicago and not the whole country. This of course, opens to door to real abuse since as the legislation is presently written, no one will actually know what the hell they’ll be doing.
Sadly, all the above brings the final pieces of what we face into scary focus. If we’ve learned anything about what happens when a large financial entity engages in terribly destructive behavior it’s that they are not going to be punished for it if they control the political process. They, the five financial corporate entities Mayor Emanuel has asked to the table, are driving/creating this process. They will be staffing this process and they are partners with the body that is supposed to be looking out for the public’s interests, that will be drawn from the ranks of people they know and trust. In a set up like this, what we can expect, if things go wrong is that we, the debtor are going to pay the creditor back no matter what happens or who is at fault. Our lenders are either going to squeeze the city to generate their expected profit and return or they are going to demand that the City of Chicago make them whole. After all, their partner, Mayor Rahm Emanuel, is not going to be on the side of the citizens because that's not where he started if he's even Mayor when things go sideways. Maybe he will have used this Chicago Miracle to become Senator or something by then?
If and when that happens, the final indignity will fall on good people of our city. We will re-discover that democracy costs organized money and that not only does Rahm have a lot of it he is in the service of it. We will all realize that the very people lending us the money, responsible for catastrophe and/or manipulating events to jack up their profits in a way that deprives kids of schools, will be the very same people who will be sitting on this board to hold themselves accountable. Then we’ll remember that they are also Rahm’s campaign investors. The entire arrangement, already fraught with conflicts of interest and control, will become a comic opera of almost infinite proportions. None of us, of course will be laughing but you can bet there will be all manner of high-fiving and cavorting going on over at the CME and Board of Trade and City Hall's 5th Floor. Bank on it... pun intended.
The bottom of all bottom lines here is that we are getting a loan from five of the least compassionate, trustworthy or ethical financial entities on the face of the earth and it ain’t no little loan. Credit must be repaid. If any of these lenders need more money or some other fancy scheme they’ve got cooking goes south it could take us with them. If something happens and we have to dig into our pockets to pay them back pensions, schools, roads, public transit, something is going to get cut right down through the bone to get their money back to them and it will be called shared sacrifice when it leaves the public sector weaker and them, the banker-financier-funders stronger. And truth be told, such a thing would be a disaster for Chicago but could very well be in the best, long-term interests of every neo-liberal economic soul at that table including Mayor Rahm Emanuel.