COVER STORY Labor proposes expanded role for infrastructure fund
by Patrick J. Byrne
News Weekly, October 24, 2015
ALP Opposition Leader Bill Shorten has announced a major infrastructure investment plan to stimulate economic growth by converting Infrastructure Australia into an infrastructure development bank.
The Old Lady of Threadneedle Street,
as the Bank of England is known,
has been putting forward some
fresh ideas for getting Western
economies going again in the
wake of the global financial crisis.
Mr Shorten’s $10 billion plan would be financed with seed funding and direct public funding. It would operate on a commercial basis, providing either loan guarantees or loans, and in some cases would take equity stakes in privately led projects. (The Sydney Morning Herald, October 8, 2015.)
While the idea of a development bank has been off the free-market economic agenda for years, Mr Shorten’s announcement comes on the tail of a similar announcement by the newly elected British Labour Leader, Jeremy Corbyn.
Mr Corbyn has proposed giving the Bank of England a new mandate to upgrade the economy to invest in new large-scale housing, energy, transport and digital projects.
He says that the investments would be made through a national investment bank set up to invest in new infrastructure and in the hi-tech innovative industries of the future. 
Earlier this year, former prime minister Tony Abbott announced that Australia would support China’s new Asian Infrastructure Development Bank, prompting the question: if Australia can support China’s new development bank, why can’t Australia have one also?
Direct injection of funds
into the economy
Mr Shorten’s announcement also comes as Macquarie Bank, Australia’s largest investment bank, predicts that Australia and other Western nations will shift from relying on the expansion of bank credit to stimulate their economies, to the direct injections of funds into their economies.
Reliance on banks creating credit at low interest rates alone is losing its effectiveness in stimulating economic growth in the post-global financial crisis (GFC) world.
Online finance site ZeroHedge reported on Macquarie’s prediction, saying: “Predictions are that we will soon be seeing the ‘nuclear option’ – central bank-created money injected directly into the real economy. All other options having failed, governments will be reduced to issuing money outright to cover budget deficits.” 
The “nuclear option” is known variously as “fiscal stimulus”, “overt monetary financing” and “helicopter money”, because it is dropped directly into the economy, where it has an immediate effect. It’s like a direct injection into the blood stream.
Willem Buiter, chief global economist at Citigroup, is also recommending “helicopter money drops” to avoid an imminent global recession. He says: “A global recession starting in 2016 led by China is now our Global Economics team’s main scenario. Uncertainty remains, but the likelihood of a timely and effective policy response seems to be diminishing.
“Helicopter money drops in China, the euro area, the UK, and the U.S., and debt restructuring … can mitigate and, if implemented immediately, prevent a recession during the next two years without raising the risk of a deeper and longer recession later.”
An ideal way to inject this money directly into the economy is though infrastructure investment, which multiplies the investment throughout the economy.
Professor Lawrence H. “Larry” Summers, US economist and former president of Harvard University, has also proposed major infrastructure spending by governments.  He said that, if ever there was a time for the U.S. Government to clean up Kennedy airport by borrowing money for 30 years, at close to 2 per cent, in a currency the government printed itself, it was now.
Further, he says: “The share of public investment in GDP, adjusting for depreciation, so that’s net share, is zero. Zero.
“We’re not net investing at all [in the U.S.], nor is Western Europe. Can that possibly make sense, given the demand issues, given the productivity of public investment, and given that if we have a moral concern about my children’s generation, deferring maintenance is just as surely passing the burden onto them as issuing debt.
“The burden of deferred maintenance compounds at a rate much greater than zero in real terms.”
Summers goes further, saying that research published by the International Monetary Fund (IMF) in its “flagship publication” reveals that this infrastructure investment will not only expand economic growth but rapidly reduce government debt. Summers says the IMF asked the question, if the industrialised countries “spend 1 per cent of GDP more on infrastructure, what would the consequence be for their debt-to-GDP ratio after five years? This is their estimate, not mine.
“They say that it would be 6 per cent of GDP lower. Why? Because increased economic growth means increased cash revenues. Increased growth in the short run means increased potential in the long run.”
A development bank directly mobilises domestic businesses and creates employment, then lifts private-sector output and productivity. For example, bottlenecks for commodity exports are reportedly costing the nation billions in lost export earnings. Targeted investment in new infrastructure to overcome bottlenecks would do wonders for many commodity exports.
And Australia’s Federal Government doesn’t have to go further into debt in order to finance a development bank because there is a better way to finance such a bank.
First, a new infrastructure development bank could fund the building of infrastructure, then sell the finished projects to the superannuation funds to manage. If the government builds, then the super funds will buy. They are hungry for long-term investments, but are reluctant to take on the responsibilities of construction.
Second, instead of raising funds in the financial markets, that is, issuing bonds at commercial rates, the infrastructure bank could operate by creating money in the same manner as commercial banks, as has been described in great detail by the Bank of England (BoE), the world’s oldest reserve bank.
The BoE has issued three papers  in the past two years explaining that banks themselves create credit when they issue loans, and this money is expunged as loans are repaid. In the last resort, their lending is backed by the central bank.
The BoE says it deliberately wrote these papers to dispel the myth that banks rely on multiplying up customers’ deposits in order to create credit.
In the paper, “Banks are not intermediaries of loanable funds — and why this matters” (Bank of England Working paper No. 529, 2015, page i), the BoE describes the model by which money is created: “In the intermediation of loanable funds model [ILF model] of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation [FMC model]. That is, they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations.”
In the paper, “Money creation in the modern economy” (Bank of England, 2014, page 15), the BoE says that of all the money in circulation, 97 per cent is made up of bank deposits and “in the modern economy, those bank deposits are mostly created by commercial banks themselves”.
The BoE’s basic explanation of credit creation by modern banks is important, because it means that an Australian development bank could create its own funds for infrastructure development. It does not have to rely on borrowing at commercial rates from the financial markets.
In fact, the Federal Government could save the $50 billion it planned to spend on infrastructure and cut its deficit by $50 billion, by having the development bank take over the funding of infrastructure.
And if the IMF and Larry Summers are correct, in five years’ time the investment will greatly lower government debt as tax revenues increase.
Patrick J. Byrne is national vice-president of the National Civic Council.
 Ellen Brown, “Time for ‘quantitative easing for people instead of banks’ (PQE): Raining money on Main Street”, Global Research, September 23, 2015.
 Larry Summers, “Reflections on secular stagnation”. Speech to the Julius-Rabinowitz Center, Princeton University, February 19, 2015.
See also, Larry Summers, “Rethinking secular stagnation after seventeen months,” IMF Rethinking Macro III Conference, April 16, 2015.
 Zoltan Jakab and Michael Kumhof, “Banks are not intermediaries of loanable funds — and why this matters”, Bank of England Working Paper No. 529, May 2015.
Michael McLeay, Amar Radia and Ryland Thomas, “Money in the modern economy: an introduction”, Bank of England Quarterly Bulletin: Q1, Vol. 54, No. 1 (2014), pages 4–13.
Michael McLeay, Amar Radia and Ryland Thomas, “Money creation in the modern economy”, Bank of England Quarterly Bulletin: Q1, Vol. 54, No. 1 (2014), pages 14–27.