Unsanitized: Why We Need a National Investment Authority

A public agency to channel capital, from bailouts to infrastructure. This is The COVID-19 Daily Report for May 3, 2020.

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The following is a guest version of Unsanitized from Saule Omarova, the Beth and Marc Goldberg Professor of Law at Cornell University, who has published extensively on the subject of financial regulation.

The coronavirus pandemic, which began as a health crisis, has now morphed into a full-blown economic crisis, with business closures and surging unemployment raising the grim shadow of this century’s Great Depression on our horizon.

To help America’s businesses stay afloat, Congress authorized the Treasury and the Federal Reserve to dispense trillions of dollars through various corporate and municipal lending programs. The implementation of this unprecedented rescue plan, however, is showing ominous signs of inefficiency and non-transparency, bringing back bad memories of past corporate bailouts. As the process unfolds, concerns are growing that the money will be diverted to the usual array of privileged special interests, like savvy hedge funds and wealthy real estate investors.

To prevent this from happening, we need a strong, hard-wired public oversight structure. Yet, ad hoc mechanisms—such as a special inspector general serving at the will of the White House or a temporary Congressional oversight commission lacking enforcement powers—cannot by themselves guarantee the necessary degree of transparency and public accountability in this process.

This is especially important as the growing threat of a severe post-pandemic depression increases the pressure on Congress to roll out potentially multiple additional rounds of fiscal stimulus. In that next phase of the crisis, we will have to start addressing deeper structural problems plaguing the nation’s economy: our eroding domestic industrial base, continuing fossil-fuel dependency, crumbling infrastructure, and crippling inequality, just to name a few.

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Federal action will be key to that effort. This is why we urgently need a permanent institutional mechanism for managing a sustained flow of stimulus funds in a transparent and democratically accountable manner—and for channeling public money into productive enterprise that serves the public’s long-term interests.

No such mechanism exists today. The Fed and the Treasury have instead routinely outsourced management of the federal government’s bailout-related assets to firms like BlackRock, the world’s largest private asset manager. This practice creates tremendous conflicts of interest.

So, why don’t we have a public-entity equivalent of BlackRock?

We can call that entity a National Investment Authority, or NIA.

The idea behind the proposal is simple. The NIA will serve as an integrated platform for coordinating the flow of public and private capital into industries, firms, and projects critical to preserving and enhancing the structural health and resilience of the U.S. economy.

During crises, that means mobilizing the country’s financial resources to keep the economy from collapsing. Working with the Treasury and the Fed, the NIA will coordinate emergency assistance to, and manage public stakes in, troubled companies. The NIA’s professional asset-management teams will allocate congressionally appropriated funds, negotiate the terms of assistance, and run the portfolio of public assets—while following clear guidelines and maximizing the public’s overall welfare, instead of hoping that private actors will operate in that interest.

For example, the NIA’s guidelines could explicitly mandate maximizing payroll retention and uninterrupted provision of social services to employees and communities as part of any emergency assistance package. For large corporations, they could also condition bailouts on specific changes to their dividend and stock buyback policies and executive compensation. The NIA’s policies and procedures could ban conflicts of interest, favoritism, and outside interference in the allocation process.

In theory, the Treasury or the Fed can operate in similar ways. In practice, however, it is difficult to ensure the necessary degree of uniformity, transparency, and integrity across multiple bespoke bailout facilities, managed by multiple public and private agents. Having a single entity with a well-defined mandate, in-house expertise, and a clear chain of accountability will enable far more effective execution and public oversight of corporate bailouts.

Once the crisis subsides, the NIA will pursue its forward-looking mission of strategically facilitating the flow of public and private capital into critical public infrastructure projects. The NIA will set up a series of investment funds (structured similarly to traditional private equity funds), in which private investors will be able to purchase passive equity stakes. The NIA management teams will then select and manage diversified portfolios of infrastructure assets. To reward private partners for their participation, the NIA will “synthesize” equity-like returns that vary depending on the estimates of local, regional, or national macroeconomic impacts of the individual funds’ projects. If, for example, experts calculate that a particular fund’s investments would generate an additional 3 percent in local or regional economic growth over a specified period of time, the NIA would translate that projected gain into a corresponding added return for the investors.

In this role, the NIA will act directly inside financial markets as a lender, guarantor, venture capitalist, and investment manager. It will combine modern financial engineering with the federal government’s unique scale advantages to boost supply of urgently needed public goods and services: clean energy, high-speed rail and broadband networks, affordable housing, tech startup incubators, and so on. This will create well-paying jobs, increase productivity, reduce inequality, and strengthen communities across America. Importantly, it will do so in partnership with private institutional investors—pension funds, insurance companies, university endowments, etc.—to whom it will offer an attractive opportunity to invest in “safe” assets with higher yields. In this model of public-private partnership, the public leads and private capital follows.

To prevent this partnership from being abused and corrupted by political incumbents and powerful private interests, it will be critical to subject the NIA to multiple layers of public oversight and accountability. Its organizational structure will need to guarantee sufficient insulation from political meddling; its process of portfolio selection will have to be conducted via transparent public auctions; its investment decisions will be regularly audited by the Government Accountability Office; and its leadership will regularly report to Congress on all of its activities. In addition, we should establish a Public Interest Council—a permanent version of today’s as hoc Congressional Oversight Commission—comprising academic experts and public interest advocates whose task will be to advise the NIA and evaluate its performance.

There is, of course, much more to say about the NIA’s design and operations. There are no quick and easy fixes to our country’s deep socio-economic problems, and implementing the NIA proposal would require a great deal of detailed planning and political will. For now, however, the key point is simple: We need an institution like the NIA to coordinate our collective response to the challenges we are facing as a nation, in crises and beyond. We need it today, to get emergency relief where it’s most needed. And we need it tomorrow, to lead us to a real economic recovery.

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