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Frank A. Weil


A Prudent Method to Rebuild America

Posted: 08/01/11 04:00 PM ET

As the nation begins to emerge from what has been called a disastrous period of reckless endangerment, we are entering a new period in which reckless disengagement, as it relates to the crumbling infrastructure of our bridges, roads, and tunnels, may emerge as an even greater threat. At the same time, the burden of too much debt and staggering deficits raises the specter of a Grecian-style collapse with unthinkable consequences for government and its citizens alike. Together, these twin challenges portend a fate far worse than the seemingly endless malaise of the most recent bursting of an artificially maintained bubble. But that presents an almost impossible conundrum: too few resources and too much need. There may, however, be seeds of hope that can be mined from the causes of the mess we now confront.

One of the principal causes of the economic disaster of the last few years was an excessive use of cheap money to fuel a vast over-expansion of housing for millions of Americans. Under cover of the worthy social goal of extending home ownership to all Americans, that money was generated and deployed by an ingenious, but as it turns out, blind, greedy and occasionally corrupt financial system built on a longstanding and dependable public-private invention called Fannie Mae.

Fannie Mae was created by Congress some 70 years ago originally as a government agency and then in 1970 converted into a "Government Sponsored Entity" (GSE), to enable more Americans to buy their own homes. Like many inventions of government, it began as a sleepy intermediary designed to both lower the cost of borrowing and increase availability by clothing Fannie Mae with the strongest credit standing in the world, namely that of the US government. Guess what? It worked -- incredibly well, in fact -- until it developed a liquidity problem from which it recovered brilliantly and then fell into financially inexperienced hands of political managers in the early 1990's, who manipulated its mission beyond anything its founders and designers had ever intended.

Fannie Mae and its offspring, including the copy cats that emerged in its wake, lowered lending standards to the point of reckless endangerment -- homes could be had with virtually no money down, no documented ability of the buyers to pay, and with interest-only mortgages that disguised, and ultimately ignored, the true cost of ownership. Coupled with greed-driven goals to deliver more and more such obvious risks into the secondary mortgage market, this "foolish money" policy brought the bubble of the first decade of the new millennium to its horrifying conclusion.

But Fannie Mae didn't start out as a disaster waiting to happen, and the things that made it great for decades offer something of a roadmap to navigating current challenges. Vast sums of private sector money were generated toward an acknowledged public good by the implicit imprimatur of the United States, and the perception of lower risk served to lower costs. Money flowed as intended into housing without utilizing the government balance sheet at all. (That is, until the system was badly abused and the bubble inevitably burst.) But, if proper and adequate safeguards had been maintained, the problems that collapsed the "house" (literally) of cards could/would never have happened and the U.S. Treasury should/would never have had to bail out Fannie Mae and its offspring, and various ancillary victims deemed "too big to fail."

Let's be clear: there can be no illusions that the history of Fannie Mae might be enough to keep political cats from getting onto a hot stove ever again. Nevertheless we should have learned from recent experience to be grownups enough to be able to manage better than cats how to deal with hot stoves. After all, as today's challenges illuminate, we do still have to keep cooking!

Today, we face an unmet need as large -- and perhaps much more dangerous -- as that of the housing market in the mid-20th century: the collapsing infrastructure of our nation's physical capital. It will require trillions of dollars over time to restore this infrastructure to a reasonable condition. Simultaneously, we are, as a nation, are struggling with solvency. There is simply no way government can, on its own, produce the money to fund those infrastructure needs. And we desperately need to create jobs to get millions of people back to work -- but again, without actually spending government money.

We also have the excellent precedent in the collaboration between the public and private sectors that Fannie Mae once epitomized. Utilizing the best of that precedent, and protecting against the worst, is where the seeds of a solution lie to address today's horrible conundrum.
The idea is really is quite simple in concept, though implementation will be in practice -- both politically and operationally -- neither simple nor easy.

To begin, Congress will need to create a new GSE entity modeled after the now infamous Fannie Mae. An InfraStructure Funding Corporation (ISFC) would have the power to borrow in private financial markets with a Federal mandate that would enable it to purchase obligations of and backed by various public and private "owners" of the tens of thousands of infrastructure projects that need to be built and rebuilt across the whole country. In theory, those "owners" could continue to go case by case directly to financial markets as they do today but as a practical matter that would be highly inefficient as well as extremely difficult and unlikely to succeed.

All those "owners" would have to be judged to be qualified to (1) properly manage and utilize the borrowed funds and (2) generate enough money from fees and tolls to pay all the interest and amortization repayment costs of the funds borrowed from the ISFC.

Many of those "owners" today are public entities that have no specific responsibility or even authority for infrastructure restoration and maintenance. Those entities, to become qualified borrowers from the ISFC, would have to face up to their need to generate income locally in some fashion.

That will require some adaptation by many communities to the reality that if they want a modern infrastructure they will have to pay for it one way or another. That fact will bring to bear an appropriate use of market forces which should cause communities to be carefully selective and not blindly go overboard. Technologies exist that make it possible relatively easily and inexpensively to cause users to pay for what they use. For example in central London today drivers either pay for a permit to allow them in or their license number is read by cameras and they are automatically charged if they enter prohibited areas. Communities will have to figure out how much they need to add to local taxes and/or how much to charge on a use type basis.

That may very well lead them to create various kinds of collaborative governance structures between public and private entities to create and maintain a balance between competing forces: on the one hand, a desire for continued free public services and, on the other, the reality that there is no such thing as "free parking" when your car is on a bridge that is beginning to crumble.

If all the moving parts in such a system are maintained in a proper way (granted, a very big IF, but isn't that always the case?), billions, even trillions of dollars could be deployed over several decades to rebuild America, generating hundreds of thousands of jobs, and utilizing virtually no government funding. At the same time, we can reasonably hope that the balance of our national fiscal structure will work its way back to normality and millions of new jobs will have been created to fix and maintain the physical capital of America.

Happy days can again lie in our future after all!