View from the Top
Felix Rohatyn of FGR Associates on the final days at Lehman
"Speech: ‘Rebuilding the Economy by Rebuilding America’
By Felix Rohatyn
Published: April 1 2009 17:30 | Last updated: April 1 2009 17:30
The following is a speech given by Felix Rohatyn, president of FGR Associates and former US ambassador to France, to the Economic Club of Chicago on March 24, 2009.
It is good to be back at the Economic Club of Chicago and to see so many friends. It is always a privilege to speak here and I am grateful to be your guest.
We meet today at a time of grave concern about the global economy and our position in it. As Roosevelt did almost eighty years ago, we are searching for a strategy for reviving America and allowing us to lead. I believe that a central component of that strategy must be significant new investment in our public infrastructure.
I have argued for greater attention to infrastructure for many years. President Obama’s stimulus program now includes infrastructure, and his budget for next year proposes a federal infrastructure bank to fund projects of regional and national significance – an idea that holds great promise for smarter, more effective federal spending.
I hope that these early initiatives, as important as they are in themselves, will lead to the massive level of infrastructure investment that we need in order to secure our future quality of life, increase economic productivity and create millions of jobs.
As of now, we must end the sterile debate over “big” or “small” government that has stopped us from making the investments we need to prosper. For almost three decades, we have been seized by a caricature of government as fundamentally inept and wrong-headed. But as we have seen in recent events, this makes for a better speech than a rule for governing. Governor Mario Cuomo once said to me: “We should have all the government that we need but only the government that we need.” He was right.
I am a capitalist but I do worry that capitalists may, through short-sightedness, greed, and/or vanity, bring our system into jeopardy. We need to move past the simplistic notion that we all will prosper if government would only “get out of the way.”
My experience in both government and business has taught me that sometimes, particularly in times such as these, government clears the way. Throughout American history, government investment has served as a platform for economic growth and a more affluent and inclusive society. From the Louisiana Purchase and the Erie Canal, through the creation of the Land Grant colleges, to the Interstate Highways and the G. I. Bill, government investment was pivotal.
These important episodes offer us important lessons. One is that none of them was born of consensus. In retrospect, we regard the Louisiana Purchase and the Erie Canal as “no-brainers.” But in their day, many people thought those projects were wasteful budget-busters –they could not see how valuable these investments would be. And I worry that today our budget rules don’t distinguish adequately between investment and consumption, leaving us with too little of the former, and too much of the latter.
Moreover, the opposition to these investments was often self-interested and privileged. The elite private universities saw no need for the Land Grant Colleges. Private utilities were appalled by the idea of TVA. And there were simply political elites who feared that the sweeping change investments bring would undermine their own power.
A third lesson of these episodes is that few of them ever work out perfectly. The railroad barons rode the Transcontinental Railroad to great and undeserved wealth. Speculators found room to maneuver within the Homestead Act. There were often great abuses of good programs. But the fact that these programs weren’t perfect doesn’t mean they weren’t worthwhile. The prospect of problems should focus us, but not immobilise us.
I mention these events because I hope that President Obama’s recent stimulus will be the beginning of a rebalancing of investment and consumption in our economy, and a long-term reappraisal of what our government does and why.
In fact, infrastructure is only one of a number of pressing, national investment needs.
Too many children go to school in dilapidated facilities. Too many suffer from illnesses because we underinvest in public health. We must make the transition to a domestically-based, carbon-free economy. We need to complete a broadband, Internet network. These are the investments that will define our future, as surely as the Land Grant Colleges or the Panama Canal did in their day.
The stimulus package passed by the Congress was not perfect. But I am dismayed when I hear it derided as wasteful public spending, or that infrastructure spending is unwarranted because some of it would take a year to get underway.
There is clearly a need for stimulus – we need to create employment. But we need to balance the short- and long-terms more artfully. We may need another stimulus in very short order.
This is another lesson reinforced by the current crisis – the recognition that we need to invest federal dollars consistently and rationally.
Again it’s not just infrastructure. We may soon invest in salvaging the auto industry; I think we should. But that investment will be wasted if we do not implement an energy tax program that will make the investments in new automobile technology worthwhile.
Our global competitors are investing in their own futures. If China’s investments in education match its massive investments in infrastructure, China will become even more competitive. The Chinese already have plans to construct 300,000 km of rural roads and nearly 100 new airports. In fact, a recent article in the New York Times noted that China is using the need for domestic fiscal stimulus as a platform for making new, public investments that will make them a better competitor.
For many years, I have looked for a different approach to the way we finance infrastructure. Our current programs are good at spending money, but not at getting something in return. They subsidise construction but spend too little on maintenance. They skirt the issue of what users are obliged to pay. And they do not make different types of investments compete for scarce taxpayer dollars.
Americans are willing to pay for infrastructure if they get value for their money. Recent polling results show that 94 percent of Americans are concerned about our infrastructure and four out of five are willing to pay more for it.
For example, Mayor Bloomberg’s proposal to charge mid-town drivers a congestion fee was killed with demagoguery. But the issue will soon be how to impose such charges, not whether to do so. You can’t build your way out of urban gridlock or airspace congestion. We will have to use pricing to ration and smooth out demands, just as we do now for electricity.
A further reality our programs overlook is that private money is now in the infrastructure funding business to stay. Our challenge is to figure out the best way to use it.
Private money should be guided towards more productive purposes – such as the construction of new facilities, as opposed to the refinancing of old ones.
When we add it all up, these new realities require a new system for appraising, selecting, and funding our public works.
Two years ago, a bipartisan Commission chaired by Senator Warren Rudman and myself unanimously recommended creating a National Infrastructure Bank. All the infrastructure funding programs would be folded into the Bank, and any major federal investment in an individual project would have to be approved by the Bank’s evaluators.
The Bank would be able to negotiate with the individual state or local sponsors of a project. Alternatively, it could help groups of states come together for projects with national implications, such as the upgrading of the national rail freight nexus in Chicago or high-speed inter-city rail that saves energy and frees up airspace while addressing security concerns, or many others.
It would also create an avenue for private investors to put risk capital into new projects and protect their involvement through the Bank’s own participation. In short, it would treat Infrastructure like an investment, and not just a jobs program.
The Bank would be capitalised by giving it the amounts that now go into the existing programs, about $60-70bn per annum. But the Bank would be free to support projects in any number of ways, as would a private sector bank in a competitive environment.
The American Society of Civil Engineers estimates it will take $2,200bn dollars to bring our infrastructure to an acceptable level within five years. This is a staggering sum, and it speaks to the negligence of which we have been guilty. The $120bn allocated in the stimulus is only a small part of a solution. However, the Bank could make significant strides towards filling these needs by issuing its own long term bonds and, with conservative leverage, could raise several hundred billion dollars initially, and become self-financing over time. Thus, the Bank could become a strong partner with domestic and foreign sources of capital to finance our infrastructure investments. The goal of $500bn of new investment over the next five years would be readily achievable if we refocused federal programs and added outside sources.
This would require a sweeping reorganisation of the way we invest in our country, and at this time may seem like a far-fetched proposal. But the problems we face are so important and our tools so outdated that only a full reorganisation will do.
I know that consideration of infrastructure financing must be weighed in the context and climate of the economic issues we face, here at home and all over the world: energy security; the prospect of global climate change; the need to reform our health care system; security against terror and the proliferation of weapons of mass destruction, to name but a few.
It is a disconcerting list, and fixing these problems will not be easy. But we are now talking about these problems realistically. I do not know if President Obama will succeed in his arduous agenda. But at least we now have an agenda, and that is the first step.
Within this framework, one of the most important issues is the necessity for the western democracies to forge even stronger ties aimed at global growth and stability. The difficulties in the organisation of the recent G20 Summit have not been encouraging on that score.
The last years of the 20th Century were years of astounding wealth creation. The markets demanded cheap money and the Fed gave it to them. Reckless speculation and excessive leverage were aided and abetted by regulators blind to what was happening. With the repeal of the Glass-Steagall Act in 1999, our leading financial firms were given the license to become too big to fail and they, in turn, became too big to be managed. New financial creations, hedge funds and private equity, invented by bankers and traders all over the world, were searching for higher and higher returns. The markets then turned into casinos and the Bernie Madoffs and Allen Stanfords became heroes to those they would destroy. Close behind came the global financial crisis. And then the music stopped.
It is futile to search for one responsible party; everyone who matters was guilty. The question now before us is how we might meet the challenge of this remarkable moment and rebuild our country.
We have so far not found a secure formula to reverse these developments. The United States has taken the lead in urging strong stimulus by the developed countries, which is beginning to create a split between the positions of the US and the UK on the one hand, and the rest of the world on the other.
I believe the Europeans are wrong about stimulus, but they have ample reason to distrust American views. During the last two years an increasing level of controversy has surrounded our capital markets and, in particular, executive compensation, which gives rise to a general critique of American capitalism in today’s world.
During my four years as United States Ambassador to France, I spent considerable time and effort singing the praises of American market capitalism. It was met generally by European skepticism of its dangers and of its harshness. America’s capitalism over the decades has had enormous successes, but we must now show that our system is fair and that we are prepared to manage it pragmatically if we are to continue being the leaders of the world.
When the Prime Minister of China, our biggest creditor, publicly raises questions as to the security of Chinese assets in the US, it is time to give some serious thought to this issue. The recent controversies involving some of our biggest investment firms, banks and insurance companies require that the United States react with high standards – that we stand for the creation of wealth within a framework of fairness.
I know from my own experience that crises can lead to the kinds of reforms that build confidence and stability. My own involvement with a major financial crisis was the crisis of New York City in 1975. That crisis had been brought about by excessive lending by our banks and reckless spending by the City.
We succeeded in rescuing the City in the face of opposition created by President Ford’s Administration. It was not until President Giscard d’Estaing of France and Chancellor Helmut Schmidt of Germany warned President Ford of the danger of a bankruptcy of New York, that we were able to negotiate a modest federal loan to the City. But this averted the catastrophe of a bankruptcy that would have seriously wounded both the City as well as the State of New York. It was an early symptom of global financial integration.
We succeeded in rescuing the City and used our momentum to put New York’s fiscal house in order, thanks in large part to my friend and leader, Governor Hugh Carey. But the crisis New York City faced was less dangerous than today’s global crisis. In 1975, the banks were the rescuers – today they are the rescued. Many have been as short-sighted as New York itself was more than 30 years ago.
We’re now learning the cost of inadequate regulation and oversight . We will inherit partial ownership of a number of financial institutions and, if we do not stabilise the economy, we may have to nationalise several big banks temporarily – a circumstance fraught with danger. This was recently predicted by former Fed Chairman Alan Greenspan, a fervent supporter of deregulation. It may be that our government will turn out to be the only credible and large enough entity to provide financial shelter to some of our large financial institutions.
Market capitalism is a sophisticated system that requires adherence to sophisticated rules; we are now witnessing what happens when these rules are ignored. The financial system must be regulated with an eye to system risk. Institutions must maintain adequate capital and submit to greater transparency and strict boundaries on the kinds of businesses they enter. We cannot count on the conservativism or common sense of the system or its managers for its long-term stability. America must be a trustworthy partner in economic policy, and must keep its own house in order. These are the rules. After we come out of this crisis, we must remember how it happened, and make sure they are never broken again. This may be easier said than done, but the world depends on our doing it."
Posts
