Thread by @AlexYablon

Hey, my @nytimes debut!

Amidst excruciating negotiations over "paying for" infrastructure and climate legislation that falls far short of what's needed, I look at proposals to cut the Gordian Knot by having the Fed backstop muni bonds for green projects nytimes.com/2021/07/16/opi…

@nytimes That sounds a bit wonky, so I'll explain: the federal government's ability to spend dollars is unconstrained: we guarantee our own debt with the Fed's money printer. But for political reasons we are all familiar with, centrist Democrats and the GOP refuse to acknowledge this fact

But markets know this is obvious. So they buy US government debt, ESPECIALLY in a downturn when tax revenues are falling, because they know that it's guaranteed. Who cares about tax receipts? Uncle Sam has a money printer.

States and cities don't have money printers. Their credit rating really does suffer when tax receipts fall. When Congress refused to bail them out for most of 2020, there was a chance the municipal bond market would demand soaring rates right when cities needed money most.

However, as part of the CARES Act, the Federal did something unprecedented: it created an emergency credit line for states and cities, the Municipal Liquidity Facility, or MLF.

Now, the MLF lent at pretty punitive rate, and only two borrowers actually used it (Illinois and the MTA, which have poor credit ratings), but it sent a message: states and cities will have cash if they absolutely need it. As a result, markets kept buying other local debt.

What does this have to do with climate and current Congressional negotiations? Right now Congress is watering down historically large but climatically inadequate green spending proposals out of a belief that expenditures must be paid for up-front with current taxes.

Meanwhile, politicians from states like New York have the political will to pass ambitious climate legislation — but not to fund it. nysfocus.com/2021/04/30/clc…

So we have a federal government that is fiscally unconstrained thanks to the Federal Reserve — but politically straitjacketed by Congress. Meanwhile, in cities and states where the politics increasingly favor climate action, financial conditions prevent doing what's necessary.

However, we know from the example of the MLF that the Federal Reserve can create much extremely favorable financing conditions for states and cities simply by extending them an emergency high interest credit line — and this is the wild part — WITHOUT doing much actual lending.

So the Fed essentially bailed out states and cities without themselves actually bailing out states and cities. Banking magic!

Why not do something similar to pay for a green transition? Have the central bank backstop the muni bond market at a DISCOUNTED rate so localities that want to do the necessary spending can raise money almost as cheaply as the federal government.

Much $ Congress may appropriate for infrastructure and climate will ultimately take the form of grants to local governments anyway. All this infrastructure is local. Power grids are run by states.

But centrists+GOP hate signing checks for "blue state bailouts."

Well, don't make them! W/ generous Fed backstop, state & local governments more democratically accountable than the Senate can raise HUGE amounts of money themselves.

These projects need not be public private partnerships — the debt could finance publicly-owned infrastructure.

And again, while the Fed might extend some loans itself, the big effect of a backstop will really be to induce private investors to offer municipal borrowers generous terms. This would reverse decades of brutal "market discipline" imposed since the 1975 NYC fiscal crisis.

The plans I discuss are, of course, workarounds for Congressional stalemate. Does that make them middling compromises?

I don't think so. In the absence of a federal GND, a muni bond backstop could let 1000 local GNDs bloom.

And just like the original Federal New Deal emerged after New York tried its own relief programs, so too these Fed-backed local efforts could actually build toward a comprehensive national plan.