How a Green Economy Is an Antidote to Casino Capitalism

By Robert Pollin, New Labor Forum. Posted April 2, 2009.

As of 2007, total borrowing by U.S. households and businesses was approximately $2 trillion. This means that, if 5 percent of total borrowing were designated for green investments, that would amount to $100 billion a year -- an amount covering about two-thirds of the $150 billion annual green investment program.

• Loan guarantees. The purpose of offering loan guarantees would be to significantly lower the risks of borrowing for green investment projects. This would then also significantly lower the interest rates that borrowers would have to pay when they seek funds to finance green investments. The U.S. government is already committed to offering $10 billion in loan guarantees for clean energy investments. Let’s assume that the full $100 billion of green investment loans stipulated by the asset reserve requirements also operated under the loan guarantee system.

Let’s now also allow that the level of government guarantee is 75 percent of the total principal on these loans. Note, crucially, that under such an arrangement, private lenders would still face significant risk -- i.e., on 25 percent of the credit they had extended -- and would therefore have to evaluate investment proposals based on their potential for profitability.

How much would this loan guarantee program cost the government? As with any other insurance policy, the government’s costs would be zero as long as borrowers do not default on their guaranteed loans. But of course some borrowers will default; the key question is how many. If we assume a default rate of 4 percent -- roughly equal to the rate of the government’s existing loan guarantee programs -- the total payouts that the government would have to make would amount to about $3 billion per year. This is less than 1 percent of total federal spending.

How it Hangs Together

Overall, we can roughly envision the financial requirements for the epoch-making project before us, of building a clean energy economy, and generating millions of good jobs in the process. Thinking of this as an annual investment project of about $150 billion, a feasible financing breakdown would be about $50 billion coming out of public funds, and the other $100 billion coming from private investments. The $100 billion in heavily regulated and subsidized private lending would also represent one important step toward transforming our financial system -- to raise the level of support for productive investment in the U.S., and to move Wall Street away from the casino logic that has been dominant for a generation. By itself, a subsidized and regulated private green investment segment of the U.S. financial market, operating at a level of about $100 billion per year, will represent only a modest step toward stabilizing the overall $2 trillion U.S. credit market, to say nothing of the additional sectors of the financial markets engaged in trading stocks, bonds, and derivative instruments.

Nevertheless, establishing a well-functioning green investment sector can serve as both a reminder and an example: it will remind us of the positive investment opportunities being lost by allowing financial markets to operate without significant regulations; and as an example of the broader approach needed to restore the principle that the capital development of the U.S. economy can no longer be guided by the logic of the casino.

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