We have then need of a "mixed" price theory to fit our "mixed society." There will be an underlying price structure that will be market-determined, though the market in question will not necessarily be self-balancing, and on top of that there will be a layer of taxation set by legislatures rather than by the market. Of course the two factors do intermingle, with the taxation contributing to costs in the market-stratum. However, it would be an immense advance if economists opened their eyes to the fact that at least two elements exist in price determination – the structural one and the market one. With such recognition would come the realization that in an advanced industrial, urbanized society prices cannot remain flat, nor can one label any deviation from such impossible flatness as "inflation" to be suppressed with higher interest rates. The latter could only add to costs and scarcities, and in the long run push prices up still further.

But here another important factor enters the fray. Interest is the prime revenue of money-lenders. Obviously, it would be in their interest if prices did remain constant while the real value of their loans could only rise not fall, And if that bankrupted borrowers, because taxation and other costs did soar, that would make possible profitable foreclosures by lenders whose loans are in arrears.

We must then reach yet another conclusion – every rival price theory and indeed every economic model is likely to favour a particular social group. The Bank Act brought in under Roosevelt in the US in 1935 confined bankers strictly to banking, and provided two main policy tools for influencing the economy, One was the benchmark overnight interest rate that influenced rates of the entire financial market; the other were the statutory reserves – a percentage of the deposits that banks took in from the public that they had to redeposit with the central bank and that earned the banks no interest. The latter made it possible to stimulate or cool an economy by lowering or raising them.

However, raising interest rates hits everybody in the economy except the lenders whom it favours. It particularly punishes the unemployed who could hardly be contributing to "inflation." Adjusting the portion of the deposits that banks had to redeposit with the central bank, merely reduced the amount of lending and financing that could be done to rein in real inflation, without unleashing the deadly tool of higher interest rates to attain an impossible goal – a flat price structure in a constantly evolving economy.

How Banks’ Bailout Followed by Deregulation Transferred Power to Them

The fact that the statutory reserves were done away with entirely in Canada in 1991, and reduced to insignificance in the US, was motivated by the need to bail the banks out from their massive speculative losses in the 1980s. Three years earlier the Bank for International Settlements – a purely technical central bankers’ organization had declared the debt of the central governments of developed countries "risk-free." As a result of it, banks could acquire as much of such debt as they cared to without putting up money of their own. That policy indicated that those who promoted it were indecently close to the speculating bankers. Such suspicions were confirmed when the banks shortly after being bailed out were allowed the gamble bigger and better, acquiring interests in the other financial pillars -– stock markets, insurance and mortgages – and used their pools of liquid capital that they maintained for their own businesses to gamble bigger if not better.

But BIS and the central banks of the world in their rush to rescue the foundering banks overlooked a crucial detail. At the same time as it declared the debt of governments "risk-free" the BIS escalated its campaign to achieve "zero inflation" by raising interest rates higher than ever. But when interest rates go up the value of pre-existing bonds with lower coupons plummets. That threatened the solvency of the banks that had just been bailed out and led to the collapse of the Mexican banking system at the close of 1994 two or three years brought on major financial woes in East Asia and Russia.

It became clear that to continue the banks’ free-loading with government bonds, the age of punishingly high interest rates had to be closed. To achieve that, Clinton’s Secretary of the Treasury, Robert Rubin chose a cunning course. The huge government deficit had in large part simply reflected the wretched standard of government accountancy. They treated a building that they acquired, a bridge or a highway that might last a half century as a current expense and then carried their remaining value at a token dollar. Yet on the other side of their ledgers they carefully noted the outstanding debt that they had incurred to acquire such capital assets. A budget of that sort could never be balanced and the attempt to do so should never have been made. For such a n attempt loads the price level with undue taxation that drives prices and leads to perceived inflation. However, it was an article of faith of President Clinton that the political center must always be held, and for that he could not even admit that governments could make investments. Hence the additional $1.3 trillion of assets retrieved from the void by proper depreciation was presented not as investment, but as "savings" which it was not in fact since it was not carried as cash. However, all that explained to the bond-rating agencies, with a wink and a chuckle, produced the improved balance sheet and the desired lower interest rates. To keep the stock market boom going, it was judged necessary to privatize power-plants, highways, or other such capital items. Such privatizations burden the public with user fees for infrastructures that they have already paid for in taxes. That constitutes a serious transfer of wealth from one social group to another. When done in stealth, some harsh names can be applied to it.

All this provides some missing key background to an intriguing front-page story of The Wall Street Journal (6/12, "From Australia, Money Chases Roads, Airports Around the Globe" by Patrick Barta and Mary Kissel).

"Last year the City of Chicago was in a bind. It faced a $220 million budget deficit and its credit rating was under review for a possible downgrade. Voters feared a jump in property taxes.

"Then help came from a surprising place: Australia. Macquarie Bank, Australia’s biggest homegrown investment bank, organized a deal to take over Chicago’s historic Skyway toll road under a 99-year lease for $1.8 billion – hundreds of million dollars more than some Chicago officials thought it would fetch.

"Australia, once a marginal player beyond its own borders, is emerging as a major financial center. Australia can trace its new wealth to a 14-year economic boom underpinned by a 1992 law that required workers to set aside big chunks of their income for retirement. While Australian households, like those in the US, still spend more than they earn, the nation is amassing a huge investment war chest.

"The retirement pool, invested by private sector managers, tallies a staggering $550 billion, with $80 billion added each year. As a result, the assets under management in Australia is the fourth largest in the world – a particularly impressive feat considering that Australia’s population of 20 million is only slightly larger than that of Sri Lanka.

"Because Australia’s economy isn’t big enough to absorb the cash, investors here are specializing in a niche often overlooked by other investors: big-ticket infrastructure projects like roads, tunnels and airports. Governments typically finance such projects either by digging into their coffers or selling debt, such as municipal bonds in the US. Banks often help organize the financing but usually exit after raising the money.

"The Macquarie model is different. The bank buys or leases the assets outright, then pools them into funds and sells stock in the funds. The strategy brings together the capital amassed by Australia’s forced savings plan together with the infrastructure needs around the world. It enables governments to avoid borrowing to pay for their projects – an often unpalatable prospect. Macquarie manages the assets with the help of experts, collecting fees along the way."

Could Forced Pension Savings and the Central Bank be Used to Finance Infrastructure?

This rules out the use of central banks in the home country of the projects, which would save the citizens the interest costs – since borrowing by the government from their own central bank would involve the return of practically the whole interest paid on such bonds to the central government. In the case of provincial or municipal projects, the central bank – depending on the laws of the particular land would probably have to guarantee the loan if it were a municipal or provincial project. However, it would be in the national interest for the different levels of government to share the advantages of domestic near-interest-free financing rather than depending on a foreign bank in an arrangement based on future user fees.

"On a given day, Macquarie Bank has a dozen bankers roaming the US in search of deals. In San Diego, one of its funds is building a 12-mile-long toll road. Macquarie operates the tunnel that connects Detroit to Windsor, Ontario, and just bought, with other investors, Icon Parking Systems, one of the biggest parking-lot operators in New York City.

"Macquarie funds also hold stakes in the airports of Brussels, Copenhagen and Kilimanjaro, Tanzania. Macquarie funds own stakes in a major port in China, a Japanese turnpike and one of England’s biggest toll roads.

"Those deals are kicking up new interest in infrastructure around the globe. The US alone needs $1.6 trillion in spending in the next five years to replace and expand its aging roads, rail lines and other infrastructure, according to the American Society of Engineers.

"Taxpayers are sometimes skeptical. Big companies don’t always have a lot of experience managing infrastructure assets, and there is a risk they could fail to maintain them – or ensure safety – in the quest for profitability."

On the other hand if privatizing and profitable investment and capital gains are the dominant motive, putting distance and international legal barriers against revoking provisions that would threaten foreign investment may ensure additional security to the foreign investors rather than to the domestic users of the facility.

This is hinted at in the WSJ article: "Many economists endorse the trend, in part because they believe it will help speed up the development of infrastructure. There are also other some tactical advantages in having privatized infrastructures managed by foreign corporations that may be shielded against charges of inadequate maintenance and excessive toll increases by the irrevocability clauses in international treaties." Many also believe private sector owners will be less prone to keep tolls artificially low to placate voters – an outcome that would make infrastructure assets more responsive to market forces.

"The Macquarie model may expose investors to risks that aren’t yet fully understood. If global interest rates keep rising, for instance, this could make other investments more attractive and hurt returns for holders of Macquarie funds. At least two of Macquarie’s infrastructure buys have turned into busts, including an Australian power-generating facility that faced unexpected competition.

"For now, though, Macquarie is seeing strong growth. The investment bank reported earnings of $610 million in its fiscal year ended March 31 – a four-fold increase from five years ago.

"Until the early 1990s Australia didn’t have an economy-wide retirement program, just government-paid pensions for poor families, some employer pensions and tax breaks for personal savings. In 1992, the government p required all Australian workers to divert 5% of their wages into individual private accounts invested by private managers. Time the percentage was increased to 9%."

What is sorely lacking is an objective study of the net effect to the public of such privatization schemes – especially if foreign interests protected by globalization treaties are involved as compared with public ownership using the central bank for financing infrastrucure.

– from Economic Reform, January 2006