The Giant Pool of Money

This American Life did a great job explaining the mortgage crisis this week in an hourlong essay by Alex Bloomberg. The short version is that the "giant pool of money," all of the savings in the world, close to $70 trillion dollars in central banks and global pension funds and the like, needed to be invested in something that yielded a decent return. And investors and managers decided that US mortgages were that stable and lucrative investment. So financial institutions bundled them up into mortgage-backed securities and sold them. And sold them. And sold them some more. To the extent that more people had to be put into mortgages to satisfy the demand. And so more and more unusual mortgage products were created and sold, and people with no income were suddenly buying houses, and the system was all grand until the loans reset, and the pyramid came crashing down.

That's the short version. But it's well worth your time to listen to the full hour for some more details.

The thing is that once we fix the mortgage crisis and restrict mortgages to those who might be able to pay for them, and curb predatory lending and basically restore balance and order to the system, there's still going to be a giant pool of money that demands investment. Where will it go? Andy Stern (head of the SEIU) and Kathleen Sebelius (Governor of Kansas) have an idea for some of it - it can be spent on an investment in America's infrastructure. But not as a commodity to be bought and sold like a mortgage-backed security. No, this would be the opposite of a privatization scheme - public pension funds could be used to provide a long-term source of capital that would be repaid at a reasonable surplus.

Public pension funds, which are responsible for the retirement benefits of more than 18 million Americans, have more than $3 trillion in assets, and a long-term investment approach consistent with the stable returns that infrastructure assets generate.

Pension funds could buy and build infrastructure, putting the profits to work for the retirement of workers, not for the benefit of Wall Street CEOs.

This is how it works: Pension funds pool their assets and invest directly in projects to build new roads and bridges in multiple states, bypassing the Wall Street firms that want to siphon off profits. The steadyily increasing streams of revenue that come from tolls and other sources would deliver stable, long-term returns to working Americans, while creating well-paying construction and service jobs connected to each project.

These pooled pension direct investment vehicles would:

• Provide the much needed capital infusion sought by governors and state legislatures to improve their states' infrastructure;

• Ensure that billions of dollars stay in our communities instead of going to big financial firms;

• Create a multiplier effect, generating jobs, economic activity, and new tax revenue for states;

• Achieve strong investment returns and stable long-term cash flows that meet or exceed actuarially required levels; and

• Support "green" infrastructure projects that are environmentally sustainable.

It's a pretty creative solution, and wouldn't it be nice for a change if Wall Street wasn't seen as the automatic answer to fiscal crisis? There are issues with legacy payments and pensions for public employees and problems with our crumbling bridges and roads. Why not let them work together and combine forces to solve both problems? This is why Stern has been so successful with his union and why Sebelius may become the first female Vice President.