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Saving the economy with Saule Omarova: podcast and transcript

Chris Hayes speaks with law professor Saule Omarova about how to keep the economy alive through this crisis.

Are we doing enough to keep the economy alive through this crisis? So far, economic relief efforts have been messy, convoluted, and inequitably distributed. But while we talk about the steps taken to save the economy, we first need to know the structures in which that recovery originates. Who decides where the money goes, how are those decisions being made — and can these mechanisms be more effective?

Not just in this current pandemic-induced economic contraction, but on a more permanent institutional level. How can we ensure our financial system is stable enough to weather these types of crises? After dedicating her academic career to answering these types of questions, law professor Saule Omarova joins to discuss her proposal for what that new type of institution can and should look like.

Note: This is a rough transcript — please forgive any typos.

CHRIS HAYES: Hello and welcome to "Why Is This Happening" with me your host, Chris Hayes. Coming to you today, as always, every week from the quarantine closet where we produce "Why is This Happening," at this point, with the assistance of Kate Shaw who is now... I have to credit as a producer, who is also anchor producing me on the show and helping with the podcast as well, that would be my wife and also cohost of the "Strict Scrutiny" podcast, which you should check out. And of course Tiffany Champion remotely managing all of this.

We've been doing sort of coronavirus related podcast conversations, but not sort of squarely repeating the same stuff we're doing on the show. And today's another example of that in that, I've been very curious about how we should be thinking about the relationship between financial regulation, the federal reserve, the federal government and businesses amidst this period of insane economic distress and also completely unprecedented measures to kind of keep the economy rescued.

And one of the problems that comes up to me here is sort of, there's two issues.There's scale questions and there's equity questions, right? So the scale of questions are, are we doing enough to keep the economy from dying while we essentially put it into a medically induced coma through the shelter in place and social distancing that we're all doing? So that's a scale question, and then there's an equity question, which is, are we doing this in a just way? Are we doing this in a way in which the ma and pop noodle shop or laundromat is getting as good a break and a chance to stay alive as a Fortune 500 company? Are we putting the same strings attached to them? Are we equitably allowing capital to flow to these different sized corporations? And I think that right now, I think that the second question is clearly answered in the negative, which is that it hasn't been a particularly just response thus far. And I think the first question is probably answered in the negative two, which is the scale is not big enough and so in both of those cases we're failing.

CHRIS HAYES: And it's also worth noting that what we're trying to do now, which is in the midst of the crisis, we tried to do a version of back in 2008 and 2009 under different crisis situations. But there's good reason to think that we should think about this in a more permanent institutional sense. And so my guest today is someone who has thought about this, whose thought about it as an academic and also somewhat as a practitioner. She was in the US Department of Treasury from 2006 to 2007, she was a special advisor for regulatory policy to the undersecretary for domestic finance and she's now a law professor at Cornell University where she specializes in financial sector regulation, the broader issue of finance and economy. And she's been writing about the idea about an idea for creating an institution or institutions to oversee this kind of national investment that would do it more equitably. Her name is Saule Omarova, professor at Cornell University and it's great to have her on the program. Saule, thank you very much.

SAULE OMAROVA: Thank you so much, Chris for having me here, it's my pleasure.

CHRIS HAYES: Just tell me a little bit about yourself? I was looking at your CV, and you went to high school in Moscow, is that correct?

SAULE OMAROVA: No, I went to high school in a small, tiny Kazak provincial town on the outskirts of the Soviet Empire and I'm originally from Kazakhstan. I went to Moscow State University for my undergrad.

CHRIS HAYES: Oh, you're undergrad, I'm sorry.So you were from Kazakhstan and you went to Moscow State University for an undergrad, and then what brought you to the US?

SAULE OMAROVA: Well, it was actually pure chance in a way. I was an undergraduate student at Moscow State University and there was at the very end of the Gorbachev era an exchange program between Moscow State and University of Wisconsin Madison. I got lucky against all odds, and I came for that one semester in 1991 to Madison, Wisconsin. While I was there in December of 1991, the Soviet Union fell apart. So there I was, a student without anywhere to go back. I was very worried about what was going to happen. So I stayed to do my Ph.D. in political science, but frankly, I'm just ... To this day, I feel guilty for having left the country at such a momentous time, because obviously they couldn't hold it together without me.

CHRIS HAYES: Your departure and it all falls apart. That's amazing timing. So you stay and you do a Ph.D. in political science.


CHRIS HAYES: What is your area of focus in that area of study?

SAULE OMAROVA: Actually, I did comparative political economy and studied the politics of oil development in post-Soviet Russia and post-Soviet Kazakhstan.

CHRIS HAYES: Then you went on for a law degree.

SAULE OMAROVA: Yes, I did. I've decided that I really wanted to have a marketable skill. Something real. So I decided to leave academia and went to Northwestern University to get my GED and then practiced law in New York City for a while. Again, purely by chance, stumbled up on banking law and financial regulation as the area of practice. I got lucky. I really loved that area of practice. So that's how I became a lawyer.

CHRIS HAYES: You were in the treasury department for a few years in the Bush Administration. Tell me about what you're working on right now. What sort of problem you're dealing with right now.

SAULE OMAROVA: My entire academic career has been centered around this issue of how to ensure that our financial system is stable, effective and efficient. So that implicates a lot of questions. The deeper I dig into the financial system and financial regulation, the more I realize that what it really is about is the social function of finance. Do we have the financial system that is basically serving the needs of the real economy? Serving the needs of the American people, as it should, or do we have a financial system that is essentially over-bloated, self-referential, self-serving and focused more on speculative investment kind of activity? That problem permeates all of my scholarship. It keeps coming up in a variety of guises, in a variety of contexts. So throughout my academic career, I looked at the variety of issues. For example, derivatives markets. Why is the big bank institutions allowed to play in essentially gambling type derivatives markets? Then I looked at big banks getting into physical commodity trading, like oil and gas and metals training and what kind of stability implications that had. Recently I've been thinking more about the underlying narrative of finance as a primarily, if not purely private enterprise, where private market factors, private investors, private lenders make decisions about how to allocate capital credit, where that money goes and what that money finances.

SAULE OMAROVA: The public is relegated to that backbench sort of spectator role, right? Or when the crisis hits, we become suddenly the janitor. Right? We come in and we sweet up all the dust and all the dirt, right? But we're never allowed to sit at the table when the decisions are made up front with respect to where the money should go. This in my view is the core of many, many problems in today's finance and the real economy. Today's crisis, the COVID crisis that we're going through, actually is bringing those structural imbalances and problems right to the fore. So that's why right now, I'm refocused again on this idea for a new type of an institution, The National Investment that would actually try to correct some of these balances from within the market.

CHRIS HAYES: Let's take a step back here. The idea of a financial market ... This is a crisis that we're undergoing right now with financial implications, though it's not chiefly a financial crisis. Right? I think it's important to make the distinction between now and 2008. 2008 was a financial crisis. It had all the features of financial crises that we've seen throughout the years, if you've ever read the ... I'm sure you have and any of the listeners, medias, panics and crashes and the sort of ... Canes and the kind of economical work on these financial crises, which have happened throughout history. We've got records of babylonian financial crises. These things happen all the time. That was a very classic financial crisis. This obviously is a pandemic, which has created huge blows to real economy, which have then reverberated into the financial markets and into credit markets, worryingly, which are now being very proactively stabilized by the fed, which is where things stand now. The point you're making about the way that financial markets function, I want to just dive into in a moment. The kind of textbook free marketeer vision of this is that the way financial capital markets work is that they channel savings to investment.So people save money and then they put it into the financial system to save. Then a well-functioning financial system takes that money, that marginal dollar that you've put away. It channels it to an investment that has some promising return. It should be doing that efficiently, right? Is that a fair characterization of the kind of simplest, but most rosy vision of what a financial market does?

SAULE OMAROVA: Yes, it is. It certainly is a fair characterization of the orthodox kind of misconceived notion of what the financial market does.

CHRIS HAYES: What's wrong with that vision? Let me take that back. Why is that not a descriptively accurate portrayal of what actually happens, particularly in U.S. financial markets?

SAULE OMAROVA: Chris, this is a simple question, but it's also a very complex question. So the way I like to describe it to my students, for example, is by using an analogy. Right? If you for the first time in your life went to a theater, for example, and watched a play. Shakespearean play. Then somebody asked you, "Please describe me what a theater is." You would say, "Well, a theater is when there are beautiful people. Men, women, beautifully dressed. They come out. They talk to one another in this beautiful language. They fall in love. Then one of them dies and then everybody sings."

SAULE OMAROVA: Then I would ask you, "Is that a fair description of what the theater is?" What would you tell me? You would tell me, "Well, on some level, it is." Right? Because that's what you see, but what you're not describing is what really makes this happen. The play in front of the stage. What's left out of that narrative is that there is a playwright who's written the play. There's a director. There are all these people behind the scenes who make] costumes, who make the play appear what it is. You're just describing what you see on the surface.

SAULE OMAROVA: So the orthodox theory of how financial markets work, that it's essentially private savers, surplus units, those nice kind of frugal people, like you and I, who sock away their hard-earned dollars. They come to play in the financial markets. Then we essentially lend our dollars to somebody else, some entrepreneur with a great idea. Right? Banks and investment banks and investment funds, they're all "intermediaries" that stand between us and make this happen, and therefore-

CHRIS HAYES: They're just the bus that picks up the money in one place and drops it off somewhere else, right? That's the standard theory. I'm their frugal saver, you're the entrepreneur with a great idea, and a bank or any sort of financial intermediary, all they do is they pick up my money and they bring it over to you. Right?

SAULE OMAROVA: That's exactly right, but the way they do it, the story goes further, is unique and extremely important, which makes them extremely important for all of us to maintain and not ever to allow them to fail. Right? They're special because without them, we won't be able to pay, make payments to one another. We wouldn't be able to finance any kind of economic enterprise. Basically, a modern economy would come to a standstill. The reality of it, however, is that it's sort of very easy to dispel it if you actually think about the mechanics of how banks operate.

SAULE OMAROVA: For example, when you come to a bank and you ask them for a loan, according to this financial intermediation theory, that orthodox picture that you just described to us, what the bank should do is first it should look into its own and see, "Oh, do I have enough deposits that Chris and Sally and so on and so forth ... People brought in. If I don't have enough money already deposited, then I shouldn't be able to extend this loan." Right? But that's not what banks do.What banks do is they look at your ability to repay. They look at how credit-worthy you are, right? They look at how good of an investment it is to give you a loan. If you are a good investment, then they're going to go ahead and they're going to open up a deposit account for you and credit the entire amount of the loan to your account. So they don't even have to worry about having enough deposits that are pre-accumulated. Somebody already earned them and brought it to them. So how come they're allowed to do that? How come they're able to do that? Because they're members of a very privileged club.

SAULE OMAROVA: That club is the commercial banking club because they all have access to the federal reserve's balance sheet. In other words, they have their own bank behind them. That bank is the federal reserve. So each bank--Bank of America, Wells Fargo, Tompkins Trust Bank, where I bank here in Ithaca, for example--they have ultimately a reserve account at the fed. So when they actually extend these kinds of loans and create these deposits to all various borrowers, right? What they're doing is they're creating their own liabilities.

SAULE OMAROVA: Technically, there are private liabilities of these banks to pay onsite. Whenever you want to withdraw money from your deposits, they have to produce the money, but that money's actually a liability of the central bank, of the federal reserve.It's not their liability. So because they have that access to that special account, the federal reserve essentially pre-commits to whatever it is that they promise to us by way of our deposits. The fed will honor on its books. That's where the public comes in because the fed is federal government. It's representative of all of us, of the sovereign public, right? It's basically standing behind all of these private banks that extend loans, create money, extend deposits. It's the power of the fed that allows this to happen.

CHRIS HAYES: I'm going to try to play student here and say back to you what you said here as my attempt to synthesize it. The picture here is that the orthodox story about financial markets and banks wants to hive it off from the public and from government, and talk about it purely in these market terms, about the supply of capital, the demand for capital and the price of capital, which ends up being interest rates. Your point is it is impossible as a factual, descriptive and definitional matter, actually, to hive off financial markets what banks do, how they operate, what makes them profitable from the public backing.

CHRIS HAYES: The public banking of the central bank and the federal reserve is actually constitutive of the market. It's not some other thing out there and you can analyze financial markets independently. Us, the sovereign public people of the United States who create the institution of the federal reserve, which stands behind all this, are inextricably bound up in the doings of finance in a way that can never be talked about purely in market terms.

SAULE OMAROVA: That is absolutely correct. You put it actually much better than even I did, right?


SAULE OMAROVA: It's true. That's exactly right. In other words, the fundamental pernicious mistake in the orthodox picture is to pretend that the public is an outsider to the financial system, but also to the economic system in general. The realm of the public is pure politics, fighting about whose interests prevail, and so on and so forth, but when it comes to money, economic resources, allocating those economic resources, they absolutely ... The public absolutely has no role in it. In reality, without the public backing, we wouldn't have money. We wouldn't have credit, we wouldn't have money, we wouldn't have credit, we wouldn't have the economy that we have today. And the banks can not survive without the central bank behind them because we've had that experiment before 1913, and it did not end well. We had essentially panics every, what, four to seven years, bank notes issued by one bank were not worth hundred cents on the dollar in a different area of the country. And that basically is the recipe for a complete disaster. Right?

SAULE OMAROVA: But now that we have the Federal Reserve backing all of those private issued bank liabilities, privately issued money, now that we have all of this public infrastructure underpinning not only banking markets, but also capital markets, because capital markets are intricately connected to the banking markets, right? Suddenly it becomes much easier to pretend that, oh, it's just kind of the Federal Reserve and the federal government in general, they're just like an old parent. They don't know anything. It's like this sort of, okay, boomer kind of thing. What do you know about the world? It's just, your job is you just pay the rent for the house in which I live, and you just pay the bill, the credit card bill when it comes once a month.

CHRIS HAYES: Right, and we roll our eyes at you, right.

SAULE OMAROVA: Exactly. We roll our eyes at you saying, "Oh, you're so last century. We are the innovative kids here." But it's really funny because during the crisis, that's when that credit card bill comes, and it's a whopping bill.

CHRIS HAYES: Well that's, and that's the point. The reason that I wanted to have this conversation now in the midst, because we're talking about a thing that you could talk about distinct from COVID right now. But the reason I want to have the conversation now is that what we've seen now twice in 12 years, right, is a very short period of time, two major crises that when the crisis hits, some notion that the private markets just do their thing and Fed is just the table that dinner is served on, that just completely goes out the window because then all of a sudden the Fed's doing all sorts of crazy s---. I never understand it frankly. Like I spent more than I would like to admit, trying to understand everything the Fed did during the last crisis. I reported on it. I went to Fed conferences and I half the time didn't understand what's going on.

CHRIS HAYES: Right now, because I have several jobs, I can't devote myself to understanding everything the Fed's doing, other than basically at the most basic terms, which is them saying, "We'll backstop everything. Don't worry." But at the moments of crisis is when you see it all come to the forefront that these public policy choices made by this public institution are essentially life or death for the U.S. economy, for the global economy, for everything. It's like there's this one guy, Jerome Powell. Most Americans couldn't pick him out of a lineup and he's going to decide the people on the board Americans couldn't pick out of a lineup, basically like what lives, what dies, and whether we get through it.

SAULE OMAROVA: That's absolutely right. That's absolutely right. Because in times of crisis, what disappears is trust, is the trust in the credit and liabilities of various private institutions. So the fundamental entity in our economy now southern economy that has the sort of the ultimate trust, the ability to really stand behind this promises is us, the sovereign public, and the Federal Reserve represents us in that situation. Of course, everything basically comes down to the strongest balance sheet, and it's the Fed's balance sheet.

SAULE OMAROVA: And the problem is that the Fed is nevertheless a single institution which has a particular mandate, it has certain legal authority to do certain things and its mandate is essentially conduct monetary policy. It's sort of, it's there to stand behind the strength of the US dollar, to make sure that there is plenty of money supply in the economy so that all productive enterprise in the economy that can be happening actually can happen.

SAULE OMAROVA: But the Fed is not really meant for direct lending, for example, to a particular coffee house in Washington, DC, or a barbershop in Ithaca, New York. It's not their job. And now we're seeing that, because it's a pandemic, it's not just a financial crisis, just like you previously noted. So it's not just about backing up liquidity or financial institutions. It's actually about keeping afloat real economy businesses throughout the country who are not able to function because the economy is essentially shut, people cannot come to work or buy their product. Because of that, the Fed is standing there now holding a much bigger bag than it was ever designed to hold. And so they tell us, "We're going to do whatever it takes." And it's a great thing that that's what they're going to do because somebody's got to do it, right?

CHRIS HAYES: Yes. I just want to stop you right there. I think there's all sorts of critiques of what the Fed's done and what Powell's done in the details. But my general feeling about that part of it, that the Fed under Powell has gone quite aggressively and quite early to say that thing you said, we are embracing our role as the final and most trusted entity in the global financial ... in global finance. Don't worry, we got this. But that has been crucially important and the correct move. Would you agree with that?

SAULE OMAROVA: I absolutely agree with that because in the moment of a panic there is this sort of self-reinforcing spiraling, or fear and sort of asset sales and running away from transactions. And it can actually exacerbate the economic crisis much more than necessary. And like you said, it's a matter of life and death.: So the fact that the Fed steps in and basically says that, "Don't worry, we got it,"regardless of all these technical details, oh, does it have the authority, what does the statute say, what does this section say, what does that section say? It's been a very good thing. But the problem with that is that once you're in that gray zone of whatever it takes, then how do you know that whatever it takes doesn't become anything goes, right?

CHRIS HAYES: That is very well said. And particularly as I watched, like I'm starting to watch the oil and gas conversation, you know?


CHRIS HAYES: Where like, okay, so we got lots of prices. We're putting out a lot of fires, we're guaranteeing a lot of stuff rightly. And now global oil markets are going haywire. A barrel of oil of West Texas crude has gone negative, which is that people are paying you to take the oil off their hands because storage costs money. And this is causing all sorts of cratering. There's a sort of price battle happening between the Saudis and the Russians, and in the midst of a collapse of global demand. So we've got this insane haywire global oil market.

CHRIS HAYES: What if the oil companies and fossil fuel companies start to fail?Well, maybe the Fed or others can come and bail them out. And that's when I say, "Whoa, whoa, whoa, whoa, whoa. I'm not quite sure I'm down with the oil and gas bailout from the Fed."

SAULE OMAROVA: Oh, that's absolutely right. As a matter of fact, I'm glad you brought up the oil and gas issue because it's kind of a topic that is a near and dear to my heart, not only because of my a long time ago PhD dissertation, but also because I've spent a lot of time researching the importance of keeping big US banks out of the physical oil and gas activities. And part of what's happening here is that there are two ways, at least two ways that the Fed could "bail out" oil and gas industry, right?

SAULE OMAROVA: One is through the sort of direct expansion of its direct lending facilities, essentially to allow highly indebted and nearly bankrupt oil companies to borrow money from the Fed directly. But the other one-

CHRIS HAYES: Hold on one second. So that would be, they're not doing that right now, right? It is not the case that the current status quo is highly indebted, nearly bankrupt oil companies, they don't have an account at the Fed where they can just borrow from the Fed directly, right?

SAULE OMAROVA: No, but one of these programs, the facilities, the main street landing facilities it's sort of, it's not geared specifically toward oil and gas companies, but the recent revision of that term sheet basically would enable a lot of oil companies to borrow through that particular emergency facility and stay afloat, which is in itself, you brought up a very important concept here because that's exactly part of whatever it takes strategy, because under normal circumstances no commercial company, oil, gas or whatever it is, would be able to borrow directly from the Fed. Only banks were able to.

CHRIS HAYES: Right. Right. The Fed doesn't do that. That's what banks are for. The Fed backstops the banks. The banks are the ones that do all that stuff.

SAULE OMAROVA: That's exactly right. The Fed is also probably going to allow, or at least I worry that it might allow, big banks who lend money previously to oil companies that are now nearly bankrupt to essentially take over those companies physical assets and operate them internally as part of their own enterprise, which is sort of exactly the problem that I've been concerned about since 2012, at least, that US financial institutions, banks that are publicly subsidized and they're supposed to be purely in the business of banking and financial activities, might now increase their presence in oil and gas production.

SAULE OMAROVA: And what does that mean from the political economy point of view? Big banks are already very powerful players in US politics and the US economy. And if in addition to their financial power, they also become significant suppliers of oil and gas and employers of workers in the oil and gas industry, that might actually prolong the life of an industry that might not be in the best of our interest to keep around for a long time.

CHRIS HAYES: Well, that sort of brings us right to this question about what a more intentional version of this looks like. Because we're now, it's like we're in thecrisis and that's a great phrase to say, you want to make sure that whatever it takes doesn't become anything goes. And that was ... A lot of that happened the last time around. Whatever it takes became anything goes. Although I think that there's ways in which they didn't do whatever it takes, actually.


CHRIS HAYES: They should have been more aggressive, the Fed should have been more aggressive, but making sure whatever it takes doesn't become anything goes in this very opaque universe of what the Fed's doing and who's accessing what facility in a tiny, tiny, tiny population of specialists such as yourself. We're paying attention to that. So there's that is the question, right? And the oil and gas is a great example.

CHRIS HAYES: And then the broader question of like, okay, if it is always the case that the public and the sovereign public in the personhood of the Fed is inextricably bound up with the functioning of capital markets that decide where investment goes, what would it look like to take that role more seriously, as something that we don't just do during a crisis?

SAULE OMAROVA: So my view is that we should take it out of the Fed's hands. We can't just overburden the Fed with every conceivable economic problem we have. These are structural problems that we're facing right now. We have a dying industry in a way. We have the industry whose continuing existence actually may jeopardize the future of the planet in effect, right? But because we're in the moment of a crisis and we haven't done anything in terms of reorienting our US economy toward more renewable energy away from the fossil fuel energy in the years preceding this crisis, now in the moment of a crisis we're facing these very difficult choices, right? Do we let these companies fail right now and effectively let a lot of workers go essentially without jobs? Or do we save these workers, but by saving them, we also save this completely inefficient and socially undesirable activities, right?

CHRIS HAYES: This is the devil's bargain right now.


CHRIS HAYES: And I have to say, as someone who feels strongly about, extremely strong about the climate, the second part of that is not, it weighs extremely heavily. This industry employs a lot of people. People are suffering the worst economic contraction since the Great Depression. The idea that like, "Welp, sorry, West Texas oil field workers, like you're s--- out of luck." It's very hard to be okay with that.

SAULE OMAROVA: It is very hard. The solutions to these kind of structural problems unfortunately cannot be fashioned overnight and solve all of the immediate problems right away. So my view is that we need a new public institution. We need a different entity. We need an entity that is not the Fed and that is not the Treasury, just the two public institutions we currently have on whose shoulders basically every problem falls during a crisis. But we need to create a permanent federal institution that would be charged with the task of devising and implementing and financing a coherent strategy of sort of economic restructuring, making sure that our US economy as a national enterprise, right, is structured in a way that actually has a future and that we actually work toward making our economy more resilient in the face of shocks, big pandemics, big climate change, big whatever kind of shocks we experience that we have resources that we can mobilize and reapportion in the way we need it. But more importantly that we actually build it in a way that creates jobs that are sustainable, that are long term, that are not some kind of temporary low wage jobs. You just shove people from one little place to another place and that doesn't reward the kind of speculative investment in some kind of financial instrument rather than investment in a sustainable longterm economic industries of the new age, new generation. Right.

SAULE OMAROVA: We could have an entity, for example, that would basically be, not a central planner. That's not what I'm saying, right? But the hybrid actor. In other words, it's a public entity that acts directly in financial markets and acts as a venture capitalist, as a private equity investor, as a lender, as a guarantor, as an insurer, to basically make it easier, not only for the public capital but for the private capital to flow into more sustainable industries rather than into the dying industries. And for that, we need to use the power of the federal government to take on the risks that private investors are not able to take on.

CHRIS HAYES: So there's two things about that that caught my ear. The first is this question of resiliency, one thing that's been very clear here is that in many cases there's an efficiency and resiliency trade off right? So a great example of this is supply chains. Economies of scale are such that it's probably the most efficient to have like one enormous factory in China making all of the N95 masks and shipping them. It's probably the cheapest and most efficient way to do it. But of course that presents a resiliency problem., as we've seen. This is true of a million different things, right? There's a trade off between efficiency and resiliency and the market doesn't incentivize resiliency because there's no reason to have like five different small N95 manufacturers that all make masks that are three times the cost of what the one big one in China makes. Other than the fact that you might face a global pandemic and not want to be entirely reliant on the one big cheapest factory in China. That makes N95 masks.

CHRIS HAYES: So what I'm hearing from you is like one, one goal here is to create a national investment authority. Some kind of public institution that's not the Fed that can kind of put its thumb on the scale towards these kinds of resiliency questions. Is that right? Would that be one of the things it does.

SAULE OMAROVA: That's exactly right because I agree you with respect to efficiency frequently related to scale, right? And scale itself is not a big problem. Scale is good, but scale is not so good, if that scale is combined with purely private concentrated private power. In other words, the resiliency part of it is not just about sort of having one big factory versus five small factories, right? It's about to what extent that one big factory is controlled by one private monopolist because the underlying tension here is between the private profit motivation and the public interest and public need. Especially in the moment of crisis, but also in normal times as well. So the National Investment Authority, the way we see it is, supposed to be kind of a federal institution that is the modern version of the Reconstruction Finance Corporation, which is suddenly a very popular idea now in this COVID crisis. That used to be really huge, it's like a capital bank for the new deal era, right? It used to be the largest investor in a variety of enterprises during the time when private capital dried out. Go ahead.

CHRIS HAYES: Let me just stop you there. So the Reconstruction Finance Corporation, which was created under the new deal, and it was created by statute. Right. And then it was like a kind of capital lending facility for projects. Is that what it did?

SAULE OMAROVA: So it was a very interesting kind of a very flexible kind of an institution. It was created actually in 1932 by Herbert Hoover.


SAULE OMAROVA: And it existed for a year and it was a fashioned after the War Finance Corporation of World War I. And for a year it was basically just doing this kind of lending and kind of guaranteeing and sort of securitizing various laws. Sort of the familiar kind of supporting of the private activity. But when Roosevelt came to power in March 1933 he basically changed the leadership of RFC with Jesse Jones, this Texas banker in charge and RFC has become a really powerful, very sort of aggressive in a good way investor in a variety of industries. And it was not just doing the lending and securitizing and insurance, it actually took equity stakes in a lot of banks and savings associations in agricultural cooperatives and even barbershops, small companies, big companies. It made injections of capital, huge injections of capital in a variety of firms that needed it because there was no private capital flowing at the time and it.

SAULE OMAROVA: And it took a preferred state, a preferred shares in all of those entities and actually exercise quite a bit of control if it wanted to over the direction of how business is conducted by those firms. Right. And so within a year, between 1933 and 34 the RFC has become the largest investor in private companies in the United States and its portfolio of investments dwarfed the entire portfolio all Wall Street banks at the time.That's how big it was. And it's done so many things. It set up various subsidiaries. For example, Fannie Mae was set up as one of the subsidiary specifically to kind of amplify the home mortgage market, for instance. And then it's done incredible, incredible work during World War II, as well with respect to mobilizing various economic resources.

SAULE OMAROVA: In other words, it was kind of like sort of if you will, a version of a BlackRock, an asset manager in many ways. And I think that's exactly what we need today. Today what we need is a version of a BlackRock type asset manager, a private equity slash venture capital firm, but that firm is not owned by private investors. Rich people, qualified institutional buyers, right? Not people like me or like you for example, but that is owned by all of us. A public entity that does exactly that work and does it in partnership with private investors, pension funds, insurance companies, sovereign wealth funds, whoever they are. And that's what we need to recreate today.

CHRIS HAYES: I want to talk about what that might look like and what the obstacles or criticisms of that might be right after we take this short break.

CHRIS HAYES: All right. So Saule, you talked about the depression era, actually Herbert Hoover Reconstruction Finance Corp and what that did and how it acted and the idea of a National Investment Authority today that would be somewhat similar to big private firms like BlackRock that are private equity and venture capital. That managed a big asset of investments, but it would be public as opposed to private. Let's say you got a magic wand to make this happen or that you were brought into an administration that had the votes to actually create the thing. What would it look like?

SAULE OMAROVA:So the National Investment Authority would be probably best organizational patterned after the Federal Reserve system that we have, right? So there would be the National Investment Authority, NIA board governing board, let's say seven to nine members with a chair that is appointed by the president with the consent of the Senate, the usual thing. The terms would be staggered terms for 10 to 12 years, each removable by president only for good cause and so and so forth. In other words, you create a nontrivial degree of independence for this particular board. Right. And the mandate of that board would be to devise and implement the coherent national strategy of economic development, right? So economic growth, structurally balanced geographically and sectorally and so on and so forth. But the NIA board itself would not actually make those allocative decisions with respect to where to put the money. It would operate through operating arms and those operating arms would be set up not as government agencies, but as special federal charter government corporations.

SAULE OMAROVA: And why is that important? It's important because government corporations are charted by the federal government, by Congress, and it's a very flexible organizational form. Basically, Congress can create a unique charter for each federal government corporation that would specify its rights, its obligations, its mandate, how it's overseen, how it's managed and so on and so forth. And that's a very important tool for this kind of an actor. So at the very least, I would say that there would be two operating arms. Two subsidiary government corporations that the NIA board will oversee and regulate.

SAULE OMAROVA: One, let's call it National Infrastructure Bank. So that's actually not a very novel idea to the extent that National Infrastructure Bank proposals are a bank. It's basically a form of a government sponsored enterprise type of an entity, right? So it's basically going to buy up loans that let's say, municipalities and states and various public and private actors. Issue to finance, certain critical public infrastructure, [00:39:00] roads, bridges, and so on, so forth. So the NIB, National Infrastructure Bank would buy those bonds, securitize them, and essentially create a secondary market in those bonds and amplify the ability to finance through credit. Those kinds of infrastructure products.

SAULE OMAROVA: But the second arm is what I personally feel particularly excited about. So my colleague, Cornell Professor Bob Hockett and I, we've originally written a paper about this. NIA project, we call it national capital management corporation or NCMC. And we sort of specifically tried to mimic the way private equity firms call themselves because they frequently call themselves capital management something, something, right? So the NCMC would actually be the asset manager, like a private equity firm, like a venture capital firm like BlackRock. And it will operate that same way, not in that old kind of Fannie Mae, Freddie Mac type of way. Issue bonds and basically securitize some loans.

SAULE OMAROVA: But it would set up a series of investment funds, kind of like private equity funds, right. And solicit private institution investors money to be passive investors in each fund. Just like a general partner of any private equity fund would do. And then, they would basically select through an auction process, for instance, a set of public infrastructure projects to put in the portfolio that, that fund would actually finance. And then the public manager, the NIA, the NCMC asset management team who would be professional finance people, that otherwise would go to Blackstone and Carlyle and other private equity firms. They would be hired by the NIA and they would actually run those portfolios just like they would in the private world.

CHRIS HAYES: So what I'm hearing from you when you talk about this sort of a degree of independence, staggered terms, a fired only for cause, subsidiaries with professional managers. Seem to me, always of attacking the obvious criticism here, right? The obvious criticism is that if you do something like this, you will create what will essentially be a cronist undertaking, right? That public pressure and politics capture, rent seeking and cronyism will all seep into this.And we see this in all kinds of, if you look at the story of Petrobras, which is the fossil fuel company that is the national fossil fuel company of Brazil, owned by the Brazilian government. That these sorts of entities are very, very ripe for corruption. They're very right for favor trading. You get your allies on the board and then they start investing in your friend's projects or they start investing in a politically sensitive areas that you need for reelection and things like that. And before you know it, you've created this entity that it's extensively entity about the public interest. And the best investments but about the public interest and the best investments, but is in fact wielded as a kind of tool of cronyism and corruption. And so, how do you think about that critique and where are we to create something like this to stave that off?

SAULE OMAROVA: So that is of course the biggest critique we encounter, right? Anytime you talk about something like the NIA, that's the biggest critique we encounter. Well, one answer to that is in how the NIA will actually run its business. It's not going to be a standalone enterprise, like Petrobras, that's basically taking the money from the federal government and investing. The NIA, particularly the the asset manager, are really will be just the manager of essentially public and private money put in a fund.

SAULE OMAROVA: And so if you think about it, what is it that it has to do to attract those pension funds and those insurance companies and those other institutional investors into that kind of a vehicle? There is a market discipline to it, because you can't force private investors to invest in your fund. So the private investors will actually be looking at how good you are at picking the projects that go into this portfolios, what it is that you promise them, and what it is that you deliver. And if you cannot deliver, they will simply not invest with you. Right.

CHRIS HAYES: Right, but then you ended up with the critique on the other side, which is the steps you take to make it as similar to private market investors by them having a value proposition. How do you then retain some sort of social function, social role that may not be offering the best rate of return? Because it seems like what we're trying to do here is combine these two things, right? We want the sort of discipline of the market so you don't end up with some cronyist bastion where people throw bad money at bad projects for political reasons,and at the same time you don't want just some other market competitor that's going to chase the highest rate of return if the highest rate of return is things like fracking or full or bad industries. What you want is to lead socially.

SAULE OMAROVA: Absolutely. In order to attract the private investors into this vehicle and sort of minimize the danger of the incumbent politicians basically taking over and corrupting the NIA from the political side, what you need to do is you need to give private investors something of value, something that they will take from you and value enough to cede control over the process to the public manager.

SAULE OMAROVA: And I think that the NIA is in the best position to give them that proposition because the NIA will be backed by the full faith and credit of the United States. And what the NIA could give private investors is a safe asset. Effectively, that's the safest asset in the market, right? For example, the NIA could even guarantee, the return guaranteed return of the principal to those limited investors. No limited partners in the private equity fund have ever guaranteed the return of the principal, but if they invest in the NIA private equity fund, they may be guaranteed that.

SAULE OMAROVA: And then what the NIA would do is they would say, look, we the public manager, we will select the projects, and we will set the projects not on the basis of what is the most profitable in the next five years, in the next seven years. We are in a position to make that kind of a decision, because private asset managers are not. Private asset managers are competing with one another, and they have to deliver the highest returns in the shortest period of time, which is why they may invest money in the fracking project, but not in some kind of long term renewable energy project.

SAULE OMAROVA: But the US government doesn't have that kind of pressure, and its time horizons are much longer, and it has many more resources. So what it can do is say, we're going to invest in this sort of longer term, renewable energy projects. If in seven to 10 years, when it's time for us to wind up this fund and return the money to you, we guarantee you we will pay back 100% of your principle, and we will pay you back certain variable equity, like additional return.

SAULE OMAROVA: Now the question is, where does that additional return come from? So a private asset manager cannot just synthesize that return out of thin air, because they actually have to make that money somewhere, which is why they go for the fastest, biggest buck, without regard to the long term consequences for the environment or for the people.

SAULE OMAROVA: But the U.S. government can actually synthesize that equity return by saying, for example, this. Look, if this fund, if you help us to finance this kind of renewable energies, let's say that the network of renewable energy plants throughout the entire United States. It may take 20 years to actually for that network to start generating returns, but in the seven years, the economists will make calculations that upon completion, for example, this type of a project will increase, let's say, tax revenues of the federal government, regional governments by, I don't know, let's say 5% or 3%. It would increase the productivity of the US economy by 7%. It would generate budget savings by let's say 5% or whatnot. And so based on those projections right now, seven years into the project, not 20 years into the project, we are willing to give you a proportion of that kind of return.

CHRIS HAYES: We will bring from the future into the present the expected net future value.

SAULE OMAROVA: Exactly. Exactly. The other thing, the other wrinkle here is that the expected net benefit, future net benefit, not to individual investors, but to us as a society, what we will do, we will transform the public benefit into privately monetize the private benefit, and we bring it in time forward.

CHRIS HAYES: You know, the interesting thing about this... I am very sold on this, and I think that if we are going to have anything like a Green New Deal or something like that, we're going to need an institution like this. I think that's very, very clear. It's also the case, these kinds of institutions have been used throughout history, different kinds of ones, but even things like the Dutch East India company, which was a privately chartered sort of government-backed company. It was private company. It had sort of government backing. It did a lot of truly horrible things and engaged in mass violence and expropriation through colonialism, but as a sort of hybrid entity, my understanding is like the canal system was built in somewhat similar ways.

CHRIS HAYES: This idea, it sounds kind of weird and technical, but the idea of essentially a private entity or a kind of private-public entity that's chartered by the government for a purpose that it goes out into the market to do, is actually a pretty old idea. Right? There's lots of examples of this going back hundreds of years of governments doing this.

SAULE OMAROVA: That's absolutely right. In fact, the corporate charter, the very idea of a business corporation, was effectively a special grant of sovereign privileged by the king, by the sovereign, to a group of private actors, specifically for some kind of big public infrastructure project. That's how that's how it appeared.

CHRIS HAYES: The origin of the corporation is literally this. This is actually the original purpose for which a corporation was constituted, was a sovereign grant by the King for some public project, essentially.

SAULE OMAROVA: That's exactly right. That's exactly right. Then only in the 19th century have we gotten the modern version of this off the shelf corporate charter that now looks like it's a purely private creation, but even closer in history, Alexander Hamilton, the famous architect of a lot of the American finance, his idea of what the federal government should do in terms of creating a strong economy and a strong financial system was if you wanted to create the US Treasury, which he did, and he created the first bank of the United States.

SAULE OMAROVA: That first bank of the United States was in part a central bank, but it was also considered in part as a development bank. It was a hybrid entity [00:50:30] in that sense, because it was the private directors who were supposed to make decisions as to where to send the capital, which projects to finance, but the public directors had the right to withdraw the federal subscription if there was cronyism on the part of the private directors, for example.

SAULE OMAROVA: We of course, you know the history. The first bank of the United States was not renewed as well and so on and so forth, but ultimately, in 1913 we got the central bank back out of the triad, Hamiltonian triad. So we have a treasury and we have the Federal Reserve, but we still don't have the development bank.

SAULE OMAROVA: That's what the NIA would be. It would be a hybrid institution that would actually fill that void right now between purely fiscal policy and purely monetary policy, and conduct that sort of developmental economic policy through hybrid means, because we don't really need to finance everything from the federal budget. There is plenty of money sloshing around in the financial sled, for example. There's too much.

CHRIS HAYES: There's too much capital. We are in the great long disinflation, and the sort of long era of capital surfeit, which just the fact of the world, and has been the fact of the world in the kind of neoliberal era for decades.

SAULE OMAROVA: Well that's exactly right. And all of these financial institutions that manage investments, that come by the way from our paychecks every two weeks. Part of my paycheck goes where? Into 401k, so some manager out there has to invest that money. I am a captive investor in capital markets, and my entire future depends on how it's invested, but those asset managers, they're looking at the menu of choices, and they're competing with other asset managers.

SAULE OMAROVA: Then you have choices. Stocks, bonds, this and that. There is speculative investments and for example, private equity funds. Apparently in the last decade or so, for example, apparently public pension funds have been the largest investors into private equity funds, because they're looking for some way of creating, generating high yield, so they can actually meet their pension liabilities.

SAULE OMAROVA: So the NIA would create a new asset class. It would allow those pension funds to actually invest into something that would benefit all of us, and we can see where our pension money goes.

CHRIS HAYES: That's a great, great point. Saule Omarova is a law professor at Cornell University. She specializes in financial sector regulation, finance and economy, and has a proposal for a national investment authority, as you heard her discuss. She served in the US Department of Treasury from 2006 to 2007. Saule, that was... I feared going into this conversation it might be too technical, but it was not, and it was really both enlightening and persuasive, so thank you very much.

SAULE OMAROVA: Thank you so much, Chris.

CHRIS HAYES: One again my great thanks to Professor Saule Omarova. That was fascinating and I know probably fairly technical for folks who are not really modern fiancee-y. I am not, though there was a time in my life when I was particularly after the crisis I did a lot of reporting on it for my book so I’m a bit rust so I appreciate that that might have been one of those hit back 15 second conversations which I personally like myself as a podcast consumer. But huge thanks to professor Omarova that was really fascinating. As always we love to hear your feedback, tweet us at #WITHpod, email us at

"Why Is This Happening" is produced by the "All In" team, and Kate Shaw, and features music by Eddie Cooper. You can see more of our work, including links to things we mentioned here by going to

Related Links

"Unsanitized: Why We Need a National Investment Authority," by Saule Omarova