Public actors in private markets: toward a developmental finance state.

• Author: Hockett, Robert C.
• Position: Abstract into III. The Future Developmental Finance State: Extending the Role of Public Actors in Financial Markets, p. 103-140

ABSTRACT

The recent financial crisis brought into sharp relief fundamental questions about the social function and purpose of the financial system, including its relation to the "real" economy. This Article argues that, to answer these questions, we must recapture a distinctively American view of the proper relations among state, financial market, and development. This programmatic vision--captured in what we call a "developmental finance state"--is based on three key propositions: (1) that economic and social development is not an "end-state " but a continuing national policy priority; (2) that the modalities of finance are the most potent means of fueling development; and (3) that the state, as the most potent financial actor, both must and often does pursue its developmental goals by acting endogenously--i.e., as a direct participant in private financial markets. In addition to articulating and elaborating the concept of the developmental finance state, this Article identifies and analyzes the principal modalities through which the modern American developmental finance state operates today. Finally, the Article proposes three broad strategic extensions of the existing modalities, with a view to enabling the emergence of a more ambitiously proactive and effective developmental finance state--and thus rediscovering a truly public-minded finance.

TABLE OF CONTENTS INTRODUCTION I. STATE, FINANCE, AND DEVELOPMENT: REDISCOVERING THE LINK A. American Origins of the Developmental Finance State: The Forgotten Heritage B. The Developmental Finance State: Outlines of the Concept 1. Working Definition: Framing the Inquiry 2. Descriptive Aspect: Developing a Taxonomy 3. Prescriptive Aspect: Testing the Outer Limits II. PUBLIC ACTORS AS PARTICIPANTS IN FINANCIAL MARKETS: A TAXONOMY OF ROLES A. Market-Making B. Market-Moving C. Market-Levering D. Market-Preserving III. THE FUTURE DEVELOPMENTAL FINANCE STATE: EXTENDING THE ROLE OF PUBLIC ACTORS IN FINANCIAL MARKETS A. Market-Making and Market-Moving: "OMO Plus" 1. Open Market Operations in Financial Assets: Why Not? 2. Open Market Operations in the Labor Market: What If? B. Market-Levering: Financing National Infrastructure 1. Infrastructure as a Developmental Challenge 2. Basic Proposal: National Infrastructure Bank 3. Advanced Proposal: National Capital Management Corporation C. Market-Preserving: Reinventing the "Golden Share" Mechanism 1. Bailouts, Banks, and the Public Interest 2. Traditional "Golden Share" Model 3. SGS Mechanism: Outline of the Proposal CONCLUSION The spontaneous transition to new pursuits, in a community long habituated to different ones, may be expected to be attended with proportionally greater difficulty.... In many cases they would not happen.... To produce the desirable changes, as early as may be expedient, may therefore require the incitement and patronage of government. (1)

[A] Bank is not a mere matter of private property, but a political machine of the greatest importance to the State. (2)

INTRODUCTION

It is surprising that many Americans assume there to be only two, mutually exclusive and poetically French-named, options for defining governments' relations to markets: "dirigisme" and "laissez faire." Many academic and policy battles have been, and continue to be, fought on this uncompromisingly binary conceptual field. It is especially surprising because our polity never has been strictly "command-and-control" or "hands-off" in relation to our economy. Rather, we have always sought means of proactively fostering and furthering economic development and growth, and have done so through government instrumentalities that act in markets as much as they act on them. Our government is more than merely a market overseer and regulator--it is also a direct market participant, acting not only to correct market failures or to provide vital public goods but also to create, amplify, and guide private markets in ways that enhance these markets' potential to serve important long-term public interests.

This Article--part of a larger project--identifies, analyzes, and builds upon the distinctly American mode of mixing polity and economy, in hopes of recovering a policy approach that the nation once had and could use again now, after a major financial crisis. (3) The tradition we seek to recover traces its roots directly to ideas originally formulated by the country's first Treasury Secretary, Alexander Hamilton. We refer to that tradition under the conceptual heading of the "developmental finance state."

The developmental finance state bears three basic attributes. First, it treats national socio-economic development not as a particular end-state but as an ongoing process of conscious, forward-looking change against a backdrop of basic financial and macroeconomic stability. Second, it specifically targets financial markets and uses modalities of finance in pursuit of its developmental goals. Third, the developmental finance state operates as an integral part of private markets, deliberately bringing private and public actors together as partners in the ongoing national-development project. In so doing, it defies and blurs the categorical public-private divide so often assumed in debates on financial regulation.

By tentatively outlining the model of our modern American developmental finance state, this Article makes an original contribution to several well-established strands in legal and social science scholarship, while nevertheless claiming its own distinctive intellectual territory. (4) We examine the critically important nexus between the state, finance, and development from a unique perspective. (5) Rather than drawing broad institutional comparisons on a grand state-market-society canvas, we focus on the specific modalities of state action within, rather than upon, financial markets. In this vein, we start defining the concept of a developmental finance state inductively, through description and analysis of its currently existing modalities.

We argue that the government is an important endogenous actor in today's financial markets and construct a provisional taxonomy of the roles the government plays in that capacity. We define these roles as market -making, market-moving, market-levering, and market-preserving. (6) The primary goal of our taxonomy-building exercise is to elucidate the hidden or under-appreciated threads of common meaning behind seemingly unrelated, and often all too familiar, phenomena. In effect, we reveal the face of the modern American developmental finance state. Importantly, our taxonomy provides a conceptual apparatus and operational vocabulary indispensable for a systematic recognition and examination of public instrumentalities' existing market-actor practices across a wide range of issues. (7)

We further argue that a functional taxonomy of present government-as-market-actor roles has potentially significant forward-looking public policy implications. It provides a conceptual framework for envisioning expansions of identified modalities beyond their current forms. To this end, we engage in an explicitly normative, prescriptive undertaking that aims to test both the public-policy relevance of our analysis and the conceptual reach of our provisional model of a developmental finance state. We argue that the normative justification for the government's action in private markets should go well beyond the traditional market-failure and public-goods arguments. Instead of acting only to correct some specific market failure or to supply some traditional public good, government instrumentalities should use their unique ability to harness the power of private financial markets for the purpose of promoting long-term national development and ensuring financial and macroeconomic stability.

We advance several proposals for expanding the scope and intensity of the government's financial market-actor functions, in pursuit of a more coherent, comprehensive, and normatively emboldened agenda. In particular, we propose adopting a broad asset-price stability maintenance program, establishing a public-private national investment and infrastructure-financing vehicle, and creating a special "golden share" regime for financial firms' internal governance. (8) In many ways, our proposals are unorthodox and ambitious thought experiments. We paint a broad picture, which inevitably glosses over a number of important issues related to institutional design, procedural framework, and broader political-economic substance of the proposed arrangements--issues we are planning to address in future work. The goal of this Article is not to offer a ready-to-use legislative blueprint but to push our collective imagination beyond the constraints of current discourse, to show how this new perspective on the role of public actors in private financial markets opens up new policy terrain, rich with possibility.

The Article proceeds as follows. Part I examines the historical origins of what we are calling the developmental finance state model and elaborates the key parameters of that concept. Part II constructs a basic taxonomy of market-actor roles that federal government instrumentalities have been playing since at least the New Deal era. Part III advances three separate sets of policy proposals aimed at extending the federal government's market-actor functions beyond their current forms, in order to enable the emergence of a more coherent and effective developmental finance state. The Conclusion offers brief closing remarks and looks forward to next steps in this project.

1. STATE, FINANCE, AND DEVELOPMENT: REDISCOVERING THE LINK

   1. American Origins of the Developmental Finance State: The Forgotten Heritage

      Contrary to today's dominant narrative, the concept of a strong centralized government actively pursuing a coherent national developmental strategy is very much an American idea. The first US Secretary of the Treasury, Alexander Hamilton, was the...