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by BlackFly
3831 days ago
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The loans are easy to come by because the fractional reserve requirements allow the banks to create money which they use to provide loans. When the government creates the same amount of money and directly spends it on infrastructure as opposed to loaning it to infrastructure providers... what changes other than the fact that the infrastructure becomes cheaper to the public since the provider does not need to pay back the loan? |
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It's massively less efficient. It's important to note that this is true by definition, not by assumption.
For starters, the provider absolutely does still "pay back" the loan either way. Infrastructure investment isn't free, and if the aggregate value produced by the investment adds up to less than what it cost in the first place, then we would have been better off not doing anything at all.
Secondly, the government isn't able to spend on all types of infrastructure, and when it does, it's almost always less efficient. Public works are only one type of infrastructure spending, and they're pretty much the only one that remains exclusively in the domain of government projects these days.
To give you an example of what "infrastructure" can look like, look at the website we're on. Silicon Valley has a robust network of companies and organizations that both provide capital as intermediaries[0] and increase the ROI of that capital[1]. This wouldn't be possible if there weren't sufficient liquidity
When money is created by the banks, it's created in response to market forces. Banks have to turn an economic profit of zero on the aggregate of all loans they extend, which means that they price them accordingly, and therefore the price of capital converges (in the long run) to the value added by that investment. This makes it difficult (though not impossible) to secure capital for projects that have an inferior risk-adjusted payoff.
By contrast, the government does not create capital in response to market forces. Keynesians would argue that this is the entire point of government economic policy - to smooth out short-term cyclical trends. The problem with "spending" all newly-created money on smoothing short-term cyclical trends is that it leaves zero liquidity allocated to long-term economic growth.
[0] most startups are still funded by banks, at the end of the day, with VCs serving as intermediaries - venture capitalists get their money from LPs, which tend to be institutional investors like banks (or substitutes for institutional investors).
[1] even aside from the money that YC provides a company, YC makes companies more successful (or at least more likely to succeed) through the other, intangible assets it provides.