Robert Hockett: US must take stakes in firms it rescues

The author is a professor of law and finance at Cornell Law School

We are in crisis again – all of us, all over the world. But this time it’s not just a financial shock or a demand shock, like in 2008. It’s these things and more – a “perfect storm” combined of supply, demand and public health .

Existing supplies of hospital beds, respirators, face masks and test kits were already too low. And now they will be lower – just like the supply of most other essentials – thanks to these social distancing measures that we all take. Social distancing is necessary, but it is a necessary evil. It is contrary to the production which we now urgently need, because so much productive work is done together.

The fact that our challenge is partly a supply crisis means that we have to rehabilitate production itself. We can start doing this by adapting certain processes to offsite collaboration. But also by speeding up the production of the equipment we need to speed up our return to on-site collaboration.

As our story shows, one important way to do this is to get our public sectors to partner with our producers and distributors in the private sector and take equity. Consider the American experience of the Second World War.

After the bombing of Pearl Harbor in late 1941, President Franklin D Roosevelt summoned manufacturers to the White House and asked how to increase the country’s capacity to produce and distribute steel, fuel, rubber, B-29s, tanks and – intriguingly for today’s purposes – equipment for soldiers and civil protection. After these discussions, Roosevelt created a War Production Office to oversee the temporary reallocation of factories, the creation of new distribution channels and other tasks necessary for rapid productive mobilization.

The WPB built on and worked with the project, which helped finance the New Deal. Its remarkable array of tools included direct grants, cheap credit or loan guarantees, and most importantly, equity investments in certain companies.

At the start of the crisis, for example, the RFC purchased preferred shares in more than 4000 private sector banks, recapitalizing them while ensuring that the public has a voice in its internal decision-making. During the war years, the RFC wholly or partly owned companies such as the Defense Supplies Corporation, the Defense Plant Corporation, the Metals Reserve Company, the Rubber Development Corporation and a host of other strategically sensitive companies.

The government’s holdings were crucial for two reasons. First, many companies ravaged by the crisis were not well placed to take on more debt – even cheap debt. And second, the equity investment allowed the public to keep a “seat at the table” of each company that their money saved. This allowed the public sector to provide internal guidance on each systemically important private production decision in times of crisis.

Fast forward to the present. President Donald Trump should take charge and form what I will call a national pandemic production and funding office, with separate but coordinated production and funding units.

The production unit would determine where the national deficits lie – hospital space, medical equipment, test kits, protective clothing and masks – and what production capacity is available. He would then decide which existing production facilities are most likely to scale up and what else might be needed.

Meanwhile, the finance unit takes care of the money. It is not a question of providing funding but rather of direction those massive financial taps that the US bailout will begin to open. The unit should cut checks for each specific project decision made by the production unit.

In order for this to work, the finance unit would likely have to take equity in some companies, as the RFC did before it. He would “bail out” certain strategically sensitive companies and would like the internal governance rights that accompany these injections of equity to guarantee that good money is not thrown away after evil. It will also help companies in their production planning and ramp-up, which makes this involvement in internal decision-making both necessary and fair.

Curiously, Mr. Trump himself recently spoke of take stakes in business, the United States will help (although it later covered). Meanwhile, the countries across the Atlantic – Britain and France, for example – plan to do the same for the same reasons. Similar measures were proposed or taken in 2008-2009. The United Kingdom has acquired stakes in Royal Bank of Scotland and Lloyds Banking Group and the United States has done the same for the automotive industry. None of this is therefore exotic. It is simply demanding.

Right now, the United States needs an organization to mobilize a coherent productive response to the Covid-19 crisis and work with counterparts around the world to save the day. In the longer term, however, I think we will also need something more permanent.

After the immediate crisis has passed, the United States should set up an independent, operationally located national investment authority between the Fed and the Treasury, to develop and regularly update a coherent national development strategy, and then help coordinate and finance its execution by the public and private sectors. the agents.

This will ensure that America will never be taken on its back again.

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