Necessary Public Investment: The Role of Public Banks

The role of public banks in financing necessary investment is discussed with reference to a causal framework linking public and private expenditure in sequential time. The text starts by looking at lending to the public and private sector in Europe and develops a simple interpretation of it, which is used to discuss the causes of the recent financial crisis. The evidence shows that the recent financial crisis cannot be imputed to excessive public debt but possibly only to the fast accumulation of private debt. These facts can be interpreted in terms of a simple causality structure where public expenditure determines the level of economic activity. If causality can run from public to private expenditure, the role of public banks in the creation of new savings becomes potentially important because, being part of the public sector, they can play also an indirect role as monetary financial intermediaries, in addition to their traditional role as nonmonetary financial intermediaries recycling savings already accumulated in the past. The article discusses these two possible roles of public banks with reference to some examples. The case of investment for climate change mitigation shows that both roles are important for the pursuit of public policy goals. If only the traditional nonmonetary intermediary role is retained, in the absence of other incentives, the level of environmental investment risks being limited to that portion of the necessary investment that the market considers profitable, i.e., it would probably be insufficient to reduce the climate change risks. In the best variant, these necessary environmental investments would be realized at the expense of other necessary public investment. If, on the contrary, environmental investment is to be realized without reducing other necessary public investments, public banks should engage also in monetary financial intermediary’s activities aimed at creating new wealth. The text concludes by describing briefly the main logical consequences of the analysis developed.