Obama's Outsized Rate of Return: No Wonder He's So Popular

In a previous post here on principle and policy, I referred to Senator Obama (D _ Illinois) as a market manager. It turns out he is also a financial wizard. Read on...

First we have a quote from the Senator's speech on the Economy given in Ohio on Febraruy 24th 2008.

We can also invest in American jobs by investing in America, and rebuilding our roads and bridges. I've proposed a National Infrastructure Reinvestment Bank that will invest $60 billion over ten years. This will multiply into almost half a trillion dollars of additional infrastructure spending and generate nearly two million new jobs - many of them in the construction industry that's been hard hit by the housing crisis we're facing.

What kind of financial magic is this? If Senator Obama (D - Illinois) put $6 billion in every year for 10 years at 6%; the investment would grow to approximately $78.5 billion at the end of ten years. If Senator Obama (D - Illinois) put in $60 billion in year one at 6%, the total at the end of ten years would be around $101 billion. Even if Senator Obama (D - Illinois) invested in an index fund that earned the market's long term average return of 10% the thing would slightly more than double to $141.5 billion.
How is the Senator planning to achieve an out-sized financial bonanza wherein the Taxpayers can yield 26.57% return necessary to turn $60 billion in year one to 500 billion in year 10? More research is necessary.
This blogger found that the alleged Bank is a now a key element of Senator Obama's economic plan:

New Jobs Through a New National Infrastructure Investment: Barack Obama believes that it is critically important for the United States to rebuild its national transportation infrastructure – its highways, bridges, roads, ports, air, and train systems – to strengthen user safety, bolster our long-term competitiveness and ensure our economy continues to grow. Investing in national infrastructure is especially important in our efforts to bolster our homeland security to meet international terrorism and natural disaster threats. Additionally, a robust federal
infrastructure investment program today will help strengthen the U.S. economy and provide at least one million more U.S. jobs at a time when the housing and construction industries are slowing. Barack Obama will address the infrastructure challenge by creating a National Infrastructure Reinvestment Bank to expand and enhance, not supplant, existing federal transportation investments. This independent entity will be directed to invest in our nation’s most challenging transportation infrastructure needs. The Bank will receive an infusion of federal money, $60 billion over 10 years, to provide financing to transportation infrastructure projects across the nation. These projects will create up to two million new direct and indirect jobs per year and stimulate approximately $35 billion per year in new economic activity.

Read the entire plan here

It turns out that this is based on proposed legislation by Senator Chris Dodd (D - Connecticut). While you can read the full text of the proposed bill here. I summarize it as follows:

An independent agency of the Federal government administratively similar to the Federal Deposit Insurance Corporation (FDIC). The "Bank" would have some strange banking powers: the ability to conduct hearings, issue subpoenas, obtain information from any other federal agency simply by asking (other agencies are required to comply), accept for funding any infrastructure project with a Federal price tag of $75 million or more (the list of possibilities goes on for two pages), unilateral authority to determine the appropriate Federal share of spending for every project accepted, to act as a centralized entity to provide financing for qualified infrastructure projects; to issue general purpose infrastructure bonds, and to provide direct subsidies to qualified infrastructure projects from amounts made available from the issuance of such bonds; to issue project-based infrastructure bonds for the financing of specific qualified infrastructure projects; to provide loan guarantees to State or local governments issuing debt to finance qualified infra
structure projects, under rules prescribed by the Board, in a manner similar to that described in chapter 6 of title 23, United States Code; to issue loans, at varying interest rates, including very low interest rates, to qualified project sponsors for qualified projects; to leverage resources and stimulate public and private investment in infrastructure; and to encourage States to create additional opportunities for the financing of infrastructure projects.

WOW! Don't see too many Banks with subpoena power! The borrowing authority of this "Bank" is capped at $60 billion outstanding (the number Senator Obama used as his investment amount); one percent of which is used to fund the bank operations. Thus, this new government agency could cost $600 million the first year.

In my first examination of the bill's text I saw not one word on how the billions of new debt will be paid for. It appears to operate under the premise that the U.S. Government need not use tax money to pay for things. We can just borrow it, and when the debt comes due, we will borrow more, and when that comes due we will borrow more.

I wonder how much of the proceeds will go to fund Amtrak, the sacred of cow of the bill's sponsor Senator Chris Dodd (D - Connecticut).

So now you know how Senator Obama can turn $60 billion into a $.5 trillion using Senator Dodd's new Bank. No wonder Senator Dodd has endorsed the candidacy of Senator Obama.