The American Society of Civil Engineers have estimated that it will take $2.2 trillion over the next five years just to provide adequate infrastructures.  In their 2009 annual report, the ASCE gives the nation’s infrastructure an overall grade of “D.”

The report card lists 15 categories, from Aviation to Wastewater, with a brief description of the problems in each category.

In Energy the engineers comment that “Public and government opposition and difficulty in the permitting process are restricting much needed modernization.  Projected electric utility investment needs could be as much as $1.5 trillion by 2030.” 

America’s drinking water facilities face an annual $11 billion shortfall to replace ageing facilities “that are near the end of their useful life.”  The average tow barge can carry the equivalent of 870 tractor trailer loads yet of the 257 inland waterway locks still in use 30 were built in the 1800s and 92 are more than 60 years old.  Expected life of a lock is 50 years.  Cost to replace locks is $125 billion.  For the complete list of categories, and comments, look here.

These kinds of projects are what need to be funded, and these are the projects that worldwide wealth will flock to fund by purchasing Treasuries.   The US government should be selling longer dated maturities now, of the 20 and 30 year variety, because interest rates are at historic lows due to the global recession.

Great wealth is represented not by stock holdings, but by fixed income holdings.  By the credit markets, in other words.  Wealth is primarily interested in safety.  It is looking for secure investments that offer return of principal and consistent cash flow, or income.  

The current financial meltdown of Wall Street came about because Wall Street, lacking enough of these types of investments, basically manufactured them (sometimes synthetically) from mortgages that were  given phony AAA ratings.  This entire straw house came about because America was not investing in itself.  It was not building infrastructure.  There was a “deficit” of this kind of investment for wealth to fund.  So Wall Street made something up for wealth to buy instead.

Unfortunately, the Wall Street collapse and the huge sums being tossed about in bailout money threatens to cripple America’s ability to fund infrastructure.  Failure to fund infrastructure fueled the collapse, which now threatens our ability to fund infrastructure.  A vicious circle.

Breaking this circle is why President Obama must walk away from shovelling trillions of taxpayer dollars into Wall Street.  Not only will this be ethically wrong because insolvent banks and their investors should be the ones to bear the losses, but it will unnecessarily add to America’s debt when so many worthwhile projects need funding, and global wealth desires these safe investments now more than ever.

Let’s avoid doing what was done during the Great Depression, where according to then Great Britain central banker Montagu Norman, “..we collected money from a lot of poor devils and gave it over to the four winds.”

PS.  The Montagu Norman quote was lifted from this week’s New Yorker review by John Lanchester of Liaquat Ahmed’s new book “Lords of Finance.”  It’s a great read.

Beezer’s email address is wp@beezernotes.com

Former Resolution Trust Company head Bill Seidman, Financier George Soros, even House Speaker Nancy Pelosi, are either dead on in favor of what amounts to nationalization of insolvent banks (Seidman, Soros), or are tacitly acknowledging it may be necessary (Pelosi).

Even the Obama administration, which is full of individuals who are deeply tied to Wall Street, is considering a so-called “bad bank” move.  A report in The New York Times says that the administration is considering creating one, large “bad bank,” which would nationalize the worst underperforming loans. This would take away the bad loans from the insolvent banks and, supposedly, allow credit to flow from the new, now solvent banks.  

The choice to be made is simple.  Should the taxpayer shoulder the losses incurred by the insolvent banks, or should the banks and their investors bear the losses?  From the public’s point of view, the answer is obvious.  Insolvent bank mangement and that bank’s shareholders and creditors should bear the losses.

Saying taxpayers should be protected from yet another money transfer to the wealthy may be obvious, but politically it is difficult because Wall Street is so entertwined with Washington and Congress, and it’s Wall Street that right now is underwater because of its speculation on risky securities.   The tipping point, Beezer believes, is that the public is simply not going to accept taking on another $1 trillion in debt on behalf of Wall Street.  This on top of an estimated $300 billion already handed out.

The lack of swift, decisive action has been an impediment to letting in new private investment–a goal politicians and Obama claim they favor.   The argument has been made that if only the taxpayer would bail out the banks and their investors, credit could begin to flow.  Not true. Credit will flow once insolvent banks are acknowledged to be so, thus paving the way for new private investment to flow in, snapping up that which has value and stepping in to replace the insolvent banks.  If they are small enough to subsidize, they are small enough to fail. 

People get tripped up on cosmetics.  Names.  Nationalization doesn’t change a bank name.  Citi will still be called Citi.  Bank of America will still be called Bank of America.  Depositors money will still be insured and secured.  Existing bank contracts with customers will still be honored.  Tellers will still be there, with the same names and faces.

What will change is bank balance sheets.  They will be solvent.  The illiquid assets will have been removed and put in warehouse–by whatever name you wish to call it (bad bank, bridge bank, RTC II).  The cost to the taxpayer?  Essentially nothing.  Eventually, the illiquid assets will be sorted out and priced over time, the proceeds used to payback taxpayers for their investment (remember the $300 billion already spent), and then the nationalized bank re-privatized at some future date. 

Despite all the wailing, nationalization is not foreign to America.  Seidman’s reign clearing out failed Savings & Loans in the late 1980s and early 1990s was a nationalization that allowed for overpriced, illiquid assets to be discounted and moved out.  Insolvent banks disappeared, and stronger bretheren survived and prospered going forward.

Importantly, this along with re-regulation of financial markets by independent regulators, will restore investor confidence.

Obama has to keep his eye on the ball.  America does need to invest trillions.  But not in failed financial intermediaries.  The real deficit facing America is the one created by decades of underinvestment in infrastructures of almost all kinds that underpin the national economy.  Tossing an extra trillion dollars or so to Wall Street is a complete waste.  Worse.  It’s counter-productive.

President Obama apparently has the political calculus, and the financial calculus, all wrong.

Wall Street concocted and sold derivative securities, the risk of which were completely miscalculated.  At this point in time, many of the securities are still performing, but as the worldwide recession deepens and  spreads, it is feared these securities will lose their value.  As a result, they cannot be traded.  There is no market for them, for now.  Private money isn’t going to throw good money after bad.

President Obama shouldn’t be throwing good money after bad either.

It is understood that, with these illiquid securities on their balance sheets, the major banks are insolvent.  They have plenty of cash, much of it at the federal reserve in the form of treasuries, but they are also long these illiquid securities.  The cure is to remove these illiquid securities from the bank balance sheets and free them up to start lending all that cash.

You can accomplish this two ways.  You can have the taxpayer pony up an estimated $1 trillion, give it to the banks, and remove the illiquid assets and put them in a “bad bank” or warehouse where they can sit until the economy recovers.  Presumably, with a strong economy, these assets may actually turn out to be worth something.

Or, you can nationalize the banks and accomplish the exact same thing without having the taxpayer pony up another $1 trillion on top of the $350 billion in taxpayer money already spent.  The government, because it is the government, has no need to rush to judgement by pre-pricing assets the value of which is unknown.

Under bankruptcy, assets are liquidated, and those that receive their investment from what is left over, line up in a specific, rational order.  The taxpayer comes first.  Secured bondholders come next.  Unsecured bondholders come after them.  Then, last, is preferred and common stock equity.

Right now, it appears Obama is knuckling under to pressure that wants the taxpayer to, first, bailout bondholders and, if the illiquid assets turn out to have some value in a strong economy, bailout equity investors.  The taxpayer will foot this entire bill, and unlike the order in bankruptcy, will go from being first in line to being last in line.

Unbelievably, Obama is rumoured to be leaning to the taxpayer bailout of Wall Street scenario.  If he does go this way, he will be faced with a huge political deficit, as well as an overstated financial deficit.

His political opponents, the very same ones who got us all into this mess, will hammer Obama as an irresponsible spender and cite the $1.85 trillion (with the brand new $1 trillion Wall St. bailout bill) as proof of his profligacy.   It’s a one-two punch that will cripple his ability to make all the investments that must be made in America’s future. 

What he should do is announce that he’s not going to use anymore taxpayer money to bail out Wall Street excesses.  In fact, he’s going to nationalize the insolvent banks and clean their balance sheets so lending can begin anew.  And when the economy recovers and he considers re-privatizing these banks, the taxpayer will be first in line to get paid back.  Instead of being on the receiving end of a Wall Street one-two punch, President Obama will deliver the one-two punch.

In effect, the government will put these insolvent banks into bankruptcy without the messiness and delay of courts and lawyers.

That’s the financial and political calculus that should inform the President’s actions.

The positives of this are overwhelming.  Taxpayers won’t be still bailing out Wall Street.  And money will be freed up for more investment in infrastructure that will redound to America’s benefit both intermediate term and longterm.

The “bad bank” bailout being discussed by Obama and his team apparently requires the taxpayer to pre-pay the insolvent banks for their illiquid assets.  The purported goal is to clean up the bank balance sheets, and thus, credit will thaw and begin to flow.

So, with one move, Obama will find himself in the position of telling taxpayers that his bailout plan is now $1.85 trillion dollars, not the $850 billion currently being advertised.  That’s because the pre-pay part of the “bad bank” idea is probably going to run, at least, $1 trillion. 

And what will the taxpayer receive for this additional trillion dollar money transfer to Citi and Bank of America, the two poster children of incompetent banking?  Nothing.  This “bad bank” scheme is just a bailout of what’s left of the bank equity, and most importantly, a bailout of the bondholders. 

The shame of it all is that this can be done without forcing taxpayers to pre-pay for these illiquid assets.  The method is called nationalization.  When the government assumes ownership of these banks, it simply moves the illiquid assets off the balance sheets to a “bad bank,” but the government can do this without providing a trillion dollars to bank bondholders who are currently stuck holding these so-called securities.  The government can do this without giving the taxpayer another horse whipping, in other words.

In both cases the banks’ balance sheets are cleaned and confident lending can be restored.  The only difference is the Obama way  will cost taxpayers $1 trillion, or more.  And this on top of the $300 billion or so already ladled out to these investors under the Bush administration.   Make no mistake, the key is that Wall Street wants to get paid for the takeover.  So they must, apparently, be paid off.  The price is $1 trillion, at current estimates.

Plus, no one knows what the accurate price is for these securities.  What’s the rush?  A government owned “bad bank” can take it’s sweet time to find the value that may be there.  Under nationalization, the government can wait without paying someone $1 trillion.  It could provide bondholders a piece of paper, the worth of which will be determined, once the illiquid assets are actually sold.  The idea the taxpayer has to pay for them now, on a guess, is a terrible idea.

Even putting these banks into bankruptcy would be better than this.

Beezer hates being taken for a sucker.

The globalization of commerce, and the corresponding globalization of banking, was thought to reduce risk by diffusing it amongst many countries, industries, companies, and investors. 

While it’s true that risk was spread amongst more players, it was not true that risk was diffused.  Reality now shows quite clearly that globalisation increased risk.  It concentrated risk.

The thinking has been that strong global commerce, money and power could counteract, could mitigate, financial problems that might arise in one region or another.  In effect, the concept was that strong regional financial centers could make it less likely that financial problems in one region would pull other regions down.

The unrecognized flaw in this thinking is that there is no region in “regional.”  In this day of electronic speed and intimacy, regional differences are illusory.  It’s as though all the banking centers of the world were located in one building, somewhere on Wall Street in downtown Manhatten.

As a result, a mortgage and leverage “bubble” created primarily in the United States swept throughout the globe at digital speed and when it finally burst, it plunged all commerce and banking everywhere into a bust.  The old saw that if the United States sneezes, the world catches cold is more true than ever in today’s “globalized” world.

Suddenly, instead of an equilibrium created by strong regional players, there is correlation.  Everyone caught cold and everyone woke up to find they’re all in the same hospital ward.  The same digital room.  Instead of diffusion, there is concentration.

As the world’s economy slows down into various degrees of recession, or worse, one correlation has been government reaction.  All governments are injecting stimulus into their staggering economies.  Similarities abound.

Sir Arthur Quiller-Couch, a Cornish born author and professor of English at Trinity College in England in the 19th and 20th centuries, was said to have maintained that there are only seven themes in all of writing.   They are: Man vs Man; Man vs Nature; Man vs God; Man vs Himself; Man vs Society; Man caught in the Middle; Man & Woman.   Considering the number of books written in every language under the sun, there may be only seven themes, but there are an infinite number of variations.

Just like the seven themes in all of literature, it is likely that the basic themes of banking, commerce and money haven’t changed with the current crisis.  But the variations, it is clear, are infinite.

A common understanding of risk needs to be shared globally.  A common perception of what to look for in identifying risk needs to be shared globally.  What needs not to be shared globally is more concentration of power. 

Diversity and power sharing are positives.  They reduce risk.  Concentration does the opposite.  It increases risk, and most importantly, it dramatically increases the damage risk can create.  

The “too big to fail” concept is a fallacy.  In the United States, huge Wall Street financial firms need to be broken up.  Their concentrated power, built up over the past several decades, has contributed mightily to our current economic crisis.  Although private corporations, their power has overwhelmed the government, which is supposed to regulate them. 

Even in today’s environment, government so far has directed most of its money towards these financial behemoths.  Individual taxpayers are being forced to insure private investors in these banks.  The bill is in the hundreds of billions of dollars. 

Beezer believes the taxpayer, acting through their government, should nationalize these insolvent giants with a view towards breaking their power.  Their illiquid assets should be warehoused and deducted from the balance sheet which would free the national bank to lend.   Once the actual value of the illiquid assets is determined, at some future date, then the national bank can be re-privatized as several banks.

This can be done cheaply.  The banks are not short of cash.  They are just long illiquid securities.  With nationalization, the illiquid securities do not have to be priced (and therefore paid for now by taxpayers).  Failure to nationalize simply means the taxpayer will have to place even more, totally unnecessary, money into the private banks.  This is being proposed because our government is overwhelmed by the power of the “too big to fail” banks.  These banks run our government, even in extremis.

Take them over.  Warehouse the illiquid securities.  Break them up when returned to private hands.  Stop draining the public’s purse to bailout bank bondholders.   There are far more urgent and worthwhile uses of taxpayer funds.  Fixing our health system, the worst by any measure of any developed country, would be a good example of where this money should be directed.

Citi and probably BA are both functionally insolvent, despite the billions of taxpayer dollars already ladled on to their balance sheets.  It’s obvious to all but the most compromised (that would be Wall Street, Congress and the national Media), that it’s long past time to realize the Emporer Has No Clothes.

The following statement is directed towards the issue of how best to write down mortgage principal where the homeowner is underwater and in trouble, but it applies to the larger issue of what to do with insolvent banks previously considered “too big to fail.”

“Financial institutions want to delay loss recognition as long as possible.  Maybe they’re hoping that the market will magically rebound.  Maybe they think that 2006 prices are the “real” prices and “2009″ prices are a very short-lived aberration.  But here’s the crucial point:  homeowners bear the cost of delayed loss recognition by financial institutions.  Delayed loss recognition means homeowners floundering in unrealistic repayment plans and then losing their homes in foreclosure.  Delayed loss recognition means frozen credit markets because no one trusts financial institutions’ balance sheets.  Delayed loss recognition means magnifying, shifting, and socializing losses.  We only make matters worse when we try to pretend that these losses don’t exist,” writes this author.