Despite, or maybe because of, the Great Recession there’s tremendous opportunity for the United States in general, and for President Obama in particular.

Without going into detail (books will be written about all this) one underlying cause of this recession was the lack of strong credit securities for investors globally.  That lack still exists.

And herein lies the opportunity.  The United States has a great need for infrastructure improvements in many areas.  It has been estimated that just maintaining our existing infrastructure will cost well over $2 trillion the next five years.  But the need goes far beyond that figure.  Our energy system needs modernizing, and the demand for clean, sustainable base energy is only going to increase the next 10 years.  Dramatically increase.

The automotive and mass transit industries need to be re-built.  Universal health care will take huge investment to implement.  Public investment in education will improve our ability to instruct our youth in the skills needed for this century.

One can only guess at how much investment all this will take, but the total is likely to be many times the $14 trillion in GDP the United States produced in 2008.

Much if not most of this investment will take the form of bonds, the lifeblood of credit markets worldwide.  And unlike the derivative securities recently exploded, these will be real bonds.  Secure bonds mainly issued by government.  These types of AAA securities are just what credit markets need.  There will be willing buyers worldwide.

But there are two hurdles to overcome.  For 30 years the United States operated under the basic assumption that free markets, if left alone and essentially unregulated, would best create jobs, income and wealth for everyone.  It turns out that, although free markets are powerfully creative, they tend to ignore longterm goals in favor of short term profits.

Long term goals, it turns out, is primarily a function of government.  The first hurdle is to convince the nation that it’s wise to support government efforts in this regard.  And this means overcoming 30 years of ideology based upon the idea that government is the last place you go to for answers.  As President Reagan so powerfully argued, “Government is not the solution.  It’s the problem.”

Convincing at the time 30 years ago, the nation took his words too literally and wandered down the now crumbling road believing free markets would take care of everything.

That’s hurdle one.  Hurdle two is planning and explaining what the goals are and exactly how we intend to get there.   The better this is done the greater is the opportunity.  Well designed plans and clearly stated goals will attract investment dollars in search of the kind of projects that provide secure credit market returns. 

President Obama has begun this effort, but it needs to be fleshed out and better explained.  He’s called his initial efforts a “down payment” for improving the nation’s energy, social and education infrastructures.

Any good plan has specific actions, each building on the other and leading to success.  There is a well understood design showing how assets will be applied to making improvements.  There is detail everyone can clearly see and agree with.

One important aspect may be to design specific Treasury bonds to specific projects, rather than just a general raising of investment capital.   This kind of clarity of purpose enhances a bond’s attractiveness to credit markets.  During WWII, for example, the United States issued “war bonds.”  Also, the Treasury investment can create the need for private bonds as industry competes for contracts.

This clarity also demands clarity of payment.  It requires the government to have strong fiscal plans that back up the bonds.  Income from private involvement will help, but in the end, the government has to honestly budget what it will take in tax revenue to pay off investors.  Fortunately many of the required investments will generate easily identifiable tax revenues.  That’s why credit markets so love utility projects, for example.

The President has shown a tendency to suggest goals and seek bipartisan support from Congress.  It’s not likely this approach will work well.  More than suggestions are needed.  Specific plans that identify all the effort’s components, including investment sources and tax income, need to be included in the administration’s proposals to Congress.

If the detail is good, the focus strong and the opportunity well defined Congress will want to be associated with any proposed plan.  Cooperation will be forthcoming because that’s how Congress gets re-elected.

And the rewards will be huge.  The first reward will be a rise in public confidence, a serious victim of the Great Recession.  America has always relied on a native sense of optimism.  Just developing the goals and explaining the plans to reach those goals, will provide a tremendous boost.

The sooner we start, the better our rewards.  Real finance.  Real goals.  Real returns for investors.  From the Great Recession to the Great Reconstruction.

“I don’t know the odds of an earthquake, but I can imagine how San Francisco might be affected by one. This idea that in order to make a decision you need to focus on the consequences (which you can know) rather than the probability (which you can’t know) is the central idea of uncertainty…..

Invest in preparedness, not in prediction.”

So says Taleb in “the Black Swan.” Taleb is an empericist. Rather than trying to predict what’s going to happen, he talks of the “Great Asymmetry” and advises that one “Put yourself in situations where favorable consequences are much larger than unfavorable ones.”

As a practical matter this means the vast majority of your assets (or a nation’s assets) be put into the safest of investments. But a much smaller portion should concurrently be put into endeavors which, while most will fail, a few will reap huge dividends.

An example of an endeavor with potentially huge dividends: R&D into clean energy. We should, as a nation, invest across the broadest spectrum of such endeavors.

But in contrast, commercial banking should be treated as a utility and capital standards should be conservative and tightly regulated. In this industry, as we’ve learned, again, there’s not much upside but plenty of downside.

Consider health care.  We are provided at birth with a marvelous creation:  Ourselves.  As far as modern science is concerned, we’re pretty much perfect from the beginning.  That means we, physically, have limited upside but lots of downside.  We can get deathly ill.  We can get run over by a car.  We can’t predict whether anything will happen to us, so we must be conservative with our most precious asset.

This would argue for a comprehensive health care system available to all citizens.  Such as system, a utility really, would allow us the maximum preparedness cited by Taleb.  People with a direct connection to a general practitioner are less likely to suffer negative health consequences.  Problems are more likely to be spotted early and the damage mitigated.  A GP’s ability to influence healthy living habits will enhance overall health, and reduce incidence and thus the cost of adverse consequences.

On the other hand, each one of us contains the ultimate in upside potential mentally.  We have marvelous computing power contained in those six inches between our right and left ears.  Our brains are, in fact, huge non-linear computers of pedaflop power (one quadrillion computations).

So what is the investment we should obviously make considering this powerful human capability?  Education.  Education is the enabling tool for the highest utilization of this human capital.  Universal health care helps keep this huge upside healthy and operating while limiting the downside.  Education enhances our mental powers and, as a result, unleashes huge upside potential.

You don’t have to take my word for this.  Take Winston Churchill’s, the Great Britain Prime Minister during WWII.

“The future of the world is to the highly educated races who alone can handle the scientific apparatus necessary for pre-eminence in peace or survival in war,” Churchill said.  He also said “Those who think that we can become richer or more stable as a country by stinting education and crippling the instruction of our young people are the most benighted class of human beings.”

Steve Waldman writes a blog, Interfluidity, which is often on point and well written.  He’s got a new post explaining what he thinks needs to be accomplished along the way of fixing our banking system.

It’s a fairly common theme amongst those, and there are many, who won’t be satisfied if the banking system isn’t reformed to avoid future financial meltdowns caused by excessive risk taking.

He writes about one aspect of the current problem which we believe doesn’t get enough attention:  That investors failed to reign in excessive risk taking and, as a result, not only damaged their own investments but damaged the investments of many others.  

“I am a true believer in American-style capitalism. So I would like to see people who earned profits lending to banks in good times bear the high costs of failing to monitor the organizations they funded. Investor fear is what is supposed to prevent the indiscriminate misuse of capital. To the degree that creditors have leaned upon “implicit” government guarantees, I think it would both be just and set a useful precedent if they were reminded that investors have to take responsibility for where they place the precious capital they steward….” Waldman writes in this essay.

Meanwhile, today’s news was that Treasury informed Bank of America and Citi that they needed to raise more capital.  Also, FDIC Chief Sheila Bair said yesterday the too big to fail bank concept needs to be tossed into the “dustbin,” and called for giving the FDIC, and other regulators, more power to wind down large companies that are systemically important.

The future path of the bank resolution is not certain, of course, but what is certain is that federal regulators from Treasury, to the Federal Reserve, to the FDIC are setting the table for taking out one or more of the TBTF institutions.  They may not want to do this, but the option is obviously still “on the table.”

We’ve noticed recently that Treasury Secretary Tim Geithner has begun to point out that he is not a banker.  Never has been one.  That he is putting some distance between who he is, and who bankers are, is no doubt intentional.  The huge subsidies made to the TBTF group raises the fear that Geithner has been “captured” by the very industry he regulates.  In effect, Geithner is signaling he hasn’t forgotten he has responsibilities to the public and not just to banks.

Waldman’s essay is featured today at Economist’s View, Prof. Thoma’s site.  There is a strong comment discussion on Waldman’s essay there, as well as at Waldman’s site itself.

For those inclined to follow this part of the Great Recession, today’s essay and comments are interesting contributions to what we believe will be a story with many twists and turns to come.

As a progressive, we get a little nervous when a conservative agrees.  But here’s an example of where one does.  Bruce Bartlett worked for Congressman Jack Kemp, and is a lifelong supporter of lower taxes.  But even from this orientation, Bartlett wonders out loud what the Tea Party protests were all about. 

Rather than edit his commentary, which appeared Friday in the New Majority (a Republican Party official publication), we reprint it in it’s entirety here.  Thanks to Economist’s View for the link.

“I have spent most of my life trying to cut taxes. Back in 1977, while a staffer for Congressman Jack Kemp, I helped draft the Kemp-Roth tax bill, which was endorsed by Ronald Reagan and enacted into law in 1981. According to the Treasury Department, this is the largest tax cut in American history.

So one might assume that I was out protesting taxes along with many of my friends on April 15. But going to rallies is not my thing; I thought my time and skills were better spent analyzing tax burdens to see what evidence justifies the sudden appearance of mass protests against taxes.

The first thing I did was look at the U.S. tax burden compared to other similar countries. Vast amounts of such data are compiled by the Organization for Economic Cooperation and Development in Paris and easily available on its web site.

The first thing I did was look at total revenues — federal, state and local — as a share of the gross domestic product. This percentage is the best summary measure we have for the burden of government on the economy.

The latest complete data are for 2006. They show that governments at all levels consumed 28 percent of GDP in the U.S. Of the 30 OECD countries, we ranked 26, just slightly above Japan and Korea. Only Turkey and Mexico had significantly lower tax burdens.

The most heavily taxed countries are Denmark and Sweden, where government takes 49.1 percent of GDP. On average, the OECD countries of Europe had a tax ratio of 38 percent — 10 percentage points higher than the U.S.

Since the level of taxation here is already considered tyrannical by tea party organizers, any tax level approaching that in Europe would surely constitute slavery in their eyes. Of course, anyone who has ever traveled to Europe knows that the people there are no less free than we are.

For the most part, Europeans just prefer to pay higher taxes for universal health care, while Americans have the cost deducted from their paychecks by their employers. If Americans took all the money they pay for health insurance and added it to their tax bills, getting free health care in return, our tax/GDP ratio would be about the same as that in Europe.

Keep in mind that Americans have always been willing to pay higher taxes when they got something they need in return. Every family with children looks carefully at the quality of local schools when buying a house and almost all are willing to pay higher property taxes to get good schools. States and localities with the lowest taxes are seldom the best places to live because of a concomitant lack of services.

I published my analysis at Forbes.com and sent it around to some of my conservative friends. The universal reaction was, “So what? Why should Americans care if foreigners are even more overtaxed than we are?”

I thought this was a fair point, so I did another analysis looking only at taxation in the U.S. Even if our taxes are low compared to those in other countries, tax protests might be justified by a rising tax level.

The first thing I did was look for more recent data on taxes as a share of GDP on the website of the Congressional Budget Office. It says that total federal revenues will consume 15.5 percent of GDP this year, down from 17.7 percent last year, 18.8 percent in 2007, and 20.9 percent in 2000.

This is a very sharp reduction in the tax/GDP ratio. As a consequence, the federal government will take less out of the economy in the form of revenue than any year since 1950.

But what about the average American, I wondered? Is it possible that the tax code has changed in some way that makes families worse off even though the aggregate level of taxation has fallen?

To answer this question, I went to the website of the Tax Policy Center. It has a table that looks at federal income taxes on the median family’s income. The median is the exact middle of the income distribution—half of all families make more, half make less.

In 2007, the latest year available, the median family paid 5.91 percent in federal income taxes. In every year from 1958 — the first year available — through 2002, it paid more. In 1981, before the Reagan tax cut took effect, the federal income tax rate on the median family was 11.79 percent—twice what it was in 2007.

Many commentators complained that these data are meaningless because they are skewed by the large and growing number of Americans that pay no federal income taxes. According to the Joint Committee on Taxation, 43 percent of federal tax returns filed in 2007 had no income tax liability.

My critics, however, misunderstood how the Tax Policy Center data are calculated. They are not affected in any way by the number of people not paying taxes. The data simply look at the median family’s income and use current tax law to estimate its tax liability.

In response, my tea party-attending friends said I had left out payroll taxes. But there has been no change in the payroll tax rate for many years and most people will get back cash benefits equal to everything they pay in Social Security taxes plus a lot more. Anyway, I didn’t see any signs at the various tax protests complaining about payroll taxes.

But what about state and local taxes, my critics replied? This is always a problem area, analytically, because they vary widely from one place to another. However, according to the National Association of State Budget Officers, the aggregate amount of state tax increases this year amounts to just $1.5 billion; all of that accounted for by one state, California. Two-thirds of states either cut taxes or had no increase.

Moreover, in surveying the location of tax protests compiled by a group called FreedomWorks, which organized the demonstrations, the bulk of tea parties appear to have taken place in Texas and Florida, which have no state income tax, or states where there has been no tax change. Few protests occurred in high-tax states; most were in states where they are low.

Finally, in desperation, my critics said that it is not actually the level of taxation today that they are protesting. It’s the implicit tax resulting from large federal deficits that really concerns them.

I might have been willing to buy this argument except for the fact that these same people justified a huge tax cut in 2001 on the grounds that large budget surpluses, which had arisen toward the end of Bill Clinton’s administration, were proof of over-taxation since the government was taking in more revenue than it needed to pay its bills.

Furthermore, the conservative line for the last eight years was that budget deficits don’t matter, as Vice President Dick Cheney famously remarked when Treasury Secretary Paul O’Neill raised concerns about them at a cabinet meeting in 2002. (O’Neill was fired shortly thereafter for not being on-message.) It’s at least a bit disingenuous for conservatives to suddenly change their view on deficits simply because their team is no longer in power.

In my opinion, these tea parties had little, if anything, to do with current or projected tax levels. They were just partisan pep rallies designed to make out-of-power conservatives and Republicans feel better. Secondarily, they were about building audiences for Fox News and right-wing talk radio hosts.

But I will grant that some of those attending tea parties are now genuinely concerned about our fiscal future even though they weren’t during the George W. Bush Administration. (Where, I wonder, were the protestors when Bush and a Republican Congress massively expanded Medicare in 2003?) But it’s not enough just to complain; specific proposals need to be developed that go beyond cutting foreign aid and earmarks — just about the only spending that conservatives ever talk about cutting.

In particular, anti-tax activists need to explain how we are going to cut Medicare by tens of trillions of dollars when its beneficiaries already represent the largest voting bloc in America and its ranks will grow sharply as the baby boom generation retires. Because of rising Medicare costs, we would be facing massive budget deficits in the near future even if Barack Obama had not been elected, Republicans still controlled Congress, and there had been no economic crisis.

Still, all movements must start somewhere. If the April 15 tea parties are really about more than just electing Republicans and increasing Fox News ratings, I may join them next year. In the meantime, protestors need to do a better job of figuring out what they are protesting and devise a real plan for dealing with our nation’s fiscal problem. Otherwise, their efforts will amount to nothing more than hot air.”

In the free market, capitalist system the “cops” are a company’s investors.  It is their job to insure that management is making wise decisions.  If the investors don’t do their job well, they lose money.  If the management is lousy enough, and bankruptcy results, investors lose all their money.

This straightforeward system provides a marvelous disincentive against management gameing the business for short term bonuses or stock options.  And in public companies that go bankrupt, creditor lawyers tend to ask management uncomfortable questions like why didn’t you tell our clients sooner about adverse developments?  This can lead to prison for wayward management.  Yet another strong disincentive against gameing the business for short term personal profit.

So why did it fail this time?  Because the government drew a protective fence around the investors, particularly the bondholders.  They have insured the investors, so there’s no “cop” on the beat anymore.

How else can you explain that investors re-elected all the top management, and the directors of Citicorp last week?  This is the crew whose decisions resulted in a 75% decline in Citi’s stock price and billions and billions of taxpayer dollars being funneled into Citi to keep it operating.  Investors stood pat because they expect to be made whole by the taxpayer.

We will not recover from this recession until the government removes it’s protection for the “cops” of free markets, the investors.  Once that is done, sanity will return to banking and other financial intermediaries.

The argument, at this point, that we still have Too Big To Fail (TBTF) institutions is false.  It’s a big, big world out there, and there will be plenty of private investment ready to sweep in to the buy the assets of discredited, mismanaged banks. 

The longer the government waits to make this move, the more expensive will be the cost to taxpayers, and to the economy as a whole.

John Bogle, founder of the mutual fund group Vanguard, has an excellent article in the Wall Street Journal, which is re-printed in part at economist’s view, where there are also a series of thoughtful comments following the Bogle post.

Bogle wrote: “But self-interest got out of hand. … Dollars became the coin of the new realm. Unchecked market forces overwhelmed traditional standards of professional conduct, developed over centuries. … We’ve moved from a society in which “there are some things that one simply does not do” to one in which “if everyone else is doing it, I can too.” Business ethics and professional standards were lost in the shuffle. … The old notion of trusting and being trusted … came to be seen as a quaint relic of an era long gone….

The managers of our public corporations came to place their interests ahead of the interests of their company’s owners. … The malfeasance and misjudgments by our corporate, financial and government leaders, declining ethical standards, and the failure of our new agency society reflect a failure of capitalism. …”

Beezer here.  But in the commentary there was one observation that stockholder interests may be different than society’s.  I disagree with that viewpoint.

I wrote the following in response to the original comment by wjd123.