Why can't you get a slice of the new bank plan's pie? Matt Yglesias asked the question last week, and Daniel Gross asks it in his Slate column today. The basic point is that Geithner's new bank plan is unfair because it restricts access to non-recourse loans to big investors. Gross writes:

If we taxpayers are going to be financing something close to guaranteed returns for hedge funds and private-equity firms, why can't we get in on the sweet deal that's being offered to Wall Street? Why can't we buy the distressed assets the same way hedge funds will?

And sure, there is something intuitively unfair about this. But I wonder: Would Gross extend his principle to all sorts of other investment restrictions?

The Securities Act of 1933 restricts the public's ability to invest in all kinds of complex instruments. In particular, to register as an accredited investor you (a "natural person") need to have a net worth greater than $1 million dollars and an income greater than $200,000 a year. This is because certain investments are considered too complicated and risky for the public at large. Soft paternalism? Sure. But soft paternalism that New Deal legislators thought was worth it.

What's the reasoning behind the investment restriction in this case? Well, I haven't seen an administration official flesh out why the securities portion of the bank plan is limited to large investors. But I assume it is because (1) The transaction costs of having many small investors would be prohibitively high. And, (2) because the investments in question are too complicated and risky for the public at large.

This isn't a defense of the Geithner plan. But I think it's similar to the point that James Suroweicki made earlier in the week: The Geithner plan has come in for some criticism because it offers non-recourse loans to banks that purchase toxic assets. But this is similar to what the FDIC does already: it subsidizes a bank's investments by insuring deposits. Why do we find this acceptable in one situation (deposit insurance) but not another (non-recourse loans in the Geithner plan)?

I think you can ask the same thing about the plan's "fairness," or lack thereof. Sure, the plan restricts the set of potential investors. But we've been restricting investors for 75 years. It was a keystone of the New Deal. Why is it suddenly a problem?

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