Geithner's bank plan offers non-recourse loans to institutions that participate in the public-private partnership for purchasing toxic assets. This gives institutions an incentive to offer higher prices than they otherwise might. Many critics of the bank plan have suggested this is crazy -- that it makes the prices "artificial -- but James Surowiecki has a good response:

Yet for all the criticism of this subsidy, the truth is that the plan's reliance on non-recourse loans is not an especially radical idea. In fact, it's essentially the same kind of subsidy that the entire U.S. banking system has depended on for the last seventy-five years. What are FDIC-insured bank deposits, after allĂ They're non-recourse loans to banks. You deposit money with a bank--that is, you lend it your money. The bank can then take that money, and leverage it up nine-to-one to make loans or acquire assets. If the loans are good, they keep all the profits. If the loans go bad, the most the bank can lose is the capital it's invested. All the rest of the bank's losses are paid for by the FDIC. This is precisely the same arrangement -- down to the loans being guaranteed by the FDIC--that the Geithner plan sets up.

I don't think the takeaway point here is that the bank plan is necessarily a good idea because a portion of it resembles the standard operating procedure at the FDIC. (For one, the analogy doesn't insulate the bank plan from the larger criticism that the assets in question are worthless and the banks in question are insolvent.) But it does mean critics of the non-recourse loans have to come up with an argument or a distinction for why the Geithner bank plan is different from what the FDIC already does. Why should we feel comfortable subsidizing investment risk in one case (the FDIC) but not another (the Geithner plan)?

Ezra Klein offers two reasons for why we should think about the Geithner plan differently than we think about the FDIC. First, with the FDIC we are getting something in exchange from the banks: oversight, accountabiltiy, and transparency: "The hedge funds and investment entities likely to participate in this auction will not be subject to the same federal oversight or behavioral modification." Second, the historical moment is a lot more uncertain: "The FDIC-insured banking market deals with lots of small loans within a fairly staid and settled business model. The asset auctions, by contrast, are a wholly new market opportunity relying on massive individual investments that carry tremendous potential upside amidst a moment of historic uncertainty."

Both points are true, but I don't think they much diminish the force of Surowiecki's analogy. Sure, the federal oversight will not be the same. But I look at the application form (pdf) to manage these assets and see a set of demands for information and oversight, not a blind giveway.

And while it's true that the historical moment is, you know, historically unsure, that's the sort of observation that can always cut in both directions. In times of historic uncertainty, why shouldn't we stick with an FDIC model that has served us reasonably well for the past 75 years?

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