Back on Monday, I noted that the briefing fact sheet about the Treasury Department’s Public-Private Investment Plan suggested that a broad swathe of the public might be able to participate in the program, and said that I think it’s a very good idea to try to make sure that this is the case. Ryan Avent surveys some information about how it actually probably wouldn’t be a great idea for individual investors to try to play the PPIP game and concludes “I’m not really sure what their inclusion is supposed to accomplish, other than some feel-good idea that they get to have the fun the bankers have.”
I completely agree with everything Ryan has to say about this except that instead of “some feel-good idea that they get to have the fun the bankers have” I would say “some much-needed political legitimacy for a massive risk being taken with taxpayer cash.” One risk with the PPIP is that it won’t work. But another risk is that it actually will work pretty well, but it’ll look a bit ugly, the public will get outraged about one of the many elements of the plan that aren’t being explained extremely clearly, and the plug will wind up getting pulled. It’s possible, for example, that this plan will wind up more-or-less succeeding in recapitalizing banks, but taxpayers will incur $100 billion in losses while some savvy institutional investors make big profits. I think most informed observers, myself included, would consider that a pretty damn good outcome considering the other possibilities. But it’s also exactly the sort of outcome that could spark an enormous backlash from the public.
Part of avoiding that is for people in a public or somewhat public role to try to explain the situation to our audiences. But part of avoiding that is to try scrupulously to go the extra mile to avoid this turning into a purely inside play. You want it to be the case that the broad public has some ability to participate in any potential windfalls through some kind of reasonably accessible investment vehicle. That’s not a crucial economic imperative, but it is very important for legitimacy and legitimacy is extremely important when you’ve got the government taking unprecedented crisis measures.