The Price We Pay For Investment Apartheid

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The federal government protects two different classes of investors very differently against losses they might incur as a result of making poor investment choices. Both forms of protection inflict incalculable damage on our economy. The injustice of this disparate treatment mocks equality before the law. Were the Occupy Wall Street protestors focused on this, they'd be on to something.

One small class of investors is uniquely privileged in that they are repeatedly made whole whenever they screw up. Politicians argue that cleaning up after them is always done for the good of society. This makes the rest of us more compliant when they stick us with the bill. Knowing they carry implied protection against losses, these elite investors are eager to make hay while the sun shines. And because they are endowed with massive intellects, when they do screw up they do so spectacularly, sometimes destabilizing entire national economies.

We usually call these people bankers.

A second class of investors is forbidden from making many types of investments, particularly in privately held companies, because they might screw up. We call these people unaccredited investors, defined by law as those with a net worth less than $1 million or annual incomes less than $200,000. These investors are underprivileged for their own good as they are presumed to possess modest or at least unaccredited intellects, making them susceptible to being easily bamboozled.

Nowadays, we call these people the 99%.

Underprivileged investors who want to invest in businesses that might bamboozle them can entrust their savings to privileged investors, who charge dearly for their acumen. They can also buy an unlimited number of lottery tickets offered by state governments, whose advertising is designed to bamboozle them.

So who are the privileged few? Here is where class warfare advocates get confused. Not all of "the rich" are members of this privileged elite, as the vast majority of the 1% did not make their money in financial services and never have nor ever will receive taxpayer bailouts. The privileged few may also be rich, but what makes them special is that they are given access to the public treasury in times of need in return for being overseen by an alphabet soup of federal agencies entrusted with making sure that they never screw up. And every time they do screw up and dip into that public treasury, politicians are quick to layer on additional agencies and regulations to make sure it never happens again.

History shows that privileged investors screw up on a cyclical basis, regardless of how many agencies watch over them. The only thing that grows faster than those agencies is the size of the bailouts. The bill is paid by the rest of us, including "the rich" who shoulder the biggest portion of the burden because they pay the biggest share of the taxes. People who don't pay income taxes don't pay to bail out privileged investors.

The regulatory agencies are usually staffed by people formerly employed by the companies they regulate. This is because it takes special expertise to understand all the different ways in which privileged investors can screw up. Yet thanks to their massive intellects, privileged investors are forever inventing new ways to screw up that regulators haven't seen yet.

Aside from the malinvestments privileged investors inflict on our economy each time they screw up, everyday small businesses get starved of funds, as loans dry up to give bank balance sheets a chance to recover. Can small businesses then turn to underprivileged investors for financing? Not under current law.

How does one become a privileged investor? By buying a seat at the table in Washington, where the laws are written tasking regulatory agencies with making sure privileged investors never need to be bailed out again. Yet each time privileged investors crawl so far out on the risk/reward limb that it cracks off, their political patrons from both parties close ranks to assure us that the bailouts are essential for the public good. And each time we believe them.

Perhaps they are right. Isn't believing this same story over and over again irrefutable evidence that most citizens lack the intellect to look out for themselves? Doesn't empowering privileged investors to find ever more exotic ways to gamble with other people's money - knowing they will be bailed out when they screw up - prove that democracy gives voters exactly what they deserve?

After all, we have the power to shut down the privilege factory every time Election Day rolls around. We have the power to cut off the bailouts. We have the power to demand that failure and bankruptcy discipline speculators of all stripes, regardless of their political connections. We have the power to unleash the savings of unaccredited investors to flow into small business instead of lottery tickets.

But will we use it? Or will we once again fall for the story that the problem can be solved "once and for all" by adding a few more agencies, a few more regulations, and a few more types of financial services into the circle of privilege? After which politicians can set us back to blaming "the rich" for our woes, rather than looking for real solutions.

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

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