The federal government is the biggest and most influential financial institution in the world, a fact often hidden by the widespread public conception that the American government largely stays out of business activities. The government’s recent frenetic interventions in the financial system, such as the rescue of the banking system or the Federal Reserve’s massive direct support for the financial markets, are therefore generally seen as aberrations. Yet even the narrowest measure of the government’s traditional role in lending shows that it directly or indirectly provides credit in an amount significantly larger than the loans on the books of any...

The federal government is by far the largest provider of credit in the United States and performs this function in many key areas of the economy. There are important public policy reasons behind the decisions to initiate and continue the various programs. Moreover, the favorable political attributes that accompany the provision of federal credit are always likely to tempt politicians. This chapter presents the policy arguments, pro and con, and then discusses the political aspects. Finally, it examines the policy and political aspects of a number of other critical structural choices regarding these programs, such as the question of whether...

With one notable exception, and a few minor ones, the federal credit programs began in a serious way as a response to the tremendous economic upheaval of the Great Depression. Consistent with the government’s overall role, which was much smaller and less active than it is today, the federal government did little that might be construed as credit provision from the founding of the republic until early in the twentieth century. The government did influence credit provision to a modest extent in the early years by sponsoring the First and Second Banks of the United States (1791–1811 and 1816...

The federal government had outstanding loans and loan guarantees of approximately $2.5 trillion at the end of fiscal year 2010.¹ Figure 4-1 shows the level of federal credit provision since 1998 and the breakdown between loans and guarantees. It does not include activity by Fannie Mae or Freddie Mac, which are not officially part of the federal budget despite the federal government’s vastly expanded role at these GSEs since the fall of 2008.

Two facts jump out from figure 4-1. First, from 1998 to 2008, growth was somewhat cyclical and relatively moderate, at an annualized rate of 4.2 percent. This...

Are federal credit programs providing good value overall for the taxpayer money spent on them? Unfortunately, the most comprehensive set of research concludes that the overall costs significantly outweigh the quantifiable benefits. Other, more limited analyses point in the same direction. On the positive side, analysis of the research literature suggests methods of reform that should improve the value for the money.¹ Nonetheless, the results of the limited research in this area are clearly discouraging.

However, there are a number of reasons not to take these studies as definitive but rather to see them as a warning of the dangers...

The financial crisis that reached its peak in 2008 spurred the creation of a number of emergency federal credit programs. These programs were created at the Treasury Department (often under the Troubled Asset Relief Program), the Federal Reserve, the Federal Deposit Insurance Corporation, and the Federal Housing Finance Agency. It is interesting to compare these programs with the longer-standing traditional credit programs, such as the Federal Housing Administration or the Small Business Administration. The comparison can give us new understanding of why federal credit programs are created, why they are structured as they are, and what approaches work best. However,...

The emergency credit programs have many similarities with the traditional programs, largely based on their common nature as federal credit programs, but there are also quite a few striking differences. This chapter examines the similarities and differences between the two categories of programs. The emergency programs had a clear overarching policy rationale: to respond to the massive market failures being seen in the private sector in the last half of 2008 and early 2009. Virtually no observers argued that the private markets were functioning as they should have been, nor was there much disagreement about the profound damage being done...

What have we learned from almost a century of federal credit activity? For one thing, federal credit activity has affected the economy in major ways for a long time. The government is the nation’s largest credit provider by a considerable distance. It offers loans and guarantees in four sectors of the economy where credit is of particular importance: housing, business (especially small business), education, and agriculture. And these programs are long established—the first began during World War I and the last in 1965.

Second, the size and importance of federal credit activity have swelled temporarily owing to emergency credit...