The Hybrid Plan: A Proposal for Federal Credit Reform

Abstract

Federal credit subsidies are one of the largest areas of government activity. However, the Unified Budget treats lending in a highly misleading manner, and federal credit management is inconsistent and deceptive. These oversights have contributed to both the rapid rise of federal lending and the financial crises facing several credit agencies during recent years. Credit reform is a vital issue both to protect the government's huge financial stake and to ensure the success of credit programs. Copyright 1990 Western Economic Association International.

Government Lending as a Tool to Mitigate the Effect of Asymmetric Information

“…Craig et al (2007) review the empirical literature to conclude that the U.S. Small Business Administration's loan guarantee program is likely to have a small positive impact on economic performance. Gale (1991) finds that credit subsidies do not affect aggregate investment much. Shaffer and Collender (2009) show that the effect of government credit varies significantly across government programs and across performance measures, making it difficult to be conclusive.…”

Support for small businesses amid COVID‐19

“…These empirical findings focus mostly on the effectiveness of government support on lending supply, but less is clear about its welfare trade-off, so our normative assessment complements these empirical analyses. In this sense, our paper is related to that of Gale (1991) who develops a theoretical framework à la Stiglitz and Weiss (1981) to analyse the quantitative effects of federal lending on credit allocation and economic efficiency. Gale (1991) shows that federal credit programmes are effective in the allocation of credit, but the estimated efficiency cost of the actual credit policy is high.…”

“…In this sense, our paper is related to that of Gale (1991) who develops a theoretical framework à la Stiglitz and Weiss (1981) to analyse the quantitative effects of federal lending on credit allocation and economic efficiency. Gale (1991) shows that federal credit programmes are effective in the allocation of credit, but the estimated efficiency cost of the actual credit policy is high. The model maintains a simple direct link between credit and real activity in that an increase in credit leads to increased real activity, whereas our model incorporates the composition of real activity so that credit contractual terms change the marginal incentive on whether to become an entrepreneur or stay out as a worker.…”

Government Loan Guarantees, Market Liquidity, and Lending Standards

“…Mankiw 1986) and suggest that guarantees lower non-guaranteed loan issuance (e.g. Gale 1990Gale , 1991. 8 These studies focus on lending in primary markets subject to credit rationing and redlining where government subsidies crowd in subsidised borrowers but crowds out borrowers that do not receive subsidies (a negative externality).…”