Government Loan and Guarantee Programs
[Pages:9]Government Loan and Guarantee Programs
JOEL FRIED
HE U.S. government is involved heavily in providing credit assistance to the private sector. From 1971 to 1981, the total amount of federally assisted credit outstanding jumped from $217 billion to $678 billion, an increase of over 200 percent.' Moreover,
government direct and guaranteed loans constituted almost 12.5 percent ofthe total hinds advanced, direct-
ly or indirectly, to the non-federal sector over the period 1972--81. In 1980 and 1981, the proportion of new funds loaned to the non-federal sector in the form of a government direct loan or guarantee rose to 17 percent.2
This article examines the consequences ofdirect and guaranteed loan programs on interest rates and aggregate demand. The analysis focuses on shifts in the supply and demand schedules for alternative sources of credit affected by each type of pi-ogram. The results indicate, under fairly standard assumptions, that an
increase in government direct loan programs accompanied by an equal decrease in government-guaranteed loan programs will decrease loan rates to borrowers who are ineligible for credit assistance. This shift in loan assistance also will increase the rate of interest on
government debt, and will increase the demand price of capital and level of aggregate demand.
GOVERNME.NT LOAN PROGRAMS ANI) PORTFOLIO CHOICE
There are two major mechanisms by which the government provides credit to private individuals through capital markets: guaranteed loans and direct loans.3 In the former, the government, having designated the potential recipients, guarantees loans made to this group by private financial intermediaries (hereafter referred to as banks) against any default. In a competitive banking environment, banks will pass on the economic value of the guarantee to the borrower. As a result, the borrower obtains the loan at a lower rate than the hank would have charged without the government guarantee.4
In the case ofdirect loans, a government agency acts as an intermediary in place of banks; it issues loans directly to the targeted group, obtaining the necessary
Joel Fried is an associate professor of economics at the Unirersity of Western Ontario. This article was written while Professor Fried
was a visiting scholar at the Federal Reserve Bank of St. Louis, Thomas H. Gregorsj provided research assistance.
`See The Budget of the United States Government, 1983,Special Analysis F, Federal Credit Programs (Washington, DC., 1982). This credit assistance consists of direct government loans, loan gnarantccs and loans by government--sponsored enterprises. 2These data are calculated from Ibid.. table F--i, p. 6. It exclndes neW equity financing.
i'his does not exhaust the forms of government capital market
intervention, Other programs affecting capital nsarkets that have come under the scrutiny of the Treasury its receost years include
lending by government--sponsored enterprises and tax exemptions for interest income on some types of loans. These are not cots-- sidcrcd in this paper. 5This subsidy need not he restricted to tlse actuarially isir value of the insurance. The government also could charge the banks afee
for the provision ofthe insurance Or could prox'ide a cash subsidy in addition to tlse guarantee if. fbr some reason. it wished the efl'ective subsidy rate to he clilkrent froas the expected defitult rate,
22
FEDERAL RESERVE BANK OF ST. LOUIS
DECEMBER 1983
Table 1
Direct Loan Transactions of the Federal Government: 1982 Fiscal Year (millions of dollars)
On-Budget Agencies
Funds approoriated to the P'esraent Agriculture Commerce Eaucation Energy Health programs Housing and tJrbar Development tnter,or Transportation Veterans Adminstratiun L.oans to me District o! ~okjrnbia Export-Impon Bank Federal Deposit Insurance ~o'poralion Foaorat Home L.oari Balk Board Natonal Creoit Union Mm nstration STerrnian!!esBsueseneVsas1eAydAmuinlnisotrr:atytion Other agences and programs
Subtota. on-budget agencies
Net Outlays
Outstandings
S 777 6.164 104 641 4 9 351 1 86 228 17 763 274 86 .34 22 69 , 224
9 10?
$ 17.932 31.186 891 9.859 13 921 13.216 441 1.003 3.368 1.684 16.565 705 758 149 9.169 267
--. 1.091
100.220
Oft-Budget Federal Entities
Rural Etectrticatron ano leiephone Revoivino Fund Rural ~eleprione Bank Federal F.nani iri9 Bark iFFB~ U S Ratway Associanor
Subtota'. off-bjccet 4ederal en!it:es
TOTAL, net d:rect ioans
.5 130 102
14 `55 42
14.345
523.452
$ 9.7/4 1 73
96519
123
107 588
5207 808
SOURCE
Ottice inert
of Management aid B~oget-Spetn/ Fiscal Yea, 7984 ti S Govnr.mert
APnriarl.ytnsqesO. tBScued.ge19t 8o3f,theTaUhnetedF.-S6'tates
Govern.
funds from the capital markets by issuing Treasury securities. Because government securities are used to raise the funds, the interest cost will be lower than on funds raised by private institutions. If the government intermediary passes on this reduction, the borrower will obtain a subsidized rate of interest on his loan.5
`The ssihsidy here refei's to tlse difference between tlse rate of intei'cst a horrower would pa\' if tise luass were nhtained frons a hank and the sate he would pay under either tIme loan guarantee Or direct hsan prngra~sss of the governsn emit, Tim is ma\ not correspond to the subsidy as viewed by tIme taxpayer; tlsat is, the eQst of tIme loan less the i'atc of iis terest pm ci on time bass, Rot gls estimates of the
ihsidies invol s'ed in thc' various government loan assd guarantec' programs are pi'esented iss Special Analysis F, Federal Credit Programs, 1982. See, especially, tables F'-- 11 A and F--ilB.
Tables 1 and 2 present the various direct loan and guarantee programs that existed in the 1982 fiscal year. As the tables show, virtually every sector of the economy is covered by some type of program, and assistance to some sectors takes the form of both direct loans and guaranteed loans. For instance, of the $9,943 million loans and guarantees outstanding in 1982 for the Farmers Home Administration's program for rural development, $153 million was on-budget direct loans, $3,387 million was ofihudget direct loans through the Federal Finance Bank (FFB) and $6,403 million was provided through govermnent guarantees. Indeed, the FFB holdings of loans guaranteed by a variety of on- and off-budget agencies provides an especially convenient mechanism to convert loan
guarantees into direct loans. `[lie FFB simply pur-
23
FEDERAL RESERVE BANK OF ST. LOUIS
DECEMBER 1983
Table 2
Gbaran eed Loan Transactions *t the ffed~tat ................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related searches
- government loan start small business
- federal government loan forgiveness
- small business government loan application
- government loan for business
- government loan forgiveness program
- health and wellness programs ideas
- business canada government loan small
- free government loan applications
- health and wellness programs in the workplace
- fidelity and guarantee log in
- training and development programs examples
- government loan small business