The Problem with Government "Aid"

The unseen consequences of government lending and loan guarantees

The Seduction of Government Credit

When economic troubles arise, politicians rush to microphones with their seemingly compassionate solution: government lending programs. Whether it's for farmers, homebuyers, students, or small businesses, the political class consistently argues that the private credit market has "failed" and only government intervention can fill the gap.

This narrative is seductive. Who doesn't want to help struggling farmers or first-time homebuyers? But as with most government interventions, there's far more beneath the surface than meets the eye. The road to economic inefficiency is paved with well-intentioned government lending programs.

The First Fallacy: Confusing Credit with Charity

The fundamental misunderstanding begins with a confusion about what credit actually is. Politicians speak of "giving credit" as though it were a gift, when in reality:

Credit is not something a banker gives to a man. Credit is something a man already has. He has it, perhaps, because he already has marketable assets of greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him.

A banker is not giving something for nothing when making a loan. He's making a calculated business decision based on the likelihood of repayment. When government intervenes to "provide credit" to those who couldn't qualify through private channels, it's not correcting a market failure—it's overriding a market signal.

The Unseen: The Economics of Opportunity Cost

The most damaging aspect of government lending programs is what economists call "opportunity cost"—what we give up when we choose one option over another. Let's break this down:

1. Real Capital is Limited: At any given moment, there are only so many tractors, buildings, or houses available.

2. Capital Has Alternative Uses: Every dollar directed by government to Borrower B is a dollar that can't go to Borrower A in the private market.