Karl Smith -- Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior
Various forms of federal loan guarantees have come under attack, from clear industrial policy-like loans related to solar power to more mainstream corporate welfare in the form of the Import-Export Bank to vanilla social policy like student loans.
We may or may not question the wisdom of the federal government attempting to shape the future of US energy, rigging the game in favor of US manufactures, or pushing marginal college students to load up on debt. However, if we are going to do these things, it's important to recognize that loan guarantees are among the cheapest ways to do them.
Why?
Well, for one the United States has an incredibly low cost of credit. Lower in fact than any private organization on earth. If there were some way to handle the inevitable political corruption, it would make sense for the US government to act as a giant bank. Indeed, by using ever-rising debt to support unusually low tax rates, the US government does to a degree act as a bank.
By offering its good name to guarantee other lending ventures the government forgoes the revenues of a bank but provides much of the same service. It allows projects to be entered into which the principals could not afford alone.