Neither a Borrower nor a Lender Be ?

The federal government is deep in debt and its policies encourage personal indebtedness

The upward march of federal government debt over the last 20 years now stands at $15 trillion. But did you know that in a single year, the federal budget contains over $1 trillion in direct loans and loan guarantees to individuals and businesses?

Here are a few items from the President's 2012 budget:

  • $185 billion in Federal Direct Student Loans and loan acquisitions
  • $24 billion in guaranteed loans by Small Business Administration
  • $35 billion in direct loans and guarantees by Department of Agriculture
  • $58 billion in veteran home loans
  • $623 billion in guaranteed loan commitments by Federal Housing Administration and Government National Mortgage Association


The effect? Indebtedness. Students begin their working life in debt. Small businesses become more leveraged. Farm product prices are "supported", causing higher prices for consumers. Veteran and other homeowners are encouraged to "invest" in a house that concentrates – rather than diversifies – their personal savings in a single immobile, illiquid asset.

The risk?  Default.  Bad credit for borrowers.  A loss for taxpayers.  Asset bubbles that burst.  Savings that vaporize.

My proposed change? Grants – rather than loans – to deserving students that need financial assistance. Equal treatment for all businesses without regard to size. An end to all subsidies and price supports. An end to the overemphasis on homeownership, instead ensuring "well housed" veterans and citizens.

The focus on total government debt rightly emphasizes the risk posed to long-term government finance and the nation's future prosperity. By ending direct loans and loan guarantees, Congress can bring into focus the risk that debt promotion and subsidies impose on all of us today.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Terry Lee March 10, 2012 at 02:34 PM
Mark, you left out the concepts of investment and risk. Government loans are made because we want students, small businesses, and veterans to succeed. Their success benefits society. So we invest in them. Investment in these groups carries more risk than other investments, meaning they can't obtain their loans at reasonable interest rates. That's good government investment at low overall cost to the taxpayer. Grants, on the other hand, increase the risk to society. As they are not repaid, there is no motivation to perform at the highest possible levels. And in effect, you are borrowing money from China (to use a cliche) to give away that taxpayers will have to pay back. That's not a worthy investment in my mind.
Mark Gibson March 10, 2012 at 07:06 PM
Terry: I think of education as a public good -- its benefits convey to society as a whole. I see higher education grants in the same light as I do funding for primary and secondary education: there is no repayment. I appreciate your point on "motivation to perform"; an approach could be to make the loan before taking the course with the debt being forgiven (in essence, a grant) upon successful completion of the course. My overall concern is twofold: the overhead cost of servicing the loan and government crowding out commercial lenders. Thanks for the input ! Mark
Mark Gibson March 10, 2012 at 10:47 PM
BTW -- I'm not suggesting that all college students should go on a government grant, only those with proven merit and need.
Mark Gibson April 10, 2012 at 12:30 PM
A recent op-ed by Washington Post editorial writer Charles Lane: http://www.washingtonpost.com/opinions/the-us-governments-credit-programs-carry-hidden-costs/2012/04/09/gIQAQ6Pu6S_story.html


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