
by John Griffith and Richard Caperton
The U.S. government is arguably the largest and most influential financial institution in the world, with about $2.7 trillion outstanding in loans and loan guarantees. Among other things, these federal credit programs help college students afford tuition, first-time homebuyers access affordable mortgages, and budding small businesses get the capital they need to expand.
In these and many other cases, the private sector will simply not lend to certain borrowers or will lend only under unaffordable or unmanageable conditions. That’s why we rely on federal credit programs: The U.S. government can bear certain risks that the private sector cannot to achieve certain public goals such as increasing the global competitiveness of our workforce, returning stability to the U.S. housing market, and adding jobs through business expansion.
These programs typically run at very low cost to taxpayers. On average, every $1 allocated to loan and guarantee programs generates more than $99 of economic activity from individuals, businesses, nonprofits, and state and local governments, according to our analysis.
But in the wake of certain widely publicized credit blunders, most notably this past summer’s bankruptcy announcement from solar company Solyndra LLC, some have called into question Washington’s ability to manage financial risk. Conservative critics contend that the government is incapable of accurately pricing risk, and that political pressure encourages government agencies to routinely underestimate the risk to taxpayers when extending credit.
Government underpricing of risk is a convenient theory for free-market ideologues but it runs contrary to the overwhelming evidence.
Our review of federal government credit programs back to 1992 shows that on average the government is quite accurate in its risk pricing. In fact, the majority of government credit programs cost less than originally estimated, not more. Specifically, we found that:
- Based on initial estimates over the past 20 years, the government expected its credit programs to cost taxpayers 79 cents for every $100 loaned or guaranteed. Based on recently updated data, those cost predictions were reasonably accurate but slightly underestimated. The current budgetary impact of these programs is about 94 cents per $100 loaned or guaranteed.
- There’s little evidence that credit programs are biased toward underpricing risk. In fact, a little more than half of all nonemergency federal credit programs will cost the government less than what they are expected to over the life of the program.
- The remainder is accounted for by the losses suffered by the Federal Housing Administration on loans made in 2008 during the peak of the housing crisis. Excluding that book of loans, all nonemergency federal credit programs cost slightly less than expected.
Conservative critics often portray a world in which government bureaucrats haphazardly issue loans and loan guarantees without considering taxpayer exposure to risk. That’s simply not the case. This issue brief explains how the government prices credit risk in the federal budget, how well those cost estimates have reflected reality over the years, and why the government is in a particularly good position to assume certain types of risk.






