Why doesn't the government extend credit directly to people?

Ask an Economist

If banks create credit from thin air, when they issue loans, and make astonishing interest in doing so, why would it not be beneficial to have their government create the credit? Then the interest collected on those loans could be used to fund goodies for the people, instead of super-yachts for crooks! Cheap loans for the poorest, expensive loans for the richest. Narrow the wealth gap a smidge. I cannot see a down side. Was this not how it once was, to our great prosperity? Is access to credit not the true essence of opportunity. Only people create value, thus, credit can only be created by the people. When did private banks capture our credit? And whom is responsible?


There are government owned corporations or government backed corporations that directly lend to households or foster lending to households in other ways, for specific purposes. For example in the US, GNMA (Ginnie Mae), FNMA (Fannie Mae) and FHLMC (Freddie Mac) sometimes provide home loans directly (through various programs) to poor households and sometimes help these households get credit at lower rates than they normally would by providing guarantees to the private lenders who lend to them. There are similar government or government backed institutions that provide small business loans to poor households in many developing countries.

The question that you are probably asking is why does a government not to do it on a larger scale for all lines of business. One answer is, government run institutions are often less cost efficient than privately managed companies. Hence socially we are better off if government enterprise is limited to sectors where it is necessary.      

Last updated on September 16, 2016