Loan Guarantees by the Federal Government

Loan guarantees constitute a major portion of the Federal credit assistance program, representing an investment of about $200 billion. The effects of loan guarantees are far-reaching: (1) they confer large benefits on credit recipients; (2) they impose large budgetary costs on the Federal Government, and therefore, on taxpayers; and (3) they impose indirect costs on firms and individuals who are not directly involved with the programs. Like other subsidy programs, the cost effectiveness of loan guarantees should be evaluated to determine whether they are meeting their objectives in an efficient manner. The preliminary findings of an ongoing study at the General Accounting Office show that, although loan guarantee programs have expanded rapidly in recent years, their cost effectiveness has not been carefully evaluated. For 1975, losses on guaraneed loan programs were about $2.3. billion; benefits to borrowers due to interest rate reduction were about $2.6 billion. Evaluating a proposed loan guarantee program requires answers to three questions: (1) Is it desirable to stimulate investment in the sector to which the guarantee would be directed? (2) Is a loan guarantee the most appropriate form of subsidy? and (3) How can the program be designed to operate most efficiently? The budget authority needed to make good on the guarantees should be explicit in the legislation and adequate to provide the reserves necessary to carry out the planned level of activity. The budget should, of course, be subject to full disclosure and to executive and congressional reviews. (LDM)