Chapter 8: Do informational frictions justify federal credit programs?
1 Stephen D. Williamson Through federal agencies, the US government administers a wide array of credit programs, which alter the allocation of credit (and the distribution of income) in the United States in important ways. In this chapter, we will consider the credit market effects of three types of federal credit programs. First, we examine direct government lending, which takes place in the United States through several federal agencies, including the Farmers Home Administration (FmHA) and the Small Business Administration (SBA). Second, we consider loan guarantees, which are an important form of federal government intervention in credit markets. Much of the activity of the SBA is accounted for by loan guarantees, and the mortgage insurance programs of the Federal Housing Administration (FHA) are essentially loan guarantees. Third, we study the promotion of secondary markets in private loans, an area in which the federal government has been active, especially in regard to the mortgage market. The Government National Mortgage Administration (GNMA) buys FHA-insured mortgages and packages these as Ôpass-through securities.Õ GNMA pass-through securities are backed by the US government. The Federal National Mortgage Administration (FNMA) is a privately owned corporation which performs a role similar to GNMA. The mortgages backing FNMA passthrough securities are conventional rather than insured, and these securities have no explicit government backing. However, it is generally recognized that the liabilities of FNMA are implicitly backed by the US government; i.e. FNMA is Ôtoo big to fail.Õ When efficiency arguments are used to justify federal credit programs, there...
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