Is the government justified in offering loans to borrowers (e.g. small businesses) who typically do not get loans from the market?
No - it is morally wrong for the government to use tax payer's money to provide a private good to another group of individuals. It is equivalent to robbing Peter to pay Paul. The money comes out from the pocket of a tax payer, and gets deployed at lower-than-market rates.
So, what should government do?
Nothing. There are two different cases under which lending market gaps arise - and there is a case for government intervention in none.
In the first case, the loan applicant has dubious financial record, the market gap is a proper outcome of market mechanism.
In the second case, the applicant may be creditworthy but these is no information or credit history on him, hence the market gap.
In the first example, there is no case for any lending to such applicant. However, in the second case the government may feel tempted to intervene to fulfill its social mandate. However, this would be morally wrong as the govt. would again be robbing Peter to pay Paul.
So, what should be the policy response for such a situation?
I think that such a situation should be left entirely to the free market. The guiding principle being - there is no moral obligation on anyone to offer a loan without receiving the desired return. If no one desires to make a loan at any interest rate, then so be it. If someone desires to make a loan at exorbitant interest rate, then so be it. If someone desires to make a loan at zero interest rate, then so be it. Lending one's own money should be a matter of one's own choice, not somebody's force.
I also think that if free market forces are at work, there would emerge a win-win solution - simply because there is genuine opportunity for value creation in such a situation, and market participants would like to capture that value.
The value is being created due to the gains from trade - the lender is trading his surplus money with the borrower's promise to pay back with appropriate interest (risk-based). Both parties are gaining from this transaction in the same way as two trading parties typically benefit from mutual and voluntary trade.
Therefore, free market is best suited to address lending market gaps. If it chooses to not serve any of the gaps, then so be it. There is no obligation on any individual to sacrifice his money for this cause. In fact, such a situation gives an opportunity to an innovator to devise an approach to address the market failure - and it is proper for him to make money from the innovation.
No - it is morally wrong for the government to use tax payer's money to provide a private good to another group of individuals. It is equivalent to robbing Peter to pay Paul. The money comes out from the pocket of a tax payer, and gets deployed at lower-than-market rates.
So, what should government do?
Nothing. There are two different cases under which lending market gaps arise - and there is a case for government intervention in none.
In the first case, the loan applicant has dubious financial record, the market gap is a proper outcome of market mechanism.
In the second case, the applicant may be creditworthy but these is no information or credit history on him, hence the market gap.
In the first example, there is no case for any lending to such applicant. However, in the second case the government may feel tempted to intervene to fulfill its social mandate. However, this would be morally wrong as the govt. would again be robbing Peter to pay Paul.
So, what should be the policy response for such a situation?
I think that such a situation should be left entirely to the free market. The guiding principle being - there is no moral obligation on anyone to offer a loan without receiving the desired return. If no one desires to make a loan at any interest rate, then so be it. If someone desires to make a loan at exorbitant interest rate, then so be it. If someone desires to make a loan at zero interest rate, then so be it. Lending one's own money should be a matter of one's own choice, not somebody's force.
I also think that if free market forces are at work, there would emerge a win-win solution - simply because there is genuine opportunity for value creation in such a situation, and market participants would like to capture that value.
The value is being created due to the gains from trade - the lender is trading his surplus money with the borrower's promise to pay back with appropriate interest (risk-based). Both parties are gaining from this transaction in the same way as two trading parties typically benefit from mutual and voluntary trade.
Therefore, free market is best suited to address lending market gaps. If it chooses to not serve any of the gaps, then so be it. There is no obligation on any individual to sacrifice his money for this cause. In fact, such a situation gives an opportunity to an innovator to devise an approach to address the market failure - and it is proper for him to make money from the innovation.
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