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Another thing I forgot to mention - if the expected value of a loan is 99 cents on the dollar, then this is a bad loan to make at the onset. It should never be

Another thing I forgot to mention - if the expected value of a loan is 99 cents on the dollar, then this is a bad loan to make at the onset. It should never be made, and never would be in the private sector. The core function of the loan and investment part of the financial sector can be summarized simply as "to provide the efficient allocation of capital". Making bad loans is not part of that function, nor should it be. The money can be put to better use elsewhere. Also, let's not forget that if the government ran a bank, it would still have liabilities to its depositors and still has to pay interest to them. Making bad loans jeopardizes that, and can make the bank non-competitive. Sure, the tax revenue would be nice, but you won't keep your depositors for the long term with this approach.

smallnamespace 9y ago
The problem here is why the expected value of the loan is only 99 cents, if $2.00 of economic activity is being created? And the simple reason is because markets are imperfect, and the downstream positive (or negative) effects of actions do not always flow upstream to the private decision-maker. This is why governments exist in the first place, to coordinate the actions of large groups of individuals for mutual benefit when smaller entities (like corporations) would not be able to do achieve that same coordination. We would never have gone to the moon if the government never got involved. Wisely, the government farmed out much of that work to private contractors, but government still had to be there to set a direction and get the ball rolling.
ThrustVectoring 9y ago
>Another thing I forgot to mention - if the expected value of a loan is 99 cents on the dollar, then this is a bad loan to make at the onset. It should never be made, and never would be in the private sector. It'd be a good loan to make if the business development subsidy took the form of a tax break instead. If the government agreed to halve it's taxes on that particular business venture, there'd be 109 cents on the dollar worth of value to divvy up between the lender and the entrepreneur. I actually don't know if subsidized access to capital is better for business development than preferential tax treatment.

smallnamespace 9y ago

The problem here is why the expected value of the loan is only 99 cents, if $2.00 of economic activity is being created? And the simple reason is because markets are imperfect, and the downstream positive (or negative) effects of actions do not always flow upstream to the private decision-maker. This is why governments exist in the first place, to coordinate the actions of large groups of individuals for mutual benefit when smaller entities (like corporations) would not be able to do achieve that same coordination. We would never have gone to the moon if the government never got involved. Wisely, the government farmed out much of that work to private contractors, but government still had to be there to set a direction and get the ball rolling.

ThrustVectoring 9y ago

>Another thing I forgot to mention - if the expected value of a loan is 99 cents on the dollar, then this is a bad loan to make at the onset. It should never be made, and never would be in the private sector. It'd be a good loan to make if the business development subsidy took the form of a tax break instead. If the government agreed to halve it's taxes on that particular business venture, there'd be 109 cents on the dollar worth of value to divvy up between the lender and the entrepreneur. I actually don't know if subsidized access to capital is better for business development than preferential tax treatment.