Your buddy wants to start a restaurant. He has never cooked professionally, has no business plan, and his credit score looks like a winter temperature in Celsius. He asks the bank for a loan. The bank says no. He asks his family. They say no. He asks you. You say no, but you feel bad about it.

Then he finds out the government has a loan program for “underserved entrepreneurs.” Six months later he has $200,000 of taxpayer money, a lease on a space that is too big, and an industrial pizza oven he saw on YouTube. Fourteen months later the restaurant is closed, the money is gone, and the taxpayers are holding the bag.

This is not a tragedy. This is the system working exactly as designed.

“More Credit” Is Just “More Debt” in a Nice Outfit

Let’s start with the most basic thing that everyone conveniently forgets. Credit is not free money. Credit is debt. When a politician says “we need to expand credit access,” what they are actually saying is “we need to get more people into debt.” Try running on that slogan. See how many votes you get.

The word “credit” sounds responsible. Sophisticated. The word “debt” sounds like a problem. But they are literally the same thing viewed from different sides of the transaction. When someone pushes for “more credit for small businesses” or “easier mortgage access for first-time buyers,” they are pushing for more debt. For people who, very often, cannot handle it.

This is not just wordplay. It is the foundation of every government lending disaster of the past fifty years.

Why Private Lenders Are Annoying (And That’s Good)

If you have ever tried to get a bank loan, you know it is not fun. They want your tax returns, your business plan, your grandmother’s maiden name, and a DNA sample. The process is slow, invasive, and sometimes humiliating.

But there is a reason for this. The bank is lending its own money. Well, technically it is lending depositors’ money, but the bank is on the hook if you default. So the loan officer has every incentive to be careful. If she approves a loan to someone who cannot pay it back, that is her problem. Her bonus shrinks. Her department looks bad. Eventually she loses her job.

This annoying process is what makes the system work. The pickiness IS the feature. Banks reject bad risks because rejecting bad risks is how you stay in business. A venture capitalist does the same thing – she sees a thousand pitches, funds maybe ten, and knows that seven of those ten will probably fail. But she is risking her own money (or her fund’s money, which her reputation depends on), so she is brutally selective.

Now imagine a loan officer who is spending someone else’s money, will never face consequences for bad loans, and whose performance is measured by how many loans she approves rather than how many get repaid. That is a government lending program.

The Whole Point Is to Fund Bad Risks

Here is the part that nobody wants to say out loud. The entire justification for government lending programs is that private banks won’t make these loans. Politicians frame this as a market failure – “banks are too conservative, they won’t lend to deserving people.”

But stop and think about why banks won’t make these loans. It is not because bankers are mean. It is because the borrowers are bad risks. They do not have enough collateral. They do not have a track record. Their business plan does not make financial sense. The bank ran the numbers and the numbers said no.

The government steps in and says, “We’ll lend to them anyway.” This is not fixing a market failure. This is overriding a market signal. The market is saying “this person probably cannot pay this back,” and the government is saying “we don’t care, we have a political goal to meet.”

Credit is not something a bank gives you like a gift. It is something you bring with you. Your assets, your history, your track record, your character – that is your credit. When someone has bad credit, it is not the system being unfair. It is the system accurately reflecting the risk.

The Borrower You Never See

This is where the invisible cost kicks in. There is a finite amount of capital in the economy. When the government channels it to risky borrower B, that capital is no longer available for creditworthy borrower A.

Imagine two people walk into a bank. Person A has a solid business, ten years of track record, good cash flow, and wants to expand. Person B has a new idea, no track record, and needs a government guarantee to get funded. In a normal market, Person A gets the loan because she is the better bet. The capital goes where it is most likely to be productive.

But when the government guarantees Person B’s loan, the bank happily funds her instead – because now the taxpayer is absorbing the risk. Person A might get told there is not enough capital available. Or she pays a higher interest rate because government-backed lending has soaked up a chunk of the supply.

Nobody writes an article about Person A’s expansion that never happened. Nobody counts the jobs she would have created. The government press release only talks about Person B. The photo op only shows Person B’s ribbon-cutting. Person A is invisible.

The 2008 Preview You Already Forgot

You want to see this theory in action? Rewind to the 2000s. The US government decided that homeownership was a social good and that everyone deserved a mortgage. Fannie Mae and Freddie Mac – government-sponsored enterprises – were told to lower their lending standards. Banks were encouraged, then pressured, to make loans to people who could not afford them. Down payments dropped to 3%, then 0%. Income verification became optional. “Stated income” loans meant you could write whatever salary you wanted on the application and nobody checked.

What happened next is not a mystery. A massive housing bubble inflated, fueled by government-backed easy money. People who should never have been given mortgages got them. They bought houses they could not afford. When rates adjusted or values dropped, they defaulted by the millions. The entire financial system nearly collapsed. Regular people lost their homes, their savings, their retirement accounts.

The government had picked winners – homebuyers who could not afford homes – and the losers were everyone else. Including, ironically, many of the very people they were trying to help.

PPP: The Speed Run Version

If 2008 was the slow-motion version, the Paycheck Protection Program during COVID was the speed run. The government threw roughly $800 billion at businesses with minimal verification. The stated goal was noble – keep workers employed during lockdowns. The execution was a disaster.

Billions went to businesses that did not need the money. Billions more went to outright fraud. People created fake companies, submitted fake payroll numbers, and got seven-figure loans that were then “forgiven.” By some estimates, over $200 billion of PPP money was fraudulently obtained. That is not a rounding error. That is more than the entire annual budget of most government departments.

Why did this happen? Because the same dynamic was at play. The lenders were not risking their own money. The loans were government-guaranteed. The incentive was to approve fast, ask questions never. When you remove the consequences of bad lending, you get a lot of bad lending. Every single time.

Student Loans: The Slow-Motion Catastrophe

The student loan crisis is maybe the purest example of government-backed credit destroying what it is supposed to help. The government decided everyone should go to college. They made student loans essentially unlimited, guaranteed by taxpayers, and impossible to discharge in bankruptcy.

What did universities do? Exactly what any rational actor would do when faced with a customer who has unlimited access to borrowed money – they raised prices. Tuition has increased roughly 1,200% since 1980. Not because education got 12 times better. Because the money was there, so they took it.

Meanwhile, students graduate with $30,000, $50,000, $100,000 in debt for degrees that do not increase their earning potential enough to justify the cost. The government “helped” them into a debt trap. The universities got rich. The students got crushed. The taxpayers are on the hook for the defaults.

If the government had never guaranteed these loans, banks would have looked at an 18-year-old borrowing $120,000 for a film studies degree and said no. That “no” would have been the most helpful thing anyone ever did for that kid. Instead, the government said yes, and created a generation of debt serfs.

Solyndra, FTX, and the Easy Money Problem

When the government decides to pick winning industries, the results are predictably bad. Solyndra got $535 million in government-guaranteed loans to make solar panels. They went bankrupt. The taxpayers ate the loss.

The pattern repeats endlessly. Government money flows to politically connected companies, not to the best companies. The selection criteria is not “who will build the best product” but “who has the best lobbyists” and “which district does the politician need to win.”

Even in the private sector, easy money creates monsters. FTX did not happen because Sam Bankman-Fried was uniquely evil. It happened because a zero-interest-rate environment and easy venture capital money allowed a fundamentally broken company to raise billions without real scrutiny. When money is cheap and consequences are distant, fraud and incompetence flourish. Government lending programs pour gasoline on this fire because they make money even cheaper and push consequences even further away.

The Tax Loop Nobody Mentions

There is a final piece of this puzzle that people overlook. Where does the government get the money it lends? From taxes. From businesses and individuals who are already productive enough to generate taxable income.

So the actual flow is: take money from successful businesses, give it to unsuccessful businesses (who could not get funded privately), and call it “economic development.” You are literally taxing competence to subsidize incompetence. You are taking capital from people who have proven they can use it well and handing it to people who have not proven anything.

This does not mean every government loan recipient is incompetent. Some succeed. But on average, the population of borrowers who cannot get private funding will perform worse than the population that can. That is not prejudice – it is math.

The Takeaway

Government lending programs are popular because they let politicians announce that they are “helping” specific groups – small businesses, first-time homebuyers, students, green energy companies. The help is visible. The cost is invisible.

The cost is the creditworthy borrower who did not get funded. The cost is the taxpayer who covers the defaults. The cost is the inflated prices that result from artificial demand (see: tuition, housing). The cost is the fraud that inevitably follows when you separate lending decisions from lending consequences.

Next time someone tells you the government should make it “easier to get a loan,” just translate it honestly: the government should make it easier to get into debt, using your money as the guarantee, with lower standards than any private lender would accept.

Still sound like a good idea?