The $1.6 trillion that U.S. households borrowed in 2010 through government-backed direct loan and loan guarantee programs—most notably from Fannie Mae and Freddie Mac, the student loan programs, and the Federal Housing Administration, but also more than 100 smaller programs— provided credit subsidies and relaxed credit-rationing constraints that caused both borrowing and spending that year to be higher than they would otherwise have been. A simple theoretical model illustrates these channels. Estimates of the increases in borrowing, scaled by multipliers similar to those applied to traditional government spending and tax policies, suggest that the programs provided a fiscal stimulus of roughly $344 billion, similar to what was provided by the American Recovery and Reinvestment Act of 2009. Although there is considerable uncertainty about this point estimate, its size suggests the importance of taking the stimulus and automatic stabilizer effects of federal credit programs into account, particularly during economic downturns that are accompanied by severe financial market distress. However, though credit programs are shown to be a relatively low-cost source of fiscal stimulus, to assess their overall welfare implications, these benefits must be weighed against the significant costs of the programs during more normal times, including the likelihood that lax federal credit policies were an exacerbating cause of the 2007 financial crisis.
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