What Is the True Cost of Government-Backed Credit? — Deborah Lucas

MIT Sloan Prof. Deborah Lucas

From The Huffington Post

The U.S. government is arguably the largest financial institution in the world. If you add the outstanding stock of government loans, loan guarantees, pension insurance, deposit insurance and the guarantees made by federal entities such as Fannie Mae and Freddie Mac, you get to about $18 trillion of government-backed credit. Through those activities, the government has a first-order effect on the allocation of capital and risk in the economy.

The question of what those commitments cost the public is important; accurate cost assessments are necessary for informed decisions by policymakers, effective program management, and meaningful public oversight. My research and that of others has shown that if one takes a financial economics approach to answering that question — one that is consistent with the methods used by private financial institutions to evaluate such costs — it leads to significantly higher estimates than the approach currently used by the federal government.

Read the full post at Huffington Post

Deborah Lucas is a Sloan Distinguished Professor of Finance at MIT’s Sloan School of Management.  

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