Money, Banking, and International FinanceCredit unions are another depository institution. Credit unions are similar to commercial
banks except they restrict membership. Credit union extends membership to people who share a
common interest. Usually people work for a particular company or industry. For example, many
states have credit unions for schoolteachers. These institutions only allow schoolteachers to
open accounts. Originally, credit unions offered savings deposits and made consumer loans for
cars and boats. Currently, credit unions evolved similarly to banks, and they offer the same
services, such as checking accounts and loans for mortgages. Some credit unions lessened their
member restrictions as they compete directly with banks. Consequently, the commercial banks
want credit unions on equal grounds with commercial banks because a credit union does not pay
income taxes on its profit.
Government Financial Institutions
Federal, state, and local governments in the United States create government financial
institutions that lend funds to the public. First, The U.S. government uses direct financing, when
it creates a public corporation that sells bonds and commercial paper to investors in the financial
markets. Then the public company uses the investors’ money to lend to borrowers directly. For
example, the Farm Credit System, a U.S. government agency, lends to farmers. Farmers use
these loans to finance growing crops, equipment, or mortgage loans. Second, the U.S.
government lends money to students who pursue a college education. For example, the Student
Loan Market Association, known as Sallie Mae, lends directly to students or buys student loans
from banks. Finally, the Federal National Mortgage Association (Fannie Mae) and Federal
Home Loan Mortgage Corporation (Freddie Mac) grant mortgages to low-income households.
They also buy and sell mortgages to boost the liquidity of the mortgage loan market.
For the second method, a government can lend to the public through loan guarantees, which
is similar to insurance. For example, a bank lends to a student to pay for an education, and the
U.S. Department of Education guarantees the loan. If the student defaults, subsequently, the
U.S. Department of Education repays the loan to the bank, and then the U.S. government uses its
authority to collect from the student.
Some people question a government’s role in financing. When a government directly lends,
the government squeezes the financial institutions out of the loan market. Furthermore, the
federal government loan guarantees increase the problem of moral hazard. Financial institutions
receiving the loan guarantees might not screen borrowers as much, lending to borrowers with a
high default risk. For example, the effects of the 2007 Great Recession continue to linger in the
U.S. economy, even in 2014. Recession caused mass layoffs and doubled the unemployment
rate. Then the housing values continue to plummet while foreclosures continue soaring.
Consequently, the U.S. government might be liable for trillions of dollars in loan guarantees and
bailout of public corporations. We explain several examples below:
The U.S. Department of Education, SallieMae, and commercial banks granted college
student loans that had surpassed $1 trillion in 2012. Unfortunately, college graduates
continue to enter an abysmal job market in 2013. Student-loan default rate hovers around
24%. College students, on average, owe approximately $24,000 while law school graduates