Government loans to businesses are often a form of malinvestment. Private loans (from banks or individuals) are made to individuals or businesses based on the credit they posses, in other words they are offered a loan based on their repayment history, business acumen, marketable assets, character, past record, etc. When the government makes loans they do it because the individual or business they are lending to likely is unable to get a loan from private lenders. The government is more likely to lend to businesses and individuals who need bailouts or are charitable cases and cannot get the money from private sources. Additionally, because the government lends the money to an individual or business to purchase a property, farm, equipment, etc. this creates unnecessary competition in the marketplace where the individual or business with good credit may now be unable to make the same investment. In other words the government may likely have loaned money to a less efficient borrower at the expense of a preferable borrower with superior business acumen who would have borrowed through private means. As Henry Hazlitt puts it in Economics in One Lesson, “private loans will utilize existing resources and capital far better than government loans. Government loans will waste far more capital and resources than private loans. Government loans, in short, as compared with private loans, will reduce production, not increase it.”
