Banks would lose money. I like it but it isn't going to happen for a long time.

I like the jist of the idea, but I think this implementation would be excessively complicated and be hard to manage. The best part is that the banks would be cut out from the process of money creation, and it would be directly between the institution that backs the money (the government) and the people that the institution is supposed to serve.

Some similar ideas: Mutual banking systems, such as the Ripple system.

The Citizen's Dividend, in particular, Thomas Paine's proposal in Agrarian Justice to give every 21 year old a sum of money, with which they could by a farm and get started in life. In your proposal, the loan would act this "starting out money", with a low interest rate attached to it.

Great idea, I could borrow money off the US government at 1% and put it in an account that gave 2% return. No skin off my nose - I'm not a US citizen.

My objection (if it were my government which was proposing this), is it good fiscal policy to encourage debt? I think not.
For both individuals and governments it is better to encourage saving than debt.

This idea is basically low interest government debt. Bank lending is limited by the money they have in their vaults (or in their computers), which comes via supply-and-demand from people saving with them. If they lend more than they have they go bankrupt.

Governments can give out more than they get - and regularly do - they just print money. That way lays inflation.

One more thing: the government would LOSE money on this program, not make money. Every dollar that is loaned out to a citizen would be money that could not be used to pay off the national debt (which runs at 2-5%, as I recall).

This is idiotic. You would basically transfer personal debt to the government, who would, in turn, need to either raise taxes to pay for servicing the debt, or just run an ever increasing debt limit which would hurt the economy.

Don't want high limits? Don't buy stuff you can't afford.

The ONLY thing you can't discharge in bankruptcy is government loans (whether they are those 'guaranteed' student loans or IRS debts). So, I guess this might make sense. This would pit the government against creditors in the way of 'competition' --again, legislation already does this. I would tie interest to some meaningful index, instead of a fixed 1% I would go for inflation as measured by the consumer price index.