Abstract: we describe a general mechanism by which government overspending can lead to asset bubbles. We show that the government can generate a bubble on its own, without any malevolent intent by financial intermediaries. We consider a two-sector economy with households and the government, where households can purchase an investment good and finance that purchase with government-provided loans. We show that an asset bubble can ensue only when both the government and the households make suboptimal decisions; if at least one sector behaves optimally, inefficiencies never arise. In general, when the government chooses to provide financing to households based on some simple criterion (such as admission to an institution of higher education or compliance with simple mortgage standards), it is only by chance that it will provide the optimal amount of financing. If too much financing is provided, households a bubble ensues and households start to default. We also show that government-provided financing creates an endogenous propagation mechanism. If financing exceeds a certain threshold, it is not only the households who receive this excess financing that default on their loans, some households who received financing before it reached the threshold will also default.