Abstract A salient trend in crisis intervention has emerged in recent decades: government and central banks have offered funding directly to nonfinancial firms, bypassing banks and other credit intermediaries. We analyse the long-term consequences of such policies by focussing on firm quality dynamics. In a laissez-faire economy, firms with high productivity are more likely to survive crises than those with low productivity. The government funding support saves more firms but cannot be customized based on firm productivity, dampening the cleansing effect of crises. The policy distortion is self-perpetuating: a downward bias in the firm quality distribution necessitates larger interventions in future crises. Our mechanism is quantitatively important: we show that if policymakers ignore such distortionary effects on firm quality dynamics, the resultant credit intervention would almost double the optimal amount.