| Government-Sponsored Enterprises: Mercantilist Companies in the Modern World |
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| Key Points |
| Posted: Monday, January 14, 2002 |
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| PRESS RELEASES |
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AEI Online
(Washington)
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| Publication Date: January 14, 2002 |
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- Six government-sponsored enterprises (GSEs) exist in the United States: Fannie Mae, Freddie Mac, the Federal Home Loan Bank System, the Farm Credit System, Farmer Mac, and Sallie Mae.
- The government has chartered and subsidized these private companies to serve public purposes such as providing funds for housing, agriculture, and student loans. The GSEs have an advantage over competitors because the government gives them an implicit government guarantee that allows them to borrow money at rates close to Treasury rates.
- Because of their government support, these companies have grown rapidly. The two largest GSEs, Fannie Mae and Freddie Mac, are the largest financial institutions in the United States. They have doubled in size every five years.
- The following table shows the combined growth of Fannie Mae and Freddie Mac. The numbers include their outstanding debt obligations, plus outstanding mortgage-backed securities, between 1970 and 2000:
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1970 |
1975 |
1980 |
1985 |
1990 |
1995 |
2000 |
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$15.2
billion |
$37.2
billion |
$76.6
billion |
$261.3
billion |
$768.0
billion |
$1.3
trillion |
$2.4
trillion |
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Source: CBO (1991) and OFHEO (2001) |
- Because the six GSEs have specific purposes and are defined and shaped by law, their particular legal framework determines much of their behavior. Stanton explores the institutional design and structure of GSEs and determines that they are a case study in flawed organizational design. Because GSEs are instruments of government policy, they provide instructive illustrations of the consequences of design choices on the strengths, limitations, and life cycles of this particular type of institution.
- GSEs are an old institutional form that has taken on new vitality because of their growing political power that protects their government subsidies and allows them to expand in the marketplace. They resemble the first and second Banks of the United States and, in Europe, mercantilist enterprises of the sixteenth to eighteenth centuries.
- Because of the large size and long life cycles of some GSEs, their patterns of behavior can also illuminate issues of governance. This book explores the contrast in behavior and evolution between investor-owned GSEs and those that are structured to be cooperatives.
- Many of the GSEs have provided valuable benefits in the past. However, the special-purpose GSE charter is no longer suited to today's fast-moving financial markets:
- Because GSEs are chartered to serve purposes defined by law, they can lack the flexibility of a completely private financial services firm that is free to define and redefine its activities and lines of business in response to market signals.
- To the extent that GSEs wield market power, they can impede the emergence of more efficient competitors and innovations.
- Because GSEs use their access to government subsidies to expand their market power, they impose burdens on market competition. These burdens would not be present if the government provided comparable subsidies to all competitors, instead of tying these benefits and preferences to a handful of institutions.
- Government supervision of GSEs is often weak because of their political influence. The situation is made worse because the government often abdicates to the GSEs themselves the power to affect their public benefits and costs.
- Despite their access to substantial government benefits, the GSEs do not match the rest of the private market in service to those home buyers and communities that most need public support. The General Accounting Office has found that "the enterprises continue to trail the primary market" in most categories of service to affordable housing and some minorities. The Department of Housing and Urban Development has had similar findings.
- Because these financial institutions are allowed to operate with less capital than other companies in the same lines of business, the major GSEs have huge amounts of debt. They have a competitive advantage and can continue to grow because of their federal support, which enables them to borrow at a lower rate than their competitors. As they expand and displace firms that are better capitalized, they drain capital from the sectors that they serve. With their high leverage and weak government supervision, the GSEs have created a state of risk that policymakers seem unable to address.
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Veronique Rodman
American Enterprise Institute
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E-mail: VRodman@aei.org
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On the Issues
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In the most recent installment of On the Issues, Michael S. Greve argues that the federal government should not go crazy in bailing out the states.
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