Government-sponsored enterprises (GSEs) are companies supported by the government to promote the free flow of credit, making education, agriculture, and housing more affordable. They can be wholly or partially owned by the government and offer low rates on loans. However, concerns have been raised about their potential liability if not properly regulated, as seen in the 2008 US mortgage market crash involving Fannie Mae and Freddie Mac.
Government Sponsored Enterprises (GSEs) are companies that are sponsored or supported by the government. People often use the term “government-sponsored enterprise” to refer specifically to financial services companies in the United States, although many other nations have similar patterns. The goal of government-sponsored enterprises is to support the nation in some way; in the case of the US, the organizations promote the free flow of credit, which is designed to benefit the US economy and individual Americans in need of credit.
In the United States, government-sponsored enterprises began in 1916, with an act of Congress establishing the Farm Credit System to support American agriculture. Subsequent acts of Congress established corporations to provide home and student loans, with these government-sponsored enterprises making education, agriculture, and housing more affordable for Americans and ensuring that credit will be available cheaply for the people who need it.
In some cases, a government-sponsored enterprise is wholly publicly owned and controlled by the US government. Others have varying degrees of privatisation, such as being owned by private shareholders, but governed by a public board. These organizations can afford to offer large amounts of funding at very low rates because they are backed by the US government. They may also be able to assist marginal borrowers who would not be eligible for credit from private companies.
Both the federal and state governments can get involved with government-sponsored enterprises. Wholly government and state-owned companies are generally designed to be run as efficiently as possible and using methods that will benefit taxpayers, while partially privatized companies are also responsible for generating returns for shareholders. If managed well and in a state of balance, such businesses can confer a number of benefits by freeing up credit and reducing the cost of credit so that people feel comfortable with borrowing to finance major endeavors.
Private firms in the financial sector sometimes complain that government-sponsored firms have an unfair advantage because they can afford to offer low rates on loans and lend to fringe applicants, thanks to their government backing. Concerns have also historically been expressed that such organizations could potentially be a huge liability to the government if they are not properly regulated, and these concerns were validated in 2008 by the US mortgage market crash, in which Fannie Mae and Freddie Mac, two government-sponsored firms that provide home loans have been heavily involved.
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