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What are Government Sponsored Enterprises?

Mary McMahon
Updated May 17, 2024
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Government sponsored enterprises (GSEs) are companies which 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 several other nations have similar models. The goal of government sponsored enterprises is to support the nation in some way; in the case of the United States, the organizations promote the free flow of credit, which is designed to benefit the American economy and individual Americans who need credit.

In the United States, government sponsored enterprises started in 1916, with an act of Congress which established the Farm Credit System to support American agriculture. Subsequent acts of Congress have established corporations to provide home and student loans, with these government sponsored enterprises making education, farming, and housing more affordable for Americans, and ensuring that credit will be available at low cost to people who need it.

In some cases, a government sponsored enterprise is wholly publicly owned and controlled by the United States government. Others have varying degrees of privatization, such as being owned by private shareholders, but governed by a public board. These organizations can afford to offer large amounts of financing at very low rates because they are backed by the United States government. They may also be able to assist marginal borrowers who would not be eligible for credit from private companies.

Both federal and state governments can be involved with government sponsored enterprises. Wholly government and state owned corporations are usually designed to be run in the most efficient way possible, and using methods which will benefit the taxpayers, while partially privatized companies are also responsible for generating returns for shareholders. When run well and in a state of balance, such enterprises 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 companies in the financial sector sometimes protest that government sponsored enterprises have an unfair advantage because they can afford to offer low rates on loans, and to loan to marginal candidates, thanks to their government backing. Concerns have also historically been voiced 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 collapse of the American mortgage market, in which Fannie Mae and Freddie Mac, two government sponsored enterprises providing home loans, were heavily implicated.

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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGeek researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By Ivan83 — On Mar 26, 2012

I absolutely support government sponsored enterprises and I have no patience or sympathy for people that try to wave the flag of the free market. The simple truth is that there has never been in this country or hardly any society a truly free enterprise. There are always rules and restrictions

And that is the way it should be. Capitalism tends naturally toward self destruction. Selfish pursuits never work out in a systematic context. So the government must play a role to protect the smooth operation of the economy and to maintain the public good.

By summing — On Mar 25, 2012
So would Fannie Mae and Freddie Mac be considered government sponsored enterprises? They certainly have a unique position in the market and receive a lot of benefits that others do not.
By truman12 — On Mar 24, 2012

There is a pretty serious debate going on right now about the extent to which the government should support certain industries. Both the left and the right have strong feelings on this issue. The left points toward subsidies for oil companies. The right points at tax credits given to green energy producers.

I think that we can probably all agree that there is a place for the government to fund research and offer certain kinds of support. The debate breaks out when you try to decide which industries get that support

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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