THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 340

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PA R T I I I

Financial Institutions

Crown Finance To promote housing and community development, the government has created
the Canada Mortgage and Housing Corporation (CMHC) to provide funds to the
Companies
mortgage market by borrowing from the federal government and also from the private sector by issuing mortgage-backed securities. The CMHC is not a bank; it
doesn t take deposits and is not governed by the Bank Act, but as a financial intermediary makes direct loans and investments primarily for social housing.
Agriculture is another area in which government financial intermediation plays
an important role. Farm Credit Canada (FCC), headquartered in Regina, was set up
as a Crown corporation in 1959 and is the successor of the Canadian Farm Loan
Board, which was established in 1927 to help Canadian farmers. It makes direct
loans to new and established farmers for any agricultural or farm-related operation, including the purchase of land, equipment, and livestock. It sources its funds
from the federal government and from selling its notes to domestic and foreign
capital markets.
To stimulate the export of Canadian goods and services, Export Development
Canada (EDC) was established in 1969 as the successor to the Export Credits
Insurance Corporation, which dated from 1944. The EDC is a Crown corporation
wholly owned by the Canadian government. With its head office in Ottawa, the
EDC provides loans to Canadian exporters to finance the working capital buildup
associated with international trade. It also provides intermediate-term, low-interestrate loans to foreign concerns for the purchase of Canadian goods, equipment, and
services.
To promote and assist in the establishment and development of business enterprises in Canada, in 1995 the government created the Business Development Bank
of Canada (BDC), headquartered in Montreal. It is the successor to the Federal
Business Development Bank (FBDB), which had been set up in 1975 to succeed
the Industrial Development Bank (IDB), which dated from 1944. The BDC issues
notes in domestic and foreign financial markets and then uses the proceeds to
make loans to small and medium-sized businesses.

GovernmentSponsored
Enterprises in
the United
States

The U.S. government has also created a number of government agencies that provide funds, either directly or indirectly, to the mortgage market. Three agencies
the Government National Mortgage Association (GNMA, or Ginnie Mae ), the
Federal National Mortgage Association (FNMA or Fannie Mae ), and the Federal
Home Loan Mortgage Corporation (FHLMC, or Freddie Mac ) provide funds to
the U.S. mortgage market by selling bonds and using the proceeds to buy mortgages or mortgage-backed securities. Except for Ginnie Mae, which is a federal
agency and thus is an entity of the U.S. government (like CMHC, FCC, EDC, and
BDC are in Canada), the other agencies, known as government-sponsored
enterprises (GSEs), are federally sponsored agencies that function as private corporations with close ties to the government. Although the U.S. government does
not explicitly back the debt of the GSEs, as is the case for government-sponsored
Treasury bonds, in practice the federal government in the United States has not
allowed a default on their securities.
Unfortunately, the implicit government backing of GSE debt leads to moral
hazard problems similar to those that led to financial crises discussed in Chapters
8 and 9. Because the U.S. government in effect guarantees GSE debt, market discipline to limit excessive risk taking by GSEs is quite weak. The GSEs therefore
have incentives to take on excessive risk, and this is exactly what they have done
in the United States, with the taxpayer left holding the bag. The recent bailout of
Fannie Mae and Freddie Mac by the U.S. government involved US$200 billion of
government funds (see the FYI box, The Subprime Financial Crisis and the Bailout
of Fannie Mae and Freddie Mac).