Last week, the board of the Federal National Mortgage Corporation, or Fannie Mae, ousted its chief executive officer, Franklin Raines, amid charges of substantial financial accounting improprieties.

Business pages in recent days have been filled with speculation about who will replace Mr. Raines. The failure, of course, is not Mr. Raines’s. The problem is Fannie Mae itself, a government backed entity that displaces what competitive firms could more efficiently do.

Other secondary financial markets operate efficiently without a government enterprise, and so, too, would the secondary mortgage market without Fannie Mae.

By virtue of selling commercial securities and having most of its board appointed by private investors, Fannie Mae has more of the patina of a commercial firm than most government enterprises. But ultimately, the federal government exerts substantial influence on Fannie Mae – and vice versa. Investors reasonably assume that Fannie Mae securities will be backed by the federal government, even under the cloud of accounting scandals.

Indeed, an accounting problem such as has befallen Fannie Mae becomes a federal budgetary problem if the government treats Fannie’s liabilities as its own. Amazingly enough, no one knows fully the extent of the federal government’s exposure for all government enterprises, or how much of the private sector they displace.

The president’s fiscal year 2005 budget lists only five private corporations with “public policy purposes” under the separate heading of government sponsored enterprises (GSEs): the Student Loan Marketing Association (Sallie Mae), Fannie Mae, the Federal Home Loan Mortgage Corporation, the Federal Home Loan Banks, and the Farm Credit System. Collectively, these institutions have substantially more than $2 trillion in liabilities, with Fannie Mae accountable for approximately $1.8 trillion. The exact amount, as we are learning from Fannie Mae’s accounting, is impossible to determine.

The Office of Management and Budget’s 2004 Federal Financial Management Report lists an additional 13 “Government Corporations” required to submit audited financial statements to OMB. Some are familiar names such as the Pension Benefit Guaranty Corporation and the Tennessee Valley Authority. Missing from the report, however, are such entities as Amtrak, the United States Postal Service, the Universal Service Administration Corporation, and many others. The federal government simply does not maintain a separate list, much less a separate budget, for all of these government enterprises.

All of these entities have worthy missions, but their “public policy objectives” would often be performed more efficiently by competitive firms alone, without encumbering the finances of the federal taxpayer, with means-tested subsidies for needy individuals.

Government enterprise activities are not limited to stand-alone corporations such as Fannie Mae. Within practically every government agency are activities that more efficiently be conducted by the private sector. For example, many federal agencies have large information-technology departments, parts of which might more efficiently be contracted out. President Bush is attempting to increase contracting out in his new management initiative and is evaluating agencies on their progress.

Some government activities directly displace private sector firms. For instance, until recently, several small businesses competed to supply state-of-the-art software for a small fee to first responders in the public-safety community. Then, a division within the Department of Health and Human Services decided to develop software at taxpayer expense and offer it free, threatening to put these firms out of business.

Last week, President Bush unveiled an ambitious plan for government austerity. The administration has properly focused substantial effort on transfer programs such as Social Security, Medicare, and Medicaid. But the goals of a balanced budget and a smaller government will not be achieved unless the administration and Congress are willing to rein in ever-expanding government enterprises. State and local governments have the same problem.

Limiting the growth of and even reducing government enterprises are not impossible goals. The Bush administration recently transferred Sallie Mae to the private sector. Other government enterprises are prime candidates as well.

The administration could also more fully identify and account separately for all federal enterprise activities, not just the select few it monitors today. Then the administration should establish a board to review government enterprise activities and to recommend a phased withdrawal. Only when the full extent of government enterprise activities is recognized can we begin the systematic process of returning them to the competitive sector.

A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached by e-mail at hfr@furchtgott-roth.com.