On the face of it, the bailout or nationalization or "Treasurization" of Fannie Mae and Freddie Mac seems simple enough, although enormous. The government has done things like this before, if not on this mind-boggling scale of notional value of the assets involved. But we all know the financial world has changed radically - even if we don't understand all the ways it has. The world's financial markets are connected as never before and the pace of innovation is dizzying. Therefore, we can safely assume that THIS nationalization will be handled as differently from previous ones as a Credit Default Swap is different from a simple loan. The two start from the same concept, but one is a meta-meta-market and the other is the thing meta-meta-traded in that market.
"Extrapreneurialism" comes when familiar, capitalist entrepreneurialism is moved into a different, more social context. But why should this happen? Well, there are technical answers, but there are also simple ones. Look at this quote from, of all places, the Ultra-Conservative, Republican blog "Redstate" (no, I won't put a link):
"Fannie and Freddie have issued $1.6 trillion in assets on top of $70 billion in shareholder equity. That's a rate of capital efficiency that's simply untouchable in the private world, and that's why mortgage interest rates have been so low (and home ownership rates so high) for so many years in the US.
If you were to fully open the mortgage market to private competition today, (which you simply can't because Fannie and Freddie already own or guarantee half of it, and it would take ten years for that to run off), retail mortgage rates would probably nearly DOUBLE, and housing values would plunge.
And what would happen then? That's right: Republicans and Democrats alike would be howling for a New New Deal."
This is an incredible admission that laissez-faire is both inferior and undesirable - although I doubt the author would admit it, so let's move on.
Because what the author is right and clever to point out is the tremendous capital efficiency of Fannie Mae and Freddie Mac. Even if Fannie and Freddie had been forced to hold more capital - as they should have been - the capital efficiency would still be incredible - as the author notes: "untouchable in the private world". That is power any real entrepreneur could only conclude must be harnessed and used for change and opportunity.
Had FNM and FRE been limited to their original mission, not bought mortgages for their own account and not allowed themselves to be fooled by banks they trusted into buying loans below their standards they would be the last ones left standing in the mortgage world. WHEN they go back to their mission - they will be a main support beam for the world's financial system.
No, they are not going to get smaller. That's ridiculous. They are going to get larger in the near term and any promises about reducing their size in the out years are silly and should be disregarded.
What will happen instead - extrapreneurialism predicts - is that the GSE model will expand and become more sophisticated. Smart, non-ideological people will look at that incredible capital efficiency and their eyes will light up. Their minds will be filled with ideas about how that incredible financial power might be applied. It will not bother them that capital efficiency like that "is untouchable in the private world." The fact that government will be involved will not deter them. They will not be blinded to opportunity by ideology and the models of the past.
THAT is extrapreneurialism - throwing off ideological blindness, embracing opportunity and bringing the entrepreneurial mindset to the new realities of "World Finance 3.0".
May you live in interesting times
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