The Next Bubble - Remembering Enron

[Hannah Bell]

The advent of the 24-hour newscycle & celebrity news must cause short memory syndrome.

The Enron debacle was less than seven years ago, yet its lessons seem to have gone to the grave with Ken Lay. Though in retrospect, the Enron business model seems to have been the template for the new century.

Back in 2000-01 there was plenty of discussion. Power outages and price hikes were causing pain in California and elsewhere.

At the time, though, most of the talk styled the pain as resulting from tight energy supplies. The solution commonly touted in the media? More deregulation, to unleash the "genius of the free market" so that more generating capacity could be built.

Ordinary people, even those affected by the price hikes and blackouts, tended to accept the standard storyline. It was a significant factor in Gray Davis' recall.

Four years later, the tune was different. This was after Enron's bankruptcy, and after its traders were caught on tape laughing about rigging markets and stealing from grandmothers: "right up her a------ for f------g $250 a megawatt hour."

In comparison with the breathless coverage of the phony power crisis, coverage of the fraud was muted. The blatant market rigging was downplayed, and threads that reached into the business community and the White House were barely touched. Martha Stewart's concurrent prosecution received as much attention as Ken Lay's, and when he conveniently died on vacation at Snowmass resort after his conviction, Enron faded from the news.

But Enron was a harbinger. It was a company without a product or service except for its dubious arbitrage. In retrospect, its business model was predicated on its access to power and its ability to manipulate markets -- we could call it the Mafia model.

Today corporate profits are at 40-year highs and the proportion of national income claimed by the top of the income pyramid hasn't seen since the 1920's. There's an ocean of cash seeking returns, but real investment opportunities haven't kept pace; not enough world demand. Thus the movement from one frothy bubble to another, the most recent being real estate.

The basic pattern is: drive up prices (either by injecting cash, restricting supply, or using monopoly power), take your cut of the resulting action, and move on.

If you shop for yourself, you've already seen the next bubble in your grocery bill. Wheat prices are in the news now. The standard storyline is being trotted out: bad harvests, more acreage for ethanol, global demand, reduced reserves, oil prices. Normal market forces.

What you'll hear less about, and only as an afterthought, is the wash of speculative money flowing into wheat futures; and indeed, into all commodities. According to France’s National Institute for Statistics and Economic Studies, world prices for a basket of basic commodities -- coal, metals, grains, cotton, wool, coffee, sugar -- tripled between 2002 and 2007. Did world demand for ALL those items really triple in the space of five years?

An analyst from the French market research firm Xerfi put it this way:

“The explosive developments in raw material prices have only the
most tenuous links with the real economy... The real reason for the
commodity bubble is investors’ growing concerns—about real estate,
the solidity of the banking system, growth in the industrialized
economies, about the stock market—which make them redistribute funds
towards financial vehicles that are weakly correlated to traditional
asset classes.”

Too much money chasing too few goods is the simple definition of inflation. But working class wages in the US have been basically flat since the 1980's, and inflation, as measured by the CPI, has also been low. So where's the inflation in your grocery bill coming from?

From the tsunami of cash neo-liberal policy gifted to the top of the income pyramid over the last 20-odd years, cash that can't find a productive home, but must get a good return at any cost. The result?

Mafia corporations like Enron and wave after wave of frothy economic bubbles which have finally trickled down to the basics: food and shelter.

Your rising grocery bill -- and implicit pay cut -- is the ultimate profit center, the end-game of the neo-liberal push-back that began in the 1970's.

[Skittles]

1. did you write this, Hannah?

fringin' awesome!

[Hannah Bell]

3. Yes,

and thanks for the nice comment.

[trusty elf]

2. Interesting post

Thanks!

K&R

[El Pinko]

4. k&r

nt

[truedelphi]

5. Most excellent post. I would like to have seen some mention of

The regressive income tax scheme that is so widely accepted. A scheme that puts the tax burden squarely on the backs of the poor and the middle income class.

[bemildred]

6. Good work Hannah.

I call it the Bubble Economy. One bubble after another. Our most important economic activity is managing a never-ending series of bubbles. Managing an ordinary productive business just won't produce the necessary ROI anymore. You have to have water in little plastic bottles at a buck a liter and pump and dump bubbles in commodities and real estate and whatever else you can manipulate.

[kenny blankenship]

7. This is so true. The current financial sector meltdown is Enron WRIT LARGE

I recently saw Alex Gibney's 2005 documentary Enron: The Smartest Guys In The Room which includes of course those damning tapes of Enron power traders requesting brownouts and giggling over the rape of Californian utility customers. It also touches on the certain complicity of BIG NAME banks-- Merrill, CS First Boston-- and others in the gigantic fraud schemes of Andy Fastow and Jeff Skilling. Fastow and Skilling were eventually called to account, and the corporate accountant Arthur Andersen was forced out of business. But the banks got away untouched. An interesting moment occurs towards the end when the atty for whistleblower Sharon Watkins exclaims, "This was the corporate crime of the century!" His client however knows better. She warns that it would a mistake to see what happened at Enron in isolation, as a singular event, the sort of thing that could not happen again. The company books she was handed "just didn't add up" and she soon realized that she was working for crooks. She also realized that the accountant firm for Enron, as well as the corporate law firm, and also the BANKS had to see those same Enron ledgers and they all surely knew what she knew. But they all went along with the fraud and took the money or continued to loan Enron money in silence. Except for Arthur Andersen, they also escaped in silence.

Five years after Enron imploded in bankruptcy we've woken up to discover that everything is now Enron. People in every major NY bank, with degrees & licenses to practice law, with licenses that proclaim them trustworthy accountants, with degrees in economics and business, have been going along with fraudulent securitized debt schemes--what's referred to as the "subprime mess". They've been signing off on the double fraud of loaning money to borrowers on terms they know will result in default and dumping bundles of this bad debt on the world market as a sound investment. Somewhere there are tapes of bank execs cackling over the CDOs they foisted on some pension fund in Indiana or a bank in Portugal that sound just as obscene as the ones where Enron power traders laugh about turning California's lights out. Watching Enron: The Smartest Guys In The Room after the advent of the subprime implosion, declarations that Enron was the corporate crime of the century can only ring with irony. Enron wasn't a 'once in a century' crime or scandal, it wasn't even the corporate crime of the decade -- just the shape of things to come.