Business as Usual in the
by David Moberg
In These Times magazine, March 4, 2002
Even more than the dot-coms, Enron-the aptly nicknamed "crooked
E"-was the star of the new "information economy."
During the past decade, economic fortune-tellers said that the
future of business lay in exploiting the Internet and information
technologies to create boundless productivity growth and profits.
At the same time, there was a continued ideological push toward
deregulation of all markets, and financial firms increased their
domination over producers of goods and services. Tapping into
and deceptively feeding the decade's collective delusion of unlimited
wealth through computerized financial wheeling and dealing, Enron
soared in a few years from a sleepy utility to the seventh~largest
company in the United States-and one of the most widely praised.
The sordid, still unfolding tale of Enron's crash is a story
with several themes: common greed that soared to uncommon dimensions;
the failure and foiling of government regulation; duplicitous
accountants, lawyers, bankers, executives and politicians on the
corporate take. But it also makes a compelling argument that the
new information economy should really be called the disinformation
In the disinformation economy, there is a systematic effort
to hide, distort and lie as a way of gaining wealth and power.
In itself, this is old stuff, but the techniques for such deception
are more sophisticated and elaborate than ever. Even though insider
dealing is a crucial part of the disinformation economy, on the
surface the economy relies heavily on public information, certainly
much more than in the era of hand' shake deals between private
capitalist titans. In this time of deregulation and globalization,
as markets grow more all' encompassing and less constrained, failures
of information can have much more dire effects. Even on capitalist
terms, markets require full, accurate and universally available
information to guide rational decisions by investors, consumers
and citizens. Disinformation raises the level and cost of irrationality
even as it promises a free market utopia.
Enron's stock market success was based on systematic ~ exaggeration
of its financial strength. Its explosive growth and sudden collapse
both were linked to the creation of more than 3,500 subsidiaries
that were often used to keep debt off Enron's balance sheets,
which in turn helped prop up its credit rating and reduce the
cost of borrowing for further expansion. Unlike Enron shareholders,
insiders-the corporate executives and selected investors, including
divisions of banks that were lending to Enron-knew these subsidiaries
were dubiously structured. But they ignored the dangers because
Enron held out hope for fantastic returns-doubling their money
or better in some years. The auditors for Arthur Andersen did
not just overlook this chicanery. Like the lawyers who said it
was all legal, the accountants were apparently paid well to help
set it up. Nearly 900 of these subsidiaries were established in
offshore tax havens like the Cayman Islands, notorious centers
for money-laundering and financial concealment.
Fundamentally, Enron transformed itself from an energy supplier
into an almost totally unregulated financial institution. The
profits Enron generated came mainly from its on-line trading of
electricity and natural gas. (Other trading, especially in telecommunications
bandwidth, was less successful.) The bulk of this trading was
in "derivatives," complex financial instruments used
to hedge or speculate about future prices. Unlike open futures
markets in agricultural or financial commodities (like Treasury
bonds), Enron not only ran the marketplace, but was a major participant
in the trades. The derivative contracts were often opaque and
confusing, even to experts. So this market was especially murky
and open to manipulation.
To succeed Enron needed markets-starting with energy- that
were deregulated, volatile and actively traded. Deregulation provided
the instability that created an incentive for hedging and speculation
as well as opportunities for Enron to profit, often by taking
advantage of minor discrepancies in prices within the marketplace.
Clear, predictable information about energy prices typical of
regulated utilities hurt Enron; chaos and confusion were its manna.
Keynes described financial euphorias as bubbles forming on bubbles.
Enron was blowing its own bubbles.
In the real-world economy, electricity deregulation has been
a massive failure for consumers. Many can't easily take advantage
of the confusing choices in deregulated markets-just like for
telephone service. For them, deregulation most often means disinformation
and overwhelming marketing madness. And in most places, energy
prices have actually gone up.
Enron's machinations played a major role in driving up energy
costs in California. (Emergency shortages soared after a bill
deregulating energy trading pushed by Texas Republican Sen. Phil
Gramm on behalf of Enron was passed, then ended when federal price
controls were reimposed, according to Public Citizen.) One study
concluded that electricity prices on the California-Oregon border
recently dropped 30 percent simply because Enron went bankrupt
and could no longer use its market power to set prices. Yet with
widely fluctuating prices, it is harder for utilities to plan
for new generating capacity, setting the stage for future shortages
or supply manipulation and price hikes.
Enron is not the only sinner; neither is Andersen. Over the
past six years, Business Week reports, investors have lost $200
billion as a result of 783 audit failures at firms that overstated
profits, and such incidents doubled from 1997 to 2000. The fallout
from Enron has helped to precipitate other major bankruptcies,
like Global Crossing, or reorganizations, like Tyco, as investors
worry about the reliability of all corporate statements. Former
Securities and Exchange Commissioner Arthur Levitt, whose efforts
to tighten accounting practices were blocked by Congress, says
that a "culture of gamesmanship"-a polite term for Iying,
cheating and deceiving-took hold in the frenzied new economy of
Politicians helped create the fertile environment for growth
of the disinformation economy. Gramm and his wife Wendy, a former
director of the Commodity Futures Trading Commission who joined
Enron's board shortly after retiring, pushed through key regulatory
rulings and legislation that fostered derivative trading and kept
Enron free from regulation. Enron's political contributions-disproportionately
to the Republicans, especially to Bush and his cronies, but also
to many Democrats-are now notorious. Maybe Bush didn't bail out
a failing Enron, but he did end Clinton's plans to rein in foreign
Bush's energy plan promoted 17 policies that Enron had lobbied
for, including six visits with Vice President Dick Cheney while
he headed the energy task force. Even within the industry, most
of those proposals are controversial, such as promoting energy
deregulation and derivatives, guaranteeing energy traders open
access to all transmission lines, and repealing the Public Utility
Holding Company Act (which restricts multi-state holding companies
from diversifying into ventures unrelated to their core utility
business). But as part of the disinformation society-and in keeping
with other Bush moves to restrict freedom of information and access
to presidential records, Cheney is fighting to keep secret the
deliberations of the energy task force, despite a lawsuit being
filed by the General Accounting Office.
But Enron hasn't just corrupted individual politicians by
buying influence through campaign contributions. The irony is
that the political corruption ends up destroying one foundation
of the market economy itself-reliable information-and exacerbating
what economist Michael Perelman calls "the natural instability
Until the dot-com and stock market collapse, many analysts
argued that computers, the Internet and telecommunications had
created a "new industrial revolution" that had transformed
the economy into a recession-proof fountain of growing productivity
and profits. But Northwestern University economist Robert Gordon
has concluded that nearly all of the accelerated productivity
growth in the late '90s came from growth in manufacturing of durable
goods, especially computers and related equipment. There was virtually
no acceleration of productivity in the rest of the economy.
The hype about Internet business and the information economy
spurred an investment boom, fed by brokerage firm stock promoters
("analysts") who even late last fall rated Enron a "buy."
Enron was worth $60 billion to shareholders before it tanked,
wiping out many of its own workers' retirement funds. But most
observers ignore damage Enron wreaked on the way up: Its exaggerated
promise of returns drew investment away from other potential investments.
What would the country be like if the billions wasted on Enron
had been used rationally and for some real social good, not swept
up in the throes of an economy built on lies and deceit?
Even within its own corporate walls, if Enron had plowed money
into its wind power division instead of its fraudulent trading
division, it could have helped reduce national dependence on Middle
Eastern oil and created more stable energy prices. Similarly,
illusory high rates of return-profit and growth in stock value-at
Enron and other "revolutionary" companies put unrealistic
pressure on other businesses to match those returns, distorting
investment decisions and helping to undermine some industries,
including many domestic manufacturers.
The tentative moves emerging in Washington toward regulation
of accountants, pension plans, accounting rules and other troubled
aspects of the Enron debacle are small, if necessary, steps toward
the broader task of unmaking the disinformation economy. But the
entire political culture has been so contaminated with disinformation
that now-even in the wake of this scandal-both Republicans and
Democrats are promoting further energy deregulation. Greed undermined
professions that once claimed the public trust-accountants, lawyers,
bankers-demonstrating the need for tighter regulation. But who
can do that if government itself is corrupted?