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June 10, 2006 - Freedomain Radio - Stefan Molyneux
47:08
275 Enron

The visible fist versus the invisible hand

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Good afternoon, everybody.
Hope you're doing well. So, I honestly could not remember the podcast that I did on Tuesday, whether or not I did Enron.
It's amazing how flaccid the brain gets when you're on vacation.
So, I listened to the podcast while doing some housework today, and lo, nary a company to be seen that cratered, not a few years ago.
So, I thought we would start a little bit to talk about Enron.
It's an interesting topic, and it's something that is a challenge to libertarians, because it's really technical.
Really, really, really, really, really technical.
And everything that goes about to cause this kind of problem in a company, there's not one person in 10,000 who understand it.
Anything in particular to do with Enron.
And I would put myself probably in the category of one person in a thousand who has some understanding of it.
So let's take a tour.
I'm not sort of saying that you should memorize any of this or trot it out when people start talking about Enron.
But it is important to understand that you can be confident when anybody tells you about problems in the free market.
I can tell you haven't looked into dozens if not hundreds of these kinds of situations.
Over the past 20-odd years, that it's always violence that's at the root of it, right?
I mean, it's just really complicated to figure out the causes of these kinds of issues.
It's a whole labyrinth of regulations and secret deals and underhand stuff and secret votes and political campaign contributions and arcane accounting practices.
I mean, it's really complicated to figure out what's going on.
So we're not going to get into a great deal of depth, for obvious reasons, because I can't...
But I think it's just worth having a look at the issue as a whole from a regulatory standpoint, and then I'll sort of give what I think might be a certain way to provide a coup de grace to this whole Enron thing if you're talking about it with people, and this can apply to other companies as well.
So let's do a little bit of deep background and start with a Jurassic tree falling in a swamp, which later produces oil, which is...
No, I'm kidding. We won't go that deep.
What we'll do is we'll go and sort of say, from about a 50-year period ending in the 1970s, with an exception from 1930 to 1933...
In the United States, real electricity rates generally fell due to the long-run decline in real oil prices and technological advances, particularly in generation.
And I'm getting this from a document called Power to the People, which I will put forward in the forums if you have any interest in it.
So, greater-scale economies in generation and transmission added to that trend.
The long-term growth in electricity made it economic to invest in more advanced generation and delivery capital, while the regulatory system, because of rate-of-return regulation based upon accounting costs, tended to protect the accounting value of obsolete capital and perpetuated other inefficiencies as well.
What this means is that you get to write off equipment over the long run, and the longer it takes to write off the equipment, the longer you're going to keep that equipment.
It's all a heavy distortion that's put into the manufacturing sector through tax policies.
So you get tax rebates for the depreciated value of your capital equipment over time.
We don't have to get into it in a whole mess of detail, but...
You can at least understand that the longer it takes to get your capital dollars back in terms of tax refunds, the longer you're going to hang on to that equipment, and it really stifles innovation.
But the long-term downward trend in real electricity prices protected the political viability of the system despite inherent inefficiencies.
Now, the hidden problems, of course, surfaced in the 1970s.
So, in the 1970s, the rapid improvements in fossil fuel technology slowed greatly, pollution control requirements became more severe, and of course, oil prices went through the roof early and late in the decade, and general inflation drove up the prices of other inputs and construction in the electric utility sector.
Regulatory lag, which is delays in rate adjustments engendered by cost increases, became a severe drag on the profitability of utilities, right?
So, your costs go up, and then you apply for a rate increase, and the politicians say, well...
Am I going to get voted back in if I give a rate increase and so on?
And so it's real.
It's a real kind of mess. Now, there's a more adverse political environment that was yielded by something called the Public Utilities Regulatory Policy Act of 1978, also known as PURPA. Which essentially mandated explicit and implicit subsidies for inefficiently small generation facilities.
In particular, the law required that utilities purchase expensive power produced by the purpa generators at marginal avoided cost.
So, of course, this is like a smallest beautiful thing.
It's designed to increase competition, but it was a real mess to get into.
Now, because the regulatory requirements around fossil fuel rising, what people began to do was to look into nuclear generation, right?
So they invested a lot of money, these utility companies, in nuclear generation, and it was combined with a load growth far lower than it was foreseen in the late 1960s.
This produced a sort of collapse of the traditional regulatory compact under which utilities were allowed to recover all investment input and procurement costs undertaken sort of, quote, prudently.
This is sort of the word that sits in regulations, which basically says, abuse me, because there's no objective definition for it.
The increasingly adverse regulatory climate provided powerful incentives for utilities to circumvent economic constraints.
The request was furthered by the important increase in interconnection of local utilities and by the growth in remote sources of power.
One effect of the price increases for the 1970s was a dramatic increase in generation costs relative to transmission and distribution costs.
So basically, of course, what that means is that because there's a dramatic increase in generation costs because of all this investment in nuclear power and so on, and not such a relative increase in transmission and distribution costs, it means that people who are further away can now compete with you if you're sort of the local energy provider.
People who are further away can compete with you.
So if they have less regulatory overhead, it's going to be much cheaper To be outside of, say, California, which is where, of course, there's a lot of regulations around energy, to be outside of California is going to give you a competitive advantage because you're going to be subjective to far fewer kind of claustrophobic regulations, and because the transmission costs aren't very high, you can send it across the state border or the state line, I guess, relatively easily.
So you have this regulatory environment, of course, that is...
Making the price of generating electricity very high relative to the price of distributing electricity.
And of course what that's going to do is to start to create what are called spot markets or bulk wholesale power.
It means that moving energy around becomes something that is pretty lucrative.
You've got regulations here, you've got regulations over there, you've got this company that's already built its nuclear power, which has paid a huge price for it.
This other company over the other side of the state line can produce it that much cheaper.
So what happens is you start to get a lot of spot markets, and spot markets are very short-term trades of electricity.
And so what this means is that the growing interconnection of locally regulated utilities guarantees that I mean, it expands enormously the hourly spot market for the Bolt wholesale power, since it's inevitable that the varying conditions and demand peaks facing the individual utilities would make it sensible to engage in short-term trades of electricity.
So what's important is that this institution has grown in response to market forces impervious to the artificial territorial boundaries created by state regulators, right?
So California costs X, and over on another state to the next, it costs Y. This is not a natural free market environment, right?
The spot market will tend over time to erode the importance of regulatory constraints.
Indeed, the more severe the constraints on prices for electricity, the stronger the incentive to trade such power in competitive markets, after which the cost of purchase power simply can be reflected in rates directly, subject to regulatory approval of what's called prudence in your investments.
So there's lots of other factors, but I think one that's particularly important is the factor that since costs have increased since the 1970s, there's been a further erosion of this sort of regulatory compact.
So the original regulatory compact between the state and the utility companies was that utilities are guaranteed, it's what's called a fair and reasonable, i.e.
competitive rate of return on assets acquired prudently.
So what that means is that it limits both the upside potential for profitability and the downside risk for losses.
So it's a competitive situation.
So if everyone's losing money, then you'll get some slack from the government.
However, increasing costs in the 1970s have led regulatory commissions to limit regulated rates and rates of return more stringently than downside risks have been compensated.
This is what always happens with the state, right?
So you get involved in the state.
And the state then says...
Well, you can't...
We're going to have a windfall tax, and your taxes are going to go up if you make money, but your taxes don't go down if you lose money.
I mean, they do a little bit, but not relative to how much it is that you're gaining money.
And this is a huge issue, because, of course, what means...
If the upside potential, if the money you can make is limited to the competitive rate of return, but the downside risk of the money that you're going to lose is not, then over time, the average...
On average, the competitive return can't be achieved, right?
It's going to take... Money out of the utility field, right?
Because if you are constantly having your profits curtailed, but your loss is not, people are just going to go into the computer field or whatever where that's not the case.
Now, this erosion of this regulatory compact, so what it's done really is it's shifted the downside risk from ratepayers to shareholders, right?
So that means that if a company starts to lose money, it's not that they can't raise their rates, right?
It's all regulatory bound.
So it means that the ratepayers, the sort of the people who vote, right?
This is the problem with democracy is the people who vote have a lot more power than they should.
So the people who vote don't want their electricity to go up.
So politicians don't want to do that.
And so what it means is that when a company starts to lose money because it's had to invest in upgrades or whatever, then the ratepayers don't share any of the risk of having to pay more money, but the shareholders do.
So this provides strong disincentives for utility management to examine more closely the difference between market and book values for valuable capital assets.
And that's fairly significant, though somewhat arcane from an accounting standpoint.
So that means that you really want to sell the output of your undervalued assets.
You want to sell the power output out of state.
Rather than have it be subject to the regulatory caps on the amount of money that you can make for selling it in-state, which is of course a strong incentive in California, as we'll see shortly, to move the electricity out of California into other areas.
Now of course there's lots more that you can look up here, but let's turn and have a look at California in particular.
Now, in the early 1990s, California's unemployment rate reached almost 10%.
This was due to a deep recession, which was also exacerbated by sharp reductions in defense spending after the demise of the Cold War.
There was a downturn in real estate values, of course, and a significant relocation of manufacturing firms to other states.
The state population grew only because of a rough replacement of middle and upper income residents with large numbers of lower income immigrants.
I guess legal or otherwise, you get large deficits emerging in the state general fund budget, sufficient in magnitude to lead the state to temporarily issue promissory notes in lieu of pay.
So this is the kind of thing that occurs when you have a significant deficit.
Right, so it's important to understand that the Californian economy was largely subsidized by an enormous amount of defense spending, which means that there were far more manufacturing facilities there than would be required in a free market.
So of course, when the defense spending gets curtailed, those guys hightail it out of there.
Now, of course, because you have an enormous amount of state money flowing into these defense agencies within California, prices can rise and people aren't going to really get bothered by that much.
So what happened was, because you had all this defense spending, and there were other things too, but let's just talk about the defense spending in particular.
In the context of the electricity market, the overall level of rates yielded by the historical system of rate regulation in California was roughly half again as high as for the rest of the nation.
That's fairly important when it comes to figure out where it is that you want to go and do business, right?
So they're 50% higher, the electricity rates in California, and that's not very good, of course.
So the combination of negative economic growth, sharply higher unemployment, large budget deficits, and the flight of business elsewhere, so this creates, of course, huge political pressure to reduce electricity rates, right?
So it's artificially high because it's so heavily subsidized by the defense industry, what do they care?
And so in 1994, the California PUC issued a proposed rule allowing open access to the transmission and distribution system so that competitors could arrange delivery, allowing customers to choose their electricity supplier.
So this is important. This is a free market to a ridiculously small degree with an enormous amount of regulations, but only on the transmission and distribution systems, not on the generation systems.
This is all sort of important. So this is a huge battle and so on.
At the end of this political tug-of-war was Assembly Bill 1890, which attempted to achieve a number of inconsistent ends, right?
So the most important of which were the repayment of stranded costs, unrecovered historical asset and contract costs, exceeding the market value of the underlying assets to the utilities, and simultaneously the preservation of low competitive rates, right?
So when you're starting to introduce...
When people have built businesses...
Relative to a particular regulatory framework, they are going to fight tooth and nail to have that regulatory framework if it's going to be dismantled.
So let's say that you and I start a company and even given the intense regulations and so on, we end up making a go of it in a manufacturing environment.
And we've paid all these taxes and we've had all of these OSHA things and we've had all of these embedded costs.
We've got all these unions. And then suddenly they say, hey, by the way, now you can just go and build a manufacturing plant without any regulations, without any unions or anything like that, and there's no minimum wage, then we are going to fight this tooth and nail because we've already invested in building something within a regulatory framework.
And if that regulatory framework totally changes, the value of what it is that we've created goes down enormously.
In fact, it virtually vaporizes, right?
The way that the regulators get around this is through bribery, right?
So in this case, they're going to pay these sort of, quote, stranded costs because there's been a significant relaxation in the regulations, but these people have all made decisions based on those regulations.
So they want to pay a lot of money to the companies, to the utilities, and simultaneously create low competitive rates, right?
It's not going to work.
You don't have to be an economist, right?
Other important inconsistencies, so of course they want to create enough capacity to preserve low rates but also preserve environmental quality and retain the powers of local regulatory agencies.
forces while preserving large implicit subsidies for the producers of alternate power, reduction of construction costs while maintaining high union wage scales, introduction of competitive forces while preserving the role of government bureaucracies in the, quote, protection of consumers, you know, all of this kind of stuff.
It's all exactly the same kind of contradictory smorgasbord you would expect from some sort of government deregulation, right?
That means just they end up with more power than less, right?
So what kind of wonderful free market is introduced to the residents of California?
Well, of course, what you start with, to begin with, is you start with price fixing, and you also start with regulatory controls over who is included and not included in these new legislative requirements.
So, for example, rates have reduced 10% in 1997 for residential and small commercial customers, but not for everyone else, and then frozen in 1998 until April 2002, or sooner if the respective utilities' stranded costs were recovered.
Rates for industrial and large commercial customers were frozen for the same four-year period at the nineteen ninety six level.
Municipal utilities not required to adhere to the terms of the legislation and utilities with survey territories only partially in California were exempted from most of the provisions of the law.
So, of course, this is quite the opposite of anything that you would call a free market.
It's sort of important to understand when people talk about deregulation.
They're talking about re-regulation.
It's never deregulation at all.
And so what does this look like in practice?
Well, fascinating, as you can imagine.
So under the bill, the operation of the transmission system and, more broadly, the coordination of electric dispatch from generators was transferred to a new independent system operator organized as a non-profit agency, as a government thing.
This is the ISO. The ISO was charged with the formulation of a new structure of tariffs for transmission services.
Right? Again, not a free market thing at all.
The California Power Exchange, PX, essentially an auction market for power trades, was created and rules were established for demand and supply bids in the PX. Right?
Again, not government stuff.
It's all government stuff. And so, direct access for all consumers was mandated, and rules set for the prices utilities were allowed to charge, independent suppliers for metering, billing, and other such services.
Again, no free market thing at all.
So, rates are frozen at a discounted level for most consumers, while the difference between the frozen rates and the low wholesale prices would be used by utilities to recover their stranded costs over a limited period, right?
So, Basically, rates are frozen 10% lower, but the new market is creating an even lower price, but the companies are allowed to keep the difference, right?
So again, the consumer is getting shafted because their prices were 50% higher than the national average.
The national average are way higher, of course, for the U.S. because of regulations and all of this stuff to begin with.
So the consumer is getting a 10% reduction, but...
The energy companies are getting an enormous amount more in terms of money.
So costs and excess of rates would be uncollected.
And during the 1994 to 1998 period, when the policies were being formulated, many expected that future outcome to prove rare.
In fact, uncollected costs, which is costs higher than rates...
Proved to be a huge problem beginning in the summer of 2000, leading to a massive loss of more than $12 billion for Pacific Gas and Electric and Southern California Edison, and respectively the actual and near bankruptcies of the two, right?
So one company went down and the other almost went down.
So, sorry, to correct what I just said, the companies were expecting to make a profit based on being allowed to reduce the rates only 10% while having a further internal rate reduction, but it didn't turn out to be the case, probably because the demand went higher once the price went down.
Now, the next bit's a little complicated.
I'll try and keep it simple, but I think it'll make sense once we get to Enron itself.
Well... In terms of trying to figure out how you're going to stabilize prices over the long term, there's short term fluctuations and long term fluctuations.
So you can say, well, I'm going to buy gas for five bucks, or sorry, I'm going to buy gas for a buck a litre for the next five years, and my costs are fixed, and that's great.
Or I can just go on the open market.
We all do this when we buy a place.
Fixed mortgage short term, long term, and so on.
Now, because the government is heavily regulating the profits that can be made, what happens is the government does not allow costs incurred under long-term contracts for natural gas and other inputs on prudence grounds.
And this is true particularly when the short-term or spot prices are lower than the contract prices.
So if I say it's going to be a buck a gallon, we just use gas, right?
A buck a gallon price. It's somewhat complicated, but basically what it does is it heavily skews the utilities in particular to focus on getting all of their power...
into short-term trading and they can't set up any long-term contracts for a stabilizing price.
And that's pretty important, right?
Because this sort of shifting of costs under shareholders is rationalized as sort of pro-consumer.
What it does is it provides incentives for the utilities to engage in the inefficient practice of buying largely or solely on the spot market, right?
So competitive spot market prices for natural gas and power could never be described as imprudent.
Because the utilities have a legal obligation to serve, the net incentive to avoid long-term contracting in favor of spot market transactions is really, really powerful.
So this is a very important thing too, that you're putting in an enormous amount of money that's being forced into a kind of day trading scenario for power.
Now, last but not least, of course, the PUC in California engaged in the time-honored American pursuit.
Everyone thinks America's a free market, which of course it's not.
But they ended up going into this time-honored American pursuit of trust-busting, right?
Didn't want there to be all of these big companies and so on.
And so the PUC threatens to reduce the allowed rate of return to a level below the interest rate on the utility's long-term debts, which forces a divestiture as a matter of sort of simple finances.
So there are provisions which says that you'll get a better rate of return in terms of your tax deductions if you divest at least half of your generating capacity.
This is supposed to increase sort of competition.
So what happens is the utilities sold off as much of their generation and future view of utilities as mere middlemen took hold.
So there's a problem with this is that there are important efficiencies derived from vertical integration in the electric power sector.
So basically people just divested non-core aspects of their business which caused a large amount of inefficiencies to take root Within the production and distribution of electricity and this of course all starts to bear fruit relatively quickly.
So basically you have a regulatory environment that's set up wherein the government is reducing prices and also strongly reducing the incentive to invest and the capacity to invest in new generated capacity, right?
So between 1991 and 2000 total electricity consumption in California grew 19%.
Peak demand grew more than 18%.
Consumption growth was more than 5% in 2000 alone.
Because of low prices and substantial reserve capacity and delays and other problems created by state and local regulatory processes, filings for construction of new generating capacity totaled only about 1,000 megawatts for the period 1990 to 1995.
They were zero in 1996 and then sort of increased after the wake of this sort of AB 1890.
So you've got a regulation which drives the price down, lowers the profits, and thus the incentive to build new plants.
And, of course, this is inevitable, right, what is going to occur.
So, from about $15 to $30 per megawatt hour in the 1997 to 1998 period, prices increased at times to $100 to $300 per megawatt hour in May 2000 and over $400 at one point, well over $700 in June.
Now, of course, that is a pretty significant price increase and inevitably the result of this kind of manipulation from state and regulatory agencies.
And what else was the government doing to help electricity production?
Well, it was restricting hydroelectricity in the Pacific Northwest.
And also, a good chunk of the government forests were on fire, which messed up all of the electricity lines.
So there was lots that the government was doing to make sure that there was going to be an electricity crisis in California.
And also, of course, the government...
In its wisdom, charges emission credits, right?
So this is the amount of money that you have to spend to the government, give to the government, in order to produce electricity.
And it's about $40 per pound.
And what that means is that as the demand increases, you bring your least efficient plants online.
And this added about $80 per megawatt hour in terms of prices.
To the overall price of electricity, and sometimes for the least effective or least environmentally friendly plants, this would be $100 per megawatt hour, right?
So this regulatory overhead, just in terms of the emissions credits, is running more than three times the original price of electricity to begin with, so of course you're going to have this massive problem.
Now, of course, in our glorious and deregulated free market, you would expect two things to occur when demand goes up that much.
The first thing, of course, is you would expect prices to increase.
The second is that these marginal capacity plants would be brought online, but the costs in terms of emission credits were too high, so that didn't occur as much as it should have.
And the third thing, of course, is that you would expect state power to be brought in from out of state to undercut the increased cost of producing it within the state.
Now, of course, what happens is the disaster occurs because none of these three things are allowed to occur because of the government, right?
So this is the government... Allowing the free market to work in all of its glory.
This is, you know, the hand of the government is the invisible fist, right?
The market is the invisible hand, and the government is the invisible fist.
So, this imbalance between supply and demand, combined with regulatory rigidities and transmission constraints, you get numerous Stage 2 and Stage 3 alerts in summer of 2000, winter of 2001, several rolling blackouts during the latter period, particularly in the northern part of the state.
You've got a retail rate freeze, which provides really, really no incentive for consumers to reduce their demand for power, and the price ceiling imposed by the ISO worsened supply difficulties, right?
So this is a huge problem.
The efforts by suppliers to maintain capacity online during the spring, summer, and fall of 2000, combined with a substantial rise in service hours during that period, it's increased the scope of required maintenance procedures.
This forces deferred maintenance into the winter of 2001, when expectation was for reduced demands, right?
So you'll put off... Doing the necessary repairs until later.
However, reduced availability of power from the northwest and the southwest yielded shortages even during that period.
So it's pretty clear. A moderate increase in rates, about 15% to 20% in the summer of 2000, would have reduced demands, and the utilities should have been allowed to enter into long-term contracts so as to relieve risks and price pressures in the spot markets for electrical power.
Because of the desperate financial condition of the utilities, the state was forced to take over the wholesale purchasing role in the spot market, spending more than $9 billion out of the general fund through the Department of Water Resources.
These funds are to be repaid or were to be repaid with the proceeds from a special issue of revenue bonds, but that administrative process, having been delayed several months, was still ongoing at the time of this report, with the outcome in some doubt.
So what happens is the government ends up buying, because the utilities simply can't afford to produce power based on the rates that are provided.
This is an example of regulations leading to more regulations, state power leading to more state power.
And so what happens is the government has to start spending an enormous amount to buy electricity.
So the state budget is hemorrhaging, so rates, of course, are yanked up by about 40%, far more than would have been necessary if the required steps had been allowed to be effected by the market earlier.
The state enters into a number of long-term contracts for powered prices negotiated during and shortly after the market peaks.
So this is quite amazing.
So the government doesn't allow for people to negotiate their own long-term contracts, but the government then, at the peak of the market, negotiates long-term contracts, and you just know a lot of stuff is occurring under the table here.
The value of these contracts reportedly totaled about $43 billion in nominal terms, and of course are going to be pretty expensive relative to the future capacity and costs of the market itself.
So, what do we glean out of all of this?
Well, you're not going to be able to win a huge amount of converts to libertarianism by going through the ins and outs of Enron trading practices and theories, the Death Star practices and all that kind of stuff.
But I think what is important to understand is that this has nothing to do with the free market, and also the idea that the government is able to regulate is ridiculous.
I mean, the government gave over $800 million worth of loans and grants to Enron, received a huge amount of campaign contributions in return, And also, Enron...
The biggest problem with Enron was not these loans or these investments that were made among senior executives to hide debt.
The issue was that they were allowed to perform a form of accounting.
This was signed off by the SEC, by the Government Regulatory Agency.
They were allowed to perform a kind of accounting wherein...
I mean, it's really quite amazing.
You get... To book as revenue money you think you're going to make from future ventures.
So one of these was that Enron was trying to get into a market of buying and selling unused bandwidth capacity in a broadband situation.
So, you know, I'm not using my internet bandwidth during the night or when I'm away at work during the day at my home one.
And so maybe this could be sold and so on.
And what happened was the...
They were allowed to book the future revenues from that kind of business as if it were real.
I mean, it's completely illegal in any kind of rational business framework.
It's like saying, well, I imagine that I'm going to double my sales as a private company next year.
I'm going to book that as revenue right now and use it as collateral to get loans and so on.
Well, this was all allowed by the government.
It was not that the government was short of any regulatory capacity when it came to Enron.
Of course, the government had all the regulations in the world for Enron and for Arthur Anderson and for just about anyone else who...
was involved in this kind of mess.
There was no shortage of regulations.
Everything that Enron did was approved by the government, the regulatory agencies.
So the idea that the government is sort of, that more regulation is going to help is obviously quite funny.
Of course, the idea that sometimes floated around with Enron and these companies too is you see how these big nasty capitalist companies, these corporations, corrupt the poor innocent regulators and politicians who are just swept into their infernal greed like sort of the The evil guy is like the Gordon Gecko from Wall Street and the regulators are just helplessly bribed and corrupted by these all-powerful corporations.
This really is astounding.
This really, really, really is astounding when you think about it.
And I'll sort of throw out a metaphor and just see if it makes sense to you about the nature of the power relationship between the state and corporations.
It's really quite amazing when you think about the perspectives that are brought to bear on it.
And it says a lot, I think, about the psychology of people and their own experiences with their own corruption, the corrupt power that they were exposed to as children, as we've talked about in other situations.
So, I am an army guy, right?
And I tell you that you have to go and arrest some business guy, right?
So, let's just say we've got the army on the home soil, and you have to go and arrest some business guy.
And when you say why, I say, well, he's done something wrong, I can't explain it to you, but just trust me, we have to go and arrest this guy and bring him in.
And I say, listen, can you take 20 SWAT guys, a tank, a helicopter, An F-16 to go and pick this guy up.
And you're like, wow, is this guy really dangerous?
It's like, yeah, well, no.
Yes and no. I mean, yes, he's dangerous, but more financially speaking.
But if you could just take all of this incredible hardware, 20 SWAT guys, all of the automatic weaponry and bazooka firings and military hardware that you can get your hands on, go and pick this guy up.
Well... So off you go, and you go and pick this guy up.
But then, you see, he bribes you, and he escapes.
Now, if I am a military guy, and we'll just make up a military guy with any kind of real integrity, but you can even take it within the military context that we have right now, is the military guy, when then examined by the Well, a reporter sits down with me and says, well, what the hell happened?
You're supposed to bring this guy in.
You've got 20 SWAT guys, all the automatic machine guns that you can get your hands on.
You've got helicopters, you've got an F-16, you've got well-trained guys.
He's absolutely unarmed, sitting at home.
What the hell happened?
Well, am I going to have a very good answer?
Am I going to say, well, my guys were bribed, and so basically the problem is with my guys, right?
I mean, of course, this guy who's just having all these SWAT guys descend on him for a crime that he doesn't even know what the hell's going on is going to try and bribe his way out.
Of course he's going to try and escape.
Of course he's going to try and escape.
Of course, when my guy comes back, he's going to tell me, oh, the guy just got away.
I'm going to find out later that he was bribed to get away.
Am I then going to say, well, you see, the problem is that I don't have enough weapons.
The problem is I need more than 20 guys.
I need 50 guys.
And I need three helicopters, and I need this, and I need that, and all this other stuff.
And that's the issue why I wasn't able to bring this guy into justice.
And I'm not going to mention a damn thing about my guys and how they were bribed.
And I'm absolutely going to try and...
Get people to believe that the real criminal here is this guy that I was going to go and try and pick up for his contravention of a law that nobody really understands at all.
Well, that's never going to fly.
I mean, people are just going to roll their eyes and say, yeah, okay, so this business guy was able to bribe and got away, and so the problem is corruption within the military.
I mean, because everybody feels that they would do the same kind of thing.
I mean, if I could bribe to get away from being thrown away in jail for the rest of my natural-born life for an unjust crime, yeah, I mean, who wouldn't?
I mean, it would be crazy not to.
So, the thing that I find amazing is that when you look at the power differential between government and And corporations, right?
The government has hundreds of billions of dollars a year in military budget.
Especially the American government, right?
It's one of the most amazing military that the world has ever seen.
The most incredible destructive power.
It's got nuclear weapons, nuclear subs, aircraft carriers, marines, and helicopters, and fighter planes, and...
I'm sure it's got mole-like burrowing equipment with diamond-tipped drills at the front to burrow anywhere they want.
They've got satellites, they can target anyone, they can track everyone down to the last pimple on your nose.
And what does a corporation have?
A corporation has, like, three fat security guards.
Right. So to me it's kind of funny when the government says that we were unable to regulate because we didn't have the tools, we didn't have the power.
We need more power! We need more power!
So we're taking like 60% of the income of the country, if you count the national debt as well as taxes.
We've got hundreds of thousands of men and women under arms.
We've got the most awesome and huge military budget and the largest civil service that any time in the history of the world has ever existed.
And the problem you see with Enron was Enron.
The problem with Enron is that they cooked the books.
So the government sets up the rules by which the books are cookable or non-cookable.
And everything that was occurring up to near the end within Enron was occurring because the government had already signed off on the accounting practices that Enron used.
So, of course, when Enron goes bankrupt, much like the prisoner bribing and escaping, then you don't get mad at Enron, right?
You get mad at the regulators.
If somebody comes and steals your stuff...
And it turns you find out that the security guard you hired to protect your stuff got bribed and the people just ran off with your stuff and he never even unbuckled his gun.
Are you going to get mad at the damn thieves and say, well, what I need is more security guards like this one?
Of course not! I would be completely deranged to think that.
You would say, well, these security guards are useless.
Clearly this doesn't work. So I need to find some alternative, but of course this is the government, right?
There's no efficiency principle for the government.
I mean, one of the arguments that I'll make at some point soon is that we don't need a government partially because of new technology, but of course we never get a chance to find that out because the government grows like a cancer and protects itself at the expense of the body politic.
So I just think that's hilarious that government says, we need more regulation, see, because WorldCom got away from us.
Well, you show me a government in the history of the planet that has more resources than the United States government, I would be fascinated to see it.
And if, with all of the amazing resources that the United States government has, that it decides to sign off on accounting practices, which the company then follows, Sets up more accounting practices, which it then exploits through these trading deals it has with the corporations registered in executives' names.
And manages to fool everyone for quite a good period of time, and also exploits this partial, horrible re-regulation of the energy market that occurred, which I described a little bit earlier, exploits all of the arcane rules and performs God knows what briberies,
and then makes an enormous profit selling power to the California legislature, which is forced to buy power because its previous policies didn't Have led it into creating situations where no power can be created profitably.
And so, if somebody comes to you with a check for $40 billion, are you going to say, no, no, no, I'm not going to cash this?
Good heavens, no. And so the idea also that politicians are being corrupted by corporate executives, I mean, let's not even bother with that.
I mean, that's something you hear, but I mean, nobody can even take that seriously who's got more than a brain cell or two rattling around in his head.
And last but not least, of course, the funniest thing about Enron is that you've got George Bush up there saying, you know, he's cooking the books.
They're cooking the books.
And if you look at the amount of falsehoods, out-and-out falsehoods that are occurring in the U.S. national debt, I mean, they've done things as silly as they've deferred a pay day for the U.S. military from a Friday to a Monday.
So that they can put it on the next quarter or the next year's books.
They have an enormous amount of...
I mean, nobody has any clue what's going on with government finances, of course, but the amount of falsehoods are just shocking.
And there's pretty credible estimates that says that the deficit is actually about twice as high as it's claimed to be, which, of course, brings the fall of the House of Usher that much closer, which, you know, for me is not a bad thing.
But that is just very funny that the government would look at anyone else.
It's inevitable, of course, but it's pretty funny that the government would look at anybody else and say, oh, you guys are cooking the books.
That's just funny. So, I mean, the way that I approach Enron comes up in conversations, then all I do is I try and figure out, well, what the hell does the person know about Enron?
Does he just know what a bunch of state hacks and state sluts in the media have been handed out if they just bought the official party line?
So if people say, well, look at Enron, there's an example of corporate corruption, I'll say, oh, okay, well, maybe you can, I say, I don't really know much about Enron, maybe you can tell me a little, who are Enron's customers?
Well, Enron's customers were the consumers.
It's like, well, no, that's not the case.
So, who did Enron cheat, right?
Who got cheated by Enron?
Well, their employees, blah, blah, blah.
Well, yeah, I understand that, but they had to have customers first, right?
So, just not asking the person what they know about Enron and their relationship to this sort of spot trading versus long-term contracts.
See if they understand anything about the government regulatory aspects of what occurred in California and Because you'll very quickly find that they just don't have a clue what they're talking about, and they're just mouthing the party line.
And that's fine. I mean, you can mouth the party line all you want.
Just don't expect to be taken seriously by anybody who's actually thinking about things.
So, I hope that that's helpful.
It's a very interesting topic to look into, just how government regulations cause paralysis and mess in the supposedly free market, and results in what generally is called fascism, which is public subsidy and private profit, and produces exactly the kind of stuff that we see in the Enron debacle and in a large number of other debacles.
So... I hope this has been helpful.
I look forward to donations, www.freedomainradio.com, and I hope that you're having a great weekend, and I will talk to you next week.
Thanks so much. Oh, okay, one thing that I forgot on my Enron thing here, after my bath, in my bathing, I have realized that there was something that I forgot to mention that's probably worth mentioning.
I think it's important. The other issue around Enron that I think is quite funny is that the defense of lay and skilling and so on is that they didn't know.
They just didn't know.
So they're overseeing this huge financial and employee empire and they didn't know all of the stuff that the CFO was doing and they didn't know all of the problematic accounting practices that were being done and so on.
And so they just didn't know.
And of course, the constant refrain of the government and the people who are also heroic people who are always investigating after the fact for the photo opportunities, right?
That when they say, well, we didn't know, they're like, oh, come on, what do you mean you didn't know?
You're completely responsible for what you say you didn't know, which you had every right and every reason to know.
Now, that, of course, is an interesting moral argument, and one of the things that appears to be the case is that you say that if you're in charge, if you have care, custody, and control over a particular situation, then you're responsible for knowing, right?
Like, the buck stops at your desk, and if you're the CEO and this and that, like, you just, you know.
And if you don't know, then you're responsible for knowing, and it's no excuse, right?
Ignorance of the law is no excuse, ignorance of your accounting practices is no excuse, and so on.
Well, you know, you could make arguments either way for that.
I don't have a particularly strong opinion either way.
But what is interesting, of course, is that if it is the case that you're supposed to know, And not knowing is not an excuse, then it would seem to me that the same standard would apply to the government, right?
So the argument for morality.
So if you're supposed to know, but you don't know, then you're responsible for not knowing, and you're as guilty, if not more guilty, as if you knew.
Well, of course, the regulators are supposed to check over everything that these people file from an SEC standpoint.
They're supposed to review everything, and the government is supposed to be on top of these things, and the Securities Exchange Commission is designed precisely...
To figure out these kinds of things.
So, it's very hard to understand how the argument is made against Skilling and Lay that they didn't know and they were responsible for not knowing and so they're as guilty as if they knew, even if they didn't.
It's hard to sort of understand how that logic would not apply to the state.
Now, of course, conversely, if it's the case that they didn't know, and like if you say about the government regulators, well, they only know what they were told.
Right? The regulators, all they do is review the filings and they just know what they're told.
Well, then this is the case for the CEO as well.
This is the case for Lay and Skilling as well, that they know what they're told by the CFO and by the...
By the accountants and so on.
And so it really could be said that if the regulators who have even more power, right?
I mean, they have even more power over the company than the CEO or CFO does, right?
They put people in jail and so on.
And so if the regulators are not responsible because they were only told what they were told, then, of course, it's the case that you can't prosecute these people either or think that they're bad guys because they were only told what they were told.
And if the capitalists at the top are responsible, then the regulators, of course, are much more responsible.
Because that's their only job, right?
These guys are running companies.
They've got to have other things to do. The regulators' only job is to look for discrepancies.
And, of course, when the whole house of cards came down, it came down precisely because somebody just went over the statements, right?
Just went over the statements.
It really wasn't that complicated.
And somebody started shorting the stock, and that brought the whole house of cards down.
All of that information was perfectly available to the regulators.
And so it seems to me that you, again, would start to look at the regulators if you're going to take a moral argument before you'd look at any of the private business people.
Okay, that was the last point I had to make.
So please resume your regularly scheduled next podcast.
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