In September 2001, the Enron Corporation ranked as the seventh largest U. S. transnational firm in terms of total balance-sheet revenues. We now know how cooked its books really were. But in the seven years preceding the scandal, Fortune magazine had ranked Enron as our most innovative firm. What did Enron do? It traded almost anything on its futures and derivatives markets and produced almost nothing. Enron’s rise from a sleepy Southwest gas pipeline owner to a privatized corporate gaming casino in which speculators could literally bet on the future of the weather epitomizes the irrationality of unregulated capitalism. Beginning with the Carter administration’s deregulation of the savings and loans (S&L), transportation, and telecommunications industries, advocates of deregulation promised what John Maynard Keynes argued could never exist (and in fact doesn’t): a self-adjusting free market economy that would be efficient in both the short and long runs.
The mainstream media frame the Enron scandal as a story of political insider trading: Bush’s Texas buddies using political connections to garner (de)regulatory breaks and manipulate energy prices. Political corruption is part of the story, but beneath the ideological cover of “corruption and influence buying” lies a starker reality. The corporate media have trumpeted deregulation and social welfare cutbacks as creating a mean and lean twenty-first-century capitalism. Mean and lean in regards to staffing levels, perhaps; but efficient, no. The dirty secret is that financial deregulation leads to speculative bubbles and bursts. As Keynes first pointed out seventy years ago, financial markets can never be self-regulating because they are based on uncertain information about future economic performance. To prevent speculative booms and busts, the democratic state needs to regulate the wild price swings of financial markets caused by, as Keynes put it, speculators devoting their “intelligence to anticipating what average opinion expects the average opinion to be.”
Thus, throughout the history of market economies, “speculative bubbles” have formed and burst because investors in financial markets focus on one another’s likely behavior rather than on economic fundamentals.
The roots of the Enron scandal go back two decades. Prior to 1980, federal law limited savings and loans banks to lending for home mortgages, which were further regulated by federal ceilings on interest rates. For years, commercial banks campaigned to deregulate interest rates and to enter the home mortgage arena. In return, they proposed that S&Ls be given more liberal accounting rules and allowed to enter the commercial real estate market. In early 1980, Congress passed a financial deregulation bill that did everything the banks wanted.
By 1985, with the collapse of oil prices in the Southwest, thirty to forty billion dollars in S&L commercial real estate loans had a...
For just $19.95 a year, get access to new issues and decades' worth of archives on our site.
Print + Online
For $29.95 a year, get new issues delivered to your door and access to our full online archives.