The amounts of money ripped off, the number of lives ruined, it all seemed so terrible at the time. The response seemed terribly inadequate as well. But seeing it again almost two years after financial collapse, it seemed at once almost Normal Rockwell quaint, because of the relatively piddling amounts of money involved (billions, not trillions), and almost HP Lovecraft horrific, because of the sense of Cthulu-like deep evil still slumbering while we foolish mortals go cheerily about our doomed lives.
There it all was again, the birth of Enron in 1985, a year after Reagan's Day-Glo "Morning in America" re-election campaign. His plan for "revolutionizing" the energy business on "free market" principles by creating a mammoth monopoly. The incredible hubris that lead to all sorts of grandiose plans-some of which put Enron deeply into debt. The phony accounting premise of "mark-to-market" that allowed hypothetical future profits to be treated like actual present-day income. The massive deception of the business press that created the aura of an invincible company. The collusion of accountants and bankers as well. The bedazzlement of the California legislature that lead to a deregulatory scheme that no one understood, but that Enron alone dedicated itself to figuring out, the better to exploit. The various schemes Enron came up with--Ricochet, Death Star, Get Shorty, and the like. The rolling blackouts that came out of nowhere, beginning in the middle of winter, when California's energy demands were around half of its summer peak. The psychopathic banter of the energy traders as they wrecked havoc on the nation's wealthiest state. The heaping of blame on Democratic Governor Gray Davis. And the sudden decline of Enron's fortunes when the Democrats gained control over the Senate, and the Federal Energy Regulatory Commission finally instituted regional price caps, signaling the beginning of the Enron's end. The blame-shifting, finger-pointing and self-serving breast-beating. The lies. The lies. The lies. The lies. And one former trader reflecting on his own uneasiness that he never acted on, who remarked on his failure to live up to Enron's ironic motto, "Ask Why".
We still haven't done that, collectively....
Enron was just "one of those things", apparently. With no larger lesson to it, even though one interviewee points out that a handful of Enron top executives just couldn't have pulled it off all by themselves. The bankers, for instance, just had to know what was going on--at least in a general way. The same bankers that moved from a barely noticed supporting role in the Enron debacle at the beginning of the Bush decade to center stage at the end. We never did take a comprehensive look at the entire Enron affair and ask, "Why did this happen? What does it tell us about our economy, economic policies and philosophy? What does it say about where we're headed? And how we might change course? None of that was ever asked.
And now, coming close to two years after the bubble burst for the whole economy this time, none of those questions has seriously been asked this time around, either. Which means that, despite a nice helping of window-dressing reforms, we are virtually assured of going through something similar again. Only next time, probably much, much worse.... if you can imagine it. Or even if you can't.
It's not just financial shenanigans we're talking about here, as Kenneth Rogoff reminds us. In fact, Rogoff, co-author of This Time Is Different: Eight Centuries of Financial Folly, argues that financial crises may be relatively tame compared to eco-technological ones:
The parallels between the oil spill and the recent financial crisis are all too painful: the promise of innovation, unfathomable complexity, and lack of transparency (scientists estimate that we know only a very small fraction of what goes on at the oceans' depths.)? Wealthy and politically powerful lobbies put enormous pressure on even the most robust governance structures....The oil technology story, like the one for exotic financial instruments, was very compelling and seductive. Oil executives bragged that they could drill a couple of kilometers down, then a kilometer across, and hit their target within a few meters. Suddenly, instead of a world of "peak oil" with ever-depleting resources, technology offered the promise of extending supplies for another generation.
Western officials were also swayed by concerns about the stability of supplies in the Middle East, which accounts for a large proportion of the world's proven reserves. Some developing countries, most notably Brazil, have discovered huge potential offshore riches.
Now all bets are off....
The basic problem of complexity, technology, and regulation extends to many other areas of modern life. Nanotechnology and innovation in developing artificial organisms offer a huge potential boon to mankind, promising development of new materials, medicines, and treatment techniques. Yet, with all of these exciting technologies, it is extremely difficult to strike a balance between managing "tail risk" - a very small risk of a very large disaster - and supporting innovation.
Financial crises are almost comforting by comparison. Speculative bubbles and banking crises have been a regular feature of the economic landscape for centuries. Awful as they are, societies survive them....
If ever there were a wake-up call for Western society to rethink its dependence on ever-accelerating technological innovation for ever-expanding fuel consumption, surely the BP oil spill should be it. Even China, with its "boom now, deal with the environment later" strategy should be taking a hard look at the Gulf of Mexico....
Given the huge financial stakes involved, achieving global consensus will be difficult, as the Copenhagen climate-change fiasco proved. The advanced countries, which can best afford to restrain long-term growth, must lead by example. The balance of technology, complexity, and regulation is without doubt one of the greatest challenges that the world must face in twenty-first century. We can ill afford to keep getting it wrong.
We've had fair warning. We've had foul warning. We've had every sort of warning one could possibly want. It's time to act.
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