Tag: enron

Enron: Dependent on Government

A new piece at the Library of Economics and Liberty written by Robert J. Bradley is a timely reminder that it’s often government policies that fosters bad corporate behavior—not the “free market” as the left likes to claim.

Bradley, a sixteen year employee of the now defunct Enron Corporation, demonstrates that the company was actually “a political colossus with a unique range of rent-seeking and subsidy-receiving operations.” Manipulating the tax code, pushing for self-serving government regulations, and grabbing taxpayer handouts were all key components of Enron’s energy empire. It’s not a stretch to suggest that in the absence of government, the Enron story never happens.

In my recent Cato paper on corporate welfare in the federal budget, I discuss the government subsidies that Enron received:

Enron Corporation is a poster child for the harm of business subsidies, particularly with regard to its disastrous foreign investments. Enron lobbied government officials to expand export subsidy programs, and it received billions of dollars in aid for its projects from the Export-Import Bank, the Overseas Private Investment Corporation, the U.S. Trade and Development Agency, the U.S. Maritime Administration, and other agencies. Enron received about $3.7 billion in financing through federal government agencies.

Business subsidies create damaging economic distortions. All those subsidies to Enron induced the firm to make exceptionally risky foreign investments. And the resulting losses were an important factor in the company’s implosion.

A 2010 Bloomberg investigation, which looked at the Ex-Im Bank, found that companies seeking financing aid from this agency had been paying the travel expenses of government employees on visits to projects under consideration. For instance, Exxon Mobil spent almost $100,000 on Ex-Im Bank employees responsible for helping the agency decide whether it should aid Exxon on a major gas project in Papua New Guinea. Eleven months later, the Ex-Im Bank approved $3 billion in financing for the venture.

Early in the Bush administration, high-level officials went to considerable lengths to help Enron on an investment in India that had gone bad. When the Washington Post reported this in 2002, the administration argued that it was simply trying to guard taxpayer interests in the more than $600 million in federal loans that had been given to Enron by Ex-Im and the Overseas Private Investment Corporation. However, the government should not be putting taxpayer money into such risky private schemes in the first place.

US Has Already Been Downgraded

Lost in all the concerns over how Moody’s and S&P will view any deal to raise the debt ceiling and whether such a deal addresses our country’s long term budget imbalances is the fact that at least three rating agencies have already downgraded U.S. government debt.  One of these agencies, Weiss Ratings, treats U.S. government debt as barely better than “junk” or speculative grade.

It would be easy to dismiss these agencies as irrelevant and attempting to simply grab attention, but at least one of these agencies, Egan-Jones, has a track record of correctly predicting problems at such companies as Enron, WorldCom, Global Crossing, Bear Stearns and Lehman Brothers that the major rating agencies missed until it was too late.  Egan-Jones also employs a business model of having investors pay for its services, rather than the debt issuer.

The simple truth is that the U.S. government has made more future promises than it will have the capacity to pay, under almost any circumstances.  The fact that the major rating agencies downplay these long term imbalances is further testament to their entrenched monopoly status.  But then when the government provides you with some regulatory protections, its only natural to assume the government will expect one to return the favor.

For more on the issue, check out Cato’s latest daily podcast.

Do Forced Mortgage Writedowns Create Wealth?

Matt Yglesias recently added his voice to the long running calls for principal reductions on underwater mortgages.  His argument is that such would create additional spending.  Or as he puts it, “I think that if people in Phoenix got a principal writedown on their mortgages, they’d have more disposable income and might go to the bar more.”

What Matt, and others calling for forced principal reductions, miss, or choose to ignore, is that while a mortgage represents a liability to the borrower, it is an asset to someone else.  Matt’s logic, which I agree with here, is that an increase in one’s net wealth (via a reduction in one’s liabilities) should increase one’s consumption.  To complete the analysis, however, we must extend that same logic to the holders of the asset, so that a reduction in the value of their asset (the mortgage) should reduce their spending.  Taking x from A and giving x to B is not going to increase A+B.  To assert otherwise is to engage in Enron-style social accounting.

Now if you want to argue that the borrower has a higher marginal propensity to consume than the investor (say, a retiree living off a pension) then provide some support for that position.  It is just as likely that those on the losing end will take efforts to protect themselves from this loss, decreasing overall social wealth.  So what one has to show is that the marginal propensity to consume for the borrower is so much larger than that for the investor that it offsets any costs from the investor trying to protect his investment from theft.

Now if you simply favor redistribution of wealth for its own sake, just say so.  If you hate investors and love defaulting borrowers, then just say so.  Personally, I don’t believe the role of government should be to take from A to give to B.  I just ask that we stop pretending, in the absence of compelling evidence, that redistribution of wealth is the same as wealth creation.