Posted on 7-2-2002

 Enron Upside Now Down
From the Editors at prospect.org

The Enron scandal should ring down the curtain on a whole philosophy of
free-market capitalism and a whole style of government-corporate cronyism.
It should launch a national movement to leash the corrupt power of money in
politics so that legislators and regulators can serve the public interest.

We have been here before, most recently when the Great Depression
discredited the speculative excess invited by laissez-faire. One generation
earlier, in the Progressive Era, financial panics and robber baron abuses
led to demands for reform (which resulted in a 1907 law prohibiting
corporate campaign contributions). In both these periods, a politically
aroused citizenry elected progressives who in turn enacted profound changes
in the ground rules of capitalism. But these changes remained politically
secure only as long as the power of voters offset the power of money.

A new reform era in this first decade of the new century will be tougher to
achieve. Enron may display all the elements of what's wrong when
laissez-faire ideology meets the purchase of political influence. But
despite the dot-com bust and the Enron collapse, we are not in a new Great
Depression. The Enron story line is numbingly complex. The nation's
attention is still focused on the hazards of terrorism. And although this
is a quintessentially Republican scandal from the ideology to the cronyism,
leading Democrats are implicated just enough to blur both the partisan and
the ideological implications.

Nonetheless, even the most craven Democrats sense the potential for a
political windfall. The mainstream press is on the case; and dominant
political orders have, in such instances, been known to unravel very fast.
Who would have thought in November 1972, when George McGovern lost 49
states, that Richard Nixon would resign in disgrace just 21 months later?
So Enron could bring a new age of reform a little closer—if the bipartisan
power of money to block reform can be neutralized.

What is this scandal really about? At one level, it is old-fashioned
influence peddling. By buying politicians, a favored corporation promoting
a new kind of scam simply purchased immunity from regulatory oversight.
Enron is not a unique case, but it is the emblem of how the entire system
is corrupted by the power of political money.

Over and over again, Enron got the regulators to change the rules so that
it could hide what it was doing, win special tax breaks, or manipulate
markets in its favor. The ideology of deregulation provided cover for the
cronyism. When Wendy Gramm, as chief commodities regulator under Bush I,
slipped in a midnight rule-change after the 1992 election to exempt Enron's
trades from oversight, it was consistent with the prevailing ideology. She
was rewarded with a seat on the Enron board and hundreds of thousands of
dollars in income. When Enron needed another favor in 2000, her husband,
Senator Phil Gramm of Texas, got yet another regulation waived. Who needed
regulators, anyway?

Well, capitalism, it turns out. Chicago economics, the ideology
underpinning the opportunism, holds that capitalism is self-correcting.
Regulation, by contrast, is said to be both inefficient and politically
tainted. But in the Enron era, both assumptions have been proved wrong.
Corporations don't support a brand of deregulation that allows consumers,
Chicago-fashion, to efficiently hold producers accountable (that would
require a form of regulation). What they support is a deregulation that
allows opportunistic forays, favoritism for insiders, and quick killings.
Enron also demonstrates that deregulation is at least as politically
corruptible as regulation.

So at a second level, the scandal is an impeachment of laissez-faire as a
principle for running an economy. Indeed, the more we learn about Enron,
the more we discover that all of the parts of the market system that
supposedly provide self-correction were in on the deal.

Accountants are supposed to attest to the honesty of corporate books, on
behalf of shareholders and prospective investors. But Enron's accountants
were involved in the scam. Banks are supposed to monitor corporations to
which they lend money, as part of their fiduciary duty to depositors. But
Enron's bankers got a piece of the action, too. Corporate managers are
supposed to be the agents of shareholders, but Enron's executives literally
granted themselves waivers from the company's own conflict-of-interest
rules in order to facilitate their self-dealing. Stock analysts are
supposed to serve customers, but they are rewarded to tout stocks, not to
ask skeptical questions. Elected officials are supposedly the check on
regulators; but whenever regulation got in the way, Enron just used its
political connections to get the regulations waived. The idea that market
forces can temper market manipulation is naive. By the time markets realize
that a Ken Lay is a fraud and a scoundrel, the money is gone.

Is Enron atypical? It may have been the most brazen offender, but the most
trusted names of American capitalism — Andersen, Morgan, Citigroup — also
are implicated in this scandal. And while Enron may have been greedier and
stupider than others, this kind of behavior has become all too common in
deals large and small. Enron parallels the savings-and-loan debacle of the
1980s. Politicians of both parties, flush with S&L campaign contributions
and soothed by the song of deregulation, changed the rules so that staid
S&Ls could become for-profit entrepreneurs free to speculate with other
people's savings. Taxpayers had to bail out the several hundred billion
dollars' worth of losses.

Nor is this scandal just about the excesses of financial deregulation.
Across the economy, some regulatory reform was sensible. But the brand of
deregulation we actually got—in industries as diverse as banking, energy,
entertainment, and pharmaceuticals—was hopelessly corrupted by the ability
of the affected industries to buy themselves an inside track with
legislators of both parties.

And here lies the deepest scandal of all. Though the odor of Enron, like
its political affiliation and ideology, is distinctly Republican, the
company had both parties on the take. As our cover illustrates, a
no-holds-barred investigation would require much of Congress to recuse
itself. Fifty-one of 56 members of the House Energy and Commerce Committee,
which is leading the investigation, have taken money from Enron or Arthur
Andersen; likewise 49 of the 70 members of the House Financial Services
Committee.

This is not to say that anyone who ever took a nickel from a
self-interested contributor is hopelessly corrupted—only that there is a
systemic bias in favor of organized corporate money crowding out democracy.
Indeed, Enron was just the 76th largest corporate campaign contributor,
dwarfed by even bigger corporations. The ranking members of every major
congressional committee are recipients of largess from industries that they
regulate. Four telephone conglomerates together gave more than $1 million
to members of House Energy and Commerce. Real-estate interests and
commercial banks gave over $2 million each to members of House Financial
Services. [For more on this, see "Devil in the Details" on page nine.]

There is such a thing as the public interest, but the current system of
campaign finance turns politicians of both parties into servants of private
corporate interests. Republicans are more explicitly so than Democrats, but
the New Democrats play the corporate-interest game essentially as
Republicans do—leaving the Democrats' role as tribune of the people blunted
and their message blurred. On the one hand, Bill Clinton could appoint and
defend a genuine public-minded regulator like Arthur Levitt of the
Securities and Exchange Commission. On the other, when Levitt got serious
about actually regulating corporate and accounting abuses, it was not just
Republicans who warned him to desist, but also New Democrats with close
ties to industry, including Senators Chris Dodd, Robert Torricelli, and
Joseph Lieberman (the same Joe Lieberman now leading the Senate's
investigation of Enron). More than a select committee or special counsel,
we need a citizens' movement for reform.

One looks in vain today for a serious movement for corporate
accountability. Those who champion "reform" of corporate governance focus
on shareholder rights—and this means big institutional investors bent on
maximizing share value; it doesn't mean more effective public regulation on
behalf of the rights of other corporate stakeholders such as employees and
small investors. That trail went cold in the 1980s.

Indeed, if you try to find the remnant of a politically and technically
serious movement to hold corporations accountable, the trail leads back to
early Ralph Nader. Twenty years later, citizen Nader was ill advised to run
a presidential race that very likely tipped the election from Al Gore to
George W. Bush, but he was surely right about the need to scrutinize
corporate behavior as well as its political influence in both parties.
Unfortunately, we get that scrutiny all too rarely from politicians who are
constantly on the prowl for campaign cash.

Money talks. The only force that can talk louder is an activated citizenry.
If we want a democratic politics that serves the broad public, we have to
change the system of campaign finance. That means not just the Shays-Meehan
bill, but a radical push to limit the influence of money in politics; it
means not just indignation at Enron and some tighter monitoring of
accountants, but a reversal of the ideology and corrupt practice of
deregulation. The common imperative for all of these reforms is an informed
and mobilized public, who can elect public-minded officials and reclaim our
democracy.