the CAMP ENRON Report
... gateway to the next Progressive Era?
Some say it's nothing but a train wreck ... roll in the big cranes, clear the track, see what the crew's been smoking. If I thought so, I'd not be writing this ... and if they thought so, they'd not be drumming so hard.
For a brief orientation, see this
Welcome to Camp Enron
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Camp Enron Archives
01/01/2002 - 02/01/2002 02/01/2002 - 03/01/2002 03/01/2002 - 04/01/2002 04/01/2002 - 05/01/2002 05/01/2002 - 06/01/2002 06/01/2002 - 07/01/2002 07/01/2002 - 08/01/2002 08/01/2002 - 09/01/2002 06/01/2003 - 07/01/2003
NOTE to READERS:
(2) All "major" articles of older material have now been imported, some with updates worth perusing. We'll keep it all on the main page for a while, will add a few loose pieces of history, will trim the main page and index the archives for convenience later.
the COGENT PROVOCATEUR:
free agent, loose cannon, pointy stick ... taking an imposing analytic toolkit out of the box, over the wall and into the street ... with callous disregard for accepted wisdom and standard English
reading the tea leaves from original angles, we've led with uncannily prescient takes on the federal surplus, the dotcom crash, the "Energy Crisis", the Afghan campaign, the federal deficit.
More where those came from ... stay tuned.
For brief orientation, see this
Welcome to CP
... gateway to the next Progressive Era?
For a brief orientation, see this
Welcome to Camp Enron
OTHER GOOD STUFF:
Many thanks to Tony Adragna and Will Vehrs, still shouting 'cross the Potomac at QuasiPundit. Early Camp Enron material can be found in QP's Dispatches department.
Sunday, July 21, 2002
--- More to Fear than Fear Itself ---Markets closed ugly Friday afternoon. Hard to say what Monday will bring ... insiders make a good case for a triple-digit bounce ... good case for stampede to the exits ... maybe a bottom and slow recovery ... or a flattish sideways muddle. Robust fundamental indicators can be read to say the market is deeply undervalued, or massively overvalued, or just about right.
In any case, real people are getting real hurt lately, and some are getting real scared.
It can get worse. Buyers are reluctant, but holders have barely begun to sell out. Passive investors are still bleeding money into the decline.
In another troubled time, FDR said "We have nothing to fear but fear itself". This Sunday there is more to fear than fear itself. There's anger, for instance. Impulsiveness. Disorganization. Unpreparedness. Prostitution (of the institutional variety). Polarization. Backlash. Mischief. Naivete. Simplism. Opportunism. Mutiny. Cascade. Chaos. Insurrection. (No, not by Monday close.)
THE GOOD NEWS
In the real economy, a brick is still a brick. All the bricks are still there, and each brick bears the same weight it always did, no matter the rent on a brick house or how the markets capitalize this stream of returns.
The brick-and-mortar economy is just fine. So is the bits-and-modems economy, after some adjustments for irrational expectations.
The Boom was real, and not necessarily over. Real output grew. Real productivity grew. Private sector workforce participation set records, as did individual investment in education. The feedstocks of intellectual capital increased markedly. Not bad at all.
Discoveries boomed, as did the means of sharing and exploiting them. The supporting branches of mathematics are in full blossom.
It's as if railroads, electricity, autos, the printing press, celestial navigation, organic chemistry and the germ theory of disease were invented all at once.
The globe is in better shape than ever. Literacy is up, democracy is ascendant. Life expectancy is up, yet population is stabilizing. Communication and connectivity is up. Productivity is up. Why should we not look forward to an age of unprecedented prosperity?
Oh, the markets. The securities markets. The markets for expectations of discounted valuations of future returns on shares of financial assets. The paper economy. Yes, the paper economy sucks. Do you have a problem with that?
Well, yes, you might. You have a problem if you hitched you wagon to those paper horses. It looks like your horses are running away, redistributed your purchasing power, and you might never get them back. You have a problem if the turbulent ebbtide capsizes you boat, or runs it aground. You also have a problem if a century's worth of settled social and political compacts come unstrung, and you get caught in a crossfire.
The real economy thus far has not joined in the paper economy's malaise, and eventual linkage is not inevitable. The collapse is confined to the token economy of financial assets and who owns which, and this collapse was inevitable.
THE BUBBLE BURSTS
Financial markets grew addicted to the idea that shares appreciate faster than economies. This untenable conceit seized control of most private assets, and made inroads into public finance as well. In the long run, economies grow maybe 2% real per annum compounded. Share prices grew 7% or more for decades on end. Law of history? No, quirk of history.
By the Law of Pies, no slice can grow faster than the pie forever. The value of shares rests on the stream of real corporate profits -- a fraction of total real output. This fraction can change, but profits can never exceed total output of the surrounding economy ... though the market-mania "Law of History" requires exactly that.
On the way up, share inflation redistributed a massive amount of wealth. So did very real efficiencies of the corporate form of organization, and so did the positional advantage of dominant firms in ever less competitive markets. But these are necessarily self-limiting trends.
The paper boom had to go bust. So did the concomitant upward redistribution of wealth. It's not clear whether the current shock signals "game over", but if so, well and good ... even for those who got caught with their chips stacked on an unlucky number. Distorted markets mis-allocate resources, damping output ... and distorted wealth intensifies the potential for destructive social backlash.
Again, the boom in shares has little necessary connection with the boom in goods and services, fixtures and ideas ... in theory we can still have all the good stuff, and there should be enough to go around. In practice its more difficult.
THE BAD NEWS
Of course fraud and corruption throws the sand of information asymmetry into the gears of efficient markets, and it goes round and round for years even after the perps are found out and tossed out.
Shocks in the token economy can bleed over into the real economy. Asset dislocation can gum up the works where resources are spun into goods and services. Hesitation, role confusion, risk aversion can jam the wheels of commerce. As Greenspan reminds us, sound investments go unmade unless somebody somewhere is placing a losing bet. The Great Depression bears witness to the possibility of sustained disorganization, even where all the factors of production and elements of demand are present in good measure.
The Age of Innovation has an unmentioned downside -- accelerated depreciation. Every idea, every machine, every skill, every logo has a shorter commercial life ... fewer months in which to wring out its weight in returns on capital before something goes it one better.
And every obvious invention creates an instant virtual shortage of non-obvious collateral innovations -- transaction frameworks, public infrastructure, "common knowledge". Imagine the effect if everybody had a car, but nobody had the collateral technologies: hardtop roads, traffic signals, freeways, garages, parking lots, drivers licenses, drivers ed, highway patrol, tow trucks, gas stations ... birth control pills. Now there's a huge backlog of digital inventions we don't know how to merchandise and collect on.
Another drag is that consumer-oriented businesses are fixated on the idea they can make most of their money by linking and leveraging customer relationships -- by exposing their customers to other purveyors of equally poor service. Put that on the creative destruction list.
There is also the small matter of $2T in real capital -- real R&D hours, real silicon -- pissed away in the stream of tech bubbles. Apparent small potatoes next to $7T in shredded paper assets, but of greater ultimate consequence.
THE OTHER BAD NEWSThere is a growing inventory of background complications, mostly under topic headings of "class war" and "global turmoil".
One-sided class warfare ran rampant after the working classes capitulated c. 1980, and Communism surrendered c. 1990. "Comparative advantage" capitalism gave way to "because I say so ... because I can" capitalism. Despite the talk of "competitiveness", competition is for losers, efficiency is for chumps ... positional advantage is the name of the game.
Malefactors of great wealth grew fat by weaseling in to suck the yolk out of average folks' nest-eggs. Now they can't skinny back out without attracting notice, but they won't give up without a fight. Several individuals enjoy personal incomes larger than the SEC budget. Wealth has learned to move like quicksilver, adept at avoiding burden sharing.
Market malaise and corporate show trials will raise questions that lead to more questions, leading the one-fifth of households who think they're in the top 1% to realize they've been had, and some of them will set out to radicalize the other four-fifths. The casino economy was bad enough when we thought the wheels were on the level. Left and Right know equally well that where wealth is perceived as illegitimate, social norms are subject to change without notice.
Globally, we have too many "away games" on the schedule. A boundless War on Terrorism, a cascade of trade disputes, a broad slate of affronts to nascent designs of international law, rejection of hard-won environmental burden-sharing compacts. Africa is in deep trouble, Latin America is losing its provisional faith in markets and democracy, the former Soviets haven't found their stride, South Asia is trouble from stem to stern, Antarctica is melting. That mostly leaves China, Japan and Europe, and for whatever reason we go out of our way to advertise contempt for them.
We reach out to dissident factions who might otherwise take out their grievances on local targets of opportunity, and nominate ourselves as global enemy #1. We propose and promote alliances between otherwise disinterested adversaries. Economic chaos has a way of feeding geopolitical chaos. Terrorists come and go ... what if the next wave are Irish? Or Mexican? Or pan-African? or Kentuckian?
THE LEADERSHIP LANDSCAPE
As luck would have it, our President is among the least equipped in history. His policy calculus started out several trillion fries short of a happy meal back during the 2000 campaign -- before the troubles -- and nobody called him on it then. His inner circle is studded with thinktank wizards, where the prevailing winds of laissez faire drive a whirlwind of "neat ideas", circling ever higher without mainstream review or practical test. The circle is further constrained by a culture of intense reciprocal loyalty, and an experiential history of narrow victories in winner-take-all confrontations.
Both parties in Congress have been walking on eggshells, afraid to upset close balances in either houses. Both are out of touch with rank-and-file sympathizers, in touch with free-spending high-intensity advocacy groups. Institutional cohesion and cooperation between parties has been eroding for years.
The People are no prize either, and neither are the media. In times of plenty, most of us could get by just going along, and so we did. I'm not sure there's been a time of greater apathy and ignorance, despite our Information Age amenities.
As scandal-tarred footprints are traced to the back doors of Wall Street and White House, sphincters slam shut on the Right and fantasies take wing on the Left. Neither side is prepared for the new realities.
Paralysis rooted in laissez faire may prevail in early years (as in the Great Depression and the Potato Famines). Traditional parties may polarize competing theories to the point of widespread blacklisting and mob action. The madding crowd may recognize its next hero in the Rorschach blather of some charismatic nutcase. Or all three may happen, or something worse yet.
DAY OF RECKONING
Will wobbles in the token economy wreak havoc in the real economy? They very well might. Will wobbles in the real economy wreak havoc in civil society? They obviously could. We are at end of a chapter in social consensus, turning a blind corner. Take the corner too fast, with too high a center of gravity, and we'll spin out, roll over, tumble down the embankment, crash and burn.
Note how abruptly the wings came off those aerial tankers fighting Western wildfires ... how quickly a gleaming silver bird becomes a splash of twisted char on the slopes. We live in a world of dry tinder, and the volunteer fire department is out of condition.
A Day of Reckoning is inevitable. Reckoning is not a bad thing when errors have crept into the accounts. What's uncertain -- what still hangs in the balance -- is whether we'll see bloodbath, or bilebath, or some other bathetic substitute to the bubblebath we've enjoyed these last few years. There is great need -- and still time -- for Third Ways we have not yet unimagined.