Preventing Human Nature

While reading about the debacle and collapse of Enron, I find myself constantly drawing connections between the largest bankruptcy in U.S history, and the pending doom faced by our nation’s banks. Before the U.S began to expirience an economic downturn, both Enron, and our nations banking powerhouses, such as Citigroup, both strongly resisted government regulation. Instead, companies perfered a free market without government rules and regulations. Enron, and other companies during the late 90’s, stressed the importance of free market trading and deregulation, because quite simply, thats how the big bucks are made, and to Enron, thats all that really mattered. Although free markets create massive amounts of wealth, as we saw with Enron (and now our nations banking system), thay can also create huge problems.

Enron goal as a company was to grow 15% a year. Through the best times at Enron, this unheard of statistic was a reality to Wallstreet, but underneath the surface, was a complete facade. Using questionable business ethics, Fastow manipulated the books in order to create the perception of massive company growth. Because of the free market system involving energy companies, Fastow was able to get away with the questionable business practices for many years, even amassing a huge personal profit from the deal. Hypothetically, if there was some sort of government involvement with energy trading during the time Enron was powerful, would the company still be around? Would Fastow be able to cook the books in order to fool investors? Although free markets are great tools to create tons of wealth quickly, without some governement regulation, they become extremely susceptible to human greed and short-sightedness. This idea is clearly demonstrated in the current housing market.

On Monday (February 23rd), the Government vowed to shore up the banking system.  Along with the government’s promise to help the failing banks, they also promised to as much as possible, avoid bank nationalization. This is where I began to draw similarities between the nations banks and Enron. Both entities strongly oppose government regulation because they believe it only slows down economic progress.  This is idea of no government regulation is where I question the motives of all people in the economic sector of America. Don’t get me wrong, I love the idea of a Keynsian free market system evoking competition, but I believe some government regulation is necessary to safegaurd our institutions. For example, look how Enron, and the largest bank CitiGroup landed themselves in trouble in the first place. Enron, with no regulation what so ever, was driven by greed to cook the books and subsequently bankrupt their entire company, leading to the greatest organizational collaspe in U.S history. Similar to Enron, the nations banks, driven by greed, dealt out risky home loans, overlooking credit problems. People are now defaulting on these loans driving our housing market into a tail spin.

Luckily for the banks, unlike Enron, the government is stepping in before a total implosion occurs. Realizing the deteriorating state of our banking system, President Obama has introduced a stimulus package to help jumpstart the economy, and hopefully bolster the banking industry. Although many economist might slap me for writing this, I believe this idea of government regulation as a form of safegaurding the economy from collapse is necessary to prevent human nature from driving us to take dangerous risks. The question I leave for discussion is where do you think the line should be drawn in terms of governement intervention in the U.S financial sector? and, would Enron still be a company if the government had regulated their practices earlier?

4 Responses

  1. I honestly think that if the government had jumped in Enron may still be here today as prominently as it was when it started out. If the government had weeded out the corrupt people from Enron, they may have been able to regrow their energy company and return to the roots (and maybe used all of the innovation for good like finding better alternative energy instead of evil self gain).

    I do agree that there is a place for the government in business. I’m not sure where the line is, but there needs to be some regulation. While the “free market” theory sounds great after taking Econ 256, I see that while it regulates prices, it does not regulate morals. Look a the gangs and mobs of the world (a sort of mini free market). They are unregulated because they are technically illegal. They are so cut throat that they will in fact cut throats if necessary (Ok… so I my be going off of a Hollywood depiction, but the gangs of the past weren’t so different form these depictions). There is no moral/ethical checks in a free market. That is one thing the government should definitely regulate.

  2. It would be interesting to see how Enron would be doing today during the financial crisis. Would Fastow’s slimy deals and complex structures survive where there was little credit? Would the government had to have bailed out Enron?

  3. I agree with you Ross, the role of Government is to be an over-seeing authority. Yes, the puritan capitalists probably don’t like this idea, but it needs to be in place to increase the number of checks and balances. Too much governance may be considered bad but so little governance (to the extent that it is almost non-existent) is also bad. Too much government authority would mean that a corrupt government setup could hijack organizations, but if the government had enough authority to ensure that they had necessary disclosures and could request judicial inquiries if something fishy was found,would probably be good.

  4. Whoa- many economists would totally agree that when markets fail is when the government must take action. What kinds of uber-conservative economists have you been hanging out with?

    Also, Keynesian usually means, among other things, the idea that you use fiscal stimulus and not just monetary policy to manage the economy.

    How much has the housing market collapsed? That kind of hard, cited fact will improve this post.

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