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January 10, 2013

Enron and the Trillion Dollar Coin

"The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and finally spiraled out of control." ~ McLean & Elkind, The Smartest Guys In the Room

Once upon a time, Enron had a real business that made real profits. They differentiated themselves from their competitors and stood atop the world, briefly, as one of the most successful, highly regarded and innovative enterprises ever. Then the roof caved in.

Or at least that's how it appeared, anyway.

In reality, as books like The Smartest Guys In the Room and Conspiracy of Fools well document, their focus changed rather early on from engaging in transactions that were good for the business economically to doing transactions that would best window-dress the financial statements by gaming the rules, accumulating massive amounts of debt along the way.

Their use of mark-to-market accounting was blamed, yet it was officially blessed by the SEC. Their hidden debt, masked by layers of special-purpose entities, was (mostly) accounted for within the rules, too, although they were straining at the outer edges.

Those rules, though, were made by man. The rules of economics, whether applied to companies or governments, are forces of nature that don't care that the FASB said 3% outside ownership in an SPE was sufficient to take it off balance sheet or that congress, in its infinite wisdom, created a loophole for the treasury secretary to mint an enormously-labeled platinum coin so the government can keep on spending.

When the end comes, it comes quickly.

"We were so sure of what we were doing and where we were going," one executive who attended [Enron's] San Antonio meeting said. "We didn't know we were living on borrowed time."

I couldn't help but think of Enron as I read the Business Insider piece Gabe linked yesterday, where the Smartest Guys In The Room are saying that the government can do this trillion dollar coin trick and keep the checks going out the door forever with no negative or unforeseen consequences.

"It's a one time thing", they say, ignoring the fact that we'll run a trillion dollar deficit this year that eats up the newly-minted room under the debt ceiling. Then what?

Mint another coin, I guess.

Meanwhile we'll continue to slog along at ~7%-8% U3 unemployment and ~2% real GDP growth (or lower, when you factor the government's deficit spending out of that number) because the tricks and gimmicks aren't really fooling anyone.

Most of the commentary on the trillion dollar coin idea has focused on its legality. That's the wrong question. The right question is: "Is this a wise thing to do?" And the answer is a resounding, "NO!"

So look for the Obama administration to press forward with it.

See also: Megan McArdle, Washington Goes Platinum

Seemingly, the most important thing is for the president to defeat intransigent Republicans—even if that means that the president “for all Americans” who once spoke of winning the future and healing the planet will be reduced to presiding over the Franklin Mint.

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posted by Andy at 10:00 AM

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