Why Is California Issuing IOUs? Remember Enron.

After I read Matt Taibbi’s piece about Goldman Sachs gaming the oil/gas marketplace and wrote my own response, I started to think about the massive $24.3 billion budget deficit in California, and I wondered, “How could they get that far in the hole?”

Sure, the global economy has tanked the past couple years and revenues aren’t coming in like they were, but how can the gap be so vast? Because we’re not talking a couple billion dollars. This took some doing and I had a really hard time believing this was due to simple revenue shortfalls or excess expenditures on infrastructure, health care, welfare and schools.

See, for all the grief government gets about being irresponsible with the taxpayers’ money, local and state government spending is normally kept in check because there are so many rules to make sure budgets aren’t exceeded and that everything is documented and accounted for so people can’t game that system. In short, there’s a reason its’ called red tape, and while it may not be efficient (and that can result in waste), it certainly makes sure that what was budgeted is what gets spent.

So I was in the video store this weekend and I walked by the documentary “Enron: The Smartest Guys In The Room.” I had seen it before, but given the situation with the banks last year I picked it up again since the sudden and utter collapse of Enron seemed to mirror what happened recently. And after I got done watching it, it’s pretty clear that Enron should have been seen as a harbinger of the systemic failures that can happen when you deregulate markets and give corporations the power to create more creative and exotic ways to make money.

That brings me back to California. Why is Enron responsible for what’s going on there? Well, they’re obviously not fully to blame. Because by the time they screwed around with California’s power for a few years, they had legally stolen an estimated $30 billion from the state and its ratepayers.

From CPUSA:

WASHINGTON – On May 6, the Federal Energy Regulatory Commission (FERC) released internal documents revealing how Enron created phantom shortages in California’s unregulated electricity market to fleece ratepayers of an estimated $30 billion during the 2001 energy crisis.

The various schemes were given code names such as “Death Star,” “Fat Boy” and “Load Shift,” all reminiscent of the gangster-like tactics after which they were modeled.

Loretta M. Lynch, president of the California Public Utilities Commission (CPUC), charged that the memos are a “smoking gun” showing that Enron’s business plan was to “game the California market so they could suck every dollar out of California.”

Of that $30 billion, about $9 billion was money the state lost. They eventually got a few hundred million dollars back, but the damage was done. And that’s not even counting the revenue lost during the times when they experienced 38 rolling blackouts and businesses were forced to close because there simply wasn’t any power. We could easily be talking about several more billion at least, if not more.

And yes, this all happened back in the late 90s, but California has had budget problems ever since. And sometimes it takes a while for those losses to be fully realized. If California and the people of California had to spend more money on energy, that’s money that wasn’t spent elsewhere to drive the economy in a positive direction. And let’s remember that in the late 90s, California was reporting billion dollar surpluses. No doubt the housing crisis and the real estate bubble has really hurt the state, but how do you go from record surpluses to record deficits in 10 years?

Listen folks, rampant and irresponsible deregulation is completely screwing up our economy. Goldman Sachs and other investment banks are doing it with the oil markets right now, as they did with the mortgage and internet bubbles. So when will we wise up and realize that making money from shuffling it around and making it appear as if there’s more value than there actually is may not be the smartest way to build a sustainable economy. And the folks who end up getting hurt are not the people in the investment banks.

So until we collectively divorce ourselves from the fantasy that this boom/bust cycle brought on by deregulation is a good thing, we’ll continue to experience more of what we did last Fall and back in 2001 when Enron collapsed. I personally think it’s grossly irresponsible to continue to let this happen, but I can find little recourse other than writing a few blog posts here and there and trying to get people to realize what’s going on.

Here’s the question: In 10 years, will we see another bubble? And, if so, what market will it be in?

(Photo: BBC)