Sunday, November 26, 2006

Enron and Iraq

There seems to be an increasing belief around that we're still in Iraq because the UK/USA leaders can't bring themselves to book a loss, as Ezra Klein puts it over at Tapped. David Kurtz at TPM argues similarly that Bush thinks the only way the US can be defeated is if it chooses to leave Iraq. He blames this on Henry Kissinger, which if true is wildly out of character, and compares the situation to that of a very wealthy man who owns a lossmaking business - he can, if he so chooses, keep covering the loss from his own funds, and he might convince himself that the business will eventually succeed if he just hangs on long enough.

Back in February, the mighty Chris Dillow made some interesting comments about Iraq and sunk costs. Chris pointed out that in some circumstances, the sunk-cost fallacy might be rational - for example, "staying the course" in Iraq might signal determination to our enemies, or on the other hand, worrying about the 2,800 dead soldiers might be an effective way of signalling to oneself that decisions have consequences.

Victor Davis Hanson is apparently peddling the first of these two arguments, which should tell us something. After all, as I think Dsquared says, past performance *is* a guide to future performance when it comes to individuals. VDH's point - that fighting on in Iraq might shore up our deterrent credibility - could be sensible, if it wasn't for the continuing costs. Our enemies can be expected to measure us by capability as well as intention. Whilst the US Army and Marine Corps are mired in Iraq, the US (and the UK) has little substrategic deterrent credibility, to say nothing of the financial cost. It will take time to restore the fabric of the army after the war, too. And, vitally, any cost-benefit analysis has to take into account the risk that things will get much worse - that we will get a serious kicking. The danger of this is rising steadily: Sadrists seize the TV station, this after last week's insurgent reconnaissance-in-force of the Health Ministry, which is just over the bridge from the Green Zone, the car bomb inside the Zone on Monday, and the Sadr City massacre. (Did you know they think the bomb was made inside the Zone?)

But, it seems, the mindset is that as long as it's not formally signed off as a loss, it don't exist. Enron used to do this. As the end of the quarter approached, by which time they needed to publish results showing steady profits growth to satisfy the stock market, there would be a frantic review of contracts. If a deal was dead, then the costs involved would have to be booked that quarter. But if there was the slightest hope, or at least someone was willing to sign their name to saying there was the slightest hope, of it eventually completing, then it didn't need to be accounted for then. Mark-to-market accounting meant that anything that was profitable (or rather, was predicted to be profitable) would be accounted for at the first possible moment - hey presto, stellar results.

But, of course, the toxic waste didn't go away, and the very real costs involved were, well, real - although they could be temporarily kept out of the profit and loss accounting, they consumed actual cash from the cash flow, just as Iraq has real consequences that aren't dependent on whether or not we accept them. When I last reread Bethany McLean and Peter Elkin's The Smartest Guys in the Room, one thing leapt out at me: Enron's culture neatly prefigured the last six years. It wasn't just that it was a scandal associated with George Bush, but the culture of it was identical. The same dominant narrative (Enron is a roaring success/GWB's policy is a roaring success) flogged, despite flying in the face of publicly available facts, to the public with the help of uncritical intermediate institutions (Wall Street and Andersens/the New York Times) and the demonisation of critics (Skilling's bully rhetoric and manipulation/the troll industry), the same unpleasant language of sexual violence people on LGF and Free Republic are addicted to, the delusions held together for internal consumption by groupthink and mutual reinforcement, and of course the corruption.

Also, the fundamental incompetence at everything but propaganda. Rumsfeld's DOD couldn't find enough body armour, Enron Energy Services couldn't issue accurate bills to its customers or even cash their cheques. Bush didn't know there was a difference between Shi'ites and Sunnis, Enron Broadband thought you could transfer spare capacity between physically separate DSL lines without using a backhoe. If you haven't read it yet, you'd better. The denial, too - there is still a lobby that Enron was really a good business, just as John Hinderaker still claims to think Iraq isn't really more dangerous than Washington DC. Well, if all those marked-to-market contracts from 1991 to 2001 really had been profitable, Enron would have had more than $500 million net cashflow less trading collateral and trades with self in 2000, as the already-booked profits arrived as cashflow.

And if Iraq wasn't really violent, you wouldn't be able to light up a government ministry within half a klick of the Green Zone with your whole platoon and get away with it. Neither would the members of parliament want to bring the Kurdish army into Baghdad, because they don't trust any other troops.

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