This is a cautionary tale as bailout fever takes hold.

On January 18, 2001, as electricity deregulation sunk California into its second consecutive day of rolling blackouts, a team of analysts at Credit Suisse First Boston in New York sent around a startling memo to its clients. 

Let’s start at the end: the rolling blackouts in California are more likely intended to soften up the Legislature and the voters to
the need for rate increases than they are indicative of a permanent "when the lights went out in California" scenario.

That same day the Legislature appropriated $400 million for the state to buy
electricity at exorbitant prices to bail out the utility companies, whose deregulation plan wasn’t working out so well.  The next day the lights returned.  The utilities, energy speculators and traders, and the Wall Street investment banks that backed them had won.  (Here’s a January 25, 2001 news release on the subject.)

Over the course of the next few months, two more sets of two-day rolling blackouts came along with more state (taxpayer and ratepayer) money thrown at the flailing energy industry and its bankers.  All told, by our assessment, energy deregulation cost Californians about $71 billion.

That was 10% of the bailout on the table today, but in many ways Wall Street’s strategy is the same.  Essentially, it is, as Stephen Colbert might call it, a threat down.  If Americans don’t pony up $700 billion, and fast, then more financial institutions will go belly up, investors could lose everything and the world economy could collapse.

That’s no way to set $700 billion worth of public policy, that’s blackmail.

I’ll never forget that feeling in 2001 — Wall Street West had set up shop in the State Capitol, indeed serving as "unpaid" advisors to the political leaders, and anyone criticizing the immediate expenditure of whatever it took to keep the lights on was endangering the very future of the state.  The naysayers were chastised as naive and not understanding the breadth, complexity and severity of the energy crisis.  In fact, nobody knew whether or not it was real or could predict what would happen if we did or did not do anything.  And so, we paid.  And paid and paid and we’re still paying.

I am sure that there are policymakers, advocates and others critical of the bailout plan who are sitting in on meetings in Washington right now being told that "they just don’t understand" and that we cannot afford to be wrong by delaying the bailout of the financial system any longer. 

And somewhere else, probably in an office on Wall Street, some analysts are writing a memo, explaining that in short order, the spigots will be flowing and the doomsday warnings will be lifted.  The lights only need to be out for a few days, before the government gets with the program.