Here's something else to add to the long list of reasons Larry Summers would make a terrible Federal Reserve chairman: He reportedly told California to suck it up when it complained that Enron was manipulating its power market.
According to Kurt Eichenwald's 2005 book about the Enron scandal, "Conspiracy of Fools," then-California Gov. Gray Davis (D) reached out in late 2000 to Summers, who was then the Treasury secretary under President Clinton, for help with the state's little problem of power outages and skyrocketing electricity prices. Davis suspected, rightly, that Enron was toying with the state's electricity supply for fun and profit.
Summers, though, scoffed at Davis's suspicions, according to Eichenwald. The book details how together with then-Fed Chairman Alan Greenspan, Summers geniusplained to Davis that over-regulation was the real problem and that Davis risked scaring away Enron and other power suppliers if he raised a big fuss. In fact, maybe the real problem was that California's energy prices were too low, because of onerous price caps, Summers reckoned, according to Eichenwald.
When energy prices kept on soaring, Davis complained again, prompting a video conference call that included Summers and Greenspan and, incredibly, George W. Bush's favorite executive, Enron CEO Kenneth "Kenny Boy" Lay. On that call, Summers declared that Lay was doing a "pretty good job" of supplying energy to California, Eichenwald writes. The book says Summers again suggested that the state's energy prices were actually too low, and that maybe if the state was so in love with low energy prices, what it needed to do was relax environmental regulations to let more power plants get built in a hurry.
Let's stop for a minute here to soak in all the wrong in these exchanges. According to Eichenwald, Summers' knee-jerk reaction to word that Enron was manipulating markets was to personally defend Enron and Ken Lay -- and call not only for deregulation of power markets, but also to relax environmental protections while we're at it.
Fortunately, Davis ignored these helpful suggestions, because before very long it was revealed that Enron had indeed been manipulating California's energy market, all of the time, with schemes dubbed "Death Star" and "Fat Boy," while its energy traders joked about the unkind things they had been doing to "Grandma Millie."
The film director Alex Gibney wrote in The Daily Beast about Summers' Enron connection back in November 2008, when President Obama was considering making Summers the Treasury Secretary again (h/t economist J.W. Mason). Gibney suggested that Summers would have to answer questions about what on earth he was thinking at the time.
For better or worse, Obama made another Robert Rubin disciple, Timothy Geithner, Treasury secretary instead. He made Summers a top economic adviser, a role in which he stifled arguments for a large-enough fiscal stimulus package in early 2009. So Summers didn't have to answer those Enron questions then.
But he should surely have to answer questions about Enron this time around, if Obama decides to tap him to run the Fed. Because this is not just ancient history: According to recent regulatory settlements by JPMorgan Chase and Barclays, power markets in California and elsewhere are still vulnerable to manipulation, including by some of the banks that Larry Summers will be charged with regulating.
The Enron response is just another example of the de-regulatory fervor Summers has shown throughout his career, helping loosen bank fetters and keep derivatives unregulated in the 1990s. Unlike some of his peers, including Greenspan, he has not repudiated those views, perhaps in part because he is on the payroll of the banks.
Summers' supporters -- a group that consists mainly of Obama and Summers' buddies -- claim that he is much more interested in bank regulation than his rival for the Fed job, Vice Chairman Janet Yellen. But so far, he has shown nothing but the wrong kind of interest.
Myth: The Fed actually prints money.
<a href="http://www.foxbusiness.com/industries/2012/08/17/chance-fed-printing-more-money-jumps-to-60/">People commonly say</a> that the Fed itself prints money. It's true that the Fed is in charge of the money supply. But technically, <a href="http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html">the Treasury Department prints money on the Fed's behalf</a>. Asking the Treasury Department to print cash isn't even necessary for the Fed <a href="http://www.huffingtonpost.com/2012/03/21/federal-reserve-profit-2011_n_1369354.html">to buy securities</a>.
Myth: The Federal Reserve is spending money wastefully.
Both CNN anchor <a href="http://www.huffingtonpost.com/2012/08/31/cnn-erin-burnett-federal-reserve-stimulus_n_1848210.html" target="_hplink">Erin Burnett</a> and Republican vice presidential nominee <a href="http://thinkprogress.org/economy/2012/09/07/813011/paul-ryan-jobs-qe/" target="_hplink">Paul Ryan</a> have compared the Federal Reserve's quantitative easing to government spending. But <a href="http://www.huffingtonpost.com/2012/03/21/federal-reserve-profit-2011_n_1369354.html">the Federal Reserve actually has created new money</a> by expanding its balance sheet. <a href="http://www.huffingtonpost.com/2012/03/21/federal-reserve-profit-2011_n_1369354.html">The Fed earned a $77.4 billion profit</a> last year, most of which it gave to the U.S. government.
Myth: The Fed is causing hyperinflation.
<a href="http://krugman.blogs.nytimes.com/2011/12/15/inflation-predictions/" target="_hplink">Some</a> <a href="http://www.businessinsider.com/niall-ferguson-has-been-wrong-on-economics-2012-8" target="_hplink">conservatives</a> <a href="http://www.businessinsider.com/ron-paul-is-putting-on-a-great-show-right-now-in-front-of-bernanke-2012-2">have claimed</a> that the Federal Reserve is causing hyperinflation. But inflation is actually at <a href="http://www.nytimes.com/2011/09/18/sunday-review/the-facts-on-the-fed.html" target="_hplink">historically low levels</a>, and there is no sign that is going to change. <a href="http://www.bls.gov/news.release/cpi.nr0.htm" target="_hplink">Core prices have risen</a> just 1.4 percent over the past year, according to the Labor Department -- below the Federal Reserve's <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm" target="_hplink">target of 2 percent</a>.
Myth: The amount of cash available has grown tremendously.
<a href="http://www.nytimes.com/2011/02/10/business/economy/10fed.html?_r=1">Some Federal Reserve critics claim</a> that the Fed has devalued the U.S. dollar through a massive expansion of the amount of currency in circulation. But not only is inflation low; <a href="http://www.businessinsider.com/the-animated-gif-of-boy-throwing-money-out-of-the-window-is-not-a-metaphor-for-qe-2012-9">currency growth also has not really changed</a> since the Fed started its stimulus measures, as noted by Business Insider's Joe Weisenthal.
Myth: The gold standard would make prices more stable.
<a href="http://www.businessinsider.com/ron-paul-is-putting-on-a-great-show-right-now-in-front-of-bernanke-2012-2">Rep. Ron Paul (R-Tex.) has claimed</a> that bringing back the gold standard would make prices more stable. But prices actually were much less stable under the gold standard than they are today, as <a href="http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/"><em>The Atlantic's</em> Matthew O'Brien</a> and <a href="http://www.businessinsider.com/why-conservatives-like-the-gold-standard-2012-8">Business Insider's Joe Weisenthal</a> have noted.
Myth: The Fed is causing food and gas prices to rise.
<a href="http://www.huffingtonpost.com/2012/09/08/erin-burnett-federal-reserve_n_1866971.html">CNN anchor Erin Burnett claimed in September</a> that the Federal Reserve's stimulus measures have caused food and gas prices to rise. But many economists believe global supply and demand issues are influencing these prices, not Fed policy. And <a href="http://www.huffingtonpost.com/2012/09/08/erin-burnett-federal-reserve_n_1866971.html">there actually is no correlation between the Fed's stimulus measures and commodity prices</a>, according to some economists Paul Krugman and Dean Baker.
Myth: Quantitative easing has not helped job growth.
<a href="http://www.forbes.com/sites/michaelpento/2012/05/01/why-higher-inflation-destroys-jobs/">Some Federal Reserve critics</a> claim that the Fed's stimulus measures have destroyed jobs. But <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm">the Fed's quantitative easing measures actually have saved or created more than 2 million jobs</a>, according to the Fed's economists. In addition, JPMorgan Chase chief economist Michael Feroli told Bloomberg last month that <a href="http://www.bloomberg.com/news/2012-09-10/bernanke-proves-like-no-other-fed-chairman-on-joblessness.html" target="_hplink">QE3 will provide at least a small benefit</a> to the economy.
Myth: Tying the U.S. dollar to commodities would solve everything.
<a href="http://articles.nydailynews.com/2012-08-16/news/33236684_1_monetary-policy-inflation-currency-debasement">Rep. Paul Ryan (R-Wis.) has proposed</a> tying the value of the U.S. dollar to a basket of commodities, in an aim to promote price stability. But <a href="http://www.theatlantic.com/business/archive/2012/08/forget-paul-ryans-budget-his-scariest-idea-is-about-the-federal-reserve/261066/">this actually would cause prices to be much less stable</a> and hurt the U.S. economy overall, as <em>The Atlantic's</em> Matthew O'Brien has noted.
Myth: Ending the Fed would make the financial system more stable.
<a href="http://www.amazon.com/End-Fed-Ron-Paul/dp/B004IEA4DM">Rep. Ron Paul (R-Tex.) claims</a> that ending the Federal Reserve and returning to the gold standard would make the U.S. financial system more stable. But <a href="http://www.bloomberg.com/video/should-the-u-s-return-to-the-gold-standard-wsDVrOKATTqyTaG5yBY1kQ.html">the U.S. economy actually experienced longer and more frequent financial crises and recessions</a> during the 19th century, when the U.S. was using the gold standard and did not have the Fed.
Myth: The Fed can't do anything else to help job growth.
<a href="http://www.nytimes.com/2011/07/31/business/economy/whats-with-all-the-bernanke-bashing.html">Many</a> <a href="http://www.guardian.co.uk/business/economics-blog/2012/jun/27/federal-reserve-runs-out-of-options">commentators</a> have claimed that there simply aren't any tools left in the Fed's toolkit to be able to help job growth. But <a href="http://www.bloomberg.com/news/2012-07-09/fed-harms-itself-by-missing-goals-stevenson-and-wolfers.html">some economists</a> <a href="http://www.boston.com/bostonglobe/ideas/articles/2011/08/28/the_i_word/">have noted</a> that the Fed could target a higher inflation rate to stimulate job growth. <a href="http://economix.blogs.nytimes.com/2012/04/25/bernanke-on-what-the-fed-can-do/">The Fed, however, has ruled this option out</a> -- for now.
Myth: The Fed can't easily unwind all of this stimulus.
<a href="http://www.salon.com/2012/09/01/ben_bernanke_speaks//">Some commentators</a> <a href="http://seekingalpha.com/article/161203-fed-unwinding-won-t-be-easy">have claimed</a> that the Fed can't safely unwind its quantitative easing measures. But the Fed's program involves buying some of the most heavily traded and owned securities in the world, Treasury and government-backed mortgage bonds. The Fed will likely have little problem finding buyers for these securities, all of which will eventually expire even if the Fed does nothing. But <a href="http://economistsview.typepad.com/timduy/2012/09/plosser-opposes-the-1933-37-expansion.html">economists have noted</a> that once the Fed decides it's time to unwind the stimulus, the economy will have improved to such an extent that this won't be an issue.