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.
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