Larry Summers' Enron Problem

This is just one of those throwback posts, where the Economists for Firing Larry Summers take a look at another of the fateful and misguided decisions Summers has made...

Alex Gibney writes:

"The supporting role that Summers played in Enron, including his reassuring correspondence with Ken Lay and his laissez-faire approach to the California energy crisis of 2000 and 2001, indicates why he may not be suited to steer the nation through the troubled economic waters that lie ahead.

In his book about Enron, Conspiracy of Fools, Kurt Eichenwald describes Summers’ role in the early stages of the California energy crisis when the state was suddenly faced with power shortages and energy costs that were soaring up to 20 times normal levels. Then-Governor Gray Davis, convinced that Enron and others were manipulating the market, begged the federal government to intervene."

So what did Summers do?

"Even as blackouts shut down dialysis machines and traffic lights from Sacramento to San Diego, Summers and the Federal Reserve chairman, Alan Greenspan, decided to take a few moments to teach the California governor a lesson or two about free markets. In an emergency meeting the day after Christmas 2000, Summers and Greenspan, responding to the governor’s complaints about corporate tampering, lectured the governor that price manipulation was only possible because California had improperly regulated its markets. They urged the governor to take it easy on Enron and the other power companies because, in effect, being too critical of them might make them reluctant to do business in California. Summers and Greenspan pressured the governor to remove state caps on consumer rates.

A second meeting took place a few weeks later, via video teleconference, with Summers, California’s governor, and energy providers—including Enron’s Ken Lay. This time, Summers not only called for consumer rate increases, he also urged the governor to reassure the markets by relaxing environmental controls (Ken Lay’s suggestion) so that more power plants could be built quickly.

Once again, the California governor protested, refusing to raise electricity rates for consumers, declining to eviscerate environmental controls, and instead requested federal price caps on the electricity that power companies sold to California. Remarkably, Summers defended the energy executives, including Ken Lay, as doing “a pretty good job” of serving California, and dismissed the possibility that they were colluding to drive prices up—even though, as we know now, that’s precisely what they were doing, Summers disparaged the governor’s plan; it wouldn’t work because such government intervention would inevitably “distort the market,” he said.

Neither side gave in. Seven days later, George W. Bush was inaugurated as president. At the time, Ken Lay himself was widely discussed as a possible treasury secretary. Blackouts increased throughout California and energy prices continued to soar until, finally, in the spring of 2001, federal regulators imposed price caps on not just California but on all of the western states.

To be fair to Larry Summers, as of early 2001 neither he, nor anyone else outside of Enron, had heard the now-famous audiotapes of Enron traders cackling with glee as blackouts crippled the state and cost Californians $40 billion. Summers also didn’t know then about the traders’ plans, with names like “Deathstar” and “Get Shorty,” which gamed the market by shutting down plants and shipping electricity out of the state to drive up prices. And to be sure, some of California’s pre-existing energy regulations were indeed a little wacky and unbalanced."

Not to attack Gibney, but, as Krugman writes, it was obvious to other economists at the time that market manipulation was the true culprit.

Aren't you glad this guy, who got suckered in by Kenneth Lay, is Obama's chief economic adviser?