Larry Summers, Next Fed Chairman?

A Digby article on Hullabaloo tells of how Larry Summers, apparently Obama's favored choice to replace Ben Bernanke as Chairman of the Fed, reacted to Enron's criminal manipulation of the California energy market:

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.

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...

Summers saw government interference in the crisis, as he put it, as “market distortion.” Yet disturbingly, Summers remained relatively unconcerned about the “distortion” caused by the market power of companies like Enron who, through collusion and predatory behavior, caused prices to soar.

Indeed, he may have been blind to the possibility. After all, in pure economic models, there is no room for manipulation because all information is known. But one thing we have learned in the early days of the recent economic meltdown is that Wall Street —like Enron —has found enormous profits in muddy markets of loan bundles whose very architecture is designed to hide the truth about their risk.