Fineman: Larry Summers's Economic Challenge

I had lunch with Larry a few years ago at The Palm, the noisiest, most exuberantly political restaurant in the capital. But rather than schmooze the tables, he focused on grilling me about the odds of this or that candidate winning this or that election.

I was honored, but a little nonplussed when he pressed for specific numbers: 60-40? 55-45? Barack Obama? He never came up.

I'm remembering this about Larry because a friend of his in the Senate told me that Summers has begun to worry aloud (but not in public) about the dollar's potential deterioration as the world's leading currency.

A rapid fall could, among other things, be matched by soaring inflation.

I'm wondering what odds Summers is placing on, say, a 50 percent decline in the dollar against the euro and yen over the next five years if, as now looks quite possible, the federal government borrows (or prints) another, say, three trillion between now and then.

His odds-calculating brain has to be working overtime right now, for the credibility of the dollar is the major risk that must be balanced against Obama's just-begun effort to spend and lend us back to prosperity.

Step back from the headlines and consider some numbers for a moment:

The Troubled Asset Relief Program, the bank (and other sector) bail-out program, will soon have committed its full $750 billion. These are loans, in theory, but in fact are obligations unlikely to be paid back soon, if ever, in many cases.

Congress by February is likely to enact a nearly $1 trillion "stimulus" package, with huge spending increases and tax cuts equivalent to an extra, full year's "discretionary" federal budget.

Obama will soon unveil another credit-revival plan, this one calling for direct government acquisition of perhaps a trillion dollars or more in "bad" assets, taking them off the books of ailing banks.

The plan is to create a government "bad" bank, one that could issue its own paper, even if (as might be likely) the major buyer is the U.S. government. It's just a new rug to sweep catastrophe under.

And all of this will take place as the Federal Reserve, looking for new ways to add liquidity to the desert, considers buying U.S. Treasuries that foreign investors may be growing wary of holding.

We're not only inventing the rug, we're inventing the money to pay for it.

At some point, foreign investors may indeed become very skeptical of lending us money, at least in instruments denominated in dollars. They may doubt our ability to invent, build, grow and prosper—to create real wealth. They may think we are too weak to generate the real profits and real tax revenues necessary to pay it all back.

I doubt the wisdom of the doubters. Personally (and I'm an optimist about my country) I would never bet against our own resilience.

But it's Summers's job to worry about the consequences of failure. In President Obama's White House, Summers is the macroeconomic equivalent of National Security Advisor. He established and now runs a morning Oval Office briefing similar to the long-standing one on global military and intelligence. Given the nightmarish state of the world (and the American) economy, the president is tending to ask to hear from Summers first, and I'm wondering what he's telling Obama about the odds.

If there is no rug, and no money to pay for it, and if too much printing and borrowing risks leading us to doom, Summers must say so. What are the odds that, if circumstances call for it, he will step up?

Well, I know the guy. He is brilliant—and blunt.

I'd say the odds are pretty good: about 70-30.