February 13 2008: 10:47 AM EST
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How bad will the economy get?

Fortune managing editor Andy Serwer spoke extensively with Lawrence Summers, Harvard University professor who served as Treasury Secretary under Bill Clinton.

By Andy Serwer, managing editor

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(Fortune Magazine) -- Fortune: How bad do you think the economy will get?

Summers: The plausible possibilities range from a substantial slowdown that feels like a recession to the most serious recession we've seen since 1982. The most likely case is somewhere in between, with a recession whose main brunt is felt this year but that has aftereffects.

What should Washington be doing that it hasn't done?

There are four areas. First, macroeconomic policy to stimulate demand. I'm encouraged by the fiscal and monetary policies that are underway. The second is concrete actions to address the housing sector. The key issue is finding ways to write down mortgages on houses whose values have fallen substantially, without imposing large losses from foreclosures. Third, we need to repair the financial system, which will require a program to assure there's more capital and transparency about valuations. If we try to get price discovery by dumping assets on the market, we'll get fire-sale prices that would trigger cascading liquidations. Fourth, we need more cooperation to assure consistent valuation of assets between the U.S. and the rest of the world and to assure that as demand falls in the U.S., others work to take up the slack.

What do you think of the candidates' economic plans?

The Republicans have missed the point. Our problem today is a shortage of demand; this is not the time for future supply-side measures. Yet the Republican candidates come back to the old standby of making the Bush tax cuts permanent. The stimulus plans put forward by Democratic candidates have emphasized a fiscal approach that would be timely, temporary, and targeted.

George Soros declared the end of 60 years of a dollar-denominated growth economy. Do you agree?

Everybody needs to take a deep breath and recognize the resilience, the potential, and the competitiveness of the American economy. America is a magnet for foreign capital and for highly skilled people from all over the world. I would be very surprised to see the U.S. economy supplanted as the leading global economy anytime soon. To top of page

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