MEMORANDUMFrom: Lawrence H. Summers, Director, National Economic CouncilTo:Members of CongressRe: Status Report on Rescuing and Rebuilding the American EconomyDt:August 4, 2009

We have traveled a remarkable distance over the past six months in pulling our economy back from the brink of economic catastrophe. The wide-ranging efforts taken by theObama Administration, working closely with the 111th Congress – implementing theRecovery Act, restoring confidence in the financial system, providing assistance for responsible homeowners and pressing to get credit flowing to small businesses – havehelped pull the economy out of a nosedive, and have put us on a path toward a sustainedeconomic recovery. While we still have a long way go, we are far closer to that recoverytoday than we were in January.

Where We Were

When President Obama assumed office, he faced the most serious economic and financialcrisis of any President since Franklin Roosevelt. Fear was widespread and confidencewas scarce. Traditional measures of consumer and business confidence fell to low levelsnot seen in decades. Typical of the prevailing sentiment was Paul Krugman’s warning inJanuary of 2009, “Let’s not mince words: This looks an awful lot like the beginning of asecond Great Depression.”

[New York Times, January 5, 2009].

Our economy was in free fallwith no apparent limit on how much worse things could get:•

GDP fell at an average annual rate of 6.4 percent in the first quarter of 2009—thefastest rate of decline since 1958.

[Bureau of Economic Analysis].

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In the first quarter of 2009, the economy lost an average of 691,000 jobs a month.This was the largest quarterly decline since 1945.

[Bureau of Labor Statistics].

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Even before any policy changes, CBO was projecting a budget deficit for 2009 wellin excess of a trillion dollars because of the weak economy.

[CBO, Budget and EconomicOutlook, January 8, 2009].

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In March, market indicators implied a better than one in six chance of the Dowfalling below 5,000 within a year.

Markets expected 38 percent of investment gradecorporate bonds to default within 10 years.

What We Have Done

President Obama’s top priority has been to stop the vicious cycle of economic andfinancial collapse, stem the historic rate of job loss, restore confidence and put theeconomy on a path to recovery. He realized from the beginning that this would requirenot only aggressive actions in the near term, but steps to build a firmer foundation for productive investment and long-term growth. These actions include:

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Passage of the Recovery Act – the largest program of fiscal stimulus in the nation’shistory, with a total cost of about 5 percent of GDP.

The Recovery Act was designed to provide a speedy, substantial and sustained boost to our economy. Already, as a result of the act:

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95 percent of working Americans have seen their taxes go down;

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$64 billion has been provided to state and local governments to avoid layoffs of teachers, firefighters and police officers and to prevent further deterioration of state budgets;

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As of May, the tax cuts, fiscal support for state and local government, and familyassistance programs have boosted disposable income by nearly two percent;

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Importantly, the Recovery Act will gain momentum over time, peaking during 2010 with about 70 percent of the total stimulus provided in the first 18 months. Five and a half months after the passage, we are on track to meet that timeline.

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A Financial Stabilization Plan aimed at restoring confidence in our financialmarkets, ensuring banks have adequate capital and encouraging the flow of creditinto the economy.

The stress tests process and Capital Assistance Program – centralelements of the Administration’s financial stabilization plan – have increasedtransparency and helped restore confidence in our financial system. Since the stress tests, banks have raised over $80 billion in equity and issued over $30 billion in debt withoutgovernment assistance.•

An aggressive effort to tackle the foreclosure crisis and help millions of Americansstay in their homes.

In addition to the significant tax credits for first-time homeownersin the Recovery Act, the Administration has launched a series of measures designed toreduce mortgage payments, prevent avoidable foreclosures, and support refinancingefforts by helping to bring interest rates to historic lows. Although we still have a longway to go, there have been a significant number of mortgage modifications under theAdministration’s plan—approximately 200,000 trial modifications have begun so far.•

Comprehensive reform of the nation’s financial regulatory system so that a crisislike this never happens again.

The Administration has unveiled a sweeping set of regulatory reforms to lay the foundation for a safer, more stable financial system: one thatcan deliver the benefits of market-driven efficiency even as it guards against the dangersof market-driven excess.

Where We Are Now

After starting the year standing at the brink of catastrophe, but we have walked somesubstantial distance back from the abyss:

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After GDP plummeted at a -6.4% rate in the first quarter, the economy’s pace of contraction slowed markedly in the second quarter. Private forecasters haveestimated that the Recovery Act added more than 3 percentage points to secondquarter GDP.

-2.7-5.4-6.4-1-7-6-5-4-3-2-10Q3:08 Q4:08 Q1:09 Q2:09

The Contraction in GDP Declined Sharplyin the Second Quarter

Source: Bureau of Economic Analysis

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While unemployment and job loss remain unacceptably high, the pace of job losshas moderated, from a monthly average of 691,000 in the first quarter of 2009 to anaverage of 436,000 jobs lost per month in the second quarter.

-691,000-436,000-800,000-700,000-600,000-500,000-400,000-300,000-200,000-100,00002009 Q1 2009 Q2

Average Monthy Job Losses Have Moderated

Source: Bureau of Labor Statistics.

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Conditions in our financial markets have stabilized, and the risk of financialcollapse has receded.

The positive stock market performance since earlier this year ishelping to restore substantial losses in household wealth. For example, since the stock market bottomed out on March 9, 2009, the typical 401(k) account is up about 30%.