MEMORANDUM From: To: Re: Dt: Lawrence H.

Summers, Director, National Economic Council Members of Congress Status Report on Rescuing and Rebuilding the American Economy 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 the Obama Administration, working closely with the 111th Congress – implementing the Recovery Act, restoring confidence in the financial system, providing assistance for responsible homeowners and pressing to get credit flowing to small businesses – have helped pull the economy out of a nosedive, and have put us on a path toward a sustained economic recovery. While we still have a long way go, we are far closer to that recovery today than we were in January. Where We Were When President Obama assumed office, he faced the most serious economic and financial crisis of any President since Franklin Roosevelt. Fear was widespread and confidence was scarce. Traditional measures of consumer and business confidence fell to low levels not seen in decades. Typical of the prevailing sentiment was Paul Krugman’s warning in January of 2009, “Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.” [New York Times, January 5, 2009]. Our economy was in free fall with 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—the fastest rate of decline since 1958. [Bureau of Economic Analysis]. • 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]. • Even before any policy changes, CBO was projecting a budget deficit for 2009 well in excess of a trillion dollars because of the weak economy. [CBO, Budget and Economic
Outlook, January 8, 2009].

• In March, market indicators implied a better than one in six chance of the Dow falling below 5,000 within a year. Markets expected 38 percent of investment grade corporate bonds to default within 10 years. What We Have Done President Obama’s top priority has been to stop the vicious cycle of economic and financial collapse, stem the historic rate of job loss, restore confidence and put the economy on a path to recovery. He realized from the beginning that this would require not only aggressive actions in the near term, but steps to build a firmer foundation for productive investment and long-term growth. These actions include:

• Passage of the Recovery Act – the largest program of fiscal stimulus in the nation’s history, 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: • • 95 percent of working Americans have seen their taxes go down; $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; As of May, the tax cuts, fiscal support for state and local government, and family assistance programs have boosted disposable income by nearly two percent; 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.

• •

• A Financial Stabilization Plan aimed at restoring confidence in our financial markets, ensuring banks have adequate capital and encouraging the flow of credit into the economy. The stress tests process and Capital Assistance Program – central elements of the Administration’s financial stabilization plan – have increased transparency 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 without government assistance. • An aggressive effort to tackle the foreclosure crisis and help millions of Americans stay in their homes. In addition to the significant tax credits for first-time homeowners in the Recovery Act, the Administration has launched a series of measures designed to reduce mortgage payments, prevent avoidable foreclosures, and support refinancing efforts by helping to bring interest rates to historic lows. Although we still have a long way to go, there have been a significant number of mortgage modifications under the Administration’s plan—approximately 200,000 trial modifications have begun so far. • Comprehensive reform of the nation’s financial regulatory system so that a crisis like 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 that can deliver the benefits of market-driven efficiency even as it guards against the dangers of market-driven excess. Where We Are Now After starting the year standing at the brink of catastrophe, but we have walked some substantial distance back from the abyss:

• 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 have estimated that the Recovery Act added more than 3 percentage points to second quarter GDP.

T e C tra h on ction in G P D D eclin S a ly ed h rp in th S e econ Q a d u rter
0 -1 -2 -3 -4 -5 -6 -7 -5.4 -6.4 -2.7 Q3:08 Q4:08 Q1:09 Q2:09 -1

Source: Bureau of Economic Analysis

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

A vera eMonth Job L s H ve Modera g y os es a ted
0 -100,000 -200,000 -300,000 -400,000 -500,000 -600,000 -700,000 -800,000 -691,000 -436,000 2009 Q1 2009 Q2

Source: Bureau of Labor Statistics.

• Conditions in our financial markets have stabilized, and the risk of financial collapse has receded. The positive stock market performance since earlier this year is helping 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%.

• We have seen some initial signs of stabilization in the housing market as well. Indicators of home sales, inventories, construction and prices all suggest that the housing market is stabilizing after having been in free fall for several months. The Path Ahead While avoiding catastrophe and restoring a sound macroeconomic policy framework are necessary for the confidence on which economic recovery depends, they are not sufficient. President Obama understands that to avoid the boom-and-bust cycle of the past several years, our economy must be rebuilt on firmer foundations: As the President explained: “Just as a cash-strapped family may cut back on luxuries but will insist on spending money to get their children through college, so we as a country have to make current choices with an eye on the future. If we don't invest now in renewable energy or a skilled workforce or a more affordable healthcare system, this economy simply won't grow at the pace it needs to in two or five or ten years down the road. If we don't lay this new foundation, it won't be long before we are right back where we are today.” [Georgetown
University, April 14, 2009].

The President has an ambitious agenda. But it is an agenda comprised of measures that lay a foundation for future prosperity and for the confidence on which the current recovery depends. • Comprehensive healthcare reform is crucial to convincing markets that the long-term growth in Federal debt is under control and to convincing businesses that the United States is the most competitive place for them to invest. • Financial regulatory reform is vital to preventing against the asset market bubbles that have characterized previous recoveries. • A stronger infrastructure will ensure that our growth is not constrained by lack of capacity and by bottlenecks that exacerbate inflationary pressures. • Comprehensive energy policies will reduce our vulnerability to the energy price gyrations that have caused so much economic pain in the past.

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