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[Joint House and Senate Hearing, 111 Congress]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 111-374
 
                          THE ECONOMIC OUTLOOK

=======================================================================

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 30, 2009

                               __________

          Printed for the use of the Joint Economic Committee

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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

HOUSE OF REPRESENTATIVES             SENATE
Carolyn B. Maloney, New York, Chair  Charles E. Schumer, New York, Vice 
Maurice D. Hinchey, New York             Chairman
Baron P. Hill, Indiana               Edward M. Kennedy, Massachusetts
Loretta Sanchez, California          Jeff Bingaman, New Mexico
Elijah E. Cummings, Maryland         Amy Klobuchar, Minnesota
Vic Snyder, Arkansas                 Robert P. Casey, Jr., Pennsylvania
Kevin Brady, Texas                   Jim Webb, Virginia
Ron Paul, Texas                      Sam Brownback, Kansas, Ranking 
Michael C. Burgess, M.D., Texas          Minority
John Campbell, California            Jim DeMint, South Carolina
                                     James E. Risch, Idaho
                                     Robert F. Bennett, Utah

                     Nan Gibson, Executive Director
               Jeff Schlagenhauf, Minority Staff Director
          Christopher Frenze, House Republican Staff Director

                            C O N T E N T S

                              ----------                              

                                Members

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New 
  York...........................................................     1
Hon. Sam Brownback, Ranking Minority Member, a Senator from 
  Kansas.........................................................     2

                               Witnesses

Christina D. Romer, Chair, Council of Economic Advisers..........     4

                       Submissions for the Record

Prepared statement of Representative Carolyn B. Maloney, Chair...    28
Prepared statement of Senator Sam Brownback, Ranking Minority 
  Member.........................................................    28
Prepared statement of Christina D. Romer, Chair, Council of 
  Economic Advisers..............................................    30
Prepared statement of Representative Kevin Brady.................    37

                          THE ECONOMIC OUTLOOK

                              ----------                              

                        THURSDAY, APRIL 30, 2009

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 a.m., in Room 
210, Cannon House Office Building, The Honorable Carolyn B. 
Maloney (Chair) presiding.
    Representatives present: Maloney, Hinchey, Cummings, 
Snyder, Brady, and Campbell.
    Senators present: Klobuchar and Brownback.
    Staff present: Gail Cohen, Nan Gibson, Colleen Healy, Marc 
Jarsulic, Andrew Wilson, Lydia Mashburn, Jeff Schlagenhauf, 
Jeff Wrase, Chris Frenze, Bob Keleher, and Robert O'Quinn.

OPENING STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, CHAIR, A 
                  REPRESENTATIVE FROM NEW YORK

    Chair Maloney. The committee will come to order.
    We are absolutely thrilled today to have Dr. Romer 
testifying, and I want to welcome Christina Romer, the 
President's Chair of the Council of Economic Advisers and thank 
her for her testimony today. The Council of Economic Advisers 
and the Joint Economic Committee were both created by the 
Employment Act of 1946 and share an important history of 
providing the White House and Congress with analysis of the 
economic conditions and effectiveness of economic policy.
    This hearing today and our hearing next week with Fed 
Chairman Bernanke on the economic outlook are timely because 
there is a sense that the economy may be bottoming out. A few 
glimmers of hope have surfaced in the economy in recent weeks 
as consumer confidence jumped last month and credit markets 
have begun to thaw.
    But yesterday's report that GDP fell at an annual rate of 
6.1 percent in the first quarter and the huge job losses over 
the past 5 months are vivid reminders of a hangover from the 
Bush administration that we still have to shake.
    The GDP and job loss numbers underscore the wisdom of the 
American Recovery and Reinvestment Act that Congress passed and 
President Obama signed into law in his first 60 days in office. 
The recovery measures are just starting to work their way into 
the economy, providing a much-needed boost. Americans are 
feeling more optimistic and are starting to spend more, which 
leaves me optimistic that we will begin to see the effects of 
the stimulus next quarter.
    Taken together, the American Recovery and Reinvestment Act, 
the financial stabilization plan and housing reforms provide 
the framework for promoting economic progress. In addition, the 
House and the Senate passed our budget resolution this week. 
Our budget is fundamentally about priorities and I applaud the 
President for working with Congress to craft a blueprint that 
builds on our recovery efforts by making investments in health 
care, renewable energy and education, to put people back to 
work and strengthen our economy for the future.
    Even before job losses began accelerating, many families 
were increasingly holding balances on their credit cards just 
to pay for basic household necessities. Because of this 
increased reliance on credit cards, especially by families of 
displaced workers, it is even more important that we pass 
legislation prohibiting unfair and deceptive practices that are 
hurting financially strapped households. The Credit Card Bill 
of Rights is on the House floor today, literally, and will, 
hopefully, pass today; and it will soon be taken up by the 
Senate.
    So I hope you will understand the importance of getting 
this bill passed and will forgive me for having to leave this 
hearing early to go and help manage the bill on the floor. With 
the strong support of President Obama, I believe we can pass 
this bill and get working Americans some relief from mounting 
pocketbook pressures.
    Nobel laureate Joseph Stiglitz testified before this 
committee last week and made a compelling case that we 
underestimate the impact of removing these kinds of predatory 
practices by only looking at potential reductions in the supply 
of credit when these practices are prohibited. Instead, we must 
also consider reductions in the demand for credit because of 
these practices. Reducing these fees and eliminating these 
practices will encourage creditworthy consumers to borrow and 
to buy goods and services which will help the economy recover 
from the current downturn.
    I have some questions, Dr. Romer, that I would like to 
submit to your office; and I would appreciate your written 
responses to them. And again I want to thank you very much for 
your testimony and for being here today. We want to limit the 
opening statements today to just the ranking minority leader, 
Mr. Brownback, on the committee and myself in order to hear 
from Dr. Romer.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 28.]

   OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, RANKING 
             MINORITY MEMBER, A SENATOR FROM KANSAS

    Senator Brownback. Thank you very much, Chairwoman Maloney. 
I appreciate that.
    Dr. Romer, welcome. I am delighted to have you here. I look 
forward to the testimony and comments you have.
    I will put my full statement into the record, and just say 
at the outset, obviously the news yesterday was terrible on the 
contraction of the economy at such a rapid high rate. I was 
pleased to read this morning's paper, a number of people were 
saying, okay, I see some silver linings in this. And I want to 
hear about those from you.
    We are looking at--poised to have the longest recession, 
post-World War II period, and it doesn't look like, to me, we 
are out of the woods yet. I would certainly hope that we don't 
exacerbate it--the problem or lengthen the recession with 
increasing taxes, increasing taxes on small business. And I 
sure want to hear your thoughts about that as well.
    Another thing that I would really appreciate, last week the 
chairwoman hosted what I thought was a very good hearing on 
what we need to do to get the banking system working again. And 
we had a panel, a Nobel laureate, a Federal Reserve chairman in 
the Midwest, testifying that too big to fail has failed; and we 
really need to work with some of these large institutions and 
just say, you know, it may be time that this goes through the 
normal process that you do when an institution doesn't work 
economically.
    And I really want to hear what you have to say about that 
policy, whether or not you believe it is working or failing 
because it is a live issue, and I think it is a very important 
one for our credit markets to follow.
    Also, it is just so obvious, you sit in the catbird seat on 
this one, about the amount of money we are putting into the 
economy, the Federal Government is, through monetary and fiscal 
policy. It may be at unprecedented amounts. It looks like, to 
me, we are virtually there; you on the fiscal side and then 
next week we will have Chairman Bernanke on the monetary side.
    I am very concerned that we are going from a housing bubble 
to a government debt bubble on funding. Obviously, you could 
see those numbers, you can look back in hindsight and see that 
housing bubble build and build and build. And it was great 
going up and everybody enjoyed it. When it burst, it had a huge 
impact.
    Well, if we build a big government debt bubble, how do you 
prevent that one from bursting, given the level of $3 plus 
trillion budgets, monetary policy producing large quantities of 
dollars being put out into the economy? And I really hope you 
give us some of your thinking and the advantage of your 
thoughts from where you sit on how you see us getting through 
this without having another big crash taking place once you--if 
you can slide on through this one, not creating another one on 
the other side of it. And I am certain you have thought a great 
deal about this, and I hope we can hear more.
    Delighted to have you here. They are certainly challenging 
times. I have got a full statement to put into the record but I 
think the better thing would be to hear from you and let us 
have some questions with your time.
    Thank you, Chairwoman.
    Chair Maloney. Thank you very much.
    [The prepared statement of Representative Brownback appears 
in the Submissions for the Record on page 28.]
    Chair Maloney. And I would now like to introduce Dr. Romer. 
She is the Chair of the Council of Economic Advisers. Prior to 
joining the Obama administration, she was the Class of 1957 
Garff B. Wilson Professor of Economics at the University of 
California, Berkeley. Before teaching at Berkeley, she taught 
economics and public affairs at Princeton University from 1985 
to 1988.
    Until her nomination, she was codirector of the Program in 
Monetary Economics at the National Bureau of Economic Research 
and served as vice president of the American Economic 
Association where she was also a member of the executive 
committee. She is also a fellow of the American Academy of Arts 
and Sciences.
    Dr. Romer is known for her research on the causes and 
recovery of the Great Depression and on the role that fiscal 
and monetary policy played in the country's economic recovery. 
She received her Ph.D. from the Massachusetts Institute of 
Technology in 1985.
    Thank you so much for coming. I would love to invite you 
and Dr. Bernanke to come and talk about both of your research 
on the Great Depression and see what lessons you might have 
that we could use during this time.
    We are fortunate to have you serving in government, given 
your expertise, your background on many of the issues we are 
confronting today. You are recognized for as much time as you 
would like. And thank you very, very much for your service and 
for being here today. Thank you.

  STATEMENT OF CHRISTINA D. ROMER, CHAIR, COUNCIL OF ECONOMIC 
                            ADVISERS

    Dr. Romer. Well, thank you very much. And certainly 
whenever Chairman Bernanke wants to come and discuss the Great 
Depression I would love to be here with him.
    So Chair Maloney, Ranking Members Brady and Brownback and 
members of the committee, thank you so much for the invitation 
to join you today.
    As Chair Maloney pointed out, the Joint Economic Committee 
and the President's Council of Economic Advisers do share a 
special relationship, and I am delighted to have my first 
opportunity to speak with you.
    As I think we are all much too painfully aware, the United 
States is undergoing the most severe economic and financial 
crisis since the Great Depression. And so today I want to 
discuss the causes of the crisis, the policies that we are 
putting into place to address it and, as perhaps is most 
important, the outlook for the economy. So let me start just 
briefly with the causes of the crisis.
    In thinking about how we got into the situation we are in, 
we need to begin with, as Mr. Brownback mentioned, the extreme 
fall in house and stock prices over the last 18 months. To just 
give you a number, housing prices, as measured by the Case 
Shiller index, have fallen some 27 percent since July of 2007. 
Stock prices today are roughly half of what they were at their 
peak back in October.
    Now, why these two key asset prices have fallen so is a 
topic we could probably spend the whole morning discussing, but 
I think, regardless of their cause, the falls have had a direct 
impact on consumer behavior. By one measure, household wealth 
has fallen by some $13 trillion since its peak. The decline in 
wealth has inevitably led to a large decline in aggregate 
demand for goods and services.
    The decline in asset prices has also been critical to what 
I think is surely the defining feature of this recession, which 
is the drying up of credit. As housing prices declined, not 
only did the value of mortgage-backed securities fall, but 
uncertainty about their value rose dramatically. The volume of 
trades fell sharply and spreads between the interest rates on 
these assets and those on safe assets, such as government debt, 
rose tremendously, and this was disastrous for lending. When 
banks can't package their loans and sell them for cash, they 
become more cautious about making new loans.
    On top of that, the collapse of asset prices put downward 
pressure on the asset side of bank balance sheets, and so banks 
sought to reduce their liabilities by letting loans run off and 
not making new loans. The decline in house prices also made 
potential borrowers less creditworthy and further reduced 
banks' desire to lend.
    Finally, the dramatic failure or near failure of several 
major financial institutions in just about the first honest-to-
goodness bank runs in over half a century no doubt increased 
banks' caution further.
    Well, this restriction in credit had two devastating 
consequences. One is that it further lowered consumption and 
business investment and, hence, further lowered aggregate 
demand. The other, perhaps less well-known, effect of credit 
limitations or credit rationing is a reduction in efficiency. 
When credit is not available, consumption can't be smoothed 
over time in economic circumstances.
    For example, students who rely on private lending may not 
be able to borrow to go to college so that they can earn even 
more in the future. Businesses can't replace outmoded equipment 
at the desirable time, and the overall productivity of the 
economy is reduced.
    Now, last fall there was actually some debate about whether 
credit was actually all that important. The horrific falls, 
however, in employment and production over the last 5 months I 
think have largely ended that debate. Shuttered factories 
across the country simply screamed that Main Street and Wall 
Street really do intersect, and credit truly is the lifeblood 
of our modern economy.
    The result of our credit disruption and the drop in 
spending has been, as I said, a very painful contraction in the 
economy. Total output of goods and services has now fallen for 
three consecutive quarters after barely rising over the 
previous three. The unemployment rate has risen from 4.7 
percent in late 2007 to now--the most recent number was 8.5 
percent; and as I am afraid we are all aware, payroll 
employment has now fallen by over 5 million. All right.
    Well, in response to the economic crisis, the 
administration, working with Congress, has fashioned a broad, 
multifaceted plan that over time will cushion the downturn, 
bring about recovery and make the economy stronger and more 
secure in the long run. Although the plan has many parts, I 
think of it as having four critical elements.
    The first is direct fiscal stimulus. The problems in 
housing and lending markets have led to a sharp decline in 
aggregate demand; thus, one crucial treatment is for the 
government to directly promote spending. This was the central 
purpose of the American Recovery and Reinvestment Act, which 
the President signed just 28 days after taking office.
    The plan is quite simply the biggest and boldest counter-
cyclical fiscal action in American history. The package amounts 
to roughly 2.5 percent of GDP over each of the next 2 years. 
And just to give you a useful comparison, the Federal 
Government's fiscal stimulus in Franklin Roosevelt's first full 
year in office was just 1.5 percent of GDP, and that was 
largely reversed the very next year.
    Now, we expect the fiscal stimulus package to be incredibly 
helpful to the recovery. Because the spending is getting out 
the door quickly, we expect it to have a beneficial impact on 
output growth in employment well before the end of 2009. I have 
been told by the Office of Management and Budget that 
approximately $75 billion of spending under the Recovery Act 
has been obligated, and almost $14 billion in outlays have 
already occurred.
    During the first 100 days in office, which the 
administration marked just yesterday, the Council of Economic 
Advisers estimates that the Recovery Act has already saved or 
created about 150,000 jobs. Of course, because only a small 
part of the spending and tax relief called for by the act has 
taken place and because much of the economy's response to 
stimulus occurs with a lag, most of the benefits of the act are 
yet to come. Our estimates remain that the American Recovery 
and Reinvestment Act spending will create or save 3.5 million 
jobs before the end of next year.
    All right, the second key element of our comprehensive 
approach, as the chairwoman mentioned, is financial 
stabilization and rescue. We have initiated a number of 
programs designed to strengthen our financial institutions and 
restart the flow of credit. One piece that I would guess the 
Chairman of the Federal Reserve will talk about next week is 
our joint program on the consumer and business lending 
initiative; and this is the program designed to restart the 
securitized lending market, which accounts for some 40 percent 
of lending.
    Another recently announced component of the financial 
stabilization plan was the program to facilitate sales of 
legacy or toxic assets. Banks and other financial institutions 
have a large number of mortgage loans and mortgage-backed 
securities on their books. And the value of these loans is hard 
to determine because the market has virtually disappeared. So 
the Treasury is partnering with the FDIC, the Federal Reserve 
and private investors to try to restart this market through the 
Public-Private Investment Program.
    A final component of the financial rescue plan is a careful 
evaluation of the health of the 19 largest banks in the 
country. The so-called ``stress test'' asks regulators to 
evaluate whether banks have enough capital to weather a more 
severe downturn than is currently anticipated, a process that, 
as you know, is almost reaching its end. At the end of the 
evaluation regulators will decide--if regulators decide that 
banks need more capital to be safe and maintain confidence, 
they will encourage banks to raise private capital, but the 
Treasury is going to be prepared to provide public capital, if 
needed, through the Capital Assistance Program.
    Though the financial stabilization plan is still just in 
its very early stages, we are optimistic that it will play a 
critical role in the economy's recovery. By restarting lending, 
it should have beneficial effects on aggregate demand. Credit-
constrained households and businesses should be able to spend 
and invest again.
    All told, the spending that could be unleashed is surely 
very large. In fact, Secretary of the Treasury Tim Geithner is 
fond of saying there is more stimulus in financial rescue than 
there is in the stimulus.
    The third element of our comprehensive recovery plan is 
direct help to the housing market through our Homeowner 
Affordability and Stability Plan. The crisis began in the 
housing market, as I mentioned, and defaults, foreclosures and 
falling house prices are contributing to the downward spiral of 
the economy.
    Now, our housing plan has several pieces. One is to work 
with the Federal Reserve to bring down mortgage rates. And 
these actions have helped to bring rates to historic lows. The 
lower mortgage rates have set off a wave of refinancing. 
Indeed, recent numbers say that refinancing applications have 
jumped nearly 80 percent since the program was announced in 
mid-February. This is important because the refinancing 
activity has the potential for macroeconomic benefit.
    If you think about a family that manages to refinance their 
mortgage at a lower rate, their payments go down; it is almost 
as if they have gotten a tax cut. And, indeed, Mark Zandi, a 
noted forecaster, has said that our housing plan has about the 
same stimulus as if we had done a $30 billion tax cut.
    Another key piece, of course, of the housing plan aims to 
reduce foreclosures. And the Treasury has announced a program 
that encourages banks and loan servicers to modify mortgages so 
that payments are more manageable and homeowners are able to 
remain in their homes. By preventing millions of homes from 
being dumped on the market, not only do we have the very 
desirable effect of preventing the tragedy of foreclosure, but 
we also prevent having a lot of homes there on the market that 
tend to bring down housing prices. As we know, foreclosure 
sales tend to lead to very low prices, so we think that this is 
something that has the potential to help stabilize house 
prices.
    All right. Well, the fourth and final element of our 
comprehensive plan involves starting to address our long-run 
economic problems. Even in the midst of an economic crisis, we 
are trying to take actions that will make the economy stronger 
in the long run.
    The focus on the long run, of course, was evident in the 
American Recovery and Reinvestment Act, as the very name 
suggests. Though any spending would be helpful for creating 
jobs, we, working with the Congress, focused on spending that 
increases productivity in the future, such as investments in 
health information technology, infrastructure and a smarter 
power grid.
    As you are well aware, the budget resolution that just 
passed provides for continuing investments in education and 
energy. In addition, we are committed to fundamentally 
reforming health care in the United States. Health care reform 
is central to our long-run fiscal prospects because the rising 
costs of health care are the single major determinant of future 
budget deficits. More fundamentally, our broken health care 
system is depressing American standards of living and leaving 
tens of millions of us without health insurance.
    Finally, we have begun to work on fixing our financial 
regulatory system. The specifics of how to best regulate 
financial institutions are a difficult and complex issue, and 
the detailed proposals will require careful study and hard 
work, but it is clear that the system that allowed our current 
crisis to occur cannot be permitted to continue.
    All right. Well, where does all of this leave us? I have 
talked about the causes. I have talked about our response. What 
is the economic outlook? I am sorry to have to start with a sad 
fact, but in the short run we are surely in for more bad news. 
The economy we inherited was so weak and deteriorating so 
rapidly that even the aggressive actions we have taken can't 
turn it around immediately. I often like to compare the economy 
to a supertanker. Its momentum is so great that it responds to 
the forces pushing on it only slowly and gradually.
    As was mentioned just yesterday, the advanced first quarter 
GDP numbers were released. They showed that overall output 
continued to decline rapidly in the first 3 months of this 
year. The rate of decline was 6.1 percent as an annual rate; 
and we, like most private forecasters, expect another decline 
in the second quarter, and we expect to see continued declines 
in employment and rises in unemployment for the next several 
months.
    But there is every reason to think that the policies we 
have put into place over the last 3 months, together with the 
natural strength and resiliency of our workers and businesses, 
will spur recovery. Already as the President likes to say, we 
have begun to see glimmers of hope that our economy is 
stabilizing. Here, I would mention a couple.
    The housing sector has shown some tentative signs of 
finding a bottom, housing starts increased slightly from 
January to March, and builder confidence in April rose 
substantially. The fall in housing prices appears that it may 
be abating.
    As of Tuesday, the S&P 500 had risen some 26 percent from 
its low point, showing at least one financial market indicator 
doing better.
    And perhaps most importantly, consumer confidence has 
increased, indicating that the American people are increasingly 
optimistic about our recovery. And indeed this is one feature 
of yesterday's GDP report, that consumer spending rose some 2.2 
percent in the first quarter, suggesting that the rise in 
confidence is actually being reflected in spending behavior.
    This development, together with the fact that nearly half 
of the fall in GDP in the first quarter reflected negative 
inventory investment, could suggest that firms will need to 
start producing again to meet demand. We currently expect the 
pace of the overall decline in the economy to moderate sharply 
in the next several months.
    This is consistent, for example, with the Blue Chip 
consensus forecast, which shows a rate of decline in GDP of 2.1 
percent in the second quarter. We expect the economy to level 
out in the second half of the year and then begin to recover.
    Whether the recovery begins in earnest later this year, as 
most private forecasters predict, or takes a bit longer is hard 
to know because labor market indicators tend to lag changes in 
output. Most likely we will see positive GDP growth before we 
see increases in employment and declines in the unemployment 
rate.
    The President's economic team is keeping a watchful eye on 
all aspects of the economic situation, and we will certainly 
not rest until we are assured of long-term and lasting recovery 
with robust employment growth. Because the downturn has been so 
long and so severe, the recovery will almost surely take a long 
time. But as I have stressed, our intent and our expectation is 
for the economy not just to recover but to emerge even stronger 
and more resilient than before.
    Thank you. And I would be delighted to take any questions 
you might have.
    [The prepared statement of Christina D. Romer appears in 
the Submissions for the Record on page 30.]
    Representative Hinchey [presiding]. Thank you very much, 
Dr. Romer. And I think we all very much appreciate that 
statement that you just gave. It is very insightful and I think 
it clearly understands the set of circumstances that we are 
dealing with and the need to continue to address the set of 
circumstances.
    That is somewhat controversial, the need to continue to 
readdress them. And I think, in the opinion of some of us, that 
needs to continue; and I think, largely the main evidence of 
that is the impact that this economic circumstance is having on 
working people, the middle-income people.
    With continued decline in employment, we are continuing to 
lose about half a million jobs a month. And as you indicated in 
your testimony, household wealth has gone down by $13 trillion.
    The mortgage situation is improving to some extent, and 
that mortgage situation was based to a large extent on the 
subprime mortgage issue, which was created back several years 
ago. It seems, though, also, that some of these houses that are 
being bought by wealthy people and then put out for rent, not 
that they are being bought by middle-income people, the people 
who have lost their houses and are now trying to come back to 
them. I think that is something that really needs to be 
addressed, and I think--that seems to be the case, and I think 
it needs to be understood and then more effectively dealt with.
    One of the problems that the working people of this country 
are experiencing on a daily basis is the increase in debt. 
There is a very, very substantial increase in debt, 
particularly of working people. That increase in debt stretches 
across the economic pattern, but a large part of it is credit 
card debt.
    I wonder if you could tell us something about that and what 
you think about that situation and how it should be dealt with.
    Dr. Romer. You raise many important points. One of the 
things that we--you are absolutely right about the rise in 
consumer indebtedness. The other thing, as you mention also, 
that kind of goes together with the tremendous decline in 
wealth that we have seen because people's housing wealth has 
gone down; if they were fortunate enough to have some stock 
market wealth, that has certainly gone down.
    I think what that means going forward, certainly for our 
macroeconomists like myself, looking at where the economy is 
going to be, I do definitely predict that we are going to see 
higher savings rates going forward. And this actually comes 
back to some of the things that Mr. Brownback talked about. 
Because, you know, one of the things--the President often talks 
about a post-bubble economy, how do we not go back to going 
from a high-tech bubble to a housing bubble? And I think one of 
the parts of that is people saving more, sort of more moderate 
kind of growth in the various parts of the economy.
    So I do think that is going to be an important feature 
going forward. I do think it is going to be something that will 
be a bit of a challenge going forward, because if consumers are 
not going to be where the growth is coming from, if they are 
not going to come roaring back to their old very high--you 
know, high-debt, high-spending ways, then we need to find some 
other mechanism.
    And I think, again going forward, what would be best for 
the economy is to move to a place where we have more private 
investment, taking up the slack in aggregate demand, something 
that will put us on a trajectory for faster growth in the whole 
economy, faster rising wages for workers if we have 
productivity increase.
    I think all of that would be important.
    I wanted to say one word about what you were saying about 
the move from purchasing to rental housing. That is actually an 
issue I have heard the President talk about in the sense that 
it is certainly better to have those units up for rent rather 
than just sitting vacant, which is happening in so many places. 
So though it is very sad not to have--you know, the home 
ownership not play the same role, but at least having those 
units be used and helping the rental market, I think, would 
probably be a positive development.
    Representative Hinchey. Well, I agree with that. But at the 
same time we need to be doing something that is going to allow 
people to continue to purchase their homes rather than just 
rent them, because that puts them in a not very good economic 
circumstance.
    Yesterday, the President in his press event at 8:00 
yesterday evening talked about the situation of indebtedness 
and interest rates; and there are some efforts here being done 
to look at the high rate of interest rates on credit cards and 
things like that and dealing with that situation in some 
positive way. Is there anything that you would have in terms of 
a suggestion for us to deal with that set of circumstances? 
Because that is a problem that is deeply affecting a growing 
number of people in this economy.
    Dr. Romer. Absolutely. And as I am sure Chairwoman Maloney 
knows, the President is a very strong supporter of the credit 
card bills that are on the floor today and the one in the 
Senate, because we definitely have a sense that there have been 
problems, abuses in this market. And doing things that are 
going to help, that are going to help consumers make better 
choices, protect them from abusive practices, I think 
absolutely those are very important things that we need going 
forward.
    And then on the issue of, you know--and part of that feeds 
into things like--you know, things like when people make a 
payment over their minimum payment, applying it to the higher 
interest rate balance, not the lower interest rate balance. I 
think all of those are so important for consumers, as you put 
out, to help them get out of any debt overhang that they have, 
but also to be in a better position going forward.
    Representative Hinchey. Thank you very much, Dr. Romer.
    Mr. Brownback.
    Senator Brownback. Thank you very much, Mr. Chairman.
    Dr. Romer, thanks very much for being here.
    It really looks like, to me, we are creating a government 
bubble. We have done a housing bubble, well documented, and you 
talked about it; and I am very concerned about this. I am very 
concerned about it from a monetary and fiscal policy, and we 
will talk about it on Monetary Policy next week.
    But how do you back out of this? I mean, you are saying, 
and most private forecasters are saying, we start to flatten 
out, maybe a slow growth at the end of this year. It looks like 
we might be on track to do that. Unemployment always lags, so 
that is going to lag afterwards.
    But, my word, the level of this debt is huge. And I know 
you have got to be concerned about that. So how do you back out 
of that without it bursting on us?
    Dr. Romer. All right. I will admit that I am as worried 
about the deficit and the debt as you are, and I would say the 
President is as well. I mean, that is something that he is 
very, very much aware of. So there are a couple of things I 
would say.
    The first is, I think we need to distinguish what we are 
doing right now from policies going forward, because in the 
middle of a severe economic crisis, I feel very strongly the 
actions that we are taking, even an $800 billion fiscal 
stimulus, a $700 billion financial rescue, that is money well 
spent simply because if an economy goes into free fall, there 
is nothing as bad for government revenues and for the----
    Senator Brownback. I think a lot of economists would agree 
with that point.
    But you were talking about 2.5 percent of GDP over the next 
2 years and an unprecedented amount of spending, which it is--
an unprecedented amount of spending. But if you are coming out 
of it, why wouldn't you then back out of that spending--like, 
say, if we are coming out of it at the end of this year, it 
would seem to me prudent on your pulling back out to say, well, 
okay, then we are going to pull back out of the government 
spending bubble because--not at a rapid pace or not at any sort 
of cataclysmic pace that you synch things back in, but it 
wouldn't seem wise to continue that level of spending for 
another year if you are pulling out of this.
    Dr. Romer [continuing]. I would have to say I disagree. 
Because if you think about the--well, first of all, 2.5 percent 
real growth, which is what, say--I think the Blue Chip is even 
a little lower than that for 2010, that that is really--you 
need to grow more than 2.5 percent to bring down the 
unemployment rate.
    If real GDP is only going up 1 or 1.5 percent, you will 
actually see the unemployment rate continue to rise. So we not 
only need growth in 2010, we actually need pretty rapid growth 
to bring the unemployment rate down. If you think about just 
how far we have fallen, a typical pattern is, then you need a 
period of very rapid growth to get back to the old path.
    So I would absolutely--I mean, if you think about where we 
are likely to be in 2010, I don't think anyone is thinking of 
the economy being robustly healthy. And so you actually--and 
those forecasts are predicated on the amount of spending that 
has already been approved with the Recovery Act. So I think if 
you were to ask those Blue Chip forecasters, suppose we took 
out $300 or $400 billion of fiscal stimulus, what would be your 
forecast for 2010, it would be much less than the 2.2 or 2.5.
    Senator Brownback. I hope you really watch this, and I am 
certain you will because these numbers are gargantuan and you 
know they are gargantuan. These are unprecedented levels; and 
it sure seems like to me, if you start pulling out of this, you 
would sure want to ease up on your government bubble that you 
are doing in this.
    I don't get much time here. So one other thing I wanted to 
ask you about was the too-big-to-fail policy. We had a hearing 
on it last week, a Nobel Prize-winning laureate and a former 
regulator who were both saying, you really should put these--
the big institutions, your 19 biggest or, particularly, the 
four largest, through the normal process you do all other banks 
if they get too highly levered and they can't function; and you 
need to take them through what we did with Continental Illinois 
or what the Swedish system did at their banks.
    What do you think about that?
    Dr. Romer. Again, I think there are two issues. There is 
the immediate issue of, if you have got big banks that are in 
trouble, what do you do with them.
    And I think one of the things--you know, what we 
described--we all are giant fans of the FDIC. And one of the 
things I think doesn't get enough play is, we have a number of 
banks that have gotten into trouble, small banks.
    The FDIC comes in. They deal with them. They shut them on a 
Friday; they are back open on a Monday. It is a process that 
works very well for small banks.
    I think what we have come up against is, when you have very 
big banks that are very complicated, bank holding companies and 
all of this, it is a much more complicated process to do 
something that sounds like exactly what you want to do, a quick 
and easy, you know, clean 'em up/put 'em out.
    So that is really the issue that we are facing: How do you 
deal with these in a way that doesn't set off a bank run, 
doesn't create uncertainty about the other banks in the system, 
all of that?
    So the reason--so anyway--so that is mainly a way of saying 
what we have proposed--I know what Secretary Geithner has been 
talking about very much--is the need for a new financial 
regulatory system that includes someone keeping track of these 
banks, making sure they don't get to be too big to fail and to 
set up a mechanism, a resolution authority for, if you have got 
a big, complicated bank that needs to be dealt with, you have 
got the tools to do it. Because, right now, we just simply 
don't. We don't have the equivalent of the FDIC for these big 
complicated banks.
    Senator Brownback. The group we had in last week said we do 
have the tools to deal with this now. I recognize that you want 
additional ones. But they believe that the tools do exist to be 
able to use that.
    Thank you very much for your expertise and thoughts.
    Representative Hinchey. Thank you, Dr. Romer.
    Mr. Cummings.
    Representative Cummings. Thank you very much, Dr. Romer. 
Welcome. I was very pleased to hear your testimony.
    Dr. Romer, a lot of people are looking at these banks, and 
consumers in my district are feeling very frustrated. And, in 
some instances, people feel that we have a phenomenal transfer 
of wealth here--I know you may not look at it that way--they 
see their tax dollars being spent, as Senator Brownback just 
talked about. I mean, they see money going out, but then they 
see the banks seeming to not be that anxious to lend.
    But I am just looking at this Public-Private Investment 
Program, for example. Will the effort to relieve banks of toxic 
assets be successful if banks aren't willing to participate?
    Dr. Romer. I mean, you raise so many good points. Let me 
start with----
    Representative Cummings. You understand the frustration of 
the public?
    Dr. Romer [continuing]. I do. I do. As a consumer and a 
citizen, I share it. Right. So I certainly understand.
    I think what all of us, who have been watching this and 
working on the recovery plans, I think one of our jobs is to 
point out that as frustrating and as much as we wouldn't want 
to do this, it is what is, in fact, best even for ordinary 
Americans.
    This has never been--dealing with the banks has never been 
because anyone wanted to be nice to the banks. It was 
fundamentally because we want them--we know they play a crucial 
role in the economy; and if lending collapses, we now have 
concrete proof of just how devastating that is for the ordinary 
Americans that lose their jobs. So that is the big picture 
here.
    And the difficult thing, of course, is, we see us putting 
money into the banks, trying to deal with things, and you know, 
there is some--you know, we have seen lending kind of hold 
even, but we haven't seen it shoot up the way that we would 
like to see.
    And so what is so hard is knowing what would have happened 
in the absence of the government intervention. And so it is 
never a fun case to have to make. But to say it would have been 
so much worse had we not done this is, unfortunately, probably 
what is true. But I agree, it is not very satisfying.
    The Public-Private Investment Partnership, that is going to 
be something--again, we are going to have to see. There are 
those who have said, gee, it is too generous, everybody you 
know will want to do it; and others will say, no bank will want 
to participate. So this is definitely sort of the design 
feature, the design challenge, and have to see who shows up and 
if it works and if we have to tweak it if we aren't getting the 
results we want.
    But we do think it will be helpful to have a mechanism. 
Because some of these assets, not only is there a real question 
about their value, but there is also just a lot of uncertainty. 
And there is the thought that having them on the balance sheet 
just prevents private capital from coming in and makes the 
banks nervous and not willing to lend. So we actually think it 
could be a very useful mechanism.
    It also may just--coming back to some of the questions that 
have been raised, it may also provide a good way--if the 
regulator comes in and says, you know what, I would feel a lot 
better if your balance sheet looked better. It is a framework 
where they could say, there is this lovely facility, go use it. 
And I think that that could be a way that it could be very 
useful to use.
    Representative Cummings. Let me ask you this: Does the 
continuing financial crisis reduce the potential effectiveness 
of the economic stimulus, do you think?
    Dr. Romer. That is an interesting question. My own view is 
that these two things sort of reinforce one another. So I 
think--the way I would say it is, the fiscal stimulus package 
is probably helping the financial rescue, because to the degree 
we can get the economy going again, to the degree we can get 
stock prices and housing prices going up again, that is going 
to be great and make it easier for the financial system to 
recover.
    I think the point you are saying is, the more the financial 
system recovers, the more effective that fiscal stimulus is 
going to be because we give people a tax cut. If they can also 
get credit, they are more likely to go out and buy a car, they 
are more likely to go out and buy a house. So it will be 
reinforcing.
    I think it is part of our strategy, and I would guess that 
the Chairman of the Federal Reserve will tell you a similar 
thing is getting--you know, attacking recovery along many 
dimensions make all the pieces more successful.
    Representative Cummings. Thank you very much. I see my time 
is up.
    Dr. Romer. Thank you.
    Representative Hinchey. Mr. Brady.
    Representative Brady. Thank you, Mr. Chairman. For the sake 
of time, I appreciate the opportunity to provide my statement 
and will submit it for the record.
    Representative Hinchey. Without objection.
    [The prepared statement of Representative Brady appears in 
the Submissions for the Record on page 37.]
    Representative Brady. For the record, it is fascinating, 
compelling reading; and if I were you, I would not go to sleep 
tonight until you have memorized it.
    Dr. Romer. Yes, sir.
    Representative Brady. That is just me. That is just my 
view.
    Dr. Romer. Here I thought you were holding up my statement, 
and I was getting a compliment.
    Representative Brady. I may do that too, Chairwoman.
    Dr. Romer. We will both stay up all night reading.
    Representative Brady. Great.
    Well, thanks for being here today. I have three concerns, 
that the rosy economic assumptions included in the President's 
budget mask much higher deficits that the budget that Congress 
rushed through this week, yesterday, ignores the true 
financial--the cost of the financial rescue plan.
    And then I have got a serious question about Treasury and 
the special investigator's--inspector general's report from 
last week and about how Treasury is not responding to it.
    The first concern, rosy economic assumptions, the 
President's budget projects real GDP will decline by only 1.2 
percent this year. Blue Chip forecast, dramatically different 
than that; this first quarter, dramatically different than 
that. The end result is that we will end up with much higher 
deficits.
    So given the data that is now available today, would you 
agree the administration's forecast for the year appears to be 
too optimistic?
    Dr. Romer. Well, I will say, we certainly did our forecast 
back in early January, and we absolutely--the economy did 
deteriorate after we did it, and most private forecasters also 
sort of downgraded their forecasts. So I think it was right in 
the middle of the pack, at the time it was done, by the time 
the budget came out. I think it was more optimistic than most.
    I have to say, I think we may ultimately be vindicated, 
quite honestly. I think what we are seeing in a lot of the 
forecasts, as they are coming out, is a real change; I mean, 
there is the sense that those glimmers of hope are starting to 
cause people to rethink some of their assumptions. We know, for 
example, the CBO forecast that came out in March was more like 
ours, at least in 2010, than it had been originally.
    And so, anyway--so I actually--I think it is certainly 
possible that it will turn out to be completely correct.
    That said, we are going to--we always do a mid-session 
review, and we will be doing another forecast in the next 
couple of months. So we will make honest budget estimates based 
on our best estimates of where we think the economy is at that 
time.
    Representative Brady. I did get a chance to question 
Secretary Geithner about these forecasts. At the time, it 
appeared to be nowhere near the middle of the pack and very 
worrisome.
    I do agree with you that adjusting to the economy is 
important. And as the administration produces any new quarterly 
estimates, could you provide them to the committee? Because I 
think this--really that budget assumption underlies and affects 
a whole lot of our problems within the budget.
    Second question: This morning, the Financial Times reported 
that International Monetary Fund estimates the U.S. taxpayer 
cost of the financial cleanup could be up to $1.9 trillion over 
the next 5 years. None of that is included in either the 
President's Budget--well, $250 billion was included in his--and 
zero in the budget that we approved yesterday.
    So I think, how can Congress, how can the White House make 
informed decisions on budget priorities while ignoring a nearly 
$2 trillion cost over the next few years?
    Dr. Romer. The important thing to say is, there is 
incredible uncertainty about what it will take to heal the 
financial system and how much taxpayer money will be needed. So 
I think the--I would go--again, it comes to, there is indeed a 
lot of uncertainty about what the economy is going to do. If 
the economy does grow more quickly, I think there is every 
reason to believe that the kind of actions we are taking will 
be enough to heal the financial system. It is just very hard to 
know.
    The International Monetary Fund, I would say, doesn't 
have--you know, they are a very fine organization, but whether 
they have really good estimates of exactly what the cost is 
going to be, I think is highly questionable.
    I think the real thing is, there is just a tremendous 
amount of uncertainty. And that was why the President put--the 
placeholder in the budget was to say, we think we have enough 
now. We have a plan for using what we have now. But we wanted 
to signal in case we needed more to have the honest budgeting.
    Representative Brady. I would agree there is a great deal 
of uncertainty around all these unprecedented actions. But even 
if the IMF was off by 50 percent, we are at a $1 trillion hole 
there.
    And maybe you do know. Are there any estimates, credible 
estimates, that say there will be zero cost to taxpayers over 
the next 5 years?
    Dr. Romer. We what we certainly know, we have already--the 
original TARP funds. We have had the $700 billion, and the 
question is going to be what fraction of those turn out to be 
losses and what fraction does the government get paid back? So 
we certainly have to think about those.
    I think there are absolutely credible estimates that have 
to do with how, you know, how fast the economy grows, all of 
those. I think something like the IMF, there is so much 
reliance on historical estimates; what these studies are 
typically based on is, other countries that have had these 
problems, this is what it has cost in terms of GDP. But one of 
the things that fails to take into account, obviously, is 
differences in the size across these episodes, but also 
differences in the policy response.
    I mentioned in my testimony, we have never had counter-
cyclical fiscal action this bold before, right; and I think it 
is very likely that it may be an important part of turning 
around the economy and making, as I said in response to one of 
my earlier questions, making the financial rescue less costly, 
easier to do.
    Representative Brady. One thing I appreciate about the IMF 
report was, they didn't look just at the bailout. They looked 
at all the bank--the direct support, the bank funding 
guarantees and the nonstandard central bank loans, all of which 
are, as you said, very uncertain; much of it is unprecedented.
    And I just think this is a credible organization. They 
raise an issue that is worrying a lot of people, a lot of 
lawmakers these days. And I think we would be better to err on 
the side of caution in putting those dollars in the budget, 
rather than ignoring it completely.
    The final question deals with the TARP and the public-
private investment funds that are really key to the 
administration's efforts to deal with the toxic loans that are 
on the books today.
    Last week, this committee had the Special Inspector General 
Neil Barofsky, and he told us a couple of things that were very 
troubling. One is that he believes that many aspects of the 
Public-Private Investment Program could make it inherently 
vulnerable to fraud, waste and abuse; and he has made 
recommendations to the Treasury how to stop these 
vulnerabilities before they become a problem.
    And then he also in his report recommends that all TARP 
recipients account for the use of their funds, set up internal 
controls to comply with such accounting and certify a 
compliance. And he told this committee that the administration, 
to date, has not accepted either the recommendations on 
accountability for TARP or the recommendations to accept just 
basic safeguards.
    Do you know why Treasury would not accept those independent 
recommendations? Or is there a timetable that you could give us 
when we will have assurances? Because building on rosy economic 
assumptions, ignoring the costs of the financial rescue plan, 
then adding on top of that more taxpayer risks within the 
bailout, all three become a pattern. And I think it would build 
confidence in the program and confidence on Capitol Hill if 
Treasury were to begin accepting some of those basic 
safeguards.
    Dr. Romer. All right. So on your specific question, I am 
going to have to get back to you because I don't know what the 
timetable is.
    But what I can tell you is, you know, from the President 
right on down, the emphasis on accountability and transparency 
in the recovery actions, in the financial rescue, have been 
unprecedented. I know that is a top priority for the President.
    So I will certainly--I will certainly mention it to the 
Secretary of the Treasury and try to get you more information 
because, you know, I know--and certainly in our design of the 
Public-Private Investment Program, we obviously don't want to 
have any chance of fraud. Nothing would be worse for the 
program, worse for the Treasury. And so figuring out what we 
can do to prevent that will be a top priority.
    Representative Brady. If you would do that, I think it is 
important.
    This is a bipartisan issue. We were not pleased with the 
accountability in the Bush administration on the TARP funds; 
not pleased or satisfied with the accountability so far in the 
new administration and with the public-private investment 
vehicle.
    Why not stop those abuses before they occur? Please deliver 
that message to the Treasury Secretary.
    Dr. Romer. I will. Right after I memorize your report, I 
will do that one.
    Representative Brady. Don't do that. But thank you, Madam 
Chairman, for being here today. Thank you, Mr. Chairman.
    Representative Hinchey. Thank you.
    Mr. Snyder.
    Representative Snyder. Thank you, Mr. Chairman.
    Dr. Romer, it is great to have you here today on this, the 
101st day of the Obama presidency, the key benchmark by which 
we judge all history--like Dalmatians, I guess, 101 Dalmatians.
    I wanted to ask--first of all, by the way, not all of us 
think it is a clear-cut wrong decision that Secretary Geithner 
doesn't agree with everything the inspector general does with 
regard--I think I share your concerns about the fungibility of 
money. And I think, as investors in some of these institutions, 
we want all their projects to do well, not just the ones that 
they say, this is where the TARP money went. I think there is a 
broader issue there than just what happens to the TARP loan 
moneys.
    Dr. Romer, would you tell us how we should view the added 
uncertainty in the economy both here and abroad that may be 
created by the threat of a major health flu pandemic around the 
world? How should we view that?
    Dr. Romer. Well, of course, it is a major concern, 
primarily, of course, from the public health issue, and so that 
certainly within the administration we are taking the attitude 
that public health is job number one and the thing, of course, 
that the President is focusing on unbelievably.
    But, of course, one does--I mean, my job is economics. So 
one of our jobs is to think about what would be the possible 
economic consequences of this. And I think your uncertainty--so 
there are two things to think about.
    The fundamental determiner, of course, is going to be how 
severe it is, and that is something that we are just now trying 
to get the information. Are we looking at a more typical flu 
and a flu with a sort of a typical kind of mortality rate, or 
is it something much more severe? And that is going to 
fundamentally determine the public health consequences and the 
economic consequences.
    So I think, you know, at this point you are right that 
uncertainty is probably the biggest effect right now, whether 
it will make consumers nervous, whether it will make, you know, 
people--governments will have to take actions that 
unfortunately will have economic consequences; that is 
certainly what we are facing.
    But certainly the administration's job number one is do 
whatever it takes to make sure that lives are saved.
    Representative Snyder. Just my own editorial comment. And I 
appreciate what you are saying about number one is public 
health. But as you know--and I think it has probably been your 
life's work--poverty also is a killer. And if this delays the 
economic recovery for 3 months, 6 months, 1 year, 2 years--I 
don't think it will, but if it has that kind of potential--that 
also leads to devastating consequences for those families who 
are in destitute poverty all around the world for that length 
of time. And that is literally a physical killer also.
    So I think that is very appropriate, what your comments 
were.
    I wanted to ask one very specific question. You are the 
Chairman on the Council of Economic Advisers. I would think you 
would make a lot of people happy if you go back and advise the 
President from your council that, you know, you really do need 
to move this trade with Cuba along. I mean, there are some 
things they could do tonight before 5:00 that would 
dramatically increase our ability to sell agricultural exports 
to Cuba that would turn into hundreds of billions of dollars in 
the next few months in additional revenues coming into this 
country.
    It makes no sense to many of us why we are not doing that. 
And you can put on just your economic hat and not your Florida 
political advisor hat, or whatever hats there are, in being 
more aggressive about this. But if we want to do something to 
help certain segments of the country, that is a very, very 
simple thing that would translate into real money and real jobs 
for people.
    Dr. Romer. I mean, you are certainly raising an important 
issue. And as you allude to, while I do economics, I am quite 
aware that there are many other factors, political and 
diplomatic and whatever, that are affecting this.
    Representative Snyder. The thing about the agricultural 
products though is, it is already our policy to sell 
agricultural products there. It is just we have got some 
intricacy in the financing that was brought about by the Bush 
administration. I don't think this is a huge new river to 
cross. It could be done very, very rapidly, and it would mean a 
lot to our agricultural exports.
    Dr. Romer. I will certainly take the message back and see 
what I can find out.
    Representative Snyder. I wanted to ask in the short time I 
have left, we have heard over the years people refer to the 
fundamentals of the economy.
    What is the list? What are the fundamentals of an economy? 
And how are they doing?
    Dr. Romer. That is an excellent question, because for an 
economist, especially an macroeconomist, when I teach my 
students, we often talk about the short run, sort of where are 
we in the business cycle over a 1-year, 2-year horizon; and 
what is the level, say, of GDP growth or unemployment that we 
come back to? Because if you look at a picture, say, of GDP, it 
wiggles around. But the thing that hits you is, it is on an 
upward trajectory.
    So when people talk about the economic fundamentals, they 
talk really about the determinants of that long-run trend and 
are we growing at 2.5 or 3 percent on an average basis year 
after year? Or is it something anemic like one to 1.5 percent, 
right?
    That maybe doesn't make a big difference in 1 year, but if 
you look over a decade or a generation, that has an incredible 
effect on standards of living, right? So if you can just get 
the growth rate up a little bit, because it happens year after 
year, that normal, long-run growth rate, that has a huge effect 
on standards of living, so the things that we think determine 
that long-run growth rate, right, what is happening to your 
labor, your capital, and your productivity.
    And so that is why--if you say, what has the President been 
looking at? He has been so interested in getting us out of this 
short-run fluctuation, but he has also been interested in when 
we come out, what does that long-run trend look like. That is 
why he has put an emphasis on education, improving our energy 
delivery system, putting an emphasis on getting more efficiency 
in health care because that is the giant piece of the economy 
that is supposed to explode over time; getting productivity 
improvements there are just absolutely crucial.
    So when I think about the long-run fundamentals, I do think 
they are sound. I do think that we have a fundamentally good 
educational system, well-trained workers. We have got a capital 
stock that is the envy of the world. We have had some of the 
fastest productivity growth, technological change. I think the 
real thing is going to be maintaining those things, doing what 
we need to make sure--like stimulating, you know, his work on 
science and investment in R&D; that is a crucial determinant. 
You know, over the long term are we doing--you know, are we 
coming up with new technologies? That has been the fundamental 
determinant of economic growth over generations, over 
centuries. Do we keep that up? Anything you can do to get more 
technological progress, more of these innovations, that is 
going to put you on a trajectory for higher growth.
    So that really, I think, explains the President's emphasis. 
And the reason I am optimistic is, I think we are doing really 
good things, not just to get us through this crisis, but to 
make sure on the other side we are growing faster.
    Representative Snyder. So it also explains why you share 
Mr. Brady's concern about budget deficits because of the 
capital markets long-term interest rates effect.
    Dr. Romer. Absolutely. I just actually wanted to come back 
because Mr. Brownback had mentioned this. I had started by 
saying that the budget deficit--I wasn't worried about it this 
year or next year because we are in the middle of an economic 
crisis.
    But absolutely I, all of the economics team, the 
President--very much, long-run budget deficits are a whole 
other issue, and getting that down is crucial because it pushes 
up real interest rates in the long run; it lowers investment, 
and that is bad for our long-run growth. And that is why the 
President has wanted to cut it in half, and that is why I think 
we would all love to work with Congress to cut it much more 
than that.
    Representative Snyder. Thank you.
    Representative Hinchey. Mr. Campbell.
    Representative Campbell. Thank you, Mr. Chairman. Thank 
you, Dr. Romer.
    Do you believe that last September/October that we were on 
the verge of or close to a financial collapse or a collapse in 
the banking sector? And if you do, do you believe that the risk 
of that has largely passed or still exists or what?
    Dr. Romer. I do think we were on the verge of a financial 
collapse. And the chairwoman mentioned my speciality was the 
Great Depression. And if anyone had ever told me that that 
knowledge would become handy in the modern economy, I would 
never have believed it.
    But I think, last September/October, the notion that we 
were on the edge of a cliff, I think, is absolutely correct. I 
think that we could have seen just an incredible meltdown of 
the financial situation.
    Since Chairman Bernanke is coming in next week, let me just 
say, I think he and the Federal Reserve have been unbelievably 
creative in taking, as we all know, unprecedented actions that 
I do think walked us back from that cliff. Where we are now, I 
think we are in a much more stable place. It is not great, but 
it is certainly--we have edged back further from that cliff. 
And so I think there is real hope that we will come through.
    Representative Campbell. But then, to Senator Brownback's 
point earlier, if a major institution was on the verge of 
failure, why couldn't we let it fail if it didn't--if the 
system itself is now reasonably stable--you know, not great, I 
agree, but stable?
    Dr. Romer. Ah, but that is, in fact--the key thing is, I 
think the reason that we are stable is precisely--because we 
have taken all these actions, I think made it clear that we are 
not going to have another Lehman Brothers. We are not going to 
let another systemically important institution just go down. I 
think that is precisely why we are in this place of being 
somewhat more stable.
    So I think--though another way to say it is, you know, back 
last August, I would have said we were nowhere near a cliff, 
right? We were unbelievably healthy. And we saw how quickly we 
come to that edge.
    Representative Campbell. Okay, switching gears to a couple 
of things.
    There are a couple areas where it seems to me that 
administration policies are kind of at cross purposes with one 
another. If we look at the TARP program, the original purpose 
of that, to a large degree, was to inject capital into these 
institutions so they would have a capital base on which to make 
greater lending. Now because of many of the restrictions and, 
you could argue, punitive things being attached to the TARP 
funds, many of these institutions want to pay them back. And I 
am personally aware of institutions that have basically stopped 
lending money because they are trying to contract their asset 
base so that they can have--so they can reduce their capital 
and meet all their requirements with reduced capital.
    I mean, aren't we sending a conflicting message--we want to 
you to lend, here is this capital, but if you do, we are going 
to put these restrictions on you and all this stuff we know you 
don't like--so we are actually getting the reverse of what we 
want out there?
    Dr. Romer. We certainly are--I mean, the basic idea of 
getting capital into these institutions, I think, is absolutely 
sound. That is what they need, to feel more confidence and to 
be willing to lend.
    You are pointing out an important fact, which is right now 
they are not acting like our capital is the capital that they 
want; and that is certainly a problem. Unfortunately, there are 
two sides to this because we just simply can't give them our 
capital and then let them fly in big jets, so--do things that 
offend and waste the American taxpayers' money.
    I think what we are going to have going forward--and maybe 
this is a desirable thing coming out of the stress test--is to 
say, all right, we have to look at how you are doing. If we 
think you need more capital, one of the things we will say is, 
for heaven's sakes, go raise private capital. If that would be 
more, you know, you would like it better, you know, we are here 
as your backstop.
    But I think everyone would agree, if they would go out and 
get more capital from the private sector, that would probably 
be the best of all worlds.
    Representative Campbell. And on a similar sort of thing, on 
the PPIC program the public-private partnership that was 
discussed earlier, it seems the same sort of thing: We want 
this private capital.
    Now I happen to think it is highly leveraged, overleveraged 
in my view. I don't know if you share that or not. But again, 
as you said, many institutions are like, if we make a lot of 
money here, you put 100 percent tax on us; if we don't make 
money, you will call us into a hearing for losing the 
taxpayers' money. Why should we participate in this because of 
all the ancillary things that may occur?
    And I guess if that doesn't go anywhere--I am not seeing 
that there is a lot of movement on that right now; and if I am 
wrong, let me know. Is there a backup plan for the toxic assets 
after the PPIC program?
    Dr. Romer. So I think the--as you described, and we can 
talk first about, is it overleveraged? I mean part of the--I 
mean, the design challenge that I mentioned earlier is to make 
it favorable enough that people want to participate, but not so 
favorable that it wastes taxpayers' money, that it does any 
more than we need to do to get this market functioning again.
    One of the things, though--and again coming into this 
question of what are the restrictions that come with it or what 
do we worry about, the President has tried to be very clear: 
This is a program where private investors coming in with us, 
right, would be helping, would be doing the system, you know, 
not a favor, but we are trying to lure them in, and so the idea 
that perhaps they should be treated differently than someone 
that only exists because the government is there holding them 
together.
    Representative Campbell. Have any deals been made yet?
    Dr. Romer. The program is still very much--as you would 
guess, the nuts and bolts, or the final pieces, are very 
difficult on this. So, no, it is not--it is not up and actually 
making deals yet.
    Representative Campbell. Thank you.
    Representative Hinchey. Thank you very much, Mr. Campbell.
    Dr. Romer, I would like to try to clarify something that 
was mentioned a little bit earlier, and the question is this: 
Does the Federal Government have now the resolution authority 
that it needs to deal with banks, the banks that are so-called 
``too big to fail''?
    Our understanding is that the Treasury has now requested 
additional authority to deal with that set of circumstances. 
Can you inform us what has been requested by the Treasury and 
what is likely to take place in the context of this 
circumstance?
    Dr. Romer. I will certainly do what I can.
    Obviously, the Secretary of the Treasury is very much 
involved in the design of this and certainly working with the 
regulators and Congress to come up with a whole sort of 
comprehensive regulatory reform. It is the view of the 
administration that we do not have all of the tools that we 
need now to do the safe resolution of complicated financial 
institutions that get into insolvency or distress. The model 
that works so beautifully for small banks through the FDIC 
process really is not there for the very large banks. And so, 
you know, the way it certainly is described is--you know, just 
as, right, a bankruptcy judge would have the ability to come 
into a firm and say, all right, this is how we handle 
creditors, this is how we handle--quickly sell off assets, all 
of that.
    We don't have that same kind of thing for a big, 
complicated institution like AIG, right, something that has a 
bit of a hedge fund, a big insurance, all of these things; and 
certainly then for very big, big banks. So we absolutely feel 
that we need more.
    As for particular details, I think that is still very much 
being worked out. And I am sure there will be many hearings in 
the Congress talking about the specifics of this.
    Representative Hinchey. Well, I thank you very much for 
clarifying that to some extent.
    The circumstances that we are dealing with, as you 
mentioned, and now, as being generally recognized, the economic 
conditions we are dealing with are the most severe that we have 
had to encounter--that this country has had to encounter since 
the Great Depression, since the collapse of 1929. And when we 
look back on the circumstances that brought about this 
collapse, we see the similarities between that and what brought 
about the collapse of 1929, too--the manipulation of funding, 
et cetera, internally here and in other places around the 
world.
    Back then and now I think one of the most effective actions 
that were taken was the need to invest internally in our own 
country. And that proved very significant back then, although 
there was a lot of opposition to it, and there was a lot of 
difficulty that tried to block it from taking place.
    Now we are experiencing some similar circumstances. But the 
fact of the matter is that while some people are saying that 
the so-called ``stimulus package,'' the investment bill that 
was passed and signed by the President, initiated by him, is 
causing an increase in debt, what we know, based on experience, 
is that investment internally, whether it is in infrastructure, 
transportation, things of that nature, health care, education, 
new technology, all of that is going to bring back more than 
what was invested. So it is not an increase in debt; it is a 
reduction in debt as it stimulates the economy.
    Dr. Romer. I mean, so I couldn't agree more in the sense 
that, you know, when we were working with the Congress to 
design this bill, I think one of the most wonderful features of 
it is its focus on these useful investments, rather--you know, 
the quintessential economic argument, well, for an economy just 
digging ditches and filling them in will at least create jobs. 
But what we all know is, that is very wasteful. Why not, if you 
are going to be doing spending, let's do it for something good; 
and that is exactly what Congress did working with the 
President.
    And so those investments--you are absolutely right, we 
expect them to pay off tremendously in terms of--you know, 
think of infrastructure, right; it makes you more productive to 
have better roads and bridges that aren't falling down. You can 
have better internal trade, building up our levees to make sure 
we don't have another Hurricane Katrina-like incident.
    Just think of what that does to the potential for growth in 
the economy and then the health IT, the investments in 
education; all of those put us on a path to be more productive 
going forward. And that, as you pointed out, is exactly what we 
saw in the 1930s.
    I had the most wonderful meeting with a group representing 
people sort of looking at the legacy of the New Deal and making 
a map of all of the things that were built in the 1930s under 
the WPA and the CCC, to just get, you know, a sense of, we are 
participating in this exact same kind of process today. And we 
are actually developing maps to show where those recovery funds 
are building roads, improving things, weatherizing buildings, 
improving schools, I think is an amazing achievement.
    Representative Hinchey. I think you are absolutely right. 
And it is part of the responsibility of this government to make 
the circumstances that we have to deal with and that the people 
of this country have to deal with to make them more solid, more 
secure and more productive and more creative. Those are the 
things that we should be doing, and that is what this so-called 
``stimulus package'' is doing.
    I don't expect you to answer this question now, but maybe 
you could provide us with this at some point in the future, and 
that is, how much money of the investment legislation has 
already been spent, including that which is being spent through 
the Federal Government, but also that which is being sent by 
the Federal Government into State governments and local 
governments around the country? How much of that is already in 
play?
    I think it is only a tiny fraction, and there is an awful 
lot more to go. And in the context of that, I can't help but 
think that there are some of us here in this Congress who 
thought that something in the nature of 5 percent of the GDP 
would be much more sound and solid and produce a lot more 
growth than something a little over 2 percent of that GDP. And 
I am hoping that we don't get anybody to lock the door for 
additional stimulus spending, because we know, based upon a 
whole host of things, including your response to the question, 
that this is a positive issue.
    It is a positive issue for two reasons. It gives us the 
kind of country that we need, one that is not old and 
foundering and falling apart; one that is vibrant and creative 
and generating new kinds of growth, new technology, new ideas, 
new strength.
    All of that is included in this so-called ``stimulus 
bill,'' and I am hoping that if we have the ability, we can 
continue to do that, because largely--one of the reasons is 
because there has been so much negativity, so much neglected of 
the internal needs of the country over the last several 
decades.
    Dr. Romer. No. I couldn't agree more. That is something I 
want to come back to.
    I have often said the shocks that the economy faced--and so 
in some of the discussion we had earlier, the financial shocks, 
the macroeconomic, you know, trouble that we faced was 
enormous. And the fact that, you know, as bad as this recession 
is, it is not the Great Depression, right?
    We have had GDP fall, and yet it fell almost 25 percent 
back in the 1930s. If we make it through this, it will be 
because of actions like the American Recovery and Reinvestment 
Act, actions like what the Federal Reserve did last fall, work 
that we have done on the financial rescue. All of that, I 
think, we have learned from the 1930s; and by taking these 
actions, I think it will have incredible effects.
    On what you said about how much has actually been spent, I 
mean, the number that I have, I know that $14 billion in actual 
outlays and some $75 billion have been obligated. But what 
fraction of that is sort of the direct Federal Government, and 
a lot of that--one of the things we could do the most quickly 
is get some of that State fiscal relief so that State 
governments weren't laying off first responders and nurses and 
things like that.
    So I think you are absolutely right. We are just at the 
very beginning of the really useful spending that is included 
in the bill. And, you know, it is one of the things we are 
monitoring very closely, so--the Vice President's office is 
doing just an amazing job of keeping track and keeping us all 
on our toes to make sure that that money is going out as it is 
supposed to.
    Representative Hinchey. Well, Dr. Romer, on behalf of the 
other members of this Joint Economic Committee and the other 
Members of the Congress, I want to just express my appreciation 
to you for the insightful statement that you provided us and 
also the insightful answers that you provided to questions.
    Thank you very much for being here. And thank you for the 
economic leadership that you are providing. We appreciate it 
very much.
    Dr. Romer. Thank you. It was an honor to be here.
    [Whereupon, at 11:22 a.m., the joint committee was 
adjourned.]
                       SUBMISSIONS FOR THE RECORD

 Prepared Statement of Carolyn Maloney, Chair, Joint Economic Committee
    I want to welcome Dr. Christina Romer, the President's Chair of the 
Council of Economic Advisers, and thank her for her testimony here 
today. The Council of Economic Advisers and the Joint Economic 
Committee were both created by the Employment Act of 1946 and share an 
important history of providing the White House and Congress with 
analysis of economic conditions and the effectiveness of economic 
policy.
    This hearing today and our hearing next week with Fed Chairman 
Bernanke on the economic outlook are timely because there is a sense 
that the economy may be ``bottoming out.'' A few glimmers of hope have 
surfaced in the economy in recent weeks as consumer confidence jumped 
last month and credit markets have begun to thaw. But yesterday's 
report that GDP fell at an annual rate of 6.1 percent in the first 
quarter and the huge job losses over the past five months are vivid 
reminders of the hangover from the Bush administration that we still 
have to shake.
    The growth and job loss number underscore the wisdom of the 
American Recovery and Reinvestment Act (ARRA) that Congress passed and 
President Obama signed into law in his first 60 days in office. The 
recovery measures are just starting to work their way into the economy, 
providing a much needed boost. Americans are feeling more optimistic 
and are starting to spend more, which leaves me optimistic that we will 
begin to see the effects of the stimulus next quarter.
    Taken together, the American Recovery and Reinvestment Act, the 
financial stabilization plan, and housing reforms provide the framework 
for promoting economic progress. In addition, the House and the Senate 
passed our budget resolution this week. A budget is fundamentally about 
priorities and I applaud the President for working with Congress to 
craft a blueprint that builds on our recovery efforts by making 
investments in health care, renewable energy, and education to put 
people back to work and strengthen our economy for the future.
    Even before job losses began accelerating, many families were 
increasingly holding balances on their credit cards just to pay for 
basic household necessities. Because of this increased reliance on 
credit cards--especially by families of displaced workers--it is even 
more important that we pass legislation prohibiting unfair practices 
that are hurting financially strapped cardholders.
    The Credit Cardholders' Bill of Rights is on the House floor today 
and will soon be taken up by the Senate. With the strong support of the 
White House I believe we can pass this bill and get working Americans 
some relief from mounting pocketbook pressures.
    Nobel laureate Joseph Stiglitz testified before this committee last 
week and made a compelling case that we underestimate the impact of 
removing these kinds of predatory practices by only looking at 
potential reductions in the supply of credit when these practices are 
prohibited. Instead, we must also consider reductions in the demand for 
credit because of these practices. Reducing those fees and eliminating 
those practices will encourage creditworthy consumers to borrow and to 
buy goods and services, which will help the economy recover from the 
current downturn.
    I have questions that I will submit to your office and I would 
appreciate your written responses for the hearing record.
    Dr. Romer, we thank you for your testimony and I look forward to 
working with you as the committee continues our focus on fixing the 
economy, putting people back to work, and helping struggling families.
                               __________
    Prepared Statement of Senator Sam Brownback, Ranking Republican
    Thank you Chairwoman Maloney for arranging today's hearing and 
thank you Dr. Romer for testifying today about the economic outlook.
    Our economy is in the midst of a serious recession and many 
Americans are suffering from job losses, home losses, and uncertainty 
about their retirement savings, their jobs, and their children's 
future. Unfortunately, in addition, our financial system remains a 
problem.
    Just yesterday, we learned that the economy contracted at a 6.1% 
annualized rate in the first quarter, on the heels of a 6.3% rate of 
decline in the fourth quarter of last year. We are poised for the 
longest recession in the post-World War II period, and we are by no 
means out of the woods yet.
    Given the severity of the economic downturn that we face, and 
efforts already under way to try to offset the downturn, it is 
absolutely clear to me that the last things we want to do is raise 
taxes and add uncertainty to the economic and financial environments. 
Unfortunately, that is precisely what is happening.
    Taxes on anyone earning over $250,000, including someone running a 
small business, will go up. Taxes on capital income will go up. Many 
Americans, including retirees living partly on dividend income, will 
see their taxes go up and values of their portfolios hurt. Under a cap-
and-trade scheme to generate higher prices on anything produced using 
carbon, taxes will go up for everyone. Every time you turn on the light 
switch, you will pay a tax. With the Administration's budget outline, 
we are adding trillions of deficit-financed Federal government 
spending, which adds trillions to our Nation's debt. Eventually, of 
course, the debt has to be paid off, meaning higher taxes for our 
children and grandchildren.
    In addition to the prospect of higher taxes, as the Administration 
reaches to expand the size of government, we have been adding to 
uncertainties facing American families and businesses. Judging from 
comments from my constituents, many businesses are in a precautionary 
mode, fearful of expanding their operations once the economy recovers 
and fearful of adding jobs to their payrolls. And some of that fear 
comes because they are uncertain about what will be the cost of carbon 
under a cap and trade scheme and what will be the cost of providing 
health care benefits given the Administration's intentions to move 
toward greater government control of the health-care system
    On the financial front, it seems that the Treasury Department 
continues to try to experiment with devices like the Public-Private 
Investment Programs which amount to speculative experiments in which 
taxpayers face risks and losses while large financial investors face 
the prospect of subsidized gains. Rather than remove uncertainty by 
facing up to losses in the financial system and breaking up and 
reorganizing financial institutions, as Kansas City Federal Reserve 
Bank President Hoenig has advocated recently before this very 
committee, Treasury seems to want to take another risk at trying to 
solve the problem with even more leveraged speculative maneuvers. It 
seems clear to me that President Hoenig and the majority of experts I 
talk with have it right: we have the tools to resolve and break up 
large, overleveraged, insolvent banks and we should get to work using 
them.
    I am concerned about the economic outlook. These days in 
Washington, throwing hundreds of billions of dollars of increased, 
deficit-financed spending at our problems is becoming all too common. 
Even the word trillion is becoming all too comfortable. Over $1 
trillion, when interest is included, was devoted to an economic 
``stimulus'' package earlier this year. I believe there was as much 
planned expansion of long-term government spending and place markers 
for ever-expanding government programs in the package as there was 
government actions to actually try to stimulate spending, production, 
and job formation in this country. Add to that $1 trillion plus in 
stimulus the President's unprecedented $3.5 trillion budget outline for 
2010, which adds $1.2 trillion in deficits, and we see trillions of 
dollars of additional debt that we are leaving to our children.
    Of course, debt eventually has to be paid off, and that means 
higher taxes for our children and our grandchildren. It also represents 
plans of the Administration to reach out and increase the size of 
Federal government as a share of our economy. That means more and more 
of any gains from hard work by American families will be taken by the 
Federal government and, if history is any guide, used far less 
efficiently than would be the case if those families could have used 
the resources themselves.
    In terms of the outlook, I am concerned about overreach by the 
Administration on expanding the size of government and setting up 
costly and most likely inefficient programs that will stay with us 
forever and be paid for by hard-working Americans. I am concerned about 
years and years of trillion dollar deficits and a piling up of our 
debt, pushing us to a tipping point where our international creditors 
lose confidence in investing in the United States. I am concerned that 
we are moving from a housing bubble to a government-debt bubble. And, I 
am concerned that we do not have a concrete plan for addressing losses 
in the financial system and confronting and resolving the problem of 
``too big to fail.''
    The Administration has promised a review of the federal budget 
``page by page, line by line'' to eliminate inefficiencies and promote 
savings. I understand that such an effort cannot be completed in a 
short time, if it can be completed at all. The President recently 
called upon cabinet members to take 90 days and identify a combined 
$100 million in budget savings. I understand the importance of 
symbolism, but at that rate it would take us close to 250 years to 
generate $100 billion in budget savings, and it seems as though we are 
spending hundreds of billions of dollars around Washington by the day. 
And, I fear, rather than scouring the budget line by line and page by 
page, most of what has been done over the past 100 days has been 
additions of more lines and more pages and more spending in the budget. 
I am very concerned that we are taxing too much, spending too much, 
borrowing too much, and creating too much uncertainty.

                               __________
 Prepared Statement of Christina D. Romer, Chair, Council of Economic 
                                Advisers

           THE ECONOMIC CRISIS: CAUSES, POLICIES, AND OUTLOOK

    Chair Maloney, Vice Chairman Schumer, Ranking Members Brady and 
Brownback, and members of the Committee, thank you for inviting me to 
join you today. The Joint Economic Committee and the President's 
Council of Economic Advisers share a special relationship and I am 
delighted to have my first opportunity to speak with you.
    As we are all much too painfully aware, the United States is 
undergoing its most severe economic and financial crisis since the 
Great Depression. Today, I want to discuss the causes of the crisis, 
the policies we are putting in place to address it, and the outlook for 
the economy.

Causes of the Crisis
    Understanding the sources of the crisis is critical to crafting the 
right policy responses for recovery. In thinking about the causes, one 
needs to begin with the extreme fall in house and stock prices over the 
last eighteen months. Housing prices, as measured by the Case-Shiller 
index, have fallen by 27% since July 2007.\1\ Stock prices have fallen 
roughly in half since their peak in October 2007.\2\
---------------------------------------------------------------------------
    \1\ House price data are from the S&P/Case-Shiller Composite 20 
Home Price Index, http://www2.standardandpoors.com/spf/pdf/index/
SA_CSHomePrice_History_042841.xls [Haver: CASC20XA@USECON].
    \2\ Stock prices are from the S&P 500 Index; historical data can be 
found on Bloomberg or at: http://finance.yahoo.com/q/
hp?s=%5EGSPC&a=00&b=1&c=2007&d=03&e=28&f=2009&g=d.
---------------------------------------------------------------------------
    Why these two key asset prices have fallen so much is a topic that 
we could spend hours discussing. Was there a bubble? If so, what caused 
it, and what caused it to burst? But, regardless of their cause, the 
falls in asset prices have had a direct impact on consumer behavior. 
Consumers have substantially less wealth than before. By one measure, 
household wealth has fallen by $13 trillion, or 20%, since its peak.\3\ 
Consumer spending depends on many things, including income, taxes, 
confidence, and wealth. Studies suggest that when consumer wealth 
declines by a dollar, annual spending falls by about four cents.\4\ So, 
a decline in wealth as large as the one we have experienced has led to 
a large decline in the aggregate demand for goods and services.
---------------------------------------------------------------------------
    \3\ Household and nonprofit net worth data are from the Federal 
Reserve Flow of Funds Data, Household and Nonprofit Net Worth, Table 
B.100, change from 2007:Q2 to 2008:Q4, http://www.federalreserve.gov/
datadownload/Choose.aspx?rel=Z.1 (choose table B. 100). [Haver: 
PA15CDA5@FFUNDS].
    \4\ See, for example, the literature surveyed in Ricardo M. Sousa, 
``Financial Wealth, Housing Wealth, and Consumption,'' International 
Research Journal of Finance and Economics, Issue 19 (2008): 167-191, 
see page 171. Estimates of the MPC out of housing wealth are often 
higher than the estimates for the MPC out of financial (or total) 
wealth; see, for example, John D. Benjamin, Peter Chinloy, and G. 
Donald Jud, ``Real Estate Versus Financial Wealth in Consumption,'' 
Journal of Real Estate Finance and Economics, 29:3 (2004): 341-354, 
which estimates that for every $1 increase in housing wealth, 
consumption increases 8 cents.
---------------------------------------------------------------------------
    Another factor to consider is the uncertainty created by the 
gyrations in asset prices. In a paper I wrote many years ago, I argued 
that the main effect of the crash of the stock market in 1929 on 
spending operated not through the direct loss of wealth, but through 
the enormous uncertainty it created.\5\ The initial crash in October 
was followed by wild fluctuations of stock prices. This volatility led 
consumers and firms to be highly uncertain about what lay ahead. I 
found narrative and statistical evidence that this uncertainty led to 
large drops in consumption and investment spending. This makes sense: 
when you don't know what is likely to happen, the best thing to do may 
be to simply do nothing as you wait for more information.
---------------------------------------------------------------------------
    \5\ Christina D. Romer, ``The Great Crash and the Onset of the 
Great Depression,'' Quarterly Journal of Economics 105(August 1990): 
597-624.
---------------------------------------------------------------------------
    The same factor may be at work today. While house prices have been 
steadily down, stock prices have been on a wild ride. Volatility, 
according to some measures, has been over five times as high over the 
past six months as it was in the first half of 2007.\6\ The resulting 
uncertainty has almost surely contributed to a decline in spending, 
especially in the last few months.
---------------------------------------------------------------------------
    \6\ S&P 500 daily volatility, as measured by the daily return 
standard deviation for the previous 30 days, averaged 3.3% from October 
27, 2008 to April 27, 2009. It averaged 0.6% from January 1, 2007 to 
June 30, 2007.
---------------------------------------------------------------------------
    The decline in asset prices and the rise in uncertainty have also 
been critical to the defining feature of this recession: the drying up 
of credit. As housing prices declined, not only did the value of 
mortgage-backed securities fall, but uncertainty about their value rose 
dramatically. It is almost as if investors suddenly woke up to the 
realization that bundling securities together and slicing them up does 
not change overall risks, only rearranges them. And, when there are 
nationwide movements in house prices, the values of many mortgages, and 
thus the values of many securities backed by mortgages, move together. 
Add to this the general uncertainty about the path of house prices, and 
it is not surprising that people stopped trading mortgage-backed 
securities. Volumes fell sharply and spreads between the interest rates 
on these assets and those on safe assets, such as government debt, 
spiked upward.\7\
---------------------------------------------------------------------------
    \7\ Data on volumes of MBS are from the Federal Reserve Flow of 
Funds data, Table F.126 http://www.federalreserve.gov/releases/z1/
Current/accessible/f126.htm. Mortgages held as assets by Asset-Backed 
Security Issuers to back the issuance of mortgage backed securities 
(MBS) have been falling since 2007:Q3; in 2008:Q4 they fell 15% at an 
annual rate [Haver: FA67MOR5@FFUNDS]. This decline in mortgages held 
implies fewer issuances of private MBS, which suggests less demand for 
MBS. Data on spreads between rates on MBS and Treasuries come from 
proprietary Lehman Brothers data through LehmanLive. The spread is 
specifically between option adjusted Fannie Mae 30 year current coupon 
and comparable Treasuries. The spread trended up from January 2007 
through September 2008, and has narrowed since then.
---------------------------------------------------------------------------
    All of this was disastrous for lending. When banks can't package 
their loans and sell them for cash, they become more cautious about 
making new loans. On top of this, the collapse of asset prices put 
direct downward pressure on the asset side of bank balance sheets. 
Mortgages and mortgage-backed securities became less valuable, and so 
banks sought to reduce their liabilities by letting loans run off and 
not making new ones. The decline of house prices also made potential 
borrowers less creditworthy, and so further reduced banks' desire to 
lend. Finally, the dramatic failure or near-failure of several major 
financial institutions, and just about the first honest-to-goodness 
bank runs in over half a century, no doubt increased banks' caution 
further.
    Fear, uncertainty, and a desire to contract lending spread to other 
markets. Overall, the Federal Reserve estimates that net lending to 
nonfinancial businesses has fallen to a seventh of its peak level.\8\ 
More dramatically, in the fourth quarter of 2008 lenders reduced the 
amount of consumer loans on their books for the first time since 
1992.\9\
---------------------------------------------------------------------------
    \8\ Data on lending to nonfinancial business data are from the 
Federal Reserve Flow of Funds Data, Table F.2, Nonfinancial Business 
Liabilities: Credit Market Instruments, http://www.federalreserve.gov/
releases/z1/Current/z1r-3.pdf [Haver: FL14TCR5@FFUNDS].
    \9\ Data on consumer loans are from Federal Reserve Board Flow of 
Funds, Table L.2, Consumer Credit Outstanding, end-of-period on 
quarterly basis, http://www.federalreserve.gov/releases/z1/Current/z1r-
4.pdf [Haver: AL15CNC0@FFUNDS].
---------------------------------------------------------------------------
    Some of the decline in lending surely reflected lower demand for 
credit. As businesses and consumers became more nervous and wanted to 
spend less, they sought fewer loans. But much of the decline reflects 
the supply-side factors I have described. Creditworthy borrowers found 
banks unwilling to lend at posted interest rates. Credit standards were 
raised, and other methods of rationing credit were employed.\10\
---------------------------------------------------------------------------
    \10\ Federal Reserve Board, Senior Loan Officer Survey. In 2007:Q4, 
over 80% of lenders said they were keeping lending standards constant; 
in 2008:Q4, over 80% said they were tightening credit standards. http:/
/www.federalreserve.gov/boarddocs/snloansurvey/.
---------------------------------------------------------------------------
    The restriction of credit had two devastating consequences. One was 
a further lowering of consumption and business investment.\11\ 
Households that can't get credit have trouble purchasing cars, 
furniture, and other big-ticket items. Businesses that can't get credit 
find it difficult not just to invest, but often to buy the raw 
materials or finance the payrolls that go into production. The result 
is that reduced credit availability lowers aggregate demand further.
---------------------------------------------------------------------------
    \11\ Real personal consumption expenditures data are from the 
Bureau of Economic Analysis, http://www.bea.gov/national/nipaweb/
TableView.asp?SelectedTable=66&FirstYear=2006&LastYear=2008&Freq=Qtr&3Pl
ace=Y. Real private fixed investment data are also from the BEA, http:/
/www.bea.gov/national/nipaweb/
TableView.asp?SelectedTable=129&FirstYear=2006&LastYear=2008&Freq=Qtr&3P
lace=Y.
---------------------------------------------------------------------------
    The other consequence of credit rationing is a reduction in 
efficiency. When credit is not available, consumption cannot be 
smoothed over time and economic circumstances. Students who rely on 
private lending may not be able to borrow to go to college so that they 
can earn more in the future. Businesses cannot replace outmoded 
equipment at the desirable time. The overall productivity of the 
economy is reduced.
    Last fall, there was some debate about whether credit was actually 
all that important. Some pundits suggested that we should just let the 
financial system fend for itself because it really didn't matter. The 
horrific falls in employment and production over the last five months 
have largely ended that debate. Shuttered factories across the country 
simply scream that Main Street and Wall Street do indeed intersect.\12\ 
Credit truly is the lifeblood of our modern economy.
---------------------------------------------------------------------------
    \12\ Data on employment are from the Bureau of Labor Statistics, 
Establishment Survey, total nonfarm payrolls, http://www.bls.gov/
news.release/empsit.t14.htm. Data on production are from the Federal 
Reserve Board, Industrial Production Index, http://
www.federalreserve.gov/releases/g17/Current/default.htm.
---------------------------------------------------------------------------
    The result of our current credit disruptions and the drop in 
spending has been a very painful contraction in the economy. Total 
output of goods and services has now fallen for three consecutive 
quarters, after barely rising at all over the previous three.\13\ The 
unemployment rate has risen from 4.7% in late 2007 to 8.5%, and payroll 
employment has fallen by 5.1 million.\14\
---------------------------------------------------------------------------
    \13\ Bureau of Economic Analysis, National Accounts Data, real GDP; 
includes 2009 Q1.
    \14\ Data are from the Bureau of Labor Statistics, Establishment 
Survey, total nonfarm payrolls and unemployment rate, downloaded 
through CES and CPS databases ``one-screen data search,'' http://
www.bls.gov/ces/#tables.
---------------------------------------------------------------------------
    Rising unemployment and falling home values have intersected to 
greatly increase home foreclosures. Hard-working families find 
themselves underwater and with falling incomes. Defaults have risen 
steadily over the last year.\15\ Foreclosed homes destroy 
neighborhoods. And, foreclosure sales further reduce housing prices, 
putting in motion another wave of troubles.
---------------------------------------------------------------------------
    \15\ Data on defaults are from the Federal Reserve Board, Loan 
Delinquency Rate, Real Estate Loans, Residential, http://
www.federalreserve.gov/releases/chargeoff/delallsa.htm.
---------------------------------------------------------------------------
    Finally, falling income in the United States means we are buying 
less from abroad. Our imports fell 32% in the last six months.\16\ This 
fall in our spending on foreign goods, coupled with the fact that other 
countries have experienced swings of their own in stock prices and 
housing prices, has had a devastating impact on our trading partners. 
To give just a few examples, Singapore saw its GDP fall at a 16% annual 
rate in the fourth quarter of 2008, and Japan by 12%.\17\
---------------------------------------------------------------------------
    \16\ Imports data are from the Census Bureau, Foreign Trade 
Statistics, Historical Series, Nominal Imports of Goods and Services, 
http://www.census.gov/foreign-trade/statistics/historical/gandsimp.xls.
    \17\ Data on Singapore's GDP come from the Singapore Department of 
Statistics, http://www.singstat.gov.sg/stats/latestdata.html [Haver: 
S576NGPC@EMERGEPR]. Data on Japanese GDP come from the Cabinet Office 
of Japan, http://www.esri.cao.go.jp/jp/sna/qe084-2/nritu-jk0842.csv.
---------------------------------------------------------------------------
Policies for Recovery
    This long discussion of what has gone wrong in our economy is 
important. Only by describing what the problem is can I explain how the 
actions we are taking will make things better. As I have described, the 
sources of our current economic problems are complicated and strong. As 
a result, the solution can be neither simple nor quick. Instead, we 
have fashioned a broad, multi-faceted plan that, over time, will 
cushion the downturn, bring about recovery, and make the economy 
stronger and more secure in the long run. Although the plan has many 
parts, I think of it as having four critical elements.
    1. The first element is direct fiscal stimulus. The problems in 
housing and lending markets have led to sharp declines in aggregate 
demand: consumers are spending less, firms are investing less, and our 
trading partners are buying less. Thus, one critical treatment is for 
the government to directly promote spending. This was the crucial 
purpose of the American Recovery and Reinvestment Act (ARRA), which the 
President signed just 28 days after taking office. The plan is, quite 
simply, the biggest and boldest countercyclical fiscal action in 
American history. The package amounts to roughly 2.5% of GDP over each 
of the next two years.\18\ For comparison, the Federal government's 
fiscal stimulus in Franklin Roosevelt's first full year in office was 
only 1.5% of GDP, and that was largely reversed the following year.\19\
---------------------------------------------------------------------------
    \18\ The deficit impact of the American Recovery and Reinvestment 
Act is from the Congressional Budget Office, Letter to Senator Charles 
E. Grassley, March 2, 2009, Table 2, http://www.cbo.gov/ftpdocs/100xx/
doc10008/03-02-Macro_Effects_of_ARRA.pdf. The data are for fiscal 
years. Because most of the spending ends early in 2011, I assume that 
the bulk of the spending in fiscal 2009, 2010, and 2011 will occur the 
24 months between April 2009 and March 2011. This number is then 
divided by nominal GDP in 2008 to express it as a percent of GDP.
    \19\ The deficit figures are from Historical Statistics of the 
United States: Colonial Times to 1970, Part 2, p. 1194, series Y337. 
Nominal GDP data are from the Bureau of Economic Analysis, http://
www.bea.gov/national/nipaweb/SelectTable.asp?Selected=Y, Table 1.1.5. I 
average calendar year figures to estimate fiscal year nominal GDP 
figures. The 1\1/2\% is for the rise in the deficit-to-GDP ratio from 
fiscal year 1933 (July 1932-June 1933) to fiscal 1934 (July 1933-June 
1934).
---------------------------------------------------------------------------
    The ARRA promotes spending in many ways. First, it cuts taxes for 
95% of American households. The Making Work Pay tax credit reduces 
taxes on middle class families by $800 per year.\20\ This tax cut 
started showing up in paychecks during the month of April. We think 
that households are likely to spend a substantial fraction of their 
higher take-home pay on the things they haven't been buying for the 
past year and a half. This will help spur the production of consumer 
goods and put people back to work.
---------------------------------------------------------------------------
    \20\ Details of the Recovery Act and Making Work Pay can be found 
at: http://www.recovery.gov/?q=content/making-work-pay.
---------------------------------------------------------------------------
    The Act also raises spending by helping states and people directly 
hurt by the recession. State and local governments have seen tax 
revenues decline as the economy has declined, and are constrained by 
balanced-budget requirements. As a result, many states were in the 
process of cutting employment of teachers, nurses, and first 
responders, and raising taxes. The ARRA gave $150 billion in aid to 
state governments to try to stop this process.\21\ At the same time, 
the money we are spending on extended unemployment insurance and 
nutritional assistance both helps the unemployed maintain the 
essentials of life and dignity, and provides spending that keeps local 
businesses producing.
---------------------------------------------------------------------------
    \21\ Details of the Recovery Act can be found at Recovery.gov, 
http://www.recovery.gov/?q=content/
act#TB_inline?height=240&width=400&inlineId=tb_external.
---------------------------------------------------------------------------
    Finally, and most importantly, the ARRA includes more than $250 
billion in direct government investment. When the private sector isn't 
spending, it is appropriate for the government to step in and use 
unemployed resources to do work that desperately needs to be done. The 
Recovery Act has money for rebuilding roads and bridges, fixing up 
10,000 schools, strengthening dams and levees, and weatherizing Federal 
buildings.\22\ It also includes spending on crucial 21st century 
investments--building a newer, smarter power grid and funding 
innovations in health information technology.\23\ This funding will not 
only create jobs over the next two years, it will leave us with an 
economy that is safer, more energy efficient, and more productive.
---------------------------------------------------------------------------
    \22\ The American Reinvestment and Recovery Plan--By the numbers, 
http://www.whitehouse.gov/assets/documents/
recovery_plan_metrics_report_508.pdf.
    \23\ Recovery Act Information, National Institute of Standards and 
Technology, http://www.nist.gov/recovery/bill.html.
---------------------------------------------------------------------------
    We expect the stimulus package to be incredibly helpful to the 
economic recovery. Because the spending is getting out the door 
quickly, we expect it to have a beneficial impact on output growth and 
employment before the end of 2009. I have been told by the Office of 
Management and Budget that approximately $75 billion in spending under 
the ARRA has been obligated and almost $14 billion in outlays have 
already occurred. During the first 100 days in office, which the 
Administration marked yesterday, we estimate that the ARRA has already 
saved or created 150,000 jobs.
    Of course, because only a very small part of the spending and tax 
relief called for in the Act has taken place, and because much of the 
economy's response to stimulus occurs with a lag, most of the benefits 
of the act are yet to come. Our estimates suggest that ARRA spending 
will save or create 3.5 million jobs by the end of next year.\24\
---------------------------------------------------------------------------
    \24\ Recovery Act, Recovery.gov, http://www.recovery.gov/
?q=content/act. For more details on the methodology for estimating job 
creation, see Christina Romer and Jared Bernstein, ``The Job Impact of 
the American Recovery and Reinvestment Plan,'' January 9, 2009, http://
otrans.3cdn.net/ee40602f9a7d8172b8_ozm6bt5oi.pdf.
---------------------------------------------------------------------------
    It is important to realize while the ARRA was a crucial first step, 
it is just a piece of our overall battle plan to deal with the economic 
crisis. A crucial lesson of economics is that it is often much more 
effective to apply a whole range of measures, rather than to focus 
exclusively on one cure. Trying to repair the economy by direct 
stimulus alone would inevitably require that we resort to low-value 
spending, necessitate enormous increases in the deficit, and leave us 
with an unbalanced economy. This is a central reason for the 
Administration's multi-faceted approach.
    2. The second key element of our comprehensive approach is 
financial stabilization and rescue. As I described, our current 
economic distress derives principally from problems in the financial 
sector. For this reason, we have initiated a number of programs 
designed to strengthen financial institutions and restart the flow of 
credit.
    One piece is the Consumer and Business Lending Initiative. This is 
a program designed to restart the securitized lending market, which 
accounts for about 40% of lending.\25\ The Treasury has partnered with 
the Federal Reserve to create the Term Asset-Backed Securities Loan 
Facility (or TALF). This program provides financing to private 
investors to help unfreeze markets for various types of credit, 
including auto, student, small business, and credit card loans. Just 
last month, this facility started operations and $9 billion of this 
securitized lending happened the first week, more than had happened in 
the previous four months. We are optimistic that this program will 
restart this crucial market. By doing so, it will make financial 
institutions able to increase their loans to consumers and businesses.
---------------------------------------------------------------------------
    \25\ Secretary Tim Geithner Opening Statement--Delivery Senate 
Banking Committee Hearing, February 10, 2009, http://www.treas.gov/
press/releases/tg02102009.htm.
---------------------------------------------------------------------------
    One important type of loan that will eventually be facilitated by 
the TALF are Small Business Administration (SBA) Loans. This is another 
market where secondary lending has virtually evaporated. Because 
conditions were so severe and because small businesses are so crucial 
to job creation, the Treasury announced a program to immediately buy up 
both current and future securitized SBA loans. This program is designed 
to get SBA loans flowing again quickly. Also, the ARRA provided for a 
temporary reduction in fees and a temporary increase in guarantees for 
SBA loans.
    Another recently announced component of the financial stabilization 
plan was the program to facilitate sales of legacy or toxic assets. 
Banks and other financial institutions have a large number of mortgage 
loans and mortgage-backed securities on their books. The value of these 
loans is hard to determine because the resale market has virtually 
disappeared. Furthermore, even if we knew the current value, the value 
of these assets is simply very uncertain. As a result, the presence of 
these assents on bank balance sheets makes banks hesitant to lend and 
makes private investors unwilling to put more capital into banks. 
Finally, because of the seizing up of markets for these assets, there 
is some evidence that their current prices may reflect temporary ``fire 
sale'' levels, not reasonable estimates of the assets' fundamental 
value.
    The Treasury is partnering with the FDIC, the Federal Reserve, and 
private investors to restart this market through the Public-Private 
Investment Program. In the case of the toxic real estate loans, the 
Treasury will form 50-50 partnerships with private investors and then 
receive loan guarantees from the FDIC for up to 85% of the purchase 
price. The loan guarantees will allow the partnership to receive 
favorable financing, and so should provide a moderate subsidy. This is 
exactly what is needed to counteract the market failure and get this 
market functioning again. The result should be slightly higher prices 
for the toxic assets, which will encourage banks to sell. Also, by 
creating a market, the government is providing a convenient mechanism 
by which regulators can encourage banks to clean up their balance 
sheets.
    A final component of the financial rescue plan is a careful 
evaluation of the health of the 19 largest banks in the country. The 
so-called ``stress test'' asks regulators to evaluate whether banks 
have enough capital to weather a more severe downturn than is currently 
anticipated--a process that is currently underway.\26\ If at the end of 
the evaluation, regulators decide banks need more capital to be safe 
and maintain confidence, they will encourage banks to raise private 
capital. The Treasury will be prepared to provide public capital if 
needed, through the Capital Assistance Program.
---------------------------------------------------------------------------
    \26\ Details of the ``stress test'' can be found at http://
www.treasury.gov/press/releases/reports/tg40_capwhitepaper.pdf.
---------------------------------------------------------------------------
    Both the Public-Private Investment Program and the Capital 
Assistance Program are aimed at the same goal--returning American banks 
to full health. Japan's experience in the 1990s shows the costs of 
skimping on bank rescue. Until banks are cleansed of highly uncertain 
assets and robustly capitalized they will be hesitant to lend, and 
lending is what we need them to do.
    Though the financial stabilization plan is still in its early 
stages, we are optimistic that it will play a critical role in the 
economy's recovery. By restarting lending, it should have beneficial 
effects on aggregate demand. Credit constrained borrowers should be 
able to spend again. This includes families that want to purchase their 
first home; consumers who need a new car or major appliance; and 
students who need to borrow to attend college. It also includes 
businesses that have had to curtail investment and production because 
they couldn't borrow to buy machinery or raw materials. All told, the 
spending that could be unleashed is surely very large. As Treasury 
Secretary Geithner is fond of saying, there is probably more stimulus 
in financial rescue than there is in stimulus.
    As with direct stimulus, it would be foolish to try to combat the 
recession solely by trying to fix the financial system. The shocks that 
have hit the system are so large that no matter what we do, financial 
recovery will take time. Thus, financial rescue is no substitute for 
immediate stimulus. Moreover, bringing about recovery solely through 
financial rescue would probably require that the government intervene 
in every nook and cranny of the financial system, which would be 
unwise, inefficient, and almost surely unhealthy in the long run.
    3. The third element of our comprehensive recovery plan is direct 
help to the housing market through our Homeowner Affordability and 
Stability Plan. The crisis began in the housing market, and defaults, 
foreclosures, and falling housing prices are contributing to the 
downward spiral of the economy. Thus, although the crisis has spread so 
far beyond the housing market that it cannot be solved by actions in 
that market alone, addressing housing has to be part of any solution.
    Our housing plan has several pieces. One is to work with the 
Federal Reserve to bring down mortgage rates. The government-sponsored 
enterprises (GSEs), Fannie Mae and Freddie Mac, currently finance about 
50% of all outstanding home mortgage loans.\27\ Even following the 
announcement of Federal government conservatorship of these entities in 
the summer, their borrowing costs remained well above Treasury bond 
rates.\28\ The Federal Reserve has instituted a program to purchase GSE 
debt as a way to bid down its interest rate. The Treasury has also 
announced a total funding commitment of $400 billion for the Preferred 
Stock Purchase Agreements, which serve as a backstop for Fannie Mae and 
Freddie Mac to ensure these GSEs are financially secure. These two 
actions helped to bring mortgage rates to historic lows.\29\
---------------------------------------------------------------------------
    \27\ GSE financing data are from the Federal Reserve Board Flow of 
Funds, Table L.218. Home Mortgages, http://www.federalreserve.gov/
releases/z1/Current/z1r-4.pdf [(GSE + Agency and GSE mortgage pools)/
total assets].
    \28\ Data on borrowing costs come from Bloomberg and are the 
spreads between Fannie Mae and Freddie Mac 2 and 10 year debts and 
appropriate Treasuries.
    \29\ Data on rates are from the Freddie Mac Weekly Primary Mortgage 
Market Survey, http://www.freddiemac.com/dlink/html/PMMS/display/
PMMSOutputYr.jsp.
---------------------------------------------------------------------------
    The lower mortgage rates have set off a wave of refinancing. 
Indeed, mortgage refinancing applications have jumped almost 80% since 
the housing program was announced in mid-February.\30\ Furthermore, the 
GSEs, in consultation with their regulator, the Federal Housing 
Financing Agency, and the Treasury, have modified their downpayment 
requirements so that even many homeowners who have seen the equity in 
their home fall because of home price declines, can still qualify for 
refinancing. This refinancing activity has the potential for important 
macroeconomic benefits. When a homeowner qualifies for a lower interest 
rate, their monthly payments fall. It is as if they just got a tax cut. 
They have more money to spend on other goods (and to help recover their 
savings). Mark Zandi, a noted forecaster, estimates that the 
Administration's housing plan is equivalent to at least a $30 billion 
tax cut.\31\
---------------------------------------------------------------------------
    \30\ Refinancing application data come from the Mortgage Bankers 
Association Weekly Applications Survey, http://www.mbaa.org/
ResearchandForecasts/ProductsandSurveys/WeeklyApplicationSurvey 
(subscription only). [For internal use, data is on Haver: 
MBAMR@SURVEYW.]
    \31\ Mark M. Zandi, ``Assessing Obama's Housing Plan,'' Moody's 
economy.com, March 10, 2009, https://www.economy.com/home/login/
ds_proLogin_4.asp?script_name=/dismal/pro/article.asp&cid=113267 
(subscription only).
---------------------------------------------------------------------------
    Another key piece of our housing plan aims to reduce foreclosures. 
Because of the fall in house prices and increasing weakness in the 
labor market, as many as six million homeowners are in danger of losing 
their homes.\32\ The Treasury has announced a program that encourages 
banks and loan servicers to modify mortgages so that payments are more 
manageable and homeowners are able to remain in their homes. This 
program is a win for both the banks and the troubled homeowners. By 
covering some of the costs of the lower payments and by providing a 
standard modification framework, the Government is encouraging 
modifications that prevent both the economic and social losses inherent 
in foreclosure. And, by preventing millions of homes from being dumped 
on the market and sold at huge discounts, as foreclosure sales 
inevitably induce, the program should help to stabilize house prices. 
Since declining housing prices were at the center of the crisis, this 
would surely be a very desirable development.
---------------------------------------------------------------------------
    \32\ The number of families facing foreclosure is noted in the 
Homeowner Affordability and Stability Plan Fact Sheet, http://
www.treasury.gov/initiatives/eesa/homeowner-affordability-plan/
FactSheet.pdf.
---------------------------------------------------------------------------
    4. The fourth and final element of our comprehensive recovery plan 
involves starting to address our long-run economic problems. Even in 
the midst of an economic crisis, we are trying to take actions that 
will make the economy stronger in the long run. This focus on the long 
run was evident in the American Recovery and Reinvestment Act--as its 
very name suggests. Though any spending would be helpful in creating 
jobs, as I described earlier, we focused on spending that increases 
productivity in the future.
    As you are well aware, the budget provides for continuing 
investments in education and energy. For example, it includes more 
funding for the Pell grant program, so that low-income students can 
achieve a college education. It funds crucial investments in 
alternative energy and research and development, as well as a proposal 
for a cap and trade system to encourage energy independence and limit 
greenhouse gas emissions. By educating our workforce and encouraging 
the development of cleaner, more efficient energy, we hope to raise 
long-run growth and living standards.
    In addition, we are committed to fundamentally reforming health 
care in the United States. Health care reform is central to our long-
run fiscal prospects, because the rising costs of health care are the 
single major determinant of future budget deficits. More fundamentally, 
our broken health care system is depressing Americans' standards of 
living and leaving tens of millions of us without health insurance.\33\ 
The Administration is committed to moving ahead with health care 
reform--and is taking concrete steps to do so.
---------------------------------------------------------------------------
    \33\ Data on health insurance coverage are from the National 
Coalition on Health Care, ``Health Insurance Coverage,'' http://
www.nchc.org/facts/coverage.shtml--nearly 46 million Americans were 
without health insurance in 2007.
---------------------------------------------------------------------------
    The budget also calls for making significant improvements in our 
long-run fiscal situation. We inherited a budget deficit that was huge 
and expected to grow substantially over time. This trajectory is 
unsustainable and could have devastating consequences for financial 
stability and standards of living. We have already moved to adopt 
honest budgeting that acknowledges our long-run problems; held a fiscal 
summit and a health care summit; and proposed a budget that identifies 
important savings. The budget resolution working its way through 
Congress reduces the deficit we inherited in half over the next four 
years. And, we are committed to working with Congress to reduce the 
deficit event further.
    Finally, we have also begun to work on fixing our financial 
regulatory system. The specifics of how best to regulate financial 
institutions are a difficult and complex issue, and detailed proposals 
will require careful study and hard work. But, it is clear that the 
system that allowed our current crisis to occur cannot be permitted to 
continue. It is also clear, as the President said long before the 
downturn had become a full-fledged financial crisis, that any 
institution whose actions have the potential to affect the stability of 
the financial system as a whole, and that is likely to receive 
government support in a crisis, must be subject to oversight and 
regulation. We also know that we need a resolution mechanism other than 
traditional bankruptcy when a large financial institution becomes 
insolvent, so that we are no longer caught between the impossible 
choice of a disruptive bankruptcy, as occurred with Lehman Brothers, 
and the propping up of a failing institution without adequate power 
over it, as has occurred with AIG. And, the system where institutions 
get to choose who they are regulated by, or even choose not to be 
regulated at all through something as simple as renaming a default 
insurance contract a credit default swap, must end.
    Before I finish my discussion of policies, I want to say a little 
about interaction effects. A key feature of our multi-faceted program 
to restore our economic health is that the different elements reinforce 
one another, with the result that the whole is greater than the sum of 
the parts. Let me give you just a few examples. One key interaction is 
that stimulus promotes recovery in financial and housing markets. When 
people are employed and buying things, loan defaults fall and asset 
prices are likely to rise. A second is that restoring the health of the 
financial system will ease the burden on stimulus. Repairing our 
financial system will allow the natural forces of consumer- and 
business-led recovery to kick in, and so allow the economy to continue 
growing as the direct stimulus winds down. A third is that the fiscal 
stimulus will help the economy not only in the short run, but also in 
the long run. There would be nothing worse for our long-run fiscal 
health than an extended period of economic weakness and stagnation. 
And, by starting critical investments in areas like infrastructure, 
green energy, and medical information technology, the government 
investments in the package will make the economy more productive in the 
long run.
    A final key interaction is that starting to tackle our long-run 
problems now will make the short-run stimulus more effective. 
Households and firms, understandably, have lost confidence in financial 
markets, and in some cases, in the economy. If they saw a large fiscal 
package unaccompanied by any commitment to addressing our fiscal 
challenges, their confidence might be further shaken, and the benefits 
of the package muted as a result. If they saw a financial rescue 
unaccompanied by a commitment to long-term financial reform, they would 
remain reluctant to participate in financial markets. This is one 
reason we are addressing our short-run and long-run problems together.

                          THE ECONOMIC OUTLOOK

    Where does all of this leave us? I am sorry to say that in the 
short run, we are still in for more bad news. The economy we inherited 
was so weak, and deteriorating so rapidly, that even the aggressive 
actions we have taken could not turn it around immediately. People 
often compare the economy to a supertanker. Its momentum is so great 
that it responds to the forces pushing on it only slowly and gradually.
    Just yesterday, the advance first quarter GDP numbers were 
released. They showed that overall output continued to decline rapidly 
in the first three months of this year. We, like most private 
forecasters, expect another decline in the second quarter. And we 
expect to see continued declines in employment and rises in 
unemployment for the next several months. But, there is every reason to 
think that the policies we have put into place over the last three 
months, together with the natural strength and resiliency of our 
workers and businesses, will spur recovery. Already, we are beginning 
to see ``glimmers of hope'' that the economy is stabilizing. The 
housing sector has shown some tentative signs of finding a bottom. 
Housing starts increased slightly from January to March and builder 
confidence in April rose five points from March.\34\ The fall in 
housing prices is abating.\35\ As of Tuesday, the S&P 500 had risen 26% 
from its low point on March 9th. And, perhaps most importantly, 
consumer confidence has increased, indicating that the American people 
are increasingly optimistic about our recovery. Both the Conference 
Board index and the University of Michigan index have risen for the 
past two months, with the Conference Board measure showing a 
particularly large rise in April.\36\
---------------------------------------------------------------------------
    \34\ The housing start data are from the Bureau of the Census, 
http://www.census.gov/const/newresconst.pdf. The builder confidence 
measure is the National Association of Home Builders/Wells Fargo Index 
of Builder Confidence, http://www.nahb.org/
news_details.aspx?sectionID=134&newsID=9045.
    \35\ See, for example, the behavior of the Federal Housing Finance 
Agency monthly House Price Index, http://www.fhfa.gov/webfiles/2119/
1Q09m02F.pdf.
    \36\ The Conference Board Index is available at http://
www.conference-board.org/economics/ConsumerConfidence.cfm. The Reuters/
University of Michigan Index of Consumer Sentiment is available at 
https://customers.reuters.com/community/university/default.aspx.
---------------------------------------------------------------------------
    We currently expect the pace of the overall decline in the economy 
to moderate sharply over the next several months. This is consistent 
with the Blue Chip consensus forecast, which shows a rate of decline of 
GDP of 2.1% in the second quarter.\37\ We expect the economy to level 
out in the second half of the year and then begin to recover. Whether 
the recovery begins later this year, as most private forecasters 
predict, or takes a bit longer is hard to know. Because labor market 
indicators tend to lag changes in output, most likely we will see 
positive GDP growth before we see increases in employment and declines 
in the unemployment rate.
---------------------------------------------------------------------------
    \37\ The Blue Chip Consensus Forecast is based on a number of 
private forecasts. It is a proprietary forecast and is published in the 
document Blue Chip Economic Indicators. The numbers reported are from 
the April 10, 2009 issue.
---------------------------------------------------------------------------
    The President's economic team is keeping a watchful eye on all 
aspects of the economic situation, and we will not rest until we are 
assured of a long-term and lasting recovery with robust employment 
growth. Because the downturn has been so long and so severe, the 
recovery will almost surely take a long time. But, as I have stressed, 
our intent, and our expectation, is for the economy not just to 
recover, but to emerge even stronger and more resilient than before.
    Thank you. I would be happy to take any questions you might have.

                               __________
       Prepared Statement of Kevin Brady, Senior House Republican

    It is a pleasure to join in welcoming Chairwoman Romer before the 
Joint Economic Committee this morning.
    The bursting of the housing and credit bubbles has wrecked much of 
the financial sector, devastated the savings and investments of many 
American families, and left the economy mired in a deep recession with 
rising unemployment. While there is plenty of blame to go around, 
government policy played a key role in the crisis by promoting weaker 
lending standards, excessive mortgage borrowing, and keeping interest 
rates artificially low for too long.
    The Administration's confidence in its policy solutions to the 
crisis are reflected in the economic assumptions that form a key 
component of the President's budget submission. The Administration 
projects that real GDP will decline 1.2 percent in 2009, compared to 
the 2.6 percent decline forecast by the Blue Chip Consensus. The 
Administration assumes that the unemployment rate will be 8.1 percent 
in 2009, lower than the 8.5 percent rate already reached last month. 
The Administration's economic assumptions are unrealistic, and have 
reduced the projected deficits and debt in its budget submission.
    The Economist called the assumptions in the Administration's budget 
``deeply flawed'' in an article entitled, ``Wishful, and dangerous, 
thinking.'' Their effect is to understate the true cost of the 
Administration's expansive new spending proposals. The Congress passed 
the President's budget yesterday, but resorted to accounting gimmicks 
instead of the Administration's economic assumptions to keep the costs 
down. As the Washington Post observed of this approach, ``Congress 
deals a blow to `honest budgeting.' '' The end result is the same 
dangerous level of excessive deficit spending and debt as the 
Administration proposed.
    One of the accounting tricks in the budget resolution is to ignore 
the true costs of the financial crisis. According to the IMF, U.S. 
losses on toxic assets are now estimated at $2.7 trillion. There is a 
broad consensus among economists that an effective bank clean-up plan 
is necessary for a sustained economic recovery. The Treasury has 
proposed a financial rescue plan, but it has serious weaknesses.
    The public-private investment funds proposed to purchase toxic 
loans would be structured so that private investors contributing about 
7 percent of the total investment would receive half of the profits, 
but 93 percent of the losses would fall on the taxpayers. Nobel 
Laureate Joseph Stiglitz has called the proposal, ``robbery of the 
taxpayers.''
    Even more disturbing was the testimony last week of Special 
Inspector General Neil Barofsky before us on the problems with the 
Treasury's proposal. According to his quarterly report, ``Many aspects 
of PPIP could make it inherently vulnerable to fraud, waste, and 
abuse.'' The vulnerabilities identified in his report include the huge 
size of the program along with conflicts of interest, collusion, and 
money laundering.
    Also troubling was Mr. Barofsky's revelation that the Treasury 
Department has indicated that it would not adopt his report's 
recommendations that ``all TARP recipients account for the use of TARP 
funds; set up internal controls to comply with such accounting;'' and 
certify compliance. Why won't the Administration accept basic 
safeguards for the trillions of dollars of taxpayer money?
    Mr. Barofsky's report estimated that up to $3 trillion of taxpayer 
money is now at risk in 12 different TARP programs. These programs 
include wide-ranging government involvement in banking, insurance, 
automotive, housing and other industries. There are many dangerous 
aspects of this level of government intervention, but the least we can 
do is protect the taxpayers from fraud. Furthermore, at the earliest 
feasible time, the firms owned or controlled by the government should 
be privatized.
    In conclusion, the Administration should immediately adopt the 
safeguards recommended by Mr. Barofsky. The Administration should also 
develop a plan to sharply reduce the government's involvement in the 
economy to normal levels once the economy recovers.
  

                                  
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