I am glad to be here. This morning I want to describe our understanding of =
the root of our current economic crisis, talk about the rationale for the A=
dministration's recovery strategy, and connect our longer-term economic str=
ategy to the central objective of sustained and healthy expansion.

Economic downturns historically are of two types. Most of those in post-Wor=
ld War II-America have been a by-product of the Federal Reserve's efforts t=
o control rising inflation. But an alternative source of recession comes fr=
om the spontaneous correction of financial excesses: the bursting of bubble=
s, de-leveraging in the financial sector, declining asset values, reduced d=
emand, and reduced employment.

Unfortunately, our current situation reflects this latter, rarer kind of re=
cession. On a global basis, $50 trillion dollars in global wealth has been =
erased over the last 18 months. This includes $7 trillion dollars in US sto=
ck market wealth which has vanished, and $6 trillion dollars in housing wea=
lth that has been destroyed. Inevitably, this has led to declining demand, =
with GDP and employment now shrinking at among the most rapid rates since t=
he second World War. 4.4 million jobs have already been lost and the unempl=
oyment rate now exceeds 8 percent.

Our single most important priority is bringing about economic recovery and =
ensuring that the next economic expansion, unlike it's predecessors, is fun=
damentally sound and not driven by financial excess.

This is essential. Without robust and sustained economic expansion, we will=
 not achieve any other national goal. We will not be able to project streng=
th globally or reduce poverty locally. We will not be able to expand access=
 to higher education or affordable health care. We will not be able to rais=
e incomes for middle class families or create opportunities for new small b=
usinesses to thrive.

And so today, I will explain the rationale behind the President's recovery =
program and our strategy for long-term economic growth. Our problems were n=
ot made in a day, or a month or a year, and they will not be solved quickly=
. But there is one enduring lesson in the history of financial crises: they=
 all end.

I am confident that with the strong and sound policies the President has pu=
t forward and the passage of time, we will restore economic growth and rega=
in financial stability, and find opportunity in this moment of crisis to as=
sure that our future prosperity rests on a sound and sustainable foundation=
.

First, I'd like to describe how best to think about this crisis.

One of the most important lessons in any introductory economics course is t=
hat markets are self-stabilizing.

When there is an excess supply of wheat, its price falls. Farmers grow less=
 and others consume more. The market equilibrates.

When the economy slows, interest rates fall. When interest rates fall, more=
 people take advantage of credit, the economy speeds up, and the market equ=
ilibrates.

This is much of what Adam Smith had in mind when he talked about the "invis=
ible hand."

However, it was a central insight of Keynes' General Theory that two or thr=
ee times each century, the self-equilibrating properties of markets break d=
own as stabilizing mechanisms are overwhelmed by vicious cycles. And the ri=
ght economic metaphor becomes an avalanche rather than a thermostat. That i=
s what we are experiencing right now.

Declining asset prices lead to margin calls and de-leveraging, which leads =
to further declines in prices.

Lower asset prices means banks hold less capital. Less capital means less l=
ending. Less lending means lower asset prices.

Falling home prices lead to foreclosures, which lead home prices to fall ev=
en further.

A weakened financial system leads to less borrowing and spending which lead=
s to a weakened economy, which leads to a weakened financial system.

Lower incomes lead to less spending, which leads to less employment, which =
leads to lower incomes.

An abundance of greed and an absence of fear on Wall Street led some to mak=
e purchases =96 not based on the real value of assets, but on the faith tha=
t there would be another who would pay more for those assets. At the same t=
ime, the government turned a blind eye to these practices and their potenti=
al consequences for the economy as a whole. This is how a bubble is born. A=
nd in these moments, greed begets greed. The bubble grows.

Eventually, however, this process stops =96 and reverses. Prices fall. Peop=
le sell. Instead of an expectation of new buyers, there is an expectation o=
f new sellers. Greed gives way to fear. And this fear begets fear.

This is the paradox at the heart of the financial crisis. In the past few y=
ears, we've seen too much greed and too little fear; too much spending and =
not enough saving; too much borrowing and not enough worrying. Today, howev=
er, our problem is exactly the opposite.

It is this transition from an excess of greed to an excess of fear that Pre=
sident Roosevelt had in mind when he famously observed that the only thing =
we had to fear was fear itself. It is this transition that has happened in =
the United States today.

What is the task of policy in such an environment?

While greed is no virtue, entrepreneurship and the search for opportunity i=
s what we need today. We need a program that breaks these vicious cycles. W=
e need to instill the trust that allows opportunity to overcome fear and en=
ables families and businesses to again imagine a brighter future. And we ne=
ed to create this confidence without allowing it to lead to unstable compla=
cency.

While the economy is falling far short today, perhaps a trillion dollars or=
 more short, we should never lose sight of its potential. We have the most =
productive workers in the world, the greatest universities and capacity for=
 innovation, an incredible amount of resilience, entrepreneurship, and flex=
ibility, and the most diverse and creative population of any major economy.

One striking statistic suggests the magnitude of the opportunity that is be=
fore us in restoring our economy to its potential. Earlier this week, the D=
ow Jones Industrial Average, adjusting for inflation according to the stand=
ard Consumer Price Index, was at the same level as it was in 1966, when Bro=
okings scholars Charlie Schultze and Arthur Okun were helping to preside ov=
er the American economy.

While there could be many ways to question this calculation, that the marke=
t would be at essentially the same real level as it was in 1966 when there =
were no PCs, no internet, no flexible manufacturing, no software industry, =
and when our workforce was half and our net capital stock was a third of wh=
at it is today, may be regarded by some as the sale of the century. For pol=
icy-makers, it suggests the magnitude of the gains from restoring sustained=
 economic growth.

Producing recovery and harnessing these opportunities, however, will depend=
 upon the choices we make now. This is what the President's program sets ou=
t to achieve.

Towards this end, the President is committed to an approach that moves aggr=
essively on jobs, credit and housing, thereby attacking the vicious cycles =
I described earlier at each of their key nodes. In this effort, he has insi=
sted that we all recognize that the risks of over-reaction are dwarfed by t=
he risks of inaction.

The first component of the President's program is direct support for jobs a=
nd income to engage the multiplier process in favor of economic expansion. =
Increases in income lead to financial repair which supports further increas=
es in income. Rising employment will lead to rising spending, which leads t=
o further increases in income and employment.

The Recovery and Reinvestment Act is the largest peacetime economic expansi=
on program in the country's history. It will inject nearly $800 billion int=
o the economy, =BE of it within the next 18 months. The Council of Economic=
 Advisors' estimates suggest that the Recovery and Reinvestment Act will sa=
ve or create 3.5 million jobs. It will at the same time do some of the work=
 that the nation has needed done for a long time=97doubling renewable energ=
y capacity in the next 3 years, supporting middle class incomes, modernizin=
g ten thousand schools, and making the largest investment in the spine of o=
ur national economy =96 the nation's infrastructure =96 since Dwight Eisenh=
ower's investment 50 years ago.

Already, its impact is being felt by cops and teachers who would have been =
laid off but whose jobs have been saved=97it may retain14,000 teachers in N=
ew York alone. It will, for most American workers, be felt in the coming we=
eks as withholding schedules are adjusted, in continuing unemployment insur=
ance benefits and health benefits for hundreds-of-thousands of workers who =
already would have done without, and in contracting already underway with r=
espect to tens-of-billions of dollars of infrastructure projects across the=
 country.

It is surely too early to gauge the broader economic impact of the Presiden=
t's program. But it is modestly encouraging that since it began to take sha=
pe, consumer spending in the US, which was collapsing during the holiday se=
ason, appears, according to a number of indicators, to have stabilized.

The second major portion of the President's strategy is the financial stabi=
lity plan. It is directed at addressing the vicious cycles associated with =
de-leveraging and credit contraction. A strong flow of credit is necessary =
because factories need it to buy equipment, stores need it to stock their s=
helves, students need it to attend college, consumers need it to buy cars, =
and businesses need it to meet their payrolls.

The approach rests on two pillars: The first is a trillion dollars for fina=
ncing or purchasing mortgages, student small business loans, and other fina=
ncial instruments through the TALF (or what is now called the Consumer Busi=
ness Lending Initiative), the GSEs, and public-private investment facilitie=
s that Secretary Geithner will be detailing in the weeks ahead.

Reactivating the capital markets is essential to realistic asset valuation,=
 to restarting nonbank lending, and to enabling banks to divest toxic asset=
s when they judge it appropriate.

The second pillar of the program is assuring that our banking system is wel=
l capitalized and in a position to lend on a substantial scale. The stress =
tests now underway will enable a realistic assessment of the position of ea=
ch different institution and appropriate responses in each case to assure t=
heir ability to meet their commitments and lend on a substantial scale. And=
 as the President said in his joint address to Congress, "When we learn tha=
t a major bank has serious problems, we will hold accountable those respons=
ible, force the necessary adjustments, provide the support to clean up thei=
r balance sheets, and assure the continuity of a strong, viable institution=
 that can serve our people and our economy."

As a result of government interventions in the financial markets, key credi=
t spreads are already substantially narrower than they were last fall. Ther=
e are some indications that the expectations of future actions have been a =
positive in reducing credit costs in a number of key areas. It is our hope =
and expectation that further support for capital markets, transparency with=
 respect to the condition of banks, and infusion of capital into the bankin=
g system, will create virtuous circles in which stronger markets beget stro=
nger financial institutions, which beget stronger markets, leading ultimate=
ly to financial and economic recovery.

The third component of the President's recovery strategy is addressing the =
housing market. The vicious cycle of rising foreclosures leading to declini=
ng home prices, leading to rising foreclosures =96 must be contained. This =
problem is at the heart of our economic crisis.

Through direct interventions, using the GSE's to bring down mortgage rates =
and make possible refinancings for credit-worthy borrowers who have lost th=
eir home equity as house prices decline, and through setting standards and =
providing significant financial subsidies for measures directed at payment =
relief to prevent foreclosures, we are achieving several objectives.

Housing wealth and its contribution to expenditures is being maintained. An=
d critically lower mortgage rates mean more income for consumers, and funct=
ion like tax cuts in support of consumer spending. Depending on market cond=
itions the administration's program may save American households more than =
150 billion dollars over the next 5 years.

Taken together, these steps to support incomes, increase the flow of credit=
, and normalize housing market conditions address each of the vicious cycle=
s that is leading to decline.

With the passage of time, it will permit the re-engagement of the normal pr=
ocesses of economic growth: rising incomes and employment, greater credit f=
lows, increased spending, a stronger US economy and a stronger global econo=
my. They will reinforce crucial dynamics that will also operate to promote =
recovery.

For example, about 14 million new car sales are necessary for replacement a=
nd to accommodate rising population growth. Yet car sales are now running a=
t an annual rate of about 9 million. New household formation requires somet=
hing like 1.7 million new housing units a year and housing starts are now r=
unning about 400,000 a year. Once the inventory is worked off, investment w=
ill increase. Historical experience suggests that rapid inventory decline s=
uch as we have observed in recent months is followed by increased productio=
n to rebuild inventories.

Of fundamental importance is ensuring that we do not exchange a painful rec=
ession for another unsustainable expansion. That would not only be irrespon=
sible =96 it would be counterproductive. We have seen what happens when we =
pursue policies that produce short-term, instead of durable and sustainable=
 growth.

We have seen housing prices reach unsustainably high levels and credit spre=
ads reach unsustainably low levels in the middle of this decade. And we saw=
 bubbles in technology in the late 1990s.

Bubble driven economic growth is problematic because of disruption and disl=
ocation =96 affecting those who took part in the bubble's excesses and thos=
e who did not. And, it is not entirely healthy even while it lasts. Between=
 2000 and 2007 =96 a period of solid aggregate economic growth =96 the typi=
cal working-age household saw their income decline by nearly $2000. The dec=
line in middle-class incomes even as the incomes of the top 1% skyrocketed =
has a number of causes, but one of them is surely rising asset prices and t=
he fact that financial sector profits exploded to the point to where they r=
epresented 40% of all corporate profits in 2006.

Confidence today will be enhanced if we put measures in place that assure t=
hat the coming expansion will be more sustainable and fair in the distribut=
ion of benefits than its predecessor. That is why the President has priorit=
ies that go beyond the immediate goal of containing the downturn and promot=
ing recovery.

An overhaul of our financial regulatory system is one such priority. In lit=
tle more than two decades, we've witnessed the stock market crash of 1987, =
the Savings and Loan scandals, the decline of the real estate market, the r=
apid decline of Asian markets, the collapse of the NASDAQ telecom bubble, E=
nron, Long Term Capital Management, and today's crisis. This is roughly one=
 crisis every 2.5 years. We can and must do better.

There is room for debate about how regulation should be enhanced, but not a=
bout whether we can stay with the status quo. Treasury Secretary Geithner w=
ill be laying out the Administration's approach in some detail in the comin=
g weeks and the President is eager to take this issue up with his fellow le=
aders at the April G-20 meeting. While the discussion can get pretty techni=
cal quickly, some things should be clear:

Regulatory agencies should never be placed in competition for the privilege=
 of regulating particular financial institutions.

Globally, the United States must lead a leveling-up of regulatory standards=
, not as has happened all too often in the recent past, trying to win a rac=
e to the bottom.

No substantially interconnected institution or market on which the system d=
epends should be free from rigorous public scrutiny.

Required levels of capital and liquidity must be set with a view toward pro=
tecting the system, even in very difficult times.

And there must be far more vigorous and serious efforts to discourage impro=
per risk taking through transparency and accountability for errors.

An additional requirement for financial stability is that the government's =
own finances be stable. When I left Washington eight years ago, people were=
 debating what to do when there was no more federal debt. That is hardly ou=
r problem today. I hope that all of those who participate in the debate ove=
r this year's budget, whether they agree or disagree with President Obama's=
 priorities, will share his commitment to truthful and realistic budgeting =
and fiscal sustainability to ensure that after recovery, the ratio of the n=
ation's debt to its income stabilizes.

If growth in the coming years is not to be driven by asset price inflation-=
induced consumption, other engines of growth must be identified. These form=
s of growth should be sustainable and shared by the majority of American ho=
useholds.

Stronger exports are one sound foundation for sustainable expansion. That i=
s why along with strengthening financial regulation, the President will be =
working on the global growth strategy at the G20. Priorities will include s=
purring demand around the world and assuring the adequacy of funding for em=
erging markets.

These are issues both for global recovery - at a time when 2009 is likely t=
o be the first year of negative global growth since the Second World War - =
and for a healthy, less debt-dependent US expansion.

But moving away from foreign debt-financed growth is only one component of =
ensuring a healthy expansion. An additional component is addressing our hea=
lthcare system. It is no accident that the period of the most rapidly risin=
g wages for middle income families was the 1990s when healthcare cost infla=
tion was relatively well controlled. Our ability to produce competitively i=
n the United States will be enhanced if we contain healthcare costs. I have=
 heard it said that GM's largest supplier is not a parts company or a tire =
company, but Blue Cross Blue Shield.

Containing healthcare costs help keep the economy sustainable and so does i=
mproving quality and access. A study I helped sponsor while at Harvard demo=
nstrated that less than 1 in 4 Americans with hypertension had it under con=
trol. This means huge costs for treating strokes down the road as well as c=
hildren who will never know their grandparents. By investing in healthcare =
now, we can make our economy, as well as our people, healthier. We will als=
o increase confidence in the ultimate stability of the nation's finances.

An equally important engine of recovery can be investment in reducing our e=
nergy vulnerability and our contribution to climate change. That is why the=
 Recovery and Reinvestment Act provided for doubling renewable energy and w=
eatherizing 75 percent of federal buildings. It is also why the President's=
 budget points toward strong action to implement a market-based cap-and-tra=
de system, after the economy recovers, beginning in 2012.

Let's be realistic. Sooner or later we will have to reduce our dependence o=
n foreign energy and contain our carbon emissions. As Federal Reserve Chair=
man Ben Bernanke's doctoral thesis demonstrated 30 years ago, unresolved un=
certainty can be a major inhibitor of investment. If energy prices will tre=
nd higher, you invest one way; if energy prices will be lower, you invest a=
 different way. But if you don't know what prices will do, often you do not=
 invest at all. That is why we must move forward as rapidly as possible to =
reduce uncertainty and carefully create a new cap-and-trade regime.

There is another benefit as well. As many enlightened business leaders have=
 recognized, the confident expectation that pricing policy will discourage =
carbon use in the future will spur a whole range of green investments in th=
e present, when our economy can benefit from all the investment it can get.=
 And in the long run, we believe this will create millions of new jobs. And=
 the evidence is clear: we can choose to lead these industries, with all th=
e commensurate economic and political and environmental benefits, or we can=
 choose to lose out on these jobs and these opportunities.

Finally, while America's education system may not be directly implicated in=
 the current economic crisis, it is surely the case that improving it is es=
sential to the long-run growth of the economy and to ensuring that this gro=
wth is shared, lifting up more families who get the opportunities afforded =
by a better education and expanded access to college.

I've spoken in the language of economists and economic policy =96 budgets a=
nd prices, capitalization and interest rates. That is because I believe the=
re is no substitute for careful analysis in setting economic policy. But as=
 we debate these abstractions, we must always keep in mind that our economi=
c policies affect real lives =96 and economic problems cause real pain.

The decisions we make will determine whether children will look to their pa=
rents with pride when they come home from work =96 or fear that their home =
will be lost. Whether families will experience the prosperity this nation i=
s capable of producing, or the disruption and dislocation that too many hav=
e found instead.

President Obama inherited an economy in crisis. This is not a crisis we sou=
ght =96 nor is it one we created. But it is one, under the President's lead=
ership, that we have answered. The Obama Administration is embarking on wha=
t I believe is the boldest economic program to promote recovery and expansi=
on in two generations. No one can know just when its positive effects will =
be fully felt. No one can predict when this crisis will be resolved. But in=
 resolution, I am confident there is enormous opportunity for both American=
s and for the United States of America. We can and we will emerge more pros=
perous, stronger, wiser, and better prepared for the future.