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US went close to depression, says Obama advis -

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US went close to depression, says Obama adviser

Peter Ryan reported this story on Tuesday, July 21, 2009 12:14:00

PETER CAVE: Barack Obama's top economic adviser has signalled the worst of the recession might be
over, declaring the world's biggest economy is no longer in freefall.

The director of the National Economic Council Larry Summers, says the US has come a long way since
the start of the year when there were fears the economy might spiral into a depression.

And while the pace of any recovery remains in doubt, some startling figures are emerging about the
multi-trillion dollar bailout bill facing future US taxpayers.

Here's our business editor Peter Ryan.

PETER RYAN: Larry Summers is President Obama's chief economics adviser and director of the White
House's National Economic Council.

The one-time Harvard University economics professor was also treasury secretary in Bill Clinton's
administration during the boom years, when a crisis borne from subprime mortgages was unthinkable.

Larry Summers admits the US went to the brink of catastrophe but has now come back from an abyss.

LARRY SUMMERS: You had an economy in freefall at the beginning of this year. You had all kinds of
people talking about the Great Depression and you could see why, given how fast jobs were being
lost, output was going down, given where markets were. You no longer have that sense of collapse in
the economy. That's really a tribute to the program that the President put in place.

PETER RYAN: But Larry Summers says the pace of any recovery in the US is very much in doubt and
that the flow of credit and confidence levels will be key.

He told Bloomberg the recession could end later this year, although what follows could be very slow
growth in the private sector.

LARRY SUMMERS: These problems were not made in a week or a month or a year and they're not going to
be solved in a year. The economy has declined further; on some measures the recession has lasted
longer than any time since the Great Depression. So the task of resuming growth and restoring
normality in economic conditions is going to be a long one.

PETER RYAN: Larry Summers also reinforced Barack Obama's plans for greater regulation of the US
banking system.

LARRY SUMMERS: We need to control what we can and that's why laying a foundation for a different
kind of expansion, an expansion that's based not on financial bubbles, not on inequality but rather
on fundamental investments.

PETER RYAN: That could include greater spending on roads and highways, new ways of producing energy
and Barack Obama's plans to overhaul of the US healthcare system.

But big challenges remain. While a private index on America's economic outlook bounced for the
third straight month in June, it's off a very low base and most economists still expect US
unemployment to surpass 10 per cent later this year, with more than five million jobs gone since
December 2007.

Meanwhile the ultimate cost of the Troubled Asset Relief Program, or the TARP as it's known, is a
much bigger problem according to a report by its special inspector Neil Barofsky.

NEIL BAROFSKY (voiceover): TARP has evolved into a program of unprecedented scope, scale and
complexity.

PETER RYAN: Neil Barofsky will tell a special committee tomorrow that US taxpayers could be on the
hook for as much as $US23.7 trillion, through economic stimulus payments and bailouts to financial
companies. The US Treasury says only $2 trillion has been spent to date and the estimates are
hypothetical.

At the same time, many banking executives who survived last year's meltdown - courtesy of
government assistance - are back in the money.

Economist Roger Bootle says that sends a confusing and distasteful message.

ROGER BOOTLE: Chief executives' and senior executives' pay is simply not set in the market at all.
It's very difficult to know what the contribution of these people is. They chair and run
organisations, they're administrative but one doesn't know if they weren't there at all whether
profits would be lower or perhaps in some cases even higher. And what happens is these people's pay
is set in a corporate club, frankly, which bears no relationship to the market process at all.

PETER RYAN: One bank in the spotlight is Goldman Sachs, which has now paid back its bailout money.
The average banker there is now on an annual salary of $US600,000.

Roger Bootle again.

ROGER BOOTLE: I think the signs are that nothing whatsoever has changed and of course the
competitive position of Goldman Sachs has actually been strengthened by what's happened because
other leading investment banks have fallen by the wayside. So it's understandable that they may
well be making more money. And that's a pretty good thing, that's actually contributing to the
recovery.

PETER RYAN: But an increasingly hostile US Congress wants some certainty on the cost of the bailout
and how the White House intends to wind back the assistance to the financial system, in particular
to Wall Street.

The Federal Reserve chairman Ben Bernanke will be under pressure to detail an exit strategy when he
faces a congressional committee tomorrow.

PETER CAVE: Our business editor Peter Ryan.