Treasury Secretary Timothy Geithner said Thursday the economy has regained enough strength to allow a shift in the government's strategy from rescue to preparing for future growth.

Appearing before the Congressional Oversight Panel for the $700-billion Troubled Asset Relief Program, Geithner said the economy was in far better shape now than a year ago when it was "on the verge of collapse," though it still had problems.

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"As we enter this new phase, we must begin winding down some of the extraordinary support we put in place for the financial system," Geithner said.

He said banks that received capital injections in the form of taxpayer-provided funds have repaid more than $70 billion, reducing the government's total investment to $180 billion.

"We now estimate that banks will repay another $50 billion over the next 12 to 18 months," he added.

Another senior Treasury official told reporters earlier that Treasury will allow its money market mutual fund guarantee program to expire on Sept. 18.

The backstop program was created a year ago to prevent panic withdrawals of $3.4 trillion in savings after a key fund "broke the buck" when its net asset value per share fell below $1.

The program took in $1.2 billion in fees from funds, but has not had any payouts.

Geithner boasted that the economy now was "back from the brink" of a free fall that it was in when the Obama administration took office in January, though he cautioned recovery will be gradual at best.

Still, he cited several signs of progress, including the fact that the government no longer feels it needs a contingency in the budget for another $750 billion in stabilization funds.

"Today, we believe that money is unlikely to be necessary and we have removed it from budget provisions, lowering this year's deficit," Geithner said.

Treasury does intend to press ahead with so-called public-private investment funds to buy toxic assets.

The senior Treasury official predicted that the first purchases should occur by early October.

The official said there was a "great deal of interest" in purchasing toxic assets among investors and money managers running the funds, but the appetite among banks to sell their toxic assets has been less than anticipated.


"We thought it would be necessary for banks to sell some of these assets in order to attract private capital.

It turned out that they were able to raise the capital without selling the assets," the official said.

Geithner said that by providing support for U.S. automakers, the government avoided substantial job losses and that a specially assembled Auto Task Force had avoided intervening in day-to-day decisions by management of General Motors Corp and Chrysler Corp.

"Such intervention could seriously undermine the companies' long-term viability and, consequently, their ability to repay the taxpayer for its investment," Geithner said.

He cited a litany of problems still facing the economy, including "unacceptably high" unemployment, a shaky mortgage market outside those covered by mortgage finance sources Fannie Mae and Freddie Mac, strained financing for commercial real estate enterprises and tight credit for small business.

Given those conditions, "it is realistic to assume recovery will be gradual, with more than the usual ups and downs," Geithner warned.

# posted by Bob Murphy @ 2:38 PM