Economic Outlook: Crisis enters phase two

Two key economic policy makers in Washington made headlines with assessments of the U.S. economy that were deemed improbable a year ago.

Approaching the anniversary of the collapse of Lehman Brothers, U.S. Treasury Secretary Timothy Geithner Thursday told members of the House Oversight Panel monitoring the financial bailout that it was time to roll back some of the extraordinary steps put in place over the past 12 months to keep banks solvent and credit flowing.

Geithner warned that the retreat from new programs should be handled carefully. "We still have a long way to go before true recovery takes hold," he told panel members. However, "the emerging confidence and stability of September 2009 is a far cry from the crippling fear and panic of September 2008," he said.

"Such a turnaround was not inevitable, nor was it an accident. It happened because the Obama administration and Congress put in place a comprehensive strategy," he said.

Geithner said, "we must begin winding down some of the extraordinary support we put in place for the financial system," signaling a delicate, new phase for the recovery process -- backing away from massive support programs that Geithner said pulled the economy back from the brink of collapse.

It helps, of course, that some financial firms have begun repaying various amounts of the $700 billion Troubled Asset Relief Program funds that was the most visible program assembled during the financial crisis.

With $365 billion of the $700 billion passed along to various firms, $70 billion has already been returned, The Washington Post reported Friday. In addition, the Treasury has earned $12 billion on its investments and expects firms will return $50 billion more in TARP funds in the coming months.

That leaves billions still in play, including funds given to American International Group Inc., Citigroup, and to U.S. automobile companies. Still, the Treasury said it would wind down its money market loan program Sept. 18 and the Federal Deposit Insurance Corp. will begin to phase out a financial firm bond guarantee program in October.

Addressing the second massive economic intervention, the $787 billion economic stimulus package, Christina Romer, chairman of the president's Council of Economic Advisers, said the program was "absolutely working effectively," an assessment Republicans who voted against the measure quickly denounced.

The Council of Economic Advisers estimated the $151 billion spent so far has raised economic output by 2.3 percentage points and added or saved up to 1.1 million jobs.

"The trajectory of the economy changed materially toward moderating output decline and job loss," the council said in an official report.

Michael Steele, chairman of the Republican National Committee quickly issued a statement that said, "the president's economic stimulus experiment clearly isn't working as promised."

U.S. investors, however, reacted positively. Markets continued a three-day streak upward Thursday. On Friday, Asian markets were mixed.

The Nikkei 225 in Japan dropped 0.66 percent Friday. The Hang Seng index in Hong Kong gained 0.44 percent, while the Singapore Straits Times lost 0.04 percent.

In Australia, the S&P/ASX index gained 0.55 percent.

In midday trading in Europe, the FTSE 100 in Britain rose 0.71 percent. The DAX 30 in Germany gained 0.55 percent, while the CAC 40 in France rose 0.82 percent. The pan-European DJStoxx 600 rose 0.63 percent.