Geithner Says U.S. Financial System Now Stronger Than Before Recession Hit

The U.S. financial system is in better shape than it was before the recession and is well placed to provide the funding needed for the economic expansion, Treasury Secretary Timothy F. Geithner said.

“The core of the American financial system is in a much stronger position than it was before the crisis,” Geithner said today during a Bloomberg Breakfast with reporters in Washington.

U.S. banks had net income of $87.5 billion in 2010, the highest since 2007, the Federal Deposit Insurance Corp. said today. The Standard & Poor’s 500 index has jumped 64 percent since March 2009, and corporate bond spreads have narrowed.

“We can say with much more confidence now that the U.S. banking system and the U.S. capital market are much more likely to be in a position to finance the capital needs that come with a recovery,” Geithner said.

The world’s largest economy is projected to grow 3.2 percent in 2011, the most since 2004, according to the median forecast of 61 economists surveyed by Bloomberg from Feb. 2 to Feb. 8.

Two weak spots remain, Geithner added. Housing finance is still “overwhelmingly dependent” on government support, while smaller community banks are working their way through soured commercial real-estate loans.

The Treasury Department this month put forward a series of proposals for attracting private capital back into the $11 trillion mortgage market while shrinking the role played by Fannie Mae and Freddie Mac, the government-sponsored enterprises that have been sustained by U.S. aid since September 2008.

‘Very Encouraged’

“I’m very encouraged by the reaction so far” to the Treasury’s proposals, Geithner said, while adding that it will take a couple of years to reach a consensus with Congress on the needed changes.

Commenting on the standoff in Congress over spending for the current fiscal year ending Sept. 30, Geithner said that “both sides have an interest in working to avoid” a government shutdown.

Congress needs to enact a new spending plan by March 4 to avoid a government shutdown, and congressional Republicans and Democrats are preparing competing plans to prevent that outcome. Congress is in recess this week.

The Treasury secretary defended the President Barack Obama’s budget for the coming fiscal year against Republican criticism that it doesn’t do enough to cut the deficit. He argued that the budget plan puts government finances on a sturdier footing over the next 10 years.

Energy Cuts

Obama’s budget aims to reduce budget shortfalls by $1.1 trillion over a decade. The plan, his first since Republicans took control of the House of Representatives, includes cuts to energy, transportation, housing and other programs popular with Democrats.

Republicans have said the president’s budget doesn’t go far enough to address long-term deficits because it fails to tackle spending on entitlement programs such as Social Security and Medicare.

Geithner played down concerns that the surge in oil prices will derail the U.S. recovery. “By almost any measure you look at, the economy is gradually getting stronger,” he said.

Crude for April delivery traded up 2.8 percent to settle at $98.10 a barrel on the New York Mercantile Exchange as Libya’s uprising threatened to disrupt oil exports. Earlier, it touched $100, the highest level since Oct. 2, 2008. Futures are up 24 percent from a year ago.

Stocks Decline

The Standard & Poor’s 500 Index slid 0.6 percent to 1,307.40 at the 4 p.m. close of trading after tumbling 2.1 percent yesterday, the most in six months.

Libyan leader Muammar Qaddafi vowed yesterday to keep fighting the rebellion with a crackdown that Human Rights Watch says has left almost 300 people dead.

The increase in oil prices comes at a time when the global economy is emerging from the deepest recession in more than 50 years. U.S. consumer confidence rose to its highest level in three years this month.

Geithner said that the U.S. is ready to help Egypt and Tunisia overhaul their economies after the ouster of their leaders in popular uprisings.

“There is going to be a very difficult and important economic reform challenge in those countries,” he said. “Where there is a good case for financial assistance, we’ll be very supportive alongside other countries in providing that.”

Egypt after the ouster of Hosni Mubarak inherits a legacy of incomplete attempts at change, including a sale of state assets and an overhaul of the tax system. The political costs of needed steps such as shedding state workers or levying new taxes likely will challenge the country’s next leader.

China’s Currency

Geithner repeated his call for China to allow its currency to appreciate faster and said the U.S. has gained backing from other countries for that campaign over the last six months. “We’re seeing broader support,” he said, adding, “It is in China’s interest to move faster.”

China has allowed the yuan to appreciate about 3.8 percent against the U.S. dollar since June, or at a 10 percent annual rate in real terms, Treasury Assistant Secretary Charles Collyns said in a speech last night in San Francisco.

To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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