How will Obama handle this potential recovery?

Even before this week’s report of a jump in retail sales and industrial production, Federal Reserve Chairman Ben Bernanke said the recession is “very likely over.” This has central bankers around the world mulling possible exit strategies — ways to begin to withdraw cash and support from the economy and various players. And now, President Barack Obama and Treasury Secretary Tim Geithner are figuring out what policy modifications a nascent recovery requires.

The president’s strategy might best be characterized as including some exit, a dose of entry and more than a little standing still. The exit applies to the propping up of the financial sector. Here’s Geithner take: “As we enter this new phase, we must begin winding down some of the extraordinary support we put in place for the financial system.”

Almost exactly one year after he agreed with others to let Lehman Bros. Holdings Inc. go down the tube, Geithner said the government will allow its $2.5 trillion guarantee of the money market mutual fund industry expire on schedule at the end of the month. That program headed off a threatened stampede of redemptions triggered by losses in a fund that had invested in Lehman debt.

The Treasury secretary also gave his support to a review by the Federal Deposit Insurance Corp. of its bank-guarantee program that was aimed at restricting such guarantees to very few cases in the future.

The government is also chortling about the fact that several bailed-out banks have repaid their loans (giving the government a 17 percent return) and wants to sell off some of its shares in still-troubled Citigroup.

This gradual exit from support for the financial sector is accompanied by an attempt to enter the boardrooms of many leading financial institutions. The president wants reform: the Fed to regulate systemic risk; banks to carry more capital, which will certainly cut into profitability, dividends and their ability to lend; capital requirements to reflect the risk exposure of each bank, with those that are “too big to fail” required to have the greatest amount of capital; the government empowered to wind down any institution it decides is creating systemic risk; and bonuses to be related to long-term performance and be recoverable if early profits are consumed by longer-term losses.

Now it’s up to Congress to decide just how much of what Obama wants will actually become law. Lobbyists are out in force, regulators are in a battle about turf and the easing of the crisis reduces the urgency to act.

The final chapter has yet to be written, but the deserved contempt in which many voters hold bankers these days suggests that more than a few new regulations will come out of the legislative sausage maker.

There are areas where the puzzled administration is standing still — in good part because it knows not what to do. Housing is one such area.

The $8,000 credit for first-time homebuyers is about to expire, and the housing and construction industries are pressing a reluctant Congress, facing constituents’ anger about the soaring deficit, to renew it. Obama has yet to weigh in on this battle.

More important, the administration has yet to decide on the future of Freddie Mac and Fannie Mae, the two government agencies that, in effect, are the mortgage market, or almost all of it. The government and the Fed have committed close to $2 trillion of investment and funds to purchase the agencies’ mortgage securities and debt. Repayment is unlikely.

Meanwhile, the administration and Congress have to decide whether subsidizing homeownership is good public policy, or whether it can rely on the market to attract the optimal amount of investment in the housing market. 

Also, the government isn’t clear on what it wants to do with General Motors and Chrysler. Obama says he didn’t run for president in order to manage car companies and is hinting that he will sell some of his — actually yours — GM shares early next year in an initial public offering.

That brings us to Bernanke. He wants to see some more life in the consumer sector and the jobs market before implementing an exit strategy. With the exception of fast-growing Israel and Australia, the world’s central bankers agree with the Fed chairman. Everyone is hoping that Bernanke gets his timing just right. If anyone can, Bernanke is the man.

Examiner columnist Irwin M. Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Studies.

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