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Source: CNN Money.com

Picking up steam

Money | Wall Street looks to a long-awaited recovery

Issue: "After the revolution," Feb. 26, 2011

Continuing a steady upward climb that began in September, the Dow Jones Industrial Average closed above 12,000 in early February, a mark not hit since the before the 2008 financial crisis. Though rattled briefly by Middle East unrest in late January, investors chose to focus instead on strong earnings reports. "Corporate earnings are very strong with no sign of that letting up," Marc Stern, chief investment officer at Bessemer Trust, told The Wall Street Journal.

Meanwhile, U.S. consumer confidence reached its highest level since November 2007, according to a consumer-spending index from Discover Financial Services. That reading came on the heels of a Commerce Department report showing that consumer purchases for all of 2010 rose at their fastest pace in three years, aided by stronger-than-expected Christmas-season spending.

Fourth-quarter economic growth was 3.2 percent, according to an initial estimate from the government's Bureau of Economic Analysis, up from 2.6 percent in the July-September period.

A crisis studied

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After reviewing millions of pages of documents and holding 19 days of hearings, a commission investigating the causes of the 2008 financial crisis concluded the crisis was "avoidable." The Financial Crisis Inquiry Commission, created by Congress in 2009, cited "widespread failures in financial regulation . . . dramatic breakdowns in corporate governance . . . an explosive mix of excessive borrowing and risk by households and Wall Street . . . [and] systemic breaches in accountability and ethics at all levels."

The final few pages of the group's 633-page report featured dissenting views from the four Republicans on the 10-member commission. A dissent signed by three of the GOP commissioners (including Vice Chairman Bill Thomas, a former congressman from California) said the leading cause of the crisis was an international credit bubble fueled by cheap investment capital coming from Middle East oil producers and China.

A second dissent by Peter Wallison, a Treasury Department official during the Reagan administration, argued that "sine qua non of the financial crisis was U.S. government housing policy, which led to the creation of 27 million subprime and other risky loans . . . [that] were ready to default as soon as the massive 1997-2007 housing bubble began to deflate."

Danger ahead

"The United States faces a daunting fiscal outlook, both for the next few years and for the long term," the Congressional Budget Office said in report examining economic trends and federal budget policy. The CBO said the government would likely incur a record deficit of $1.5 trillion in fiscal year 2011, causing the "debt held by the public" to rise to $10.4 trillion. Within a decade, the report said, the debt is expected to nearly double, to $18.3 trillion. "With such a large increase, along with an anticipated rise in interest rates as the economic recovery strengthens, interest payments on the debt are expected to skyrocket"-rising to just under $800 billion a year by 2021, according to the report. By comparison, in 2010 the government spent $197 billion on interest.
-Joseph Slife is the assistant editor of SoundMindInvesting.com

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