The Story of America's Economic Recovery

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The Capital Hilton Hotel is located a block north of the White House, right in the heart of DC's K Street power hub. Recently, it served as a venue for The Atlantic's Economy Summit, which assembled a diverse cast of leaders and thinkers for a discussion on the state of America's recovery.

To the casual observer, the Hilton's exterior appears stark, a box-like structure lacking embellishment. To an architect, however, it typifies the "brutalist" style introduced by the Swiss architect Le Corbusier. His design was part of a post-World War II movement that embraced minimalism, an anti-bourgeois approach, and an extreme practice of austerity.

Fittingly, these same characteristics dominated the discussion throughout the day. After all, the Tea Party's message of government minimalism still resonates across the country, Occupy Wall Street serves as an outcry against the modern-day bourgeoisie, and across the pond, European leaders are advocating almost extreme forms of fiscal austerity.


The architects of our economy
On this day, some of the leading architects of our current economy were present. Among those present were former Federal Reserve Chief Paul Volcker and former Treasury Secretary Robert Rubin. While these figures laid the foundation for our economy, their blueprint drawings accompanied periods of robust economic growth during the boom years of the 1980s and 1990s. Oh, how times have changed.

Only three years ago, the Dow Jones Industrial Average (INDEX: ^DJI) toppled by more than 50%, and the road ahead is still uncertain. America's collective faith in our current leaders is in limbo, to put it mildly.

Not surprisingly, the chief architect of America's monetary policy, Federal Reserve Chairman Ben Bernanke, sparked a dynamic debate on this day. He was just featured on the cover story of The Atlantic magazine, in which Roger Lowenstein described him as both a "hero" and a "villain" in the eyes of many Americans. Despite Bernanke's restrained demeanor and belief in the democratic process, he attracts heavy criticism from both political parties. However, because of Congress' constant gridlock, Lowenstein claims Bernanke has "more influence than anyone else over the economy."

The discussion that ensued on this day carried a similar tone. Ron Paul's chief economic advisor, Peter Schiff, fervently disagreed with the Fed's practice of maintaining low interest rates, claiming: "Ben Bernanke has the whole economy hooked now on cheap credit, and it's masquerading as economic growth. ... We don't have any growth. Our economy is actually getting sicker."

However, few other economists shared this sky-is-falling sentiment. Former Treasury Secretary Larry Summers remarked that he is "more encouraged than he's been over the last five years about the situation of the American economy." Summers also commented indirectly on inflation, another controversial topic, noting that any "risks are much more on the side of the economy being too cool than they are on the side of the economy being too hot." In other words, inflation outcries could be unfounded, given our modest economic growth and stubbornly high levels of unemployment, which currently top 8%. Further, on this issue, Lowenstein points out that no Federal Reserve chief since the Vietnam War has presided over an economy with a lower rate of inflation, which has averaged 2.4% under Bernanke's watch.

When the legendary Paul Volcker made his remarks, he refrained from endorsing Bernanke's interest-rate strategy but noted that rebuilding the economy would remain a slow process. Volcker emphasized the severity of the downturn, stating that it was not "V-shaped," not a "garden-variety" recession, but instead exaggerated by an unprecedented collapse in housing. Very few of us have seen a buildup of the "enormous scale" Volcker describes in our lifetimes. In an illuminating chart, fellow Fool Morgan Housel recently described the housing bust, stating: "It was far worse than even the Great Depression."

GDP vs. the stock market
As Americans continue to digest the various decisions made within the administration and by the Fed, such insight from economists tells only part of the story. A recovering economy bodes well for company profits, but does it indicate an attractive stock market?

Not necessarily. In fact, although GDP serves as a broad measure of the American economy, it serves as a terrible indicator when predicting the success of the stock market.

Even in the recent past, these two measures of growth -- GDP and stock market returns -- have widely diverged. When President Obama stepped into office, he was handed a busted real-estate market, a bloated, casino-like financial sector, a labor market fractured by globalization, and ballooning government deficits. Not surprisingly, all of this added up to a pretty dismal performance by the economy. Unemployment soared to 10%, and GDP growth stagnated. When comparing Obama's first term with the other presidents over the past 100 years, he finishes near the bottom of the pack in terms of GDP growth.

anImage

*Out of a total of 25 terms. Figures as of March 23, 2012.
Source: The New York Times.

*Out of a total of 25 terms. Figures as of March 23, 2012.
Source: The New York Times.

Only three presidential terms experienced slower (actually negative) growth, and all three were during the time of a major world war or the Great Depression.

Unremarkable GDP growth, however, tells only half of the story. When it comes to stock-price appreciation, Obama's tenure in office has been marked by an impressive run-up. The collapse that took place a few years ago depressed stock-price valuations considerably, and the subsequent rebound shows impressive annual returns.

anImage

*Out of a total of 25 terms. Figures as of March 23, 2012.
Source: The New York Times.

*Out of a total of 25 terms. Figures as of March 23, 2012.
Source: The New York Times.

Viewed in isolation, these two measures of economic growth paint two widely divergent stories. Despite lackluster GDP growth, the stock market recovery reflects the fifth-highest returns experienced during any term over the past century. The current administration entered office at truly a unique moment in our recent history, faced with an economy spiraling out of control. As a result, low valuations in the stock market enabled a drastic run-up since early 2009, one that investors hope will continue in the near future.

A rising tide
Investors need to be cognizant of stock-price valuations, but the positive upward trend in both the economy and the stock market indicates less risk of another recession. Even the large banking institutions, including Citibank (NYS: C) , Bank of America (NYS: BAC) , and JPMorgan Chase (NYS: JPM) , all of which needed a rescue plan a few years ago, have been a part of the market's surge in recent months. While the Dow climbed more than 8% in the first quarter of 2012, these banks notched 33%, 70%, and 37% gains, respectively.

Eighteen of the nation's largest 19 banks passed the Fed's recent stress tests, which revealed stronger, more transparent balance sheets for much of the sector.

Only a few years ago, extreme ideas like nationalization were on the table, but a more tactical and palatable approach resuscitated these institutions. The individuals responsible for preventing the next Great Depression had to work at an alarming speed, implementing programs that were incredibly unpopular. To date, the Treasury has recovered all of the bank bailout money, and then some.

The pragmatist and the radical
The progress of our recovery illustrates the true depth of the recession, but it also reflects the incremental, rather than dramatic, steps taken by the current architects of our economy. While controversial in some arenas, Bernanke's pragmatic approach to managing the Fed has gained the respect of many of his peers, including economists on both sides of the aisle. Labeling the architects of our recovery as "villainous" or claiming they are uprooting the foundations of our economy adds little to the discussion of our economic situation.

To compare Bernanke to a true radical like the architect Corbusier, who sought to transform buildings, communities, and even society as a whole, is disingenuous. The brutalist approach broke entirely with architectural history and aimed to revolutionize communities in a utopian ideal. Bernanke seems content to use history as a guide in his management of the economy. In fact, he dedicated his graduate studies to the study of the Great Depression, learning from the Fed's failures in the early 1930s. Further, Lowenstein observed in his meetings with Bernanke that he has a "sense of history uncommon among public officials."

Over time, the brutalist movement in its most dramatic form was deemed a failure in many respects (the Capital Hilton excluded). The transformation that Corbusier attempted fell short of building idealistic communities, and the structures created were uninviting and isolating.

While only history can judge the current economic architects of our time, their approach appears more practical than radical, and hopefully the outcome will prove to unite rather than divide.

Disagree? Feel free to add comments below.

At the time this article was published Isaac Pino owns no shares in any of the companies mentioned above. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Bank of America. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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