Washington Post business columnist Steven Pearlstein was online Wednesday, Feb. 20, at 11 a.m. ET to discuss Wall Street's widening crisis and why it has sparked in him a sense of satisfaction. The transcript follows.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

Read Pearlstein's latest columns.

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White Ciy, Ore.: All the talk of saving for citizens ignores the lack of interest banks pay for saving. The talk of "investing" ignores the cost of an account with a brokerage. Where should a working class citizen "save" in this predatory environment?

Steven Pearlstein: Bank CD's might be a good place to start. Countrywide bank is offering very good rates, I hear. Government guaranteed, too.

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Bluffton, S.C.: Is there really a market crisis, or are we in a correction phase that resulted from years of easy credit and irresponsible lending - and borrowing? I think the media has overhyped this situation, and seem to jump from position to position based upon normal day to day events in the financial markets.

Steven Pearlstein: This is a massive correction following a massive credit bubble that inflated the price of all sorts of assets and created a speculative frenzy in real estate and some commodities. Now we are in the midst of a widespread deleveraging of the financial system and, to a lesser extent, of the economy itself. Our focus on this is not irresponsible and we in the media have not caused it or even made it worse. If anything, we have undercovered it.

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New York City: Steve,

I've got a comment & a question. I live & work in lower Manhattan, although I don't work on Wall Street. What bugs me is that because an industry has decided to pay its employees in what can best be described as a highly slanted manner, and Wall Streeters have money to toss around, everyone in N.Y. pays for it in terms of inflation on homes, schools, and even a coffee at Starbucks.

My question is how can the boards of such companies rationalize such compensation schemes? I recall reading in the Post that bonuses this year were only down a miniscule amount from last year. Any business other than Wall Street that hemorrhages money wouldn't pay obscene bonuses.

I can't imagine how this would stop unless big investors like Fidelity say we're not going to buy stock in Merrill, Bear, etc. until some sanity comes to the compensation scheme.

Thanks!!!

Steven Pearlstein: The compensation issues are a bit complicated, but they fundamentally result from what is known as the "superstar" phenomenon, which we see in sports, finance, entertainment, etc. Those that appear to have the best performance are paid hugely more than the "next best," even though the difference in performance is not so huge. That's part of it. Then you have this ridiculous competition that the firms get into where they feel, even when someone has a bad year, they can't NOT pay a big bonus because the person may jump ship to another firm. Now you'd think that the bad performance might dampen the enthusiasm for the other employer, but for some strange reason it doesn't, because there is a macho factor in stealing a competitor's top maoney managers. So you get this silly arms race where if somebody does really well one year, they get a huge bonus and if they do lousy, they get a bonus big enough to make sure they don't jump ship. It's like Lake Woebegone, where everyone insists on being paid above average and no company wants to thinnk of itself as paying below average. So the average keeps going up and up, irrespective of performance.

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Rockville, Md.: Can the difference between Wall Street and Main Street be largely summarized that the former are traders and latter want investors? The former thrive on short-term changes while the latter want long-term stability.

The 30-year mortgage is supposed to exist so people can make a lifetime commitment to put down roots in a community. Isn't there something inherently silly and destabilizing about turning it into a CDO whose daily fluctuations can be traded on a futures exchange?

Every good personal finance book tells you to invest for the long term, and put your short-term money into something safe. Did Wall Street think it was too smart to do that?

Steven Pearlstein: Short answer is yes, it was too clever by half. One of the big instabilities in the financial world now is that people borrow short for what are essentially long term investments, and this mismatch has now caught up with them for a variety of reasons. Banks, of course, have always borrowed short and lent long, but they have had to maintain reserves to protect themselves against a bank run. The "market-based" intermediation doesn't have those reserves, and so what you are having now is an old fashioned run on a "bank" with no reserves. And we know how that turns out.

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Rockville, Md.: Steven,

It seems most of the existing mechanisms, including capital markets, are oriented towards short-term and rewarding quick results, even at the expense of non-realized gains (and even losses) in the long term. As a result, few are interested in long-term projects, even is they promise big rewards years down the road.

What do you think can force decision makers to start thinking more long-term rather than short-term?

Steven Pearlstein: Changing compensation systems is one thing, as you point out. Better regulation is another. You might want to use the tax code to favor longer term capital gains over shorter. But fundamentally, we all have to celebrate more those who have gotten rich by long term investing and value-creation (Buffett) and sneer at the short-termers more, rather than celebrating them for their brillance, which is usually more about luck, leverage and inside clout and information.

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I see the problem and it is me...: I had to laugh ruefully reading your column today as a 40ish investment banker (not at Goldman). My father was the son of a school principal and grew up on a Kansas farm during the depression. He used the GI Bill to help fund an MIT engineering degree and worked on environmental issues. My maternal great-grandfather was an engineer and even my father-in-law was an engineer (both working in the defense industry). I had newspaper routes, caddying and summer factory jobs to make money growing up. I went to top schools on scholarships/loans but eschewed the engineering/science track as too arduous given other things I was doing at school and the business/finance path I saw other fathers at school follow successfully. I ended up going to one of the top MBA programs and then, you guessed it, into investment banking because it was the quickest way to repay my school loans going back to private school. It has been a live by the sword, die by the sword career but overall it has provided for my family (not anything like a NY/Goldman banker though). Could I and would I do something else that would benefit society and the economy greater? Absolutely. Meanwhile, the concept of kids having paper-routes as an early employment experience has gone the way of the afternoon Globe paper and my kid is an ace fighter pilot on Wii (future Predator UAV pilot?). We try to reinforce the critical importance of reading, writing and arithmetic and working hard in school but I wouldn't bet that any of my kids will grow up to be engineers or scientists even if that is what I wished or the country needed. Something tells me it is a different existence than those in India and China now but SUVs and Wii are coming there as well.

That's a long preamble to this question: what does a post-innovation economy or imported-innovation economy look like?

Steven Pearlstein: It looks like France or Italy, or Britain 25 years ago.

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Hyattsville, Md.: Steven,

Thanks for today's column! It's how I, without the economic knowledge, have been feeling for a long time.

My question is a very "main street" one. I just started a new job and want to begin contributing the max to my 403(b) plan. My spouse and I also want to begin investing some of the excess cash we have lying around on a regular monthly basis. Is now a good time while the prices continue to go down? I KNOW that I cannot even begin to time the market. I guess I'm just wondering, percentage wise, how much further general stock mutual funds will be falling (your best guess, that is!).

Steven Pearlstein: I'd say its too early. You can certainly wait until the summer,and it is possible you can wait until next summer. Market timing is hard, but its not that hard, in my opinion, to avoid the frothiest periods or the bottoms of bear markets. It is not clear we have hit the bottom of the market yet. And bear markets, unlike corrections, don't bounce back very fast. They stumble along for months and even years. So don't be too quick about it. Protect your principle, look for good, safe vehicles that pay decent interest rates or bluechip stocks that you can hold for a long time and pay good dividends, and be patient.

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Boston, Mass.: Citigroup, State Street, and myriad other US banks hid billions in contigent SIV liabilities off-balance sheet, often using off-shore tax havens. What does this say about the FED's competence as a regulator? Or do you think it's a matter that the FED is corrupt and turned a willful blind eye to all of these off-balance sheet transactions? Is it time to combine regulators so that there is one sole financial markets regulator? Thanks Steve!

Steven Pearlstein: The Fed is not corrupt but they have been blinded by the mindless regulatory philosophy of the Greenspan era and they do look on the big bans and the holding companies as their charges -- institutions to be protected, part of a financial system that needs to be protected -- so they never utter a bad word about them and try to handle things quietly and without penalty. The result is that they give up the deterrant aspect of regulation, which is to have a ritual hanging every couple of years and scare the bejezzus out of people so they behave better in between the hangings. The Fed doesn't believe in that. They also don't believe they should substitute their judgment for the markets, which is crazy, because in financial regulation, that is exactly the purpose of regulation. Otherwise, you'd just leave things to markets. It is a form of modesty that they have taken to gross excess. And frankly it is not going to change until someone like Barney Frank finally makes such an example of a Fed chairman of the head of the Fed's banking regulation department that they get fired for being a bad regulator. Greenspan got out before he could be fired, but there are others who should be held accountable so that their unpleasant dismissal will be a lesson that will be remembered by their successors.

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Washington, D.C.: What is going on with the non-borrowed reserves going negative? I understand that the newly created Term Auction Facility caused the banks to borrow a lot from the Fed because interest rates were low and the collateral requirements are weak, but that is not giving me a warm fuzzy. Caroline Baum's column in Bloomberg basically says don't worry about it because the Fed will never go insolvent because they can always print more money. That answer doesn't make me feel better either.

Steven Pearlstein: It may be true that the collateral being offered is not of top quality, but I don't think any major bank is going to get away with stiffing the Fed in the long run. Anyway, that all ought not to be our top priority concern right now. I'm more concerned is that the markets are going to push the Fed around too much and they will lower rates too much too fast.

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Reston, Va.: Do you think raising the ceiling on "jumbo loans" from $417K will indeed stimulate the housing industry?

Steven Pearlstein: As a temporary measure in high cost areas, it's a no brainer. The market needs some pump priming right now. We can revisit the issue in a year or two, when the private market returns, about how and how far to wind down Fannie and Freddie's participation.

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Bowie, Md.: Thanks for today's column. (Aside to your producer: could the discussion pages include a link to your column archive, or even the current one? Thanks!) I've been conscious that I've been thinking that the current "crisis" is nothing more than an overdue correction -- the invisible hand and the free market at work, baby -- but I hadn't actually advanced to your level of schadenfreude, and your column is convincing me.

Are there signs that the current administration is going to let the free market work, or step in to rescue its friends on Wall Street?

washingtonpost.com: Pearlstein's latest columns.

Steven Pearlstein: They are at least principled enough as market adherents that they don't want to do a rescue. But you have to understand that the main reason the Fed is cutting rates now is not to stimulate the economy but to reflate the balance sheets of the banks and other financial insituttion. It is a form of rescue operation, which is why I think they need to be careful about it. They will claim otherwise, with all sorts of economic mumbo jumbo. But it is basically a rescue effort for big financial players and mortgage lenders.

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Boston, Mass.: Mr. Pearlstein,

Could you talk a bit about the potential impact that the problems of bond insurers like AMBAC and MBIA could have on the bond market in general and tax-exempt bond funds in particular. Why doesn't the uncertainty of this situation have a more noticeable impact on tax exempt bond fund returns? Why haven't these funds tanked over the past few months? And what are the risks for a bond fund investor going forward?

Steven Pearlstein: Because the creditworthiness of the borrowers is basically sound, the insurance is rarely used, and the muni part of the bond insurance companies will be carved out or bought and continue to be solid as ever.

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Gwinn, Mich. What I have never understood about the "mortgage meltdown" is why do banks foreclose on terms that could be re-negotiated with the consent of both parties? Why would they be willing take possession of properties that they know, in advance, will be declining in value?

Also, when did this trend of agreeing to contracts that say one party (let's call them...credit card companies) can do whatever they want, whenever they want to and the other party has to suck it up, aka "terms and conditions". Doesn't contract law state that a contract is not enforceable if one party is incapable of understanding it? They can also change the terms of the agreement without the consent of the other party. Honestly, read the T & Cof the average credit card agreement, but be sure to take a couple of days off...you'll need the time.

Thanks,

Bob

Steven Pearlstein: When they want to change the terms, they send these letters that nobody can understand that give them legal cover. When you get such a letter, you should always call the number on it, say you won't accept the change and demand that your account be closed immediately and that any money due to you be returned immediately, in cash, in small bills (since you no longer trust their checks) and if they don't, you'll be calling the state attorney general's office in the morning. They tape record all these calls, so you should get them to acknowledge that on the call and then ask for the name or number of the operator, who will be so scared about getting in trouble she/he will immediately call her supervisor and a report will be filed to the legal department. That should get you a call back from someone with enough authority and knowledge to deal with.

There are enough people trying to peddle credit cards to people with good credit that there's no reason you should accept these unilateral changes.

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Madison, Wis.: Mr. Pearlstein, yet another excellent article. You are justifiably critical of the lack of regulation in the investment banking/securities "industry." Can you give a summary of the kinds of regulations you favor to bring integrity back to the system? This is an industry - fiercly protected by Republican politicians - that eschews accountability in any form.

Steven Pearlstein: Its not a matter of setting down specific rules. It is a matter of having regulators who know and see what is going on, and can respond quickly and flexibily to it. The way the industry wins is when it says, you have to write down exactly what we can and can't do, and then they find a way around it, and it takes three years for the Feds to realize it and propose a new regulation, which they fight tooth and nail and argue over for so long that by the time some watered-down version takes effect, they are already on to the next scam. This is their time-honored MO in Washington, and we need regulators who have more plenary power and more backbone and willingness to use it.

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Fairfax, Va.: Thank you for putting my thoughts to paper, your article this morning is right on. But if this were to happen where could a "boomer" like myself put his nest egg?

soon to retire.

Steven Pearlstein: Right now, bank CD's.

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Falls Church, Va.: Steve, I love your column, but I have to bust your chops about some of your assertions in today's entry.

First, it makes no sense to blame the tools for the mistakes of their users. Businesses have always made some bad decisions about misallocation of capital and short- vs. long-term goals; they were doing it long before the invention of any of the financial toools you mention were invented.

Second, it's simply not true that these tools have caused greater spillover of financial-industry cycles into the real economy. On the contrary, by deepening credit and capital markets, the increasing sophistication of financial tools have insulated the real economy from the financial industry's ups and downs. Compare the collapse of the real economy following the stock market crash of 1929 to the relative indifference with which the real economy shrugged off the collapse of stock prices in 2000-01. The business cycle is the gentlest it's ever been in history; recessions have been light and infrequent. Your notion that markets used to be more transparent and less naipulable in the good old days strikes me as rose-colored nostalgia.

Look, I don't work on Wall Street, and I'm as cynically pleased as you are to see the oscenely wealthy take it in the ear. But your ranting about the smart young whippersnappers is a short step away from wishing that we were still on the gold standard.

Steven Pearlstein: I don't agree. The recent misallocations of capital (S&L crisis, Internet bubble, third-world debt crisis, current real estate and credit bubble) are much larger than we've seen since the Great Depression days. And while the normal business cycle has been tamed a bit, what recessions we have now tend to be caused by financial booms and busts, more like the 19th century than the post-war 20th century. I'm not saying the recessions are deep, but the slow growth hangover does last longer and they have generated a higher level of exonomic anxiety on the part of ordinary people.

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Washington, D.C.: Your column today identifies Wall Street executive and money manager compensation levels as the root cause of many economic distortions. Short of "burn baby burn," would the recent proposed (but filibustered) change to the way fund managers are taxed (taxing their % of the gains from their funds as ordinary income rather than capital gain) have been a reasonable smaller step towards lessening outsized compensation in this field?

Steven Pearlstein: It might have helped. It would have raised some needed revenue for worthy government purposes.

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New York: Aside from gloating, what kind of policy prescriptions can you offer? A major step up in the margin tax rate for incomes over $1 mn? The problem with just waiting for markets to fall is that falling markets do create collateral damage (i'm sure that the junior clerical people who get laid off -- and they exist in the thousands -- of course don't have the severance packages the CEOs do). Aside from deferred comp, the boards could also look into metrics other than eps growth.

Steven Pearlstein: Those would be a start. Changes in tax laws, as suggested, is another. Insuring that there is more price competition among fund managers through vigorous antitrust enforcement would be useful. Maybe paying public servants and government researchers and others a more competitive wage would help, even if it means raising taxes on Wall St. titans. Give me some time and I could give you a longer list.

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London, U.K.: In your view, what is the best solution for the monoline crisis? Surely a breakup would make matters worse for the credit industry, isn't that right? From what I understand, it's like owning a portfolio with some very risky assets and others less risky, which makes the portfolio balanced. So if they break up their two divisions, concentrate all the risky credit ones into one, and the municipals into another, do you reckon the credit market, still reeling from subprime CDOs, will suffer a complete meltdown?

Steven Pearlstein: I think the idea behind the split-up is that you could raise new capital for the "good" business (munis) and use the current capital to back the bad business. But I have some of the same questions you do.

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NW D.C.: Couldn't agree more with your article, Wall Street needs a major overhall. Any chance the political revolution we are going through (yes I believe Obama will win and clean house) spills over from Capitol Hill to Wall Street?

Steven Pearlstein: We can only hope.

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Melbourne, Fla.: I was doing some reading a couple of days ago after a niece asked some questions about the Great Depression. I was struck by the similarities between some of the things that have been happening in the financial world today and prior to the crash of 1929. I know that there are supposed to be safeties in place to prevent a repeat of the Great Depression, but I'm not so sure that these are the right measures. Greed seems to be able to find a way to overpower common sense.

Steven Pearlstein: There are a lot of similarities, particularly in terms of causes.

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Potomac, Md.: Steven, thank you for your comment on the status of America's financial system today. As a 24 year-old finance professional looking to apply to business school in the coming years, I hope to shift into a line of work that generates "genuine long-term value." I remember at graduation the air of superiority surrounding my classmates who landed jobs as analysts on Wall Street. For many of us at "elite" Northeast schools, they seem to be the only jobs out there, because everyone is gunning for them. How can the other industries appeal to the talented kids who are so easily swayed by the glamour of I-banking salaries and bonuses?

Steven Pearlstein: That's a simple question that probably doesn't have a simple answer. But one thing we could do is not to glamorize Wall Street so much in the press or in movies, and begin to show more appreciation for real enterpreneurs and public servants and scientists and engineers. I think a lot of this is as much cultural as economic.

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Danvers, Mass.: Reading the column I kept wondering, where's the "but"? When is Steve going to say, "Yeah, all this is bad, but we should still bail' em out." But it didn't come!

I keep wondering given their arguments that we couldn't live without the benefits for our economy they provide, just how much improvement in productivity growth (the source of our future wealth) do these guys actually provide?

Steven Pearlstein: We need them, John, we just need to take them down a couple of notches.

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Palmyra, Va.: Have you by chance seen the piece called "The Age of Decadence" by Rudolph-Riad Younes in the annual report of the Julius Baer mutual fund company? You would really like it.

Steven Pearlstein: No, could you send it to me at pearlsteins@washpost.com. Thanks.

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Bernardsville, N.J.: As Wall Street continues to correct itself due to the loss of its speculative credit bubble, who will lose the biggest? Will it be the wealthy investors and financiers who bet the big money and lost it? Or will it be middle class American consumers who face increasing credit problems - generally in the form of rapidly rising mortgage rates on adjustable rate mortgages - AND may be forced to pay higher prices for certain goods such as oil?

Steven Pearlstein: Both, actually.

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San Francisco,Ca.: How do you explain the extreme incompetence on Wall Street where professionals overlook the first principles of finance like balancing risk against return?

Steven Pearlstein: Asymetric compensation.

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Winchester, Va.: To the topic originally proposed: why does this trainwreck-in-progress give you a sense of satisfaction? I assume your reasons are more humane than voyeuristic.

Steven Pearlstein: My reasons have to do with correcting imabalances in the economy and society that can't be accomplished without sharp declines the relative standing, pay and importance of Wall Street.

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Stafford, Va.: Excellent column. Don't feel guilty for wanting the full financial workout to take place. As a society we need to be open to considering big changes in our tax, fiscal, foreign exchange and other systems. Only a big crisis can create a consensus to make such change. The sooner it happens the smaller the shake out will be. Bob

Steven Pearlstein: Thanks. In truth, I'm not feeling all that guilty. But you probably knew that.

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Main street: Is it just me or is there a regulatory climate created by Bushes that leads to a banking crisis of such proportions that a public bailout is in order, enriching the right people (who also got the tax cut) at the expense of the middle class?

Steven Pearlstein: It's a regulatory climate that's been around for more than a decade and has as much to do with Greenspan as Bush.

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Arlington, Va.: That was an excellent column today. Is there any possibility that the subject of Wall Street excess will make its way responsibly into the national political debate this year?

Steven Pearlstein: Curious that it hasn't. Do you think that may have something do with the campaign contributions to both parties? It would be nice if one of those TV commentators would put the question of Wall Street's culpability to the candidates at the next debate. But don't hold your breath. They are part of the national political press pack that likes to keep asking the same questions over and over and over again and focusing on campaign tactics and little political tempests in teapot rather than on real substance.

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Charlottesville, Va.: Could you give some specific illustrations of the points you made in your column about:

1. How financial innovations have "given corporations clever new tools to hide risks liabilities and losses from investors;

2. "...have given traders a greater ability to secretly manipulate markets".

Steven Pearlstein:1. Off balance sheet entities.

2. See energy market manipulation by Enron and others, or the manipulation of gas futures by Amaranth trader.

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Washington, D.C.: Great column today. Would there ever be a situation where traders who racked up huge losses didn't get a bonus, at all? Reward them when they're good, but it seems that even in this turmoil banking traders will still get bonuses that are monstrous compared to the average American salary. Where is the risk for them? Where are the traders about to lose their houses?

Steven Pearlstein: You won't find them. That's the problem. Not enough personal financial risk. They are always playing with other people's money, which is a pretty good working definition of Wall Street. Indeed, one of the dirty little secrets about Wall Street is the contempt the peoople there have for their customers. It's all a game for them, and their loyalty runs first and foremost to each other, not the customer.

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Fredericksburg, Va.: Love reading your columns immensely. Your factual and no gloss analysis of the current events is a rare commodity in the coverage of all things financial. I definitely miss the one that used to appear on Sunday's Business section. What happened? Why was this replaced last Sunday with something from Kiplinger's? I really don't care much for the replacement. Hope you are back on Sunday pages also.

Steven Pearlstein: I'd done the Sunday thing for more than five years and it was very time consuming. Needed some relief. I hope to do something just as interesting for Outlook on a regular basis. Stay tuned.

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Washington, D.C.: You must be (gasp!) the Washington Post's house populist. The Post a couple of days ago, channeling the Wall Street Journal, accused Clinton and Obama of engaging in "class warfare" for trying to take up some of the point of view of John Edwards. This made me angrier than I've been in a long time. I don't need two subscriptions to WSJ, which I read daily. Unfortunately Samuelson today is correct that Obama's prescriptions fall short-- but so do Clinton's, Edwards', and Robert Reich's (couple of days ago in the NYT). The question is, how to turn some of the insights in your article into policy prescriptions - because our economy needs more fundamental fixes to enable a free and innovative future that does not depend on cheap foreign labor, immigration and more lawyers and MBA to evade higher corporate taxes.

Steven Pearlstein: Normallyh, I'm not a very convincing or reliable populist, but this is one time when a fair amount of outrage is not only called for, but can have a beneficial effect. Let's scare the hell out of 'em for a few months so maybe next time they'll remember.

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Falls Church, Va.: Regarding your article today in The Washington Post: are you really hopeful that Wall Street will pay for its excesses? Some believe that nexus between Wall Street and Treasury Department will guarantee continuance of existing imbalance in our society in favor of Wall Street. Remember how Long Term Capital Management was rescued by the Feds?

Steven Pearlstein: The market is extracting the penalty at the moment, not the government. That will come later, when the SEC and the Justice Department start putting some of these guys through the perp walk.

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Alexandria, Va.: So we need regulators that know what's going on, but we have a climate where regulation is more of an afterthought? How do we change that? Is this something that will take months, years? And why don't we take that first person we make an example out of, make a complete mockery of them, and then give them a job as a regulator. If these people are so ego-centric, surely they'll go after others doing the exact same thing they were caught up in because they can't stand that others have gotten away.

Steven Pearlstein: We change the climate by changing the elected politicians who set that climate.

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Steven Pearlstein: That's all the time we have for today, folks. Good chat. Send the column around to your friends and neighbors. "See" you next week.

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