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Pearlstein: Wall Street Turmoil

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Steven Pearlstein
Washington Post Columnist
Thursday, September 18, 2008; 11:00 AM

Washington Post columnist Steven Pearlstein was online Thursday, Sept. 18 at 11 a.m. ET to discuss Wednesday's financial meltdown and why it happened.

This Story

A 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.

Pearlstein was honored with the Pulitzer Prize for commentary for his columns about mounting problems in the financial markets. His award was one of six Pulitzer Prizes won by The Washington Post this year.

Read Pearlstein's latest columns.

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New York, N.Y.: Is there a tie between the debt of the Iraq War and this financial mess?

Steven Pearlstein: The government's large and persistent budget deficits are part of the country's problem of living beyond its means, and the war is obviously a contributor to the federal budget deficit. So the answer is yes, remembering however that it is no different than agricultural subsidies, Medicaid payments, etc.

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Mary Baltimore, Md.: Mr. Pearlstein,

What are the implications to consumers if the US Treasury is forced to loan more money to the FDIC in the event that the insurance fund runs out of money? Where does the money come from and how will it impact the average person?

Steven Pearlstein: The money comes from lenders who buy government bonds. Until the last few months, I would have said that money would therefore come from foreigners. But at the moment, there's plenty of Americans that are taking money out of other investments and putting them into Treasuries (or their pension funds are). Anyway, the money is being borrowed from whomever at very low interest rates. But at some point, that money will have to be repaid, which will either require higher taxes or lower levels of other government services. There is no free lunch. In the larger scheme of things, however, these sums, while large, are manageable over time.

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Falls Church, Va.: I'm wondering about what regulation might have done to prevent these problems -- would you agree that the root issue here was mortgage lending that created loans too large for the borrower to pay back (either because borrower income wasn't verified, or if it was verified, still may have been insufficient for the monthly payments); and if so, could Fannie Mae and other government or quasi-government institutions have nipped a lot of these bad loans in the bud by refusing to insure/acquire them?

Steven Pearlstein: It is surely true that the regulators could have done more to prevent some of the individual bubbles from getting as big as they did. But -- and this is hard to get your imagination around because it is so theoretical -- the basic problem is that there was too much cheap credit coming in from abroad as a result of our trade deficit. And if that money had not gone into subprime mortgages or CDOs backed by takeover loans, it would have probably gone somewhere else that would have caused a problem. So you have to consider this at both levels -- the macro level, where huge international imbalances were building up, and at the micro level, where bad investment and lending regulatory decisions were made.

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Arlington, Va.: Mr Pearlstein, Thank you for your very insightful and prophetic column. I wondered what your take is on the takeover of HBOS by TSB Lloyds? Is it a "shotgun marriage"? Did short sellers exploit weakness in the bank, or create panic selling due to nervousness in the market? Or both? If the latter, in the UK, without the safeguards on short selling that exist here - doesn't that beg the question, 'Who could be next?'

Steven Pearlstein: Good questions all to which I don't have answers because I haven't looked into it at all. There will be a lot of shotgun marriages in the coming months, however. And short-sellers are obviously affecting the psychology of professional market players.

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Alexandria, Va.: Please keep writing - you explain things so well. So please tell me this: When you talk about American families in debt, do you mean anyone with a mortgage? What about those of us who have a mortgage we can afford, and pay our credit cards off each month with money to spare?

Steven Pearlstein: We took on too much of all kinds of debt, including mortgage debt but also credit card and college loans and home equity lines. Let me give you a very important example of this: people now live in much bigger houses than they used to, square foot per resident. Okay, how did that happen? It happened because people financed their move up to a bigger house or they financed that new family room, thanks to cheaper and easier to get mortgages and home equity lines. Now I'm not sure, when people did that, they said to themselves, "I'm going to live beyond my means." or "I'm taking on lots of new debt." In fact, the monthly payments may have been the same or less as they were before. But it was more debt, nonetheless, the reality of which becomes more real when it turns out that the bigger house or the family room now isn't worth what you paid for it.

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Frederick, Md.: From this morning's column:

"Suddenly, in early 2007, something important happened: Foreigners began to lose their appetite for financing much of this activity -- in particular, the non-government bonds used to finance subprime mortgages, auto loans, college loans and loans used to finance big corporate takeovers. What should have happened at that point was that the interest rate on those loans should have increased, demand for that kind of borrowing should have decreased, the price of real estate and corporate stocks should have leveled off, takeover activity should have slowed and companies should have begun to cut back on expansion.

Mostly, however, that didn't happen. Instead, the Wall Street banks that originally made these loans before selling them off in pieces decided to try to keep the good times rolling -- and, significantly, keep the lucrative underwriting fees pouring in. Some used their own 'AAA' credit ratings to borrow more money and keep the loans on their own balance sheets or those of 'structured investment vehicles' they created to hide these new liabilities from regulators and investors. Others went back to the foreigners and offered to insure those now-unwanted takeover loans and asset-backed securities against credit losses, through the miracle of a new kind of derivative contract known as the credit-default swap."

I think it's a fair reading of these two paragraphs to conclude that you are suggesting that there was a significant expansion in the use of CDSs beginning in early 2007. Can you provide any sources to help quantify the scale of that expansion -- if that is what you are saying?

The reason I ask is that I think by the fall of 2006 most people saw that housing prices had probably peaked and the risk to this market was always about the fact that the financial models being used to quantify it were flawed because historically there was no precedent for a sustained, significant reduction in housing prices nationally. Since there was no historical data, the quants couldn't quantify the possibility and discounted it. And the people paid to make sure the risk assessments pass the smell test were either asleep or had their objections overridden because of the profit potential -- probably the latter.

If it's true that the investment banks and insurance companies decided to greatly expand the risk to their own capital in 2007 (rather than mostly just rolling over existing obligations) they really do deserve what they're getting.

I agree with your assessment that the desire for fee income (basically greed overcoming fear) drove the decisions which led to the current debacle, but as a matter of financial history I think it matters whether the fundamental problem is what happened in the first half of this decade or can be ascribed to more recent choices.

As always, thanks for the great columns. You're the best financial columnist writing today!

Steven Pearlstein: Thanks for your comments. The evidence, as surprising to me as it is to you, is that while it should have been obvious that there were bubbles and that real estate prices had peaked, the institutions did in fact step up their risk taking.

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Potomac, Md.: The only justification we hear for bailing out AIG is that it is too big to fail. Shouldn't we scrap the exemption the insurance industry has from the Sherman Act? After all this exemption allowed AIG to grow so big.

Steven Pearlstein: Of all the things we did wrong, that one is pretty low on my list.

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Laurel, Md.: I hope my question applies to many readers. I have a 30-year fixed mortgage that I am on pace to pay off a little early. My car was paid for last month, and I never carry a balance on my credit cards. Because of a change in my company's 401(k) provider, my retirement was temporarily stashed in a money market account. I'm thinking I'm in decent shape to ride this out. Am I deluding myself?

Steven Pearlstein: You're in pretty good shape. If you want to take some of that and put it into a bank CD, up to $100,000, that is probably the safest thing you could do. Or buy some Treasury bonds.

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Fairfax, Va.: I have two mortgages with WaMu. I know that payments continue, but what happens short and/or long-term with people like me? Will someone, sometime, from WaMu communicate things to us?

Steven Pearlstein: Yes, if there is need. WaMu is a government insured depository institution. Its customers will be fine, for the most part.

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Springfield, Va.: Steven. First of all, thank you so much for your cogent analyses and for your voice of reason through all the chaos. I already trusted you late last year when, in response to your suggestion that protecting capital should be a priority a chatter asked if that was the time to move money. You responded, 'If not now, when?' I'm not a big investor, but I have a few hundred thousand in the federal TSP. I left your chat, went to the TSP website, and requested a transfer of all my funds into the G fund. Thank you, thank you, thank you.

The question of the moment, after reading today's article and the warning about local and regional banks is this: How can I find out if my heretofore stable little bank is at risk? What are the disclosure rules, and how do I determine what shape my bank is in?

I've been feeling pretty smug... retirement bucks in Treasuries, a house bought before the runup with a very traditional non-funky mortgage, a pretty secure job, and your good advice. Is it now time to put my cash under the mattress??

Thank you for helping us understand what's going on!

Steven Pearlstein: Insured banks aren't much of a risk as long as you are below the $100,000 limit. Despite what Alan Greenspan thinks, you can't be expected to perform financial due diligence before deciding where to put your savings account. That's why we have deposit insurance -- we let the regulators do that for you.

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D.C.: Steven: the CEOs and other leaders in a number of these failed/failing institutions are walking away with huge golden parachutes. Has anyone done any research/reporting on how these CEOs would fare under the various candidates tax proposals? I ask this because McCain has called out Wall Street for its greed, but if he is promising tax breaks for the wealthy, isn't his tax plan essentially rewarding this greed?

Steven Pearlstein: Look, as I've been saying repeatedly in these chats, I know the CEO pay thing gets people mad and all that, but in these times of crisis, its important to focus on the important things, and in the scheme of things, that's not one of them. Taxes on the rich are going up -- I can assure you of that, no matter what any candidate says at the moment. But they aren't going above the 40 percent rate, and on capital gains they aren't going to go up a whole lot more than to 20 percent. To look at that and say, well, if they are not taxed 100 percent on CEOs who failed to run their companies well, then it is a subsidy from the federal treasury -- that's a rather silly kind of analysis.

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Alexandria, Va.: As Wall Street crumbles, it is time to start pointing fingers and assigning blame. The executives of the failing institutions seem to be taking the brunt of the criticism. I find it hard to assign blame to any one person. If a CEO had taken the high road and refused to enter the mortgage backed security game they would have quickly been replaced for missing the massive returns these vehicles provided for a few heady years. Thoughts?

Steven Pearlstein: That's probably right. It takes great courage and fortitutde and persuasive abilities to fight the herd on these sorts of things, and it is rare when somebody does it. That's not an excuse, but it is an observation.

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One Year from Now: What will the financial landscape look like? What kind of institutions will we have: investment banks? hedge funds? a return to local banking? One, big ERTC (Everything Resolution Trust Corp) run by the Post Office?

Steven Pearlstein: Very funny. We'll have a landscape that looks a lot like it looks currently, with a bigger presence for the large, global superbanks and the government holding lots of assets on its books, or the books of some new agency, that it will be selling off slowly. The world as we know it is not ending.

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Toronto: When the Wall St. crisis finally ends, how many fundamentals will have lost their jobs in your opinion?

Steven Pearlstein: Funny.

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Washington, D.C.: Will "sub-prime" be synonymous with "buying on a margin" post-1929?

Steven Pearlstein: Not, that's actually not fair. Subprime means credit extended at higher rates to people with less than stellar credit records or income. It's not a dirty word, and lending to those borrowers is not always a bad thing. But if you lend them too much, on too easy terms, and don't bother checking that they have a job -- well, that's pretty stupid, isn't it?

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Washington, D.C.: I am curious whether the big financial companies are using lobbyists to negotiate these enormous bailouts from the Treasury. If so, I suspect these are the best paying jobs in the country. It seems to me these transfers of money might be used for investor parachutes while the ship continues to sink. Are there stipulations the firms must follow when they receive this money?

Steven Pearlstein: No, this isn't a story about lobbyists or a Republican administration helping out its friends on Wall Street. Let's set aside those populist fantasies. This is a story of very smart and capable people working very hard to try to contain a crisis -- nothing more, nothing less.

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Silver Spring, Md.: One thing I have never understood is how mortgages can become worthless. Doesn't the company that owns the mortgage still own a house even if the borrower defaults? Even if the value of that house is reduced significantly they still own real property so how can these companies lose so much money? Granted they may have to hold onto it for a while to see a return, but it can't be worth nothing or even I could afford a house.

Steven Pearlstein: They don't become worthless. But there are mortgage-backed securities that can become worthless because the individual mortgages are actually chopped up into tranches, and the most risky tranche is the tranche that takes all the initial losses until it is wiped out, and then the losses go to the next tranche, and the next, and so on. So while no one mortgage is a wipeout, people who bought tranches, or packages of tranches, can be wholly or substantially wiped out. Hope that helps.

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Boston, Mass.: It seems the prices of everything have come down in the last decade or so, except those things we sell almost exclusively to each other here in this country: college educations, real estate, and health care. With the prices of those items rising ever higher, do you think we have artificially inflated our wealth, and Americans just aren't as wealthy as we think we are? Thanks.

Steven Pearlstein: You betcha.

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D.C.: Steve,

Thank you for being a voice of reason in tough times.

My first question is factual: Has the stock market performed worse under Bush 43 than any other president in, say, the last 100 years?

My second question is political: Why aren't Bush and the GOP suffering more political damage for their "management" of the economy these past 7.5 years? McBush is even in the polls as the stock market collapses.

Steven Pearlstein: Don't know. And it seems to me they are suffering pretty considerably -- lowest approval rating of any modern president.

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Curridabat, Costa Rica: Steven,

I have two questions. At least since 1980 we have been hearing the mantra that government cannot run anything, while the private sector is extremely efficient. Now, under our free market, MBA president we are witnessing the Chavez-esque nationalization of US financial institutions. How did the private sector by way of the financial sector lead us to this point?

We have also been hearing the mantra that high income taxes are about transferring wealth from the wealthy to the middle and lower classes. But, isn't what we are witnessing today, with the government bailing out the private sector, the greatest transfer of wealth from the middle class to the wealthy? We know that US taxpayers are going to be stuck with the bill for these bailouts, and that it is the middle class, whose jobs have been under assault from Wall Street for 2 decades, which pays the bulk of these taxes. We also know that the overcompensated financial sector employees, who may now be losing their jobs, are going to retain a good portion of the wealth they have accumulated while they have been pilfering the economy.

Steven Pearlstein: That is one way to look at it, and it is not a totally invalid way of looking at it.

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Laurel, Md.: Did the fact that so many ordinary Americans now participate in the financial economy, via 401k and real estate speculation, help create a lax political environment in which financial speculation was perceived as being "good for America"?

Steven Pearlstein: A bit, yes, but I wouldn't overdo that point.

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Herndon, Va.: Dear Steve,

Love your columns. I have one common sense Q:

Why should a investor invest in something for 0% return or less. Why can't he/she keep it as cash instead of losing the transaction fee and no return or negative return? Also, I read that the insurance cost for $10m bonds were at $5m upfront and $500,000 annual. If I do the math, the guy loses 55% in first year - what am I missing - where is the gravy? As usual, your answers offer clairvoyance.

Steven Pearlstein: The reason you might buy a low interest bearing bond is that at least you know you'll get the principal back and there is no where safer you can do that. This is a problem for people who are managing billions of dollars, not individuals.

As for your second question, what it tells you is that the insurers think there is a better than even chance of a default.

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Beaufort, S.C.: Many financial institutions, including Wachovia and Merrill Lynch, have announced auction rate securities buybacks. Are those programs likely to be victims of the buyouts/mergers that have been announced or rumored?

Steven Pearlstein: Probably not.

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Batesville, Va.: Steve, what about a 401K invested in the AA/AAA paper of the major insurance companies like Prudential? Are these companies exposed to any bad real estate investments?

Steven Pearlstein: Possibly, although if the rating hasn't been changed, it is a good indication that the exposure isn't so great that it jeopardizes policyholders.

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Herndon, Va.: Steve, I would like to thank you for your timely advice to pull out of market last year. I pulled my Ret a/c from S&P when it was 1524.

My question: We don't hear anything any more about Sovereign Wealth Funds and the rich Sheiks? We know the reason, just wanted your estimate on how much they lost and do they still have any stomach for more churns?

Steven Pearlstein: They may have lost plenty, but considering where the price of oil has been this year, I'm not sure they are complaining very loudly.

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Laurel, Md.: Did the financial sector become too big a part of the US economy, so that there were too many people trying to make "nothing but money," and reform will require diversifying that talent into other fields?

Steven Pearlstein: I'm going to give you a long and complicated answer to your very good question: Yes.

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NYC: This is a quote from WSJ today...Hong Kong's free-market government went on a massive stock-buying spree in 1998, buying up shares of every company listed in the benchmark Hang Seng index. It ended up packaging them into an exchange-traded fund and making money.

Is it possible that in the end there could be a positive outcome from this disaster? Of course we all need to live within our means going forward.

Thank you

Steven Pearlstein: Never forget that there are all sorts of unintended and unforeseen consequences to things, some of them bad, but some of them good. These things happen more often than you think.

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Finance as a confidence game: To me, the difference between this bubble and historical ones is computers. If finance is a confidence game, then previously at least some fund managers could value an underlying asset before fortune's wheel was spun. Now computers and computer models create assets out of electrons, and brokers, being optimists, sell them. The problem is how to tie the electrons to something real.

Steven Pearlstein: That is a problem, which is why we are more reliant than ever on trusted intermediaries (investment banks, rating agencies, regulators) to make sure things are what they appear to be. Unfortuantely, those intermediaries fell down on the job.

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Laurel, Md.: Is this, in a nutshell, what's going on? A year ago Big Bank was worth $100 Billion because it owned the difference between $1 Trillion dollars worth of mortgage loans and its own borrowing costs of $900B. But then some of those mortgages started defaulting, dropping their value to $800B, so now Big Bank is worth NEGATIVE $100B.

My question is though, is this resulting in a big transfer of American wealth to foreigners? So far, we've heard about the cost to the American taxpayer. But do China and the OPEC countries hold the right to the collateral behind a lot of the defaulting bonds?

Steven Pearlstein: Right now, I'm not so sure they are feeling so wonderful about their investments in U.S. assets, other than government bonds. They may wind up owning some stuff that they thought they were merely lending money for, but they will have lost money if it comes to that. But your broader point is a good one: when you run huge current account/trade deficits year after year, then you are essentially putting yourself in the position of selling some of the family silver. I'm not sure we care a lot if Deutsche Bank rather than Goldman Sachs owns some assets, but there is that shift going on, yes.

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Silver Spring, Md.: Jim Cramer, the popular TV investing guru has been advocating for both the uptick rule and the rule prohibiting naked short selling to be reinstated after their repeal in 2007. Do you think that if these rules had been in place, it might have thwarted some of the vicious short selling we have been seeing? I'm thinking specifically of AIG, a company with liabilities in its financial services division, but also a company with great assets in its other businesses, esp. insurance. Do you think that, other than reinstating these rules, hedge funds need more regulation?

Steven Pearlstein: It's hard to know. But, believe me, these are not the causes of our current crisis. They may have made it marginally worse for a time, or caused things to come unwound a bit more quickly, or maybe caused them to overshoot more on the way down than they otherwise would have. But those are not things that are knowable.

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Fairfax, Va.: I was listening to Democracy Now on the radio yesterday and someone was arguing that the fixes being put in place will tie Obama's hands if he is elected and will ensure that the financial sharks who got us into this mess will not pay for their greed but the taxpayers will. Why is no one in the MSM speaking out about who the winners and losers will be from the "fixes"?

Steven Pearlstein: Ah, the old "mainstream media is letting the bad guys off the hook" argument. We don't have a system, when I last checked, that makes greed a criminal violation and puts government in the role of punishing people for their greed. So your question sounds a bit weird to me. Lots of financial sharks who made bad bets have lost a lot of money. They didn't lose all the money they ever made, but they lost a lot more than you did, I'm guessing. Should I presume that you and the others who listen from Democracy Now would like to have the government be able to take all their assets and hang them in the public square? Capital punishment for Wall Street Sharks!

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Richmond, Va.: Do you think I have this right? The Republicans don't want deregulation any time, but know that if they get in trouble, the "big government" that they hate will come and rescue them? Interesting philosophy, but seems to be just about where we are, right?

Steven Pearlstein: The intellectually honest ones -- and there are some of those -- don't want rescues, actually.

BTW, I'm assuming you meant that Republicans don't want regulation, not deregulation.

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Melbourne, Victoria, Australia: Hey Pearlstein -- when are you going to start calling it for what it is? DEFLATION!!!! And you can't even cop to the U.S. being in a recession, when this current financial panic, a la those in 1873 and 1907, will lead to a Big-D Depression. How did you win a Pulitzer Prize? By being as snarky as you were toward people the last time you did one of these Post Q&A's?

Mate, I'm in Amsterdam on the monthly holiday my wife and I take each year in Europe. Not bad for someone like me who makes his living wiping arses (a part, but not all of the job) as a hospital nurse in Australia. The reason I can do this is because we saw the crisis coming long ago, sold our house at the peak of the market, moved our money to Switzerland and upped sticks to Down Under. It is SOOOO much fun watching the country that allowed President Cheney to seize power TWICE finally get what it truly deserved. Tell us again today how the country "might" have a recession, won't you?

Steven Pearlstein: Hey, what's so bad about snarky?

There is asset deflation, not sure about price deflation, but if a recession gets long and deep enough, that is a possibility. A remote possibility, in my mind. This isn't Japan. Why, it's not even Australia. We'll probably manage to get through this without a Depression, whatever that is.

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D.C.: Hi Steve,

I've read several articles on the financial crisis, and I'm still struggling to understand parts of it. Maybe you can fill in the holes for me.

My understanding is that a huge speculative bubble just popped. The speculation was based on bad assumptions about the growth rate of house values. People took out loans and banks lent them money with fewer restrictions than usual because of these bad assumptions.

A few factors compounded the problem.

1. These loans were sold and resold to different institutions and packaged in ways that made transparent accounting difficult.

2. A regulation change in 1999 (sponsored by Phil Gramm) blurred the lines between banks, brokerages, insurers, etc., These institutions stopped doing due diligence on each other's books because they were often part of the same company now. Also, this allows the "toxic waste" mortgages to spread to almost every financial institution instead of a few.

3. The bad assumptions about the growth of housing values and the security of these loans encouraged financial institutions to take too much risk and (in hindsight) over- leverage themselves.

4. Bond rating agencies over-valued these finances because... (one of the many things I don't understand).

Questions. What parts am I leaving out or getting wrong? Also, what was the original domino to fall? What was it that made people finally realize that their homes weren't worth as much as they thought they were?

Long comment, I know, but I doubt I'm the only one confused.

Steven Pearlstein: There are lots of parts and lots of causes and lots of people to blame. But as I said at the outset, please remember that the original sin here is that households and taxpayers in the United States lived beyond their means, to a great degree, for a long time, setting up the conditions for a credit bubble from which all else flowed. In other words, if we are honest with ourselves, our search for culprits will eventually lead to the front hall mirror.

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Oakton, Va.: Does "too big to fail" mean that they shouldn't have gotten that big in the first place? That they should have been broken up before something like this could happen?

Also, what's the difference between bailouts for homeowners facing foreclosure, versus bailouts for businesses facing bankruptcy? How come a bailout for AIG can be put together in a matter of days, while any sort of bailout or assistance for homeowners has been few and far between?

Steven Pearlstein: First of all, we have done some assistance for homeowners, direct and indirect. So your underlying assumption is not true.

There is a question of whether we should let any institution get so big that its failure is unacceptable, but I'm afraid we're so far beyond that that there is no putting that genie back in the bottle.

Nobody associated with AIG is getting bailed out except perhaps the people with whom it did business. The company will be sold off in pieces by the government over time, and the government may make money or lose money -- nobody knows. But nobody is getting bailed out. Your vocabulary doesn't describe the situation as it really is.

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Santa Fe, N.M.: Thanks for chatting a second time this week.

I've read speculation that the net result of this unwinding market will be an inability of businesses to raise necessary capital. Is this the case, in your opinion? Is the "hoarding" mentioned temporary? Or will it be a long-term problem?

I'm also curious about the numbers given in an op-ed on Sunday by Donald Luskin, a McCain surrogate. It was the badly-timed article on how our economy is just fine, so we should stop fretting, and Luskin alleged 3.3% growth last quarter. You were unimpressed with that number, commenting that the inflation rate used was unrealistic. Do you have any idea what the real inflation rate has been this year? I understand that the govt-released one doesn't include food or fuel increases, which seems to me to be useless in the face of the last six months.

(And tell me, could we say that the fundamentals of our economy are strong, excluding minor matters such as food, housing, employment, currency, energy, credit and investment markets? I admit, I'm still a little hung up on that particular idiocy.)

Steven Pearlstein: I'll answer only your first question because time is getting short. The hoarding is most likely temporary.

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NYC: Okay I get it, we have all lived beyond our means. (I have personally and in my business made a point of living by cash only and saving as much as possible.) With regard to those in the financial world who took risky bets, debts, and more with other people's money do you think in their personal lives they were that risky? Will the deciders of my investments have to face the same reality I am facing? I guess misery enjoys friendship.

Steven Pearlstein: People who have lots of money tend to put enough of it in very safe investments so that if everything goes down, they will have enough to still live comfortably. But beyond that, most of them had their money tied up in at least as risky a place as their customers.

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Glenville, N.Y.: Mr. Pearlstein,

You wrote today of the impending need for discipline to be leveled, one way or another, on the finances of American homes.

May I offer you a somewhat embittered news flash?

Dateline Upstate New York: A few Americans actually didn't employ their money with their heads up their backsides since 1980. These few Americans, who didn't come from money, believe that a piece of plastic also served as a winning lottery ticket, and knew that the party never really started and that the foolishness had to end, lived within their means.

These few Americans kept borrowing to a minimum: college, a car every eight to 10 years, and, believe it or not, never got into the 2,400 square feet with four bedrooms, three-and-a-half baths, and a sign that read Get Your Feet The Heck Off My Front Yard sign. These few Americans paid off their loans, usually early. These few Americans paid off their credit cards in full each and every month. These few Americans knew no other way.

These few Americans lived within their means. These few Americans did not - I repeat, did NOT - buy what they could not afford. Yes, these few Americans know that their actions probably sound treasonous to some, definitely anti-capitalist, and probably worthy of an FBI investigation or a John Poindexter Special.

If these few Americans did not have it, these few Americans did not buy it. Scandalous, they know.

However, these few Americans face a whopper of a problem: the foolishness of a society that could not heed the words of Benjamin Graham and think for itself with a modicum of common sense and a boatload of restraint and discipline. Now, these few Americans are going to pay for the insanity, inanity, and personal greed of so many of our fellow Americans. We may lose our jobs in some sort of cost-cutting, job-slicing mania. We already pay more for gas, food, and just about every other thing sold from the shores of eastern Maine to the shores of western Hawaii and Alaska.

See, these few Americans know they are not perfect. Never tried to be. These few Americans just do not want to take it on the veritable chin or have to double down on their supplies of Tums and Pepto Bismol because of the actions of the masses.

So, the $64,000 (with money all in the bank and none on margin or credit) question is, what in the name of Milton Friedman are these few Americans who used their fiscal heads supposed to do now?

Thanks for your time.

Steven Pearlstein: They are supposed to be happy that there are people in charge in Washington who understand that there are costs of intervening and there are costs of doing nothing, and they intervene when the former are less than the latter. They are trying to make sure that the economy in which you operate doesn't crater, which presumably has some effect on your economic well being. That's all they are doing. And to do it they are spending or lending some of your money. You should thank them for their hard work and pray they are making the right decisions.

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But nobody is getting bailed out: Foreign nations holding bonds are getting bailed out. Preferred share holders are getting bailed out. Middle Americans are the ones left holding the bag.

Steven Pearlstein: No preferred shareholders have gotten out, as far as I am aware. As for bondholders, to know whether they have been bailed out, you'd have to know to what degree these various institutions were insolvent. And nobody knows that yet. Maybe their liabilities did exceed their assets somewhat. To that degree, they might be bailed out. But they were not bailed out for every dime they invested -- that is incorrect.

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Steven Pearlstein: Afraid we've run out of time. I'll print a few more of your comments without any reply other than a thank you.

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College Park, Md.: My understanding of AIG's collapse is that as soon as their credit rating went down their borrowing costs skyrocketed and that they need to borrow money very frequently to run their business. Why would a company allow itself to be so vulnerable that they would fail within a week if they can't borrow? If they had more time could they have recovered by selling off their good assets to cover their exposure in the credit default swaps or found someone in the market to lend them money? Is this a case where frequent borrowing gives a big advantage in the short run and so if everyone does it then AIG can't compete in the short run even though it makes all of the companies more fragile?

Steven Pearlstein: Thanks.

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Staten Island, N.Y.: If housing prices need to rise and/or stabilize for balance to be restored, aren't we in for a long wait?

With current employment, inflation issues, where are the buyers going to come from, unless prices drop even further?

Steven Pearlstein: Thanks.

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Moon, Penn:"our search for culprits will eventually lead to the front hall mirror."

So if everybody is guilty, then nobody is guilty? I only have a back hall, with two mirrors, leading to the den. I guess I'm good to go.

Steven Pearlstein: Yup.

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remember that the original sin here is that households and taxpayers in the United States lived beyond their means: What other options do most of us have? Wages are down over the last 8 years while tuition and health care costs skyrocket. Home prices plummet along with our retirement funds. A caste system is being forced upon middle America. Good health and education are how one succeeds. These have been priced out of range for most Americans. You are naive and wearing rose colored glasses. I bet you have health care and can afford educating your children.

Steven Pearlstein: Thanks.

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Albany, N.Y.: Steve,

In response to an earlier question, you wrote:

"We don't have a system, when I last checked, that makes greed a criminal violatio (typo) and puts government in the role of punishing people for their greed. So your question sounds a bit weird to me. Lots of financial sharks who made bad bets have lost a lot of money. They didn't lose all the money they ever made, but they lost a lot more than you did, I'm guessing."

Could it be that the Greedy Crowd lost a lot more than most of us because, well, they had a lot more in the first place?

One has to ask how they were able to acquire so much more in a deregulated economy and, worse, with a Harvey Pitts-Chris Cox Securities and Exchange Commission that did everything to protect the money of Cheney-Bush Pioneers and little, if anything, to look out for, or care about, Mr. and Mrs. Main Street, USA.

Or am I trying to wipe the veritable lipstick off the pigs feeding at the trough?

Steven Pearlstein: You decide.

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Albany, N.Y.: Doesn't it strike you as odd that the former czar of Goldman Sachs has orchestrated these bailouts absent much in the way of Congressional oversight and that Goldie remains one of the two big games left in the Investment Town?

Or is Hank Paulson, he of the nearly $200 million golden parachute and who knows how many billions hidden offshore, merely doing all of this out of the goodness of his Richard Milhous Cheney heart?

Steven Pearlstein: Thanks.

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Rick (Washington, D.C.): There is a big difference between someone who had millions/billions losing stocks and still being easily being able to live a full life with plenty of money and the average joe whose life savings is wiped out.

Someone who loses 50 billion but still has 2 million in the bank...no offense but they aren't hurting vs the average consumer who lives on $40K a year and who now has no life savings.

Steven Pearlstein: Thanks.

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Amherst, N.H.: Hi Steven. I have been wrestling with this question for a long time. How can Americans reconcile the conflicting messages of "insufficient savings" vs. the need to continue to grow the economy? Isn't it true that if we increase our savings to a more acceptable level, i.e., from 0% to 6%, doesn't that take the air out of the economic balloon?

Steven Pearlstein: They are irreconcilable in the short run.

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This is a story of very smart and capable people working very hard to try to contain a crisis -- nothing more, nothing less: If so, where have these smart, capable and hardworking people been prior to this crisis? Paulson lunching with his multi-millionaire buddies briefing them on his plans?

Steven Pearlstein: Thanks.

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Brooklyn, N.Y.: Is this really a crisis? Is what's going on really that unholy and unnatural? Or is it more like a forest fire that burns off the brush and the dead waste? We lament poor Merrill, poor Bear, and so on. But is it a crisis for BoA or JPMorgan? When would they have ever been able to acquire these companies before?

Businesses go under every day. That's the free market economy. Where was the government to bail out Burger Chef, or Atari? Companies get hurt. Other companies swoop in and take them - if they're worth having. If not - see Lehman - and Burger Chef.

Steven Pearlstein: Thanks.

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White Plains, N.Y.: Mr. Paulson and Mr. Bernanke apparently rejected on Sunday night a deal with various private banks that would have required a much smaller bridge loan from the Fed to AIG, but then turned around in two days and agreed to absorb the full amount of the $85 billion loan.

My husband, a former investment banker who is an acquaintance of Mr. Paulson's, tells me there are only two possible explanations for this. First, as of Sunday evening Paulson and Bernanke were willing to let AIG fail, and something changed between Sunday evening and Tuesday. The second explanation is that Paulson terribly miscalculated his leverage in these negotiations and adopted too hard a line in his negotiations with the private banks, only to be left holding the bag when the private banks pulled out of the negotiations.

My husband, based on his dealings with Paulson, says the second option is all but inconceivable because Paulson is far too smart and savvy. My husband also says that Paulson could not have been taken by surprise by the market's reaction on Monday.

My husband's assumption is that Paulson was told by the White House that although AIG's collapse may be acceptable from an economic viewpoint, it was not acceptable from a political viewpoint any longer.

Are we way off base here? If so, what accounts for Mr. Paulson's apparent change of heart between Sunday evening and Tuesday?

Steven Pearlstein: Thanks.

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New York: The real reason we have regulation is all of us, especially the regulated, are made better off. Nobody would deposit money in a bank if the bank wasn't regulated. Nobody would fly in an airplane if the airline wasn't regulated. We've got to kill off, finally, this vile Republican lie that regulations hurt us. It is -always- the case the regulated try to get out from under regulation - this self-defeating behavior is why we rationally tie our hands so to speak.

Steven Pearlstein: Thanks.

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Gainesville, Fla.: Privatize their profits, socialize their losses.

Typical greedy capitalist republican hypocrites.

Meanwhile, as long as decent paying jobs continue to be shipped overseas, benefits/health care slashed, the rich get richer and the working middle class continues to slide downward along with their declining assets and resources.

People honestly believe John McCain and the Republicans who have controlled congress and the white house 12 out of the last 14 years are now the 'responsible' and 'responsive' ones?

Give me a break.

Steven Pearlstein: Thanks.

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Mt. Vernon, Va. : Excellent column today. Question: If the U.S. had actually taken the step of allowing citizens to invest a portion of their social security payments into individual accounts, would this crisis have been even worse? Would the introduction of millions/billions of dollars into the investment markets have forced brokerages/investment bankers to flock to even more risky investments? And, if that's correct, do you think people understand this potential risk of privatizing social security?

Steven Pearlstein: Thanks.

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Warren Buffet is the man: Did you see that Warren jumped all over Constellation today after its stock dropped 75%? Brilliant, savvy. The exact opposite of a proposed Morgan Stanley/WaMu suicide pact or Bank of America vastly overpaying for Merrill Lynch one day before Merrill's price dropped 75%.

Steven Pearlstein: Thanks.

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D.C.: Steve I never hear the words responsibility/accountability associated with mismanagement of the troubled financial firms---I also never hear the word --Criminal--- Do you think these greedy managers will be brought to justice?

Steve

Steven Pearlstein: Thanks.

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