Pearlstein: The Economic Crisis
Wednesday, October 1, 2008; 11:00 AM
Washington Post columnist Steven Pearlstein was online Wednesday, Oct. 1 at 11 a.m. ET to discuss the ongoing financial crisis.
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.
Warrenton, Va.: The "bailout" is really a "rescue plan" for the credit markets, something every rational person has agreed needs to be done, and soon.
But isn't there a dark side to the credit markets, too, in that a majority of Americans have become accustomed (addicted?) to satisfying their champagne tastes and beer budgets through the use of cheap and readily available credit? Corporations too, for that matter. And add the Federal Government to the list as well. Every taxpayer wants $1.50 in government services for every dollar they pay in taxes, and it's always the "other guy's" spending program that is wasteful. Endless borrowing is everybody's ace in the hole.
So, once the rescue plan has stabilized the credit markets, how do you then go about convincing an entire culture that limited access to credit is good for the economy? What's the consensus solution to too much available credit at every level of society?
Steven Pearlstein: That is the $700 billion question, isn't it. The short answer to your question is that markets will convince them by refusing to supply the cheap and easy credit. And that will force the adjustment. Remember, as I've been saying, this isn't a morality play, its economics. People weren't bad people (except some sleezy financial types), they were simply responding in very rational ways to various pricing and other signals that, in fact, were false signals. Now those false signals are going away, and people will adjust. But the adjustment will involve a temporary reduction in lifestyle for many people, and right now they both don't know this and certainly don't accept the necessity of it.
Silver Spring, Md.: So between the two candidates, Obama is the one who first suggests raising the FDIC insurance limits. My understanding is that this is a sticking point that may bring on additional House votes and a suggestion a lot of people support. Given that this is the only item that either candidate has directly proposed after the vote that seems to possibly make an impact, is Obama also the winner on this front?
Steven Pearlstein: This is the kind of question that serves no useful purpose. Part of the over-politicization and overly partisan nature of discussion on public issues.
Baltimore, Md.: During this recent financial strife why have we heard nothing from the media, or Obama, for that matter, about the S&L scandal and the Keating Five? Does the Obama campaign figure that McCain is struggling without it?
Steven Pearlstein: And this...
Savage, Md.: I'm sure this has been asked a million times, but I don't remember the answer.
Why did lenders ever think highly variable and exotic products like ARMs with artificially lower teasers or interest-only options were ever appropriate for subprime borrowers with bad credit? I can understand the existence of subprime mortgages -- higher rates reflect higher risk, just like with jumbo mortgages -- but if the lender had wanted to minimize risk, wouldn't the only sensible thing be a constant payment schedule?
Steven Pearlstein: I have never explained it because it is simply inexplicable, other than by the conclusion that the people making and brokering thse loans knew full well that it was stupid but that (1) it wasn't their money at risk (2) the fees were great and (3) the borrower would get into trouble and then simply get out of trouble by refinancing the loan (with another set of fees) later, and using the higher price and added equity to get into a more reasonable loan. When the prices stopped rising and refinancing was no longer possible, the Ponzi scheme ended.
Columbia, Md.: Hello Steve, You are correct in your piece yesterday that 'we don't get it'. I don't get the fact that millions of admittedly reckless homeowners are losing their homes but we only worry about bailing out big banks. Everybody says 'This is a credit crisis. It's all about confidence'. Well, I don't have confidence in the people who authored this 'bailout' and give them absolutely zero credit for the job they have done so far. I ask again what I asked you last week: Why not buy out the bad mortgages of the 'subprime' borrowers? The lenders will get their money and the government might get its money back in the future. Why not bail up instead of bail down? What is the consequence and how much will it cost? One of the reasons I don't like this bailout is that no one knows how much it will cost and we don't get any benefit or 'shares' for bailing out this banks. Thanks.
washingtonpost.com: They Just Don't Get It
Steven Pearlstein: This is not a bank bailout, in the sense that you use that term, meaning a bailout for its shareholders and its top executives. Nobody has been more critical of the practices of banks and Wall Street and brokers than I have, probably long before you were even focused on this issue, so I certainly don't owe you any apology on that one. If you want to check, you'll see I won a certain prize for that. We have already passed legislation to "bail up," several months ago, using an idea that I was one of the first people to push (refinancing involving a reduction of principal in return for equity stake in the house). We might want to expand that program even further, but it is simply not true that we haven't done anything. We put $300 billion of refinancing into that, thanks to Congressman Frank, who you would villify. And if you had read the proposal, there are several ways in which the taxpayer will get "shares" in the banks that would be directly participating in the program. So I'd say on all four points, you are misinformed.
Portland, OR: No, Mr. Pearlstein, it's you who doesn't get it. Nor does Barack Obama who said (as quoted in 9-30-08 WP): "success is unlikely if we start from scratch or reopen negotiations about the core elements of the agreement."
Wrong. We do have to start from scratch because it's the "core element" of this bill that's wrong. We have millions of middle class families who can't pay their mortgage debt vs. a handful of banks who own that debt, but the Bush/Pelosi bill gives 700 billion $'s only to the latter, the very small number of very, very rich people who own these banks, and nothing at all to the former.
The whole approach of this bill is wrong, and that's why the great majority of the American people reject it. We won't bite this apple you and the politicians have handed us because we see that it's rotten to the "core".
Bail out the people who need - and deserve - our help keeping up the payments on their homes. If we do that, Wall Street's bad mortgage debt will take care of itself.
Steven Pearlstein: The left wing bloggers are out in force on this one -- they see this as a seminal issue, like the Iraq war vote and the vote on warrantless searches. But other than not really understanding the problem and not really having studied the proposal, you guys are doing just great! Thank God there is a mainstream media out there that actually does reporting and has people who understand thing, because if the flow of information and news to the American people were left solely to bloggers, we'd be in a big mess.
Milwaukee, Wis.: We hear that unless the banks get bailed out, businesses that currently exist by getting short term loans from banks will be unable to get credit. There will be NO credit available. Why then did I receive this week - an offer to put $50,000 into my checking account in just 10 minutes by calling a Bank of America 1-866#; and an offer for a B of A No Fee Mortgage Plus - Stop Worrying and Start Celebrating Loan; 3 blank checks from Citigroup; and 4 applications for additional credit cards? I thought we were in a catastrophic credit bind. Also the banking industry is fighting the Credit Card Bill of Rights for Consumers that would make them stop sending out their bills with less than 14 days turnaround, or gotcha, you're one day late so we charge you 30% usurious rates. How can we get the banks to stop this bad behavior?
Steven Pearlstein: Interesting.
Waynesboro Pa.: If banks don't trust each other to lend money because of solvency concerns then isn't the normal mechanism to go to the Fed "window" - the bank of last resort. Why not lower the interest rate to the interbank loan rate and use existing market mechanisms to free up the frozen credit markets for some period of time. Every time a bank used the window they would be required to identify very specifically its list of nonperforming assets so at least there would be data on where the problems are specifically. This data could then be used to develop a well plan to deal with the underperforming assets on each banks books.
Steven Pearlstein: Well, actually, that's being done, in effect. The NY Fed has a pretty good idea of the collateral banks are posting to get overnight loans from them. And central banks are pumping in hundreds of billions of dollars to keep the interbank lending rate down in the channel that they control, which has a gravitational effect on the channel that they don't control. But if banks are hoarding cash and they are unwilling to lend for 3 months at a time, then that does drive up the 3 month dollar libor rate.
Juneau, Alaska: The approach being taken to this situation appears to be rather myopic. One of the alternatives that was being discussed a few weeks ago was to provide secured loans to troubled institutions, rather than having the taxpayers buy the debt and let the institutions off free. This approach was supported by a number of economic analysts and is essentially what the Fed has been doing in a limited way. So, why isn't this approach getting more support? Why are you and so many legislators advocating for the taxpayers to purchase the debt?
Steven Pearlstein: Academic economists very widely believe that if the government would simply recapitalize the banks somehow, it will solve the problem by giving banks the room to borrow more and lend more, and by bringing in additional private capital. In a well functioning market, that would happen. But it ignores the reality that this is not a well functioning market, which is the basic problem we are trying to solve with this legislation. First, a dollar of new capital would not allow the banks to leverage it 10 times and lend out $11 because the market is not willing to lend at decent rates even to well-capitalized banks. Second, even if they had the money, banks are hoarding and unwilling to make loans because they are gripped by the same fear and panic as everyone else, particularly because they have assets on their books that have gone down in value every quarter for a year now and are likely to decline in the quarters to come. So the simple recapitalize the banks solution isn't going to cut it. That needs to be part of the solution, and but it is not sufficient at the moment.
Columbia, Md.: Steven, I read your column religiously and you've been dead-on this crisis for a long time. But today's (Tuesday) column struck a sour note with me. I'm one of those "uniformed", "stupid", "don't realize the gravity of the situation" Main Street people. I've been sending my congressmen and senators emails telling them that they'll lose my vote if they favor this "bailout" - p.s., they're going to lose my vote anyway but I want them to squirm - it makes me feel good. I recognize the dire need to pass this bill, but the big problem I have is exactly what you stated in the last line of your column. I don't want this administration, and, more importantly, this Treasury Secretary, who's last job was heading up a Wall Street Investment bank, making any decisions on how to spend MY money. I want this group gone, gone, gone. If they would add a rider to the bill that stated no monies would be spent by this administration - form a public board to make decisions between now and January 21 if need be - I would support it. John
Steven Pearlstein: We have one president and one treasury secreatry at a time. It is a shame they have lost your confidence, and I understand why you feel that way. But this isn't a Bush thing -- its a Paulson and Bernanke and Geithner thing, and they have been about as straight and professional on this one as they could be. The administration has put aside its ideology and its partisanship in fighting this fire and doing what is needed for the country. What Paulson is and has been doing is a total repudiation of everything the Bush administration has stood for. Now it's your turn to do the same.
Springfield, Va.: I am completely disgusted with your condescending articles (A Pill Americans Can Swallow & They Just Don't Get It), Mr. Pearlstein. Can you explain how the Paulson Wall Street Bailout Bill addresses the root causes of the current credit crisis??? You seem to be a strong supporter of the bill, but you write remarkably little about why this bill is better than the myriad of alternatives that have been proposed. Americans "GET IT!" We get that we've been lied to repeatedly about concocted emergencies. We get that Wall Street is in it for Wall Street. We get that the economy has been just peachy up until 2 weeks ago and that, now, ex-Goldman Sachs CEO Hank Paulson requires $700 billion and unlimited authority in order to save it. Please explain your position Mr. Pearlstein!
Steven Pearlstein: Obviously you've read one column and none of the dozens that preceeded it. Please do your homework before sharing your disgust.
New York, N.Y.: With regard to the bailout, and why many people do not support it, is part of the problem the creator and messenger? I support the bailout (reluctantly), but every time I look at Secretary Paulson I think "That man made a lot of money while creating this crisis, has never admitted fault, said "I'm sorry," or even indicated that he would change the Street's behavior in the future." It's just "give me $700,000,000,000."
Steven Pearlstein: Lots and lots of people on Wall Street contributed to this crisis. Paulson probably has some culpability. But in the list of villains, he's pretty low on the list, I would imagine. In any case, he has shifted course in his new job and done what is needed to be done. He let Lehman fail, and that nearly brought Goldman down with it, which doesn't sound like a guy who was out primarily to protect his Wall Street friends. I think you may want to think again before questioning his motives or h is competence. He's obviously been an inadequate salesman.
Del Ray Beach, Fla.: If the main problem is the house mortgages and the fact that many will not be repaid, and the foreclosures are likely have a domino effect throughout the economy, doesn't the rescue bill's failure to address this mean that it will do nothing for what could be the major problem affecting Main Street over the next several years? So while there will be credit available and the investors will be assured, the middle class and lower classes will have no relief. Even though the businesses will have credit to buy inventory, the customers won't have the scratch to move it off the shelves. Only upscale businesses catering to the investor class will thrive?
Steven Pearlstein: Don't think that's a very accurate description of the reality.
Laurel, Md.: When James Galbraith wrote an op-ed opposing the Bush administration bailout plan, I thought the political lineup on this issue had been delineated in Austin, Tex. And was surprised that the Democrats voted for the plan and the Republicans against it, since it had been criticized as a "taxpayer bailout of Wall Street". Could you summarize what were the main ideological factions within each party that were for or against it?
Steven Pearlstein: The left doesn't want to do anything to rescue financial institutions from failure, and instead provide whatever relief to individual homeowners, which would make mortgages and mortgage-backed securities worth more and take pressure off the balance sheets of the banks. The right continues to blame over-regulation and excessive taxation, and thinks the solution can be found by reducing both and using non-cost solutions like a mortgage insurance program paid for through premiums collected on the banks holding the mortgages. Both are looking at reality through ideological prisms, in my opinion.
Only two choices: In one of your columns this week, you declared there were only two choices, penalize the fat cats that robbed the economy or stabilize the system. You then stated it was obvious we had to choose the latter. Your column after the bailout failed and public opinion was against it was that people didn't get it.
Did it ever strike you that the public isn't dumb, and does get it. They've just gotten sick of all of the well fed, upper middle class and higher pundits, legislators, etc...who are beneficiaries of the system as it stands telling them they have no choice but to continually bail out the fat cats?
Maybe they've finally decided they are willing to take the hit to see just a few fat cats finally get what they deserve? That they are willing to take a haircut on their miniscule 401(k)'s to see some justice done?
When I was in for my Econ graduate degree, my one professor defended the free trade/free market/Chicago School ethos by standing on absolute gains and tsking away relative status. I finally got sick of his recitation of cant by pointing out that if the gains go disproportionately to the top, then a rational actor model states everyone else would be better off killing the system which led to that distribution. If "I" am in competition with "you" for mates, status, children's comparative advantage, etc...and by killing free trade I knock "you" down by 50%, while knocking "me" down 10%, I am better off hurting "you".
Steven Pearlstein: Not too many columnists who have been willing to criticize standard economic theories than this one, so I don't think I need to apologize for that. It's unfortunate that to stabilize the financial system, you have to stabilize financial institutions, but that shouldn't be surprising, should it. You may be sick of seeing the elites do well while the average household hasn't. That's true about the elites, and something of an exxageration of the plight of the middle class, but I won't argue that point here. The question is, as I put it last week: do you want to get revenge, or do you want an outcome in which you will come out economically better off? It's a real choice, although you are right, I think the right choice is obvious. But you haven't given any evidence that you can do both.
Moraga, Calif.: A lot has been said about how Fannie Mae and Freddie Mac are pivotally responsible for the mortgage crisis, but I thought that both only bought conforming mortgages and that they required higher standards than did private mortgage aggregators. Maybe over time they did loosen their standards to compete with those private market bundlers, but I'm not clear on why they are being made critical villains for the underlying problems.
Steven Pearlstein: Contrary to the suggestion by the president and many Republicans, Fannie and Freddie were not the major culprits in the creation and packaging and insuring of questionable mortgages. As you point out, they didn't deal in this part of the market until late in 2005 through 2007, and then they let down their guard and began to buy these kinds of mortgages, or packages of them, in various ways. One reason was that they didn't like losing market share to the private-label mortgage packagers and insurers, which was happening at a rapid rate and was depressing their stock price (that decision was wrong). They also liked the big boost to profits that dealing in this part of the market gave them, since it had higher margins. And they saw it as a way of meeting low-income housing goals. None of those are excuses -- they were wrong. But they were not the big driver in creating these non-conforming markets or even in providing the capital for them. They were a factor, but not the biggest factors.
Dupont Circle: This isn't the top concern on anyone's list right now, but I'm curious if you know: If I'm a Citibank customer, will I be able to use Wachovia ATMS, too? If so, that's even better than 7-11s!
Steven Pearlstein: I'm sure you will eventually.
San Diego, Calif: A number of people I work with are "credit crisis skeptics"; they seem unconvinced that the "paper economy" on Wall St. affects the "real economy". I don't have your explanatory gifts, so help me out here: how would you convince a skeptic that this crisis is real? Also these people seem to think there are many alternatives to the Paulson plan that failed to pass Monday, but the ones I hear about (eliminating capital gains, helping homeowners directly etc.) strike me as too slow or small-ball to work.
Steven Pearlstein: It takes a while before a tight credit regime flows into the real economy, but you're seeing more and more of it every day -- credit card lines of credit being cut in half, fast food franchisees not beging ablt to get loans to fix up their restaurants, small businesses not beging able to expand and hire new workers, cities and states having trouble borrowing money at reasonable rates for infrastructure projects or even ordinary cash flow needs, companies being unable to float bonds, banks being unable to package and sell the consumer loans they make for cash that they can use to do make new loans, car companies losing a chunk of sales because they can't get the capital to finance auto leases. How's that?
Arlington, Va.: Since we are seeing a rapid consolidation of the banking industry, how long do you think we should allow this consolidation to stay before we start breaking up the pieces again? Is it safe to leave so much of the nation's finances in the hands of three large banks?
Steven Pearlstein: Good question. To the degree the consolidation is between banks that operate largely in different regions, there is not the immediate loss of competition question. But there is a question of whether we are creating banks that are so big that they, and everyone else, knows that they will never be allowed to fail and therefore are allowed to take risks they shouldn't. The bigger they are, the more closely they will have to be regulated.
San Francisco: How would you rate media coverage of the crisis so far?
Steven Pearlstein: Pretty damn good.
Silver Spring, Md.: Mr. Pearlstein, what's your take on the "trickle-up bailout" proposed by Jonathan G.S. Koppell and William N. Goetzmann in today's op-ed section? They recommend that the government pay off all the delinquent mortgages rather than bail out the banks directly.
washingtonpost.com: A Trickle-Up Bailout?
Steven Pearlstein: The government is already doing that, to some degree and perhaps should do more of it. The obvious problem is that, if you say you'll do it prospectively, then everyone will make themselves delinquent if they think they can get a better deal, and we'll have a huge bill. My guess is that it will also be politically unacceptable when people see that their taxes are being used to help out the guy next door who took on too much debt.
St. Cloud, MN: You will probably get a lot of questions on the "mark to market" accounting rule. I think I understand how it works; but could you tell us how long it has been in effect, how well it has worked, and whether you think suspending it is a good idea, both as a short-term expedient, and as a long-term policy? I very much appreciate your columns and these discussions!
Steven Pearlstein: Short answer: banks should be required to disclose what their balance sheet would be if they marked things to market, so investors have as much information as possible about the state of their finances. But whether you use mark-to-market values for the purposes of calculating (1) GAAP profits and (2) regulatory accounting is another question. I'd say on those issues, I'm for making some concession in the case of assets that are irrationally priced because of markets that have become so fearful as to be dysfunctional.
Boston: Steve, let me see if I've got this right. I wanted a new TV, my wife said not now, I said lets have a Yard Sale for the money.
We put together our yard sale which I estimate to have about $1,000 of sellable goods. Turns out the market for those goods is not what I thought it was, not even close. The market (buyers) are willing to give me $240 for those items I can sell. $240 equals no TV for me!
But now with the "Mark-to-market" rules erased can I go back to my wife and tell her I have $1,000 worth of valuable assets, and thus I should get my new TV?
Steven Pearlstein: It matters. Is the market for your used junk unusually depressed because all the buyers are so panicked that they are staying home, or because everyone on the block is trying to sell the same sort of junk all at the same time? In that case, the market price probably isn't a good indicator for economic value (usually, with lots of rational buyers and sellers, it is). In which case, if you think an accounting system should bear some resemblance to economic reality, you might not want to strictly adhere to mark to market.
Not a question: I am reading this Q&A and amazed at how angry people are. I am not amazed at how angry they are about the situation (they should be!), I am amazed at how angry they are at you.
I just wanted to thank you for your reporting. It has not always been what I wanted to hear and there are points I may see a bit differently around the edges, but what I really like is that I understand your articles. They aren't dumbed down, but they are readable by the average non-economist reader. Everyone I have shared them with has been grateful for reporting that helps them try to understand something at a time when we are not really getting any information directly from Treasury, the Senate, the House or the White House about what is being considered or why.
Please continue to report. Please continue to inform.
To everyone else - be grateful for facts, don't kill the messenger.
Steven Pearlstein: Don't worry about it. It comes with the territory. It's mostly the bloggers who have come in and, on this one, poisoned the conversation, as they are wont to do.
Vienna, VA: Amen to Milwaukee! I just got a letter from Chevy Chase Bank telling me to call the mortgage broker and reduce my monthly payments by $450 per month. The fine print on the back of the letter ran over half a page and appeared to involve signing on for a series of periodic refis, at the then-current LIBOR rate, over 30 years! This is a perfectly good 6 year old mortgage (30 yr fixed, with 20% down) reeling with documentation, for a house at half the price the broker tried to persuade me I was qualified for. Who is going to take away the apples these snakes continue to offer?
Steven Pearlstein: Throw it AWAY!
To Columbia, MD: Your desire to make your Congressmen "squirm", even though you want this situation fixed, is contributing to the nonsensical lockdown keeping the legislation from passing. Congress has a keen awareness of their political necks sitting on the chopping block and it is having the effect of freezing them in place.
They are afraid to move without full-on bipartisan support, knowing that any decisive action will come with enough negative repercussions to provide ample fodder for partisan attack ads. Taking out your frustrations by increasing their fears just because it feels good isn't helping.
Steven Pearlstein: Thanks for that.
Baltimore: Steve: For me, the most interesting aspect of the bailout/rescue package is how it has united the radical right and the loony left. A Texas Congressman deplored the plan as putting America on the road to socialism, while the left persists in fomenting the idea that the government will be handing bags of cash to investment bankers from a drive in window. Meanwhile, the LIBOR rate went from 2.5% to 6.9% yesterday. All the members of the public bombarding the Hill with "Hell no" e-mails about the rescue package are the same folks who will be screaming "Why doesn't someone do something" when their ARMS adjust up 4.5 percent.
Steven Pearlstein: Indeed.
Salinas, Calif.: Steven Pearlstein: markets will convince them by refusing to supply the cheap and easy credit.
Question: And will this drive home prices down? Essentially the markets are a zero-sum game and as credit gets more expensive something has to balance out this increase. Without prices going down it will cost way too much for anyone to buy homes, yet I hear no one mentioning this point.
Steven Pearlstein: Your observation is correct and that is why home prices will and should continue to decline, although much of the correction has already happened.
Kansas City: We keep hearing about the financial system being seized up.
Are you aware of whether this event can be measured? Are we more seized up say, than we were ten days ago?
What are the criteria used or such measurement?
Is there a fail-safe point down the road where after that point the damage will be irreparable? IF so, how long before we hit it?
Steven Pearlstein: The measures that exist are as "freezed up" as people have seen them in decades.
Steven Pearlstein: That's all the time we have for today, folks. "See" you soon.
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