washingtonpost.com
Steven Pearlstein on Timothy Geithner's Bailout

Steven Pearlstein
Washington Post Columnist
Wednesday, February 11, 2009 11:00 AM

Washington Post columnist Steven Pearlstein was online Wednesday, Feb. 11 at 11 a.m. ET to discuss Treasury Secretary Timothy Geithner's $1.5 trillion bank bailout plan and Wall Street's reaction to it.

A transcript follows.

For more discussion, visit our On Leadership panel discussion, where experts and leaders explain why corporate and government leaders develop sometimes fatal blind spots -- and what they can do to change.

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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Nellysford, Va.: Often voiced by critics of the stimulus/TARP/Bank plans etc. is the warning of runaway inflation or an unavoidable devaluation of the dollar. Would you please comment on whether this is a strong possibility or just ill-informed rants against the plans?

Steven Pearlstein: This is a serious risk, but one that must be taken. It doesn't flow primarily from TARP, however. It flows from the dramatic increase in the balance sheet of the Federal Reserve, $1 trillion heading toward $3 trillion, most of which can be described as freshly printed dollars. That is the definition of an inflationary action by the government. The hope is that when the crisis is past, the transactions involved in creating that new credit/money can be unwound in a timely fashion, eliminating the inflationary threat. But that's a tricky business and one thing we have learned in recent years is that central banks are more effective at creating new money and credit than sopping it up.

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Annapolis, Md.: Is there hope that the guys at Treasury and the FED will finally realize that it's banks like these and not the big investments banks that make the economy work? I am starting to lose hope.

Steven Pearlstein: Not much of a distinction left between the big investment banks and the big banks. Goldman and Morgan Stanley are still primarily investment banks, but are making the transition toward regular banking, with its lower leverage and greater reliance on cheaper, deposit funding.

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Surprise, Ariz.: On Hardball with Chris Matthews this afternoon (Feb. 10), you gave three points about the Geithner plan. However, Chris interrupted you before you were able to talk about a fourth point. What was that point. Please explain in the very understandable way that you did the other three points. We really appreciate your clarity.

Steven Pearlstein: The fourth part of the Treasury program will be a more aggressive mortgage foreclosure prevention program, along the lines recommended by FDIC chairwoman Sheila Bair. That should help.

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Tallahassee, Fla.: President Obama said there are no earmarks in the stimulus package. John Kyl, Senate Minority Whip, made a list of items today that he considers earmarks? Which is more accurate?

Steven Pearlstein: I'm sure there are items in there for which there are only one logical recipient of the money. Haven't seen the list. But the question you need to ask is whether these are useless pork or worthy projects whose funding will stimulate in the short run and have good long term payoff. Let's not let process trump substance.

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Silver Spring, Md.: Outstanding column today. I hope every bailout happy congressperson in town reads it and decides to put some REAL regulations on the next round. I have a question as well... Pretty much, our economic mess right now can be explained by being "in over our heads". We were buying way too much consumer junk, so retailers like Circuit City, Linens and Things, etc.. etc.. are paying the price for over expanding. We were buying too-big houses on loans we couldn't afford. Banks over expanded on that and are now paying the price. Really the only true fix is to cut back, which means retailers are going to go out of business, which they are. But it also means that some lending capacity has to decrease. We couldn't ACTUALLY afford the lending capacity we had for the last decade. Negative national savings rates don't last forever. I understand the need to let that happen slowly and not all of a sudden. But sometimes it seems like these bailouts are more geared towards "help them out through this temporary down turn" instead of "deflate this industry down to something sustainable", no?

Steven Pearlstein: You identify the key dilemma we have: to deal with a problem caused by borrowing too much money as a country, we need to borrow more to prevent a deleveraging and reduction in spending that is so great and so fast that it creates a dangerous downward spiral that has the economy badly overshooting its mark on the way down as it did on the way up, and getting stuck in a deflationary dynamic that is very hard to pull out of. So we have to manage the process of moving from spending 106 percent of our income to 86 percent, which will be wrenching -- wrenching in terms of the value of our assets, wrenching in terms of eliminating as much as 10 percent of private sector capacity, wrenching in terms of bringing government services in line with what we are willing to pay for them through taxes, wrenching in terms of bringing our private spending in line with our incomes and our need to save for college and homeownership and retirement.

That's the big story, the story to keep your eyes on as we go forward. But we need to manage that process, in large part through government, so that those most vulnerable are protected and the thing doesn't spin out of control and cause the financial markets and economy to collapse completely, as they did during the Great Depression. We can avoid that outcome, but not if we fixate on small issues that are politically or morally satisfying but have little impact. And we have to realize that there is no way to punish the banks and save the banking system both at the same time.

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District of Columbia: OK, so the bank executives have made an immense numbers of missteps. People are suffering and the whole economy has nosedived as a result. Perhaps many of them should lose their jobs, or at least diminish their pay packages significantly. If any indication of fraud come to light, they should go to jail.

But all these appearances before Congress? Good god, man -- that's cruel and unusual punishment. Someone tell the House and the Senate to stop calling these guys in front of their committees, before they actually start to look sympathetic in comparison.

Steven Pearlstein: Actually, I'm watching this morning's hearing and it is surprisingly good so far. The bankers are good, the questions are good, and it has an effect of letting out some of the emotion and anger.

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Great Falls, Va.: Your columns a few months back persuaded me that large-scale infrastructure spending would actually make sense in this economic environment, given the likely length of time before recovery. Because we have similarly large-scale infrastructure needs, I came around to the line of thinking that a stimulus package focused heavily on infrastructure could potentially kill two birds with one stone. And even if it did not actually resuscitate the economy, we'd be left with a significant secondary benefit - much like the New Deal certainly didn't save the economy, but at least gave us some wonderful aesthetics is public works projects.

So I was sorely disappointed to see how little big-ticket infrastructure spending is in this bill, and then equally disappointed to see you level most of the blame on the Republicans last Friday.

There was a quote from Rohm Emmanuel soon after the election, concerning the economic situation. He said something along the lines of every crisis is a great opportunity. I think that's the Rosetta Stone to how the Congressional Democrats are regarding this: as an opportunity to fund every special interest project on their wish list for the past several years.

Belch. We can quibble about whether every dollar spent is per se stimulative. But even if that's true, it doesn't mean every one of those dollars should be spent.

Steven Pearlstein: I think they concluded that infrastructure spending had to be spent quickly, and there was a limit to how many projects fit within that. So they went to other things than simple roads and bridges, like building medical and educational and energy infrastructure and weatherizing homes. You may not think of that infrastructure spending, but it really is.

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Pleasantville, N.Y.: The latest incarnation of the program to get bad assets off the books of the banks is to have the private sector do it protected by a government stop-loss. Then, if the banks' capital positions take the hits everyone expects if the assets are bought at reasonable prices, the government comes in with yet another slug of recapitalization funds.

It seems to me the first step can be avoided if the banks keep these assets on their books but are forced to write them down to levels resembling their sale prices (assuming these prices are fair to the taxpayer, meaning that the government has a decent expectation of earning a profit on them over time) under the private sector-government buyout. It is said that write downs are unfair because, in this wild market, it's impossible to accurately value individual securities. Then don't write them down individually. Set up a bulk reserve so that when the assets are eventually sold individually in a more orderly process the reserve could be charged piecemeal. Such a reserve would probably have to be accompanied by more government capital, but, if big enough, it should convince counter parties that the major downside risk from the toxicity of the portfolio has been largely eliminated.

Steven Pearlstein: You are in a very technical area but I would say you are on to something. I would give the banks the one-time option of moving assets from the bucket that says "potentially for sale", which requires mark to market, to the bucket that says, "hold till maturity," which under the accounting rules can be priced at their longterm economic value, under strict rules about how that longterm value is determined and what assumptions are made. This would have several effects, but one is to eliminate the big hole created unnecessarily in bank balance sheets because of the total collapse of the markets in some types of securities.

It seems to me, as it does you, that we have enough of a real problem with loans that are genuinely bad that we don't need to compound our problem with accounting rules that make things worse than they already are.

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New York, N.Y.: Re: Goldman Sachs returning bailout funds GS has announced the intention to return the $10B in loans it took out (so to free themselves to pay executives anything they want). Isn't that a moot point? Didn't GS benefit tremendously via the AIG bailout? The huge bailout of AIG allowed AIG to keep their CDS counterparties whole. GS was a key counterparty. Shouldn't GS also "repay" those taxpayer funds as well?

Steven Pearlstein: Yes, Goldman was a big beneficiary of the AIG bailout.

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Arlington, Va.: OK With no accountability on wall street...why can't the U.S. Treasury become a bank to make loans? Since the Wall Street types are not being transparent and much of the tax dollars seem to have evaporated from the first part of the bailout.

Seems cutting the middle man out in this instance would be a good thing. Or identity a bank and utilize it for this purpose. Why throw more money at them? Why?

Steven Pearlstein: The Federal Reserve is becoming the banker of second resort, buying up loans the banks have made and will make in the future. There is no need to recreate the front end of the banking system -- they already do this, they have generally learned from their mistakes, and by setting parameters, the government can protect itself against sloppy underwriting going forward.

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Mashpee, Mass.: Mr. Pearlstein, I'm a fan of your sensible, reasoned and understandable commentary; however, I just heard your discussion with Chris Matthews (on MSNBC) regarding the Geithner plan and jumped out of my seat cheering when you analyzed the Wall Street reaction to the plan. You hit the proverbial nail on the head--using the selfish whiners on the street as a gauge of whether this is a good plan IS nonsense. Of course they didn't like it! I especially loved your description of (as best as I can remember) "tanker trucks filled with cash" backing up to the loading docks to bail them out as their idea of a plan. Thankfully adults are in charge now--and thankfully you are there to explain the seemingly incomprehensible.

Steven Pearlstein: Thanks. Used to spend some quality time down in Mashpee during my youth, which was a long time ago.

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Laurel: Your column says Price's bank never got into subprime lending. I'm wondering if there's any lender that serves as a model of how to do subprime correctly -- charge fixed rates with PMI -- and who's made a profit with well-contained risk doing so.

Steven Pearlstein: There probably are a number of banks that did responsible and profitable subprime lending. I just don't happen to have researched that.

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Golden, Colo.: How much will this increase the national debt (TARP, Geithner's plan, Stimulus plan, etc.,) and what will the total national debt be after these programs are in place? How will this debt affect our credit worthiness in the international monetary markets and are we in danger of "defaulting" on the debt with GDP shrinking?

Steven Pearlstein: We're not in danger of defaulting. The debt is cheap right now. It will need to be paid off but the best way to make sure it is is to prevent a Great Depression from happening, because if that doesn't, federal revenues will be constricted severely for a long time. From a fiscal standpoint purely, to say nothing of human standpoint, the stimulus and bailout spending is the most prudent course, believe it or not.

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Laurel, Md.: If I hear about a filmmaker who wants to create a new version of It's a Wonderful Life for the 21st century, I'll direct them to your column.

But doesn't the rhetorical question at the end of today's column implicitly assume that being Kim Price at a higher level is the goal to which the Wall Street bankers aspire? Maybe in their sound bites and annual statements it's what they SAY. But perhaps the people like John Thain are only in their jobs to collect the $30 million bonuses, and rebuilding their companies on a half-million a year would defeat the purpose of being there.

Steven Pearlstein: Maybe.

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Columbia, Md.: What is the real difference between this "plan" and Paulson's?

Steven Pearlstein: It is merely an extension of Paulson's plan, with modifications reflecting changed conditions and lessons learned and a bit more aggressiveness. There are only some many ways to skin this cat, so to expect something wholely different is misguided.

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District of Columbia: I am an Obama fan, but all this stimulus and TARP stuff see off point of a core issue impacting many Americans, not just hose facing foreclosure. The proposals to cut interest rates to a flat 4 percent was very interesting. However, why wasn't it a monetary proposal versus a fiscal proposal? What would the estimated cost be of such a plan? I'm about to refinance my house down to 5.1 percent and it can save me close to $700 a month.

Steven Pearlstein: One of things we should have learned from the recent bubble is that if credit is too cheap and too available, the effect isn't (over the medium to long term) to reduce the payments of the homeowner, it is to increase the price of the houses. The plan to reduce mortgage rates by fiat is a very bad idea, because it is essentially reflating the bubble. A 5-6 percent interest rate, which is what we have now for 30 year fixed, is consistent is a healthy credit market and the world should adjust to that. House pricing is adjusting to that. And if people can't afford to buy a home at that rate at the new lower prices, then they need to look for a less expensive home or continue to rent, which isn't a tragedy.

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Dallas, Texas: Mr. Pearlstein

If you watch any of the money news channels all you hear is that the sky is falling. These guys are really upset at the administration's plan announced by the Secretary of the Treasury. Should ordinary folks take this reaction with a grain of salt or did the administration miss the mark as badly as the Wall Street talking heads say they did?

Steven Pearlstein: Yes, take the reaction with a grain of salt. It is self-interested pouting for not getting the full-fledged bailout they were hoping for. We WILL have to help them out of their hole with government money. But they want a total bailout.

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Braddock Heights, Md.: Mr. Pearlstein,

Like many others I am disgusted with the banks and the politicians willing to hand money over to them. But, your column this morning was a wonderful reminder that there are responsible banks out there.

I now have my own plan. I'm putting the market to work. I'm voting with my money and closing the accounts I have associated with Citi. I can't stop them from getting my tax dollars. But I can darned sure guarantee that they don't get my business.

Steven Pearlstein: That's the markets at work -- the market for public opinion.

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Danvers, Mass.: Full bore skepticism, good to see in the Post!

I wonder how this bank's idea works out if as many people expect (who have been right early and often on this crisis) that housing has another 15 percent to 20 percent to fall on average. A cheap loan is pretty good, but paying too much is still bad, isn't it?

Steven Pearlstein: Just because the value of a house goes down a bit after you buy it, doesn't mean you made a mistake. If you like the house, think it worth what somebody is asking, then buy it. It will go down and then it will go up and ten years from now it may turn out to be the best investment you ever made. If you think you can time the market bottom, you'll be making a mistake. At this point, at lot of the price adjustment has already occurred.

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Silver Spring, Md.: Mr. Pearlstein, your article about Kim Price was a tiny ray of sunshine in this great big storm. Do you think that if we put, say, 99 percent of the bailout package in the hands of small common-sense businessmen like Mr. Price, we could cushion ourselves enough to allow the big guys to fail without taking the rest of us down with them? In other words, strengthen those who have been doing the right thing all along instead of propping up those who are likely to go right back to raping and pillaging.

Steven Pearlstein: Can't do it. The big banks dominate the market. To be fair, most of them are continuing to lend, contrary to what you hear and read. But I haven't been too impressed with the crativity of their programs.

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New York: Although I'm generally a believer in free markets, our current economic crisis has really changed my opinion. These self proclaimed keepers of capitalism beg for government intervention to stave off bankruptcy but then lavish themselves with bonuses saying the free markets demand that you pay your best people. My two year old son could not cause as much damage to the financial system as Weill, Thain, Cayne, Fuld, Rubin, etc. did, and my son would work for a lot less money. I'd go one step further: To prevent future blow-ups we really need to impose strict restrictions on leverage, risk and pay. It's quite obvious that Wall Street has zero credibility to police itself. This whole episode disgusts me in the highest manner possible.

Steven Pearlstein: Amen.

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Duluth, Minn.: I think you have an unusual ability to make complex economic ideas more understandable. I am wondering if you have written any books. Would like to read more of you.

Al

Steven Pearlstein: No books. I like the column format.

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Falls Church, Va.: After Geithner's performance yesterday, and Paulson's history in office, can we agree that no one in either party has the slightest idea how to deal with this crisis?

We all know what the underlying problem is: There is a huge pool of overvalued assets on the banks' books, and we have to deal with the fact that someone, sometime, is going to have to absorb that loss. But the political leaders in both parties who have been charged with figuring this out have answered only "someone else, later."

No details are provided because no details have been decided upon, and any decisions that get made get changed the next week anyway.

In this atmosphere of constant uncertainty, the economy is never going to heal. No one's going to absorb a loss if they think that someone else will take that loss off their hands. No one's going to take a risk if they think the rules are going to change in the next few days. All of the frantic tail-chasing at the Treasury is ultimately going to worsen our stagnation.

Steven Pearlstein: It's a fair criticism, but it is premised on the false assumption that there is a right answer and that right answer will be right even as conditions change. Predictability is important, disabusing various players that if they hold back, there will be a better deal later -- that is useful. But we're going to deal with this problem of the bad old assets through trial and error, through some sort of combination of public and private, and through both direct financing and some sort of downside guarantees. I think the Treasury is wise to remain flexible and set out a set of principles but not get locked down with a single solution. That said, it is time to get out there and start trying things and learning.

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Arlington, Va.: Dear Mr. Pearlstein - loved your column today! I have 2 questions about the TARP money. First, the reports you see in the media make it seem like the first half of it has been badly misused; is that really true or is it just hype based on a few anecdotes that are not representative of the whole picture? Second, if the idea behind TARP was to relieve from the banks' books toxic mortgages, why not give the second half to a public corporation (Troubled Assets Relief Corporation?) to buy these bad loans? Seems to me that would: (1) remove the bad mortgages from the banks' books; and (2) transfer them to a company that would have greater incentive to work with homeowners to modify the mortgages and mitigate foreclosures, thereby allowing more people to stay in their homes.

Steven Pearlstein: The first half was not badly handled, it was not a failure. It stopped a systemic crash. It recapitalized banks that either did or will soon need more capital and won't be able to raise it privately. I would not have structured it as they did -- I would have gone ahead with some program to try to jump start the market in the so-called toxic assets. But in the end, Treasury will have to do it all -- recap the banks, buy the bad assets and help the Fed buy up new loans. Everything you suggested is reasonable and all of it is being done.

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Southwest Nebraska: Wow, you certainly took Nebraska's Senators to task for economic illiteracy! I'm certain they deserved the notoriety. Have you been pleasantly surprised by anyone in Congress that seems to have a good working knowledge of economics?

Steven Pearlstein: I just heard Sen. Hatch and Sen. Alexander on MSNBC talking against the stimulus bill and I have never seen so much economic nonsense packed into so short a time in my life. It was truly breathtaking -- every comment they made was based on an economic fallacy. And I truly think they believe what they were saying. They were wrong on the fact, wrong on the theory, wrong on the logic. It was like listening to people claim the sky is green.

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Richmond, Va.: OK...I am trying to stay open minded about this stimulus bill.

I am having a hard time understanding there can be a successful bailout with borrowed money. Won't the result down the road be higher taxes for everyone, plus inflation?

Also...

Please tell me a couple of examples of what will be stimulated that will create actual private sector jobs?

Steven Pearlstein: If it is not borrowed money, then it is not stimulative. How's that. Because if it is extra spending paid for by extra taxation, then all you have done is reduced private spending and increased public spending, dollar for dollar. That's not stimulative. The stimulative effect comes from shifting money from savings to present consumption. Yes, it will have to be paid back, but the reason you do it -- to repeat once again-- is because over the long term, you will get more output and more tax revenue by preventing a deep recession than not.

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Los Angeles, Calif.: Since fiscal 2004 former Wall Street titans (Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns) lost $83 billion in market value while paying out $239 billion in compensation and bonuses. That's $3 compensation for every $1 investors lost. These capitalists stood in line as if with hats in hand for government bailouts costing taxpayers 2.5 times the cost of the S&L bailout (nearly $8,800 per taxpayer household). Now we learn they used some bailout money to pay additional bonuses and for meetings at luxury hotels.

Doesn't that $239 billion personify Wall Street greed and financial malfeasance, and result from lax regulations previously trumpeted by Republican conservatives? You think most politicians would target that $239 billion for politician contributions before condemning it as an anathema to capitalism?

Steven Pearlstein: That analysis is a bit unfair, because it is comparing an operating cost with a profit figure. It makes a good point, however, which is that over the long run, bonuses were paid out of phantom profits to an obscene degree.

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Rockville, Md.: I gather from your column yesterday that you are critical of the many critics of the Geithner plan -- as much as we know about it. Could you describe your position further?

Steven Pearlstein: They have outlined pretty much what needs to be done. They haven't been able to reach consensus on the details of the foreclosure mitigation effort, which mystifies me: its not that complicated. They haven't been able to reach consensus of the buying up the bad assets effort, which is complicated, but they should just go out and try a bunch of things and see what works, because there is not "right" answer that can be determined now. The Fed facility to buy up new consumer and commercial loans -- its under way and will work. And recapitalizing banks that need the money and are strong enough to survive -- that's being done and will be done. So there are the four parts.

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Explaining this to children: Steven,

What would you say if a child were to ask you about this bank bailout and how this will affect them down the road when they become adults? Let's say it's a child around the age of 10, who has some basic understanding of money and saving.

Steven Pearlstein: Your mommy and daddy are going to borrow some money now on your behalf, that you'll have to start paying back when you get out of college. Its as cheap a money as you can borrow. And we'll use it to prevent the economy from collapsing and mommy and daddy from losing their jobs now, which would mean that mommy and daddy wouldn't the money to buy you toys and take you to McDonalds and allow us to remain in this house. It would also put mommy and daddy in a very bad mood if they were to lose their job, and increase the risk that they would become sick or get a divorce. So on balance, we think this a good thing to do, not just for us, but for you as well.

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Alexandria, Va.: Mr. Pearlstein - to your answer that there is not much difference between the big banks and other banks -- sorry to disagree. My bank, Burke & Herbert, is very different in terms of operation, management and efficiency. We had our best year ever in '08. All banks are NOT greedy, short-sighted and risk-taking. We operate with common sense. Thank you for highlighting a GOOD COMMUNITY BANK! Bravo!

Steven Pearlstein: You are right about Burke and Herbert, which continues to thrive because of its sound business practices. Deserves a column of its own sometime.

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White Plains, N.Y.: "Weatherizing homes"? That may meet some definition of infrastructure somewhere, but it's not going to keep me from falling through the Tappan Zee Bridge.

Steven Pearlstein: If it reduces the need for oil and gas, and that marginal change in demand lowers the price that you and everyone else pays for gasoline and heat, then you are a beneficiary. There ARE spillover effects, actually.

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Albuquerque, N.M.: Steven, thank you for speaking to this issue so clearly and accurately. I stood up and cheered when you wrote about the Wall Street Gang only wanting to "once again earn inflated profits and obscene pay packages by screwing over their customers and their shareholders." I especially enjoyed the comparison to Citizens Bank and their impeccably responsible president; a truly rare commodity these days. Maybe these avaricious bozos will listen to you and maybe our public outrage is getting through but a fox will always be a fox and when you put him in the henhouse, he's going to eat chickens. Without tough expectations and oversight now, they will clean us out and wonder why there's nothing left the next time around.

Steven Pearlstein: I think they are getting it and beginning to change their own view and actions. But they have a long way to go to change the culture of these firms, which are fundamentally oriented toward taking advantage of everyone else.

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Alexandria, Va.: SP: "We need to borrow more to prevent a deleveraging and reduction in spending that is so great and so fast that it creates a dangerous downward spiral that has the economy badly overshooting its mark on the way down as it did on the way up, and getting stuck in a deflationary dynamic that is very hard to pull out of."

But isn't this precisely what Japan attempted during the 1990s, without success? Why do you believe the outcome will be any different here and now?

Steven Pearlstein: They did it badly, they did it late and they didn't do it in conjunction with other things, like forcing their banks to clean up their balance sheet. This is part of a multi=pronged effort. And this isn't Japan, which brought its own set of cultural and political hangups to the effort.

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Save or Spend?: What's your take on whether people should save or spend? Or does it depend on individual circumstances? I wish the president - who I like - had given a better answer the other night.

Steven Pearlstein: People should move steadily toward lowering their income to be consistent with their income and their need to save.

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La Plata, Md.: Thank you for your article this morning. It was very enlightening. Yesterday's business was just about short term traders taking profit. What I find promising about your take on Geithner's plan is accountability. Maybe just maybe we'll start holding firms accountable for there actions and there is a price to pay for their actions. I like to idea of private markets participating in the restructuring. The mortgage backed securities value rise over a long term. Buying at significant discount with government backing for the downside sounds like a were headed in the right direction.

Steven Pearlstein: Thanks. And that's all the time we have for today. "See" you all next week. And I apologize for not getting to the dozens of questions still in the queue.

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