Washington Post Columnist
Wednesday, February 25, 2009 11:00 AM
Washington Post columnist Steven Pearlstein was online Wednesday, Feb. 25 at 12 p.m. ET to discuss President Obama's Tuesday night speech before the joint session of Congress, which will outline his economic agenda.
Read his analysis of the speech here: President's Historic Message Balances Urgency, Optimism
The transcript follows.
About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.
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.
Las Vegas: People and economic reporters keep talking about the stock market as if it were a living, breathing, rational being -- "The market thinks this" "The market doesn't like" "The market (insert your example here)," etc. Who really is "the market"?
Steven Pearlstein: That's a very astute observation. Youo've put your finger on the source of a lot of nonse that gets tossed about, particularly by the press.
Most people, when they hear something about the market, assume that it is long term investors making decisions based on information that changes their view about a stock based on its longterm profitability. Nothing could be further from the truth.
Most of the trading on any day is dominated by -- surprise-- traders who buy and sell stocks in large quantities, usually on credit, and hold it for a matter of minutes, days or at most weeks. They couldn't give a damn about the longterm fundamentals of the company. What they care about is what other traders are likely to think, since that is their reality. If they think a bit of news will lead other traders to sell or buy a stock, then they rush to buy or sell quickly, wait until the stock moves and then take their profits. It's a game of spy versus spy versus spy.
So to ascribe any wisdom to this process is silly. Yes, over the long run, the market does reflect the underlying economics of a company. But long term is just that -- very long. Moreover, you often have no idea which piece of news is really driving the direction of the market in general, or even a particular stock, on any given day. You can sometimes guess, based on the timing and comments made by traders. But remember, these are traders, not investors.
Herndon, Va.: Conservatives are pushing the line that the New Deal did not end the Depression, WWII did. Okay. If so, does that argue for a laissez faire response to our troubles or for more spending and employment? Wasn't the gearing up for a wartime economy, in effect, a massive stimulus package?
Steven Pearlstein: Yes, it was a massive stimulus package, which only goes to prove that increased government spending of borrowed money is a stimulus. And the more you do of it, the greater the effect. The logical conclusion then is that the New Deal, to the extent there was increased spending, made things better than they would otherwise have been. To say the New Deal failed is just silly.
West Annandale, Va.: Do you think Wall Street would react more favorably to a "short-term fix" or to tackling the long-term structural items in the federal budget? Isn't it all about Net Present Value?
Steven Pearlstein: Wall Street would respond to anything that bails out the financial system as quickly and as painlessly for Wall Street as possible. It's just that simple. The bond market might care about longterm budget matters, but the stock market generally is uninterested in that.
Restructung the Banks: When we go through these breezy media presentations on "nationalizing" Citigroup and Bank of America, has anyone even bothered to ask what happens to the bondholders?
I ask because until a few months ago C and BAC debt was AA rated. That makes it a foundation of our pension plans and insurance companies. You liquidate the debt, you end up with financial crisis that makes the Lehman collapse seem like an anthill. Government takes over the debt and....well we're talking nearly two trillion dollars of debt to assume, need I say more?
Steven Pearlstein: Bondholders, for the moment, are still continuing to receive their payments, and even under various "nationalization" scenarios, they would probably continue to be protected. One reason we would bail out a bank, or nationalize it, is to avoid default and the domino effect that would have on the financial system.
AgriBusiness subsidies: Reduce Ag subsidies? Really? Has Obama discussed this with Ben Nelson?
Steven Pearlstein: Good question. I did notice, however, that the chairman of the House Agriculture Committee (no ag. subsidy reformer, he) was one of the only Democrats to vote against the Obama stimulus package. Guess he thought there weren't enough goodies in there for farmers, since when it comes to farm subsidies, his concern about the national debt seems to fade into the sunset.
Topeka, Kan.: Raising taxes on the upper 2 percent:
The very wealthy, those making over $1 million, will not be affected because historically their tax paid doesn't change no matter what the rate is.
So those that will be affected are the ones making $250,000 - $1 million.
This is really a raising of taxes on small businesses. As a former small business owner (s-corp), all of my company's income rolled over to personal taxes.
I had a small tier-1 business consulting at GM and Delphi with 10-12 employees.
For every employee, I had to keep 2 months of salary, FICA, health insurance cost in the bank, which for me was $12,000/employee.
When Bush lowered the tax rate in 2003, I was able to hire 2 more people because I could "float" the salaries of 2 additional people with the additional cash in our pocket.
Business people are in it to make money. Any extra income went into the business.
I would have had to let the two people go with a tax increase.
I estimate this increase will cause small business owners across the country to lay off, as they will not have resources available to cover wages, health insurance, FICA.
Does anyone ever look at the actual numbers when making these decisions?
Steven Pearlstein: Let me see: you had enough business that it would take up the time of two additional employees, but you didn't accept that business because you didn't have the up front cash to pay them to do the work for which they would be paid? Interesting. Did you consider going to a bank with those contracts and asking for a loan?
The idea that businesses will plow all their additional after-tax profits into the business, either in new plant and equipment or in hiring new workers, defies economic logic. If those were good investment, if it is a good idea to expand the business, then raise the capital to do it. And if its not, not. Your model assumes the business is capital constrained, which is true sometimes, but not most of the time.
Furthermore, your little business already enjoys a tax advantage by avoiding the corporate tax and then the additional tax on capital gains or dividend payments. Now you want to lower it to -- what? Zero. By your theory, you would take every dollar that you saved by paying no income taxes and plow it right back into the business, without giving yourself a raise or taking a profit.
Arlington, Va.: Instead of continually giving out money to people who have made some pretty poor choices on mortgages, credit cards etc, how about the government looks to reward those who have been financially responsible and lived within our means. The $15K tax credit would have been very helpful to getting into a house, but $8K just doesn't help enough. We may all be loosely in this together, but at some point it's okay to cut (or severely reduce) the help to certain people and use the resources elsewhere.
Steven Pearlstein: This isn't about rewards and punishment -- the market doles out plenty of that already. It is about solving a problem that now drags down everyone, the "innocent" and the "guilty," as you'd like to describe them. If it weren't worth it for the "innocent," then nobody would be suggesting we do this stuff. This is an extraordinary situation requring extraordinary measures. It's not costless, but the calculation is that the cost over time is less than the cost of letting the economy slip into a prolonged and deep recession.
Cumberland, Md.: The country is bankrupt -- why are people and pundits think that all this spending is so wonderful? Maybe we need to just let things happen and concentrate on cutting spending and not creating new spending -- why isn't the media raising more question about our enormous debt and the fact that it is financed by our enemy, China?
Steven Pearlstein: The country is not bankrupt. And in any meaningful sense, the federal government is not bankrupt. Let's not overstate the case here, please. Our debt is too large, but it is less than our national income for one year. And our interset rate for short term borrowing is near zero, longer term about 2.5 percent. We can handle the interest payments, and when and if we get out of this mess and the economy is growing at 3, 4, or 5 percent, we can begin whittling down this debt to a more comfortable level. As I said above, the only reason to do all this spending is because it avoids an even worse economic and fiscal outcome.
Bethesda, Md.: Every time the President or the Treasury Secretary address economic issues, the market drops a couple of hundred points. Wouldn't we all be better off if they just stopped talking? Or talked about something else?
Steven Pearlstein: Believe me, they would love nothing better.
Washington DC: Steven. I have a question that has been addressed by neither the politicians nor the media.
What changes to the economy need to be made during the recovery to help minimize the risk of repeating this within the next 30 years? Do we have to adjust our view on a consumer driven economy? This question is important for making decisions about bailout and stimulus. If we are going to be consuming cars at a lower rate, then the issue is to we have the number of car companies but they are smaller, or do we have few companies that are the same size as before?
I am a trained economist and have been reading and arguing since last March that we were then in a L shaped recession. The views of the non-punditry economists has been grim since late 2007, and non-of us see the beginning of the recovery before 2012/15, maybe the decline will stop in the next year but no working economist I've talked to think the flat part of the L will last less than 2-3 years, most argue 3-5 and a few are learning Japanese.
Steven Pearlstein: I'm with you on the L shaped recovery -- it will be a couple of years of bumping along the bottom. Five is probably too pessimistic, if we take the right policy moves now. But two is probable, in my opinion, because it will take that long to bring our consumption in line with our production, which was a root cause of this and needs to be cured before we have the basis for a sustainable recovery.
In addition, we need to revamp the regulatory apparatus of the financial industry so that the micro causes of the financial crisis are dealt with. That's not really an issue in terms of the timing of the recovery. But it is an issue in terms of avoiding a repeat of the same mistakes.
Fairfax, Va: With all the talk of overarching debt and frozen credit, has anyone thought about reinstating the tax deductions on consumer credit, such as car loans, credit card balances, etc. This might act as a tax cut stimulant for the middle class?
Steven Pearlstein: There are a few in the stimulus bill, but much watered down from what the Senate wanted. The problem with these is that for every additional sale you incent througha tax break, you give a windfall to five or ten other people who would have made a sale anyway. Not an efficient use of government funds. Better to use the same money and have the government buy houses and cars directly, if that's what you think is necessary.
Glenmont: Mr. Pearlstein, I turn to you for a sane, rational analysis of confusing developments. What would you say to someone who insists that the "New Deal did not work" and that nationalizing the banks is "fascism." I would like to be able to respond rationally to someone who I think is woefully ill-informed.
Steven Pearlstein: The New Deal didn't end the Depression, so in that sense it was a failure. It just made it less bad than it would otherwise have been. There are lots of reasons for that, but there is simply no denying that when the government paid somebody to build a federal post office or paint a mural, that person was employed, he spent the money to buy goods and services from other people and it generated economic activity that would not otherwise have occured. Unless you believe that government borrowing crowded out private borrowing and investment that would have been more stimulative -- unlikely in my opinion -- then you have to say the New Deal worked to the extent it was funded, which was pretty modestly. One reason the numbers are so big in the current effort is that we learned from the Great Depression that you really have to do it up in a big way to reverse the downward spiral and the psychological effects.
Reston, Va.: Although the stimulus package is being promoted as a vehicle for creating jobs, my take on the package is that its primary purpose is to keep states from defaulting on assorted debt obligations.
When I dig into the details, it looks like town after town is struggling with recurring operating and maintenance costs ranging from sewer systems.. to basic services.
If this is true, how serious it is?
Steven Pearlstein: Yes, the loss of funding for state and local services is very, very severe. That's why so much of the stimulus package is going directly to the states. For Republicans to argue that this is wasted and is not stimulative is, frankly, ludicrous on its face.
Columbia, Mo.: I enjoyed watching you this morning on "Morning Joe". I found it very entertaining that Joe and Pat Buchanan really didn't respond to your notion that if Americans WANT various government programs that you must PAY for them in some way -- taxes. That's why we pay taxes. Tax cuts will not PAY for programs that the public desires -- but then again, they just seem to want to cut and provide no services -- I guess the private sector should be providing roads, education, sewers, police, firefighters...The fact that European countries pay higher taxes and provide MANY more services makes no positive impression on these folks. Yes, they pay higher taxes -- and are provided with health care, public transportation, and on and on. Tax cuts are not the answer to our problems.
Steven Pearlstein: Yeah, they continue to buy into the false theory that any rise in overall tax levels is a drag on economic growth. The writer Matt Miller has a new book out that calls a "dead idea." It's time to bury that sucker.
Sewickley, Pa.: What do you say to the folks who continually refer to Obama's program as socialism? I am amazed at the economic illiteracy of the debate over stimulus -- at best it often seems illogical and at worst completely dishonest. Yet the reaction to Mr Obama's speech last night indicates our fellow citizens are listening to the president. They are with him for now and the "socialist" canard isn't connecting with anyone except the folks that live in red state bubbles. How do you see it? Thanks so much for taking questions today.
Steven Pearlstein: There isn't much power to the socialist charge, frankly, except among a certain set. Nobody is denying the fact that the government is taking extraordinary actions. Nobody really wants to do them. And everyone who proposes them wants to unwind them as soon as they can. This is not the first step toward Sweden.
New York: Steven, I heard a local public radio interview this morning with NJ Gov. John Corzine, who said that the unemployment expansion funds being rejected by some Republican governors amounts to about 1 percent of the total stimulus package. Is this such a small part of the package? Thanks.
Steven Pearlstein: Sounds about right.
Providence, R.I.: Steven, I'm hearing that banks account for about 1/3 of all lending - at least, they did before the economic crash. If that's correct, how can we possibly encourage enough lending to fuel the economy again? Haven't most of the other entities (hedge funds, investment cos.) that engaged in lending ceased to exist? What am I not getting here? Thanks.
Steven Pearlstein: You make an important point: most of the financial intermediation was done, ultimately, through markets where packages of loans were bought and sold. And those markets are now dead (hedge funds were buyers of those securities). And that is probably the most important thing to fix, since it is into those markets that banks sell their loans and take the proceeds and make new loans, again and again. The Fed is about to launch a program to jump start some of those markets, maybe this week. It involves hundreds of billions of dollars of freshly printed money. And it is the most important initiative we have going right now.
Washington, D.C.: Did you see Joe Stiglitz's economic smackdown on CNN last night? "Wall Street is not the right metric here." Hilarious!!!
Steven Pearlstein: No, didn't catch it. Was working, actually.
Houston: Wall Street responds negatively! What does Wall Street really want?
Steven Pearlstein: Bailout with no strings and a return to the good ole days of the bubble. Nothing more. Nothing less.
NoVa: Dr. Pearlstein, I still don't think Obama grasps the level of anger the public feels for bailing out the financial sector, irresponsible howeowners, GM and Chrysler, and now others who want a piece of the bailout pie. Although his approval rating is still high, it's slipping. He's entering dangerous and uncharted territory.
Steven Pearlstein: He understands the anger, I think. What many angry people don't understand is that anger, as he said, is not the basis for good policy. We need to do what we need to do to get through this thing as quickly as possible. As I once wrote, you can fix the banking system or you can punish the bankers but you can't do both at the same time. Sorry, but that's the way it is.
Evanston, Ill.: Hey Steven, do you see any evidence that Obama realizes letting Pelosi craft the first draft of the stimulus was a mistake? Obama shouldn't cede control of the rest of his agenda to the whims of Democratic Party hacks in the house. Martin Wolf, in the FT, has written some pretty devastating critiques of this political/economic strategy.
Steven Pearlstein: That's overstated a bit -- the Obama team was aware of the package as it was taking shape in the House and had some impact on it. In hindsight, it might have been better for Obama to have crafted it after close consultation with Congress. But in fact its pretty complicated thing to do, spend this money this fast, and the appropriations committee staffs know these programs well, so they were probably in the best position to take a stab at it. Remember, at that time, all Obama had was a transition staff made up of former campaign workers, and Pelosi was determined to have a bill on his desk the day he took office. You can quarrel with that goal, but at the time it seemed pretty reasonable.
"The Market": A brilliant mathematician friend of mine who has the foresight to go to work for Google said this about the market.
"There are long-term trends in the market, but they are too hard to study. Instead people study the noise in the market."
Steven Pearlstein: They don't study the noise, but they focus on it in speaking about the movements in a given day, week, or even quarter.
Washington, D.C.: Can you please explain what the point of the administration's "stress test" of the 20 or so biggest banks is? I understand that it tests how well they would hold up under more adverse conditions, but what is the point of the possible plan to replace preferred stock with common stock for the government, especially if, as Bernanke seemed to suggest, that will only happen if the banks are in serious, serious trouble? Doesn't that just keep the banks artificially alive at taxpayer expense, helping out shareholders and bankers for no good reason?
washingtonpost.com: A Second Try at Calming Bank Investors
Steven Pearlstein: No, it doesn't. If the preferred is repaid, with interest, then its a loan that turned out well. If the preferred is converted to common, then the existing shareholders are massively diluted.
Downtown DC: What exactly happened to Bank of America? Are its problems tied almost exclusively to the Merrill acquisition? Throughout the fall, while its peers were in crisis mode, it looked like BofA was one of the stronger banks because of its deposit base. How is it now a zombie?
Steven Pearlstein: I've heard tell that the Bank of America's problems primarily stem from its acquisition of Countrywide and then Merrill. The bank's gamble was that these would weigh down the balance sheet, but in the long run the company would more than make up for the eventual losses by the increased profits from these valuable business franchises. We'll see. But one thing to remember is that the "losses" now being taken by Bank of America might be exxagerated by the deeply depressed market value of some of the securities they are holding on their books that they inherited from Countrywide and Merrill. If, as many believe, those securities will wind up being worth more once all the loans are either paid off or resolved, then the bank will be able to post gains on them in the future.
Richmond, VA: Thanks for your work and taking our questions.
I really liked the speech. In many ways Obama is a breath of fresh air.
However, I really am skeptic about this very expensive plan. How does giving Americans an extra $13 a week and SOME mortgage holders a less-than $200 a month loan-adjustment assistance going to help? Do you really believe if someone is in financial trouble they are going to be "okay" with an extra $150 bucks a month? Won't they just default anyway?
Steven Pearlstein: Well, the idea behind $13 a week isn't that it is going to dramatically improve your standard of living, but that you will spend it, and all those $13, multiplied millions of times, will generate increased economic activity. That's pretty sound logic, to me.
As for the $150, I don't know what you are referring to, but there are households for whom $150 extra a month may be the difference between paying the mortgage bill in full and not.
Charleston, S.C.: I frankly don't understand the administration's insistence on saying that it will not nationalize troubled banks. As an economic conservative the idea of the government owning the distribution of capital is anathema to me, but I'm also a pragmatist. It's very clear if you look at historical parallels that nationalization is the only solution that works when you have banks weighed down by worthless assets - just look at Japan vs. Sweden. So far all of the counterarguments I've heard about why nationalization won't/can't work here don't seem to hold water (yes we have more banks but we're not talking about nationalizing all of them, just the ones that are mired in the muck).
It seems to me that in the long run, we'll spend less money and be able to restore the banking system to private, functioning hands more quickly if we DO nationalize the banks and clean them up. So with that in mind, I just don't get the insistence that we aren't going to do it. Sure the existing equity-holders get screwed, but we're talking about what's best for the entire economy and all of the citizens. Is there some reason why the Obama administration doesn't want to go there? Is this just temporary posturing? Do you think they'll change their tune at some point?
Steven Pearlstein: Don't get too hung up on the nationalization vocabulary. For the big banks that get into real trouble, like Citi, we're nationalizing them in every way but name. The Treasury will decide who will be the top executives, will decide broad lending and investment policies, and will wind up holding a good chunk of common stock. It will also guarantee the bank against further drop of certain assets. The differences between that and full-blown nationalization, for most intents and purposes, are quite small.
Alexandria, VA: Mr. Pearlstein, Thank you for the wonderful work you do explaining complex economic situations to us in terms we can understand. I was hoping you could do the same with this (rather long) question.
First, a little background on my situation. My wife and I are both in our late 20s/early 30s and are renting a condo. We make good money, and are trying to put together enough for a down payment on a house, though with housing prices what they are in the DC area, that's a tall order. We could have qualified for one of the no-doc-ARM-balloon-payment-NINJA mortgages (or even a standard FHA mortgage) during the boom, but decided we couldn't afford it, so continued renting. We saw our tax bill rise last year and didn't take home as much as we'd have liked.
If the stimulus/recovery/financial aid package lowers interest rates, as President Obama claims it already has, it is my understanding that housing prices will remain higher than they otherwise would. With a lower interest rate, the monthly payments on a mortgage would remain the same only if housing prices increased. Essentially, money becomes cheaper, so you can afford more house or lower your monthly housing bill.
Before, it felt like I was paying more in taxes to help bail out people who bought when it was imprudent. As a staunch supporter of other entitlement programs like welfare and unemployment benefits that also help catch people when they fall, I'm not necessarily against that concept. But it bothers me that as a direct result of this bailout, it'll be harder for me to get a big enough down payment to buy a house, since housing prices are being propped up by lower mortgage rates. After hearing about all these proposals, it feels like, after saving and making smart money and life decisions, I'm bailing out those people who didn't. And as a direct result of that bailout, it's going to be harder for me to get the house that I want.
I've read some of your previous transcripts, so I know that saving and making smart money and life decisions is its own reward. But since I'll be paying for this bailout for the foreseeable future with increased taxes, it's hard not to ask what's in this bailout for me? It's in my immediate interest to see the housing market lower prices so I can afford a house. It's in my immediate interest to raise interest rates so they lower housing prices to true market value and reflect the true risk of lending. So how is this proposal to cut interest rates not a slap in the face of anyone in my situation?
I know you've been a proponent of this stimulus package. And with a Pulitzer Prize and a working knowledge of the situation more advanced than mine, I assume you know more than I do. So please tell me where my analysis is wrong and why I should support this plan with its promises of lower interest rates.
Steven Pearlstein: Its true that one purpose of the government's takeover and recapitalization of Fannie and Freddie is to drive down mortgage rates from where they would have otherwise been, which is quite high because the secondary mortgage market has collapsed, except for Fannie and Freddie's participation. But they somewhat lower rates aren't really pushing house prices up -- they are merely slowing the decline in house prices so that there isn't such a steep decline. There are lots of other dynamics at work here, but remember that the spread between Treasury rates and mortgage rates is still pretty high. So I wouldn't blame the bailout for your woes.
But be patient. House prices are already down 20 percent, and they could go down further before we're done. I noticed yesterday that the cost of renting a house and buying the same house have pretty much converged, which is a sign that prices could stabilize before too long, although these things tend to overshoot on the way down just like they overshot on the way up.
This isn't about rewards and punishment : Thank you! Of course no one wants to reward folks who made poor choices, but I'm not sure how rewarded they really feel. I am lucky to be in a community that has not been impacted as much as others, but the folks I know who are now having a difficult time with mortgage payments (and facing possible foreclosure) are folks who made all the right decisions, but have lost their jobs and health insurance in the crumbling economy. I'd venture to say that they may make up a significant portion of those who need the help - but these are concepts too difficult for the cable guys to research, I guess. Do you agree?
Steven Pearlstein: No comment.
Chicago: Hey Steven, I understand the importance of reviving the flow of credit but don't the American people really need a raise, not just more cheap credit?
Steven Pearlstein: With the business sector in the shape that it's in, I wouldn't be counting on a raise this year or next. Be glad you've got a job.
Baltimore: Re the conservative claim that the New Deal was a failure: Columnist Mark Shields has a nice way of refuting this. In 1933 when Roosevelt took office, unemployment peaked at 25%. By 1937, it was 9%. Something good must have happened.
Steven Pearlstein: Thank you Mark Shields.
Aldie, Va.: Do you foresee a scenario where we run out of buyers for T-Bills (or at least a serious slow-down)? This would drive up the interest rate, right, which in turn would drive up virtually all interest rates since, inevitably, they're either directly or indirectly tied to the T-Bill rate.
Or put another way, if the Fed maintains artificially low interest rates, isn't that basically just printing more money and therefore driving up inflation?
Steven Pearlstein: At the moment, they are selling like hotcakes.
Steven Pearlstein: Folks, got to go chatter on one of those cable stations again. "See" you next week.
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