Washington Post business columnist Steven Pearlstein was online Wednesday, May 14, at 11 a.m. ET to discuss the Congressional proposals to rescue homeowners at risk of foreclosure.

A transcript follows.

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

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

Read Pearlstein's latest columns.

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Owings, Md.: When Bush announced in 2001 that he was directing Treasury to pursue a weak dollar policy I wondered what Treasury would do to achieve that goal. The lessons of the 70's convinced me that turning on the printing presses to produce more paper money was the root cause of inflation. The FED no longer publishes the M3 (total money supply) as they claim it is unnecessary, I respectfully disagree. Is not this new bail out of speculators ultimately inflationary? Where else will this money come from if not from overtime shifts in the pressroom?

Steven Pearlstein: I don't have a degree in economics, but one thing I have become convinced of is that inflation, in the current world, is not everywhere and always a monetary phenomenon, in the sense that it is only about the supply of money. I think it is about the supply of both money and credit and the amount of demand that determines, in part, how quickly money circulates. So while I'm sure the loose money policies of the Fed and other central banks is a factor in today's inflation, just as big of a factor is the pegging of the Asian and Middle Eastern currencies to the dollar.

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New York, N.Y.: When do you think the Frank/Dodd bill is going to pass? Do you think the final bill after approvals will be effective? Do you see a split in support between those who preside in states with housing issues versus those who have been less affected?

Thank you.

Steven Pearlstein: The problem is -- and the reason I wrote this morning's column -- is that I don't necessarily think it will pass. I'm not even sure it will be allowed to be taken up in the Senate.

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Corona del Mar, Calif.: How would the proposed "profit sharing" between the homeowner and the FHA on the sale of a home work? Why shouldn't lenders that are being asked to reduce the mortgage be allowed to share in the profit sharing?

Steven Pearlstein: Actually, I agree with you on the lenders having some upside. If you think about it, the new mortgage will actually create, from thin air, some "equity" for the homeowner in that he will own the house with no more than 85 percent of the value being mortgaged. That's a good thing. But it also means that the equity was essentially coming out of the hide of the former lender.

Now you wouldn't expect most lenders to hold on to this lien on a portion of future capital gains. You'd expect them to want to monetize it immediately by selling it at a steep discount, since the actual value won't be known. And you can imagine some clever investment bank buying these, packaging them and selling them. That was my suggestion back last August, when I first proposed this, thinking it was an original idea (actually, others had it too). The idea would be to incentivize more lenders to adaopt this workout approach with more homeowners facing default.

Frank's view is that, to avoid the political problems, it would be better to use the value of the liens to reduce the government's costs. I won't second guess his political judgment on that. From a pure policy perspective, however, it would have been better to have a bigger program and leave the upside lien with the former lender.

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Northwest, D.C.: What corporate interests are against this bill in addition to the political games?

Steven Pearlstein: Here's the thing: NONE. In fact, many are in favor of it and would actually like to lobby harder for it, except that they fear that in doing so, it will give ammunition to those who want to call this an industry bailout.

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Washington, D.C.: We hear so much talk about the impact of falling housing prices on the economy. Why has nobody been talking about the negative long-term impact of artificially high housing prices? Is it really productive for younger generations to tie up twice as much of their income on housing than previous generations? Won't that discourage more productive investment?

Steven Pearlstein: I'm with you on that one -- been writing that for months now. The purpose here isn't to stop the repricing of residential real estate so it gets down to levels that are economically sustainable and justifiable. It is to get there more quickly and in a more orderly fashion, without creating the downward spiral which will cause the market to radically overshoot on the downside the way it did on the upside. That's why the FHA refinancing proposal is a good idea. It accepts the inevitable decline in house values, sets the new mortgage amount to the current level of depressed prices, and then some, and encourages lenders to do their workouts quickly.

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Columbia, S.C.: Posting early because of a meeting. I know that housing values have dipped (to say the least), but are we really saying that for many mortgages may be more than the worth of the house over the term of the mortgage? Housing prices only matter when you sell. Thus, while houses may be worth less then the amount owed on the mortgage today, they may rebound at the end of the mortgage term. Gasp, that means people should look at housing as a long term option. Notice I did not say investment. A house was never intended to be an ATM. I fear that current legislation will encourage people to think that way.

Steven Pearlstein: I agree too much attention has been put on underwater mortgages. But in the case of these refinancings, reducing the principal is necessary to make the new mortgage affordable to the people in the house (if they could afford something more, then we wouldn't have a problem). You can do that with rate reductions, but only up to a point. If you want to get these people into a new, fixed rate, 30 year mortgage (or even 40, which would lower the monthly payment even more), then you are going to have to reduce principal. And under the rules of good underwriting, you want that principal amount to be no more than 90 percent, which is where the Frank bill puts it, plus allowing for certain fees and insurance premiums, that effectively bring it down to 85 percent.

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Silver Spring, Md.: Housing crisis, housing crisis... but personally, as an upper middle class worker with a graduate degree, I can ALMOST afford a small condo finally. Sure, I could have had a 4 bedroom house on an interest only loan 3 years ago... but I've been responsibly holding out, and prices are just now STARTING to head in the general direction of reality. The old 2.5x your salary mantra is an absolute joke at this point - most families of 4 would live in studio apartments if they followed conventional guidance. Yes, yes.. I've read enough of your online chats to realize that letting the bubble just BURST has broader effects on the economy and is not a good solution. But my question is this... will this legislation at least still continue to let the hot air out, if only slowly? If it doesn't then we're just pushing the problem off for half a decade, not solving it.

Steven Pearlstein: Yes, yes, yes, this bill would be part of the process of letting out the air. That is why reducing principal to the lower value of the houses is so important.

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Richmond, Va.: Do you mind if I diverge from the topic? I was just wondering this: Last week I read that Alan Greenspan said the worst of the economic downturn has passed, but last night on the News Hour With Jim Lehrer, George Soros said the exact opposite. In fact, he said we are in real trouble. So who's right?

Steven Pearlstein: Nobody can really say for sure, but I would say that even if the worst of the financial market crisis is passed (which may be true, although barely), it is certainly not true that the worst of the economic crisis has passed, since the impact of the financial market crisis is only now just beginning to hit the real economy.

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Great Falls, Va.: I take your point, and I think you're largely right, but there's nothing that says that homeowners and speculators must be mutually exclusive.

Steven Pearlstein: No, but as it is used in political discourse, a speculator is thought of as someone who is a house flipper, not a house liver.

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Vienna, Va.: My teen children's college savings funds have been ravaged by low interest rates and high inflation, as have my retirement savings.

We are unfairly paying others to save their homes. I don't think this is right. Neither me nor my children can recover these lost savings.

Why should we be punished to help others? Who will help us,and how?

Steven Pearlstein: While there is some unfairness there, as you describe it, it is not the fault of legislation like this one. It is the result of there being excess investment capital in the world right now (lots of causes of that, from macroeconomic imbalances to demographic bulge of baby boomers at the height of their earning and saving). You need to look for investments that pay reasonable dividends but have some upside potential, and then wait for markets to turn up.

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Bethesda, Md.: Steven,

This legislation confounds me. Of course, the whole industry is so complicated and confusing that even myself, a CPA, can't understand it (always use firm experts on FAS 133). A few questions.

First, is there any good reason that Fannie and Freddie (the difference between the two I don't understand either) should be public companies when their whole purpose of existence is for the public good (well, capital markets and banks - so maybe they should be wholly owned by the banks)? The fact they have permanent backstops by the Feds (tax dollars) makes no sense to me when no other industry (save farming, but that's a whole different discussion) has this guaranteed minimum and existence as a business?

Second, you fail to make the argument stick for those people who bought more than they could afford that they deserve relief. I suffered in cheap, crappy apartments for many years to save up enough money to afford what I really wanted. In the end, I still couldn't afford everything I wanted so I sacrificed a number of things but I worked my tail off to save that 20% plus another 15% for cushion, repairs and such. My wife and I do well, but we live far within our means. To see people buying houses that are 10 times their annual salary (with little hope of expected raises beyond inflation) drives me up the wall - and these are also people who bought million dollar homes. I don't get why I should have any sympathy for people who act irresponsible in homeownership.

Third, the banks themselves seem to be sticking it "to the rich" by creating a new "conforming jumbo" interest rate that is somewhat equivalent to the old non-conforming jumbo rate, in terms of premium over conforming rates. For myself, who was excited to refinance (even with my 30 year fixed rate), this took the incentive away - those 40 basis points make all the difference in the world. I'm a much lower risk of default than most people, with plenty of savings and solid income. Why should I be penalized for working hard and being successful?

Thanks for your insight.

Steven Pearlstein: Okay, so let's go through a couple of those points.

Fannie and Freddie are hybrids. They allow for the raising of private equity capital at reasonable rates, supplemented by lots of debt (as you'd expect) that is raised at preferable rates because of the government guarantee. That allows for cheaper mortgages and a steady supply of mortgage money in bad times.

Obviously, because of the government involvement, there has to be regulation to make sure that the entity doesn't take excessive risks with the governemnt's backing, and to make sure that they don't merely use the advantage of lower cost funding to buy up the entire mortgage market.

Its unusual, but it works, as we are seeing now. If the regulation is not strong enough, which it wasn't in the past, then you get abuses and excessive risk. So there is the need for a strong new regulator who insists on a good balance between the need to provide shareholders with a fair return and the public needs to limit public risk while providing steady liquidity to the secondary mortgage market.

Your second question about helping people whom made bad decisions is often heard. There's nothing wrong with the concern, except that, in my opinion and the opinion of many, you sometimes have to put aside your moral outrage to help prevent a market dynamic from getting so bad that it drags the entire economy down with it and causes all sorts of hardship for hundreds of millions of people who had nothing to do with any bad judgments. The bailout, as you'd call it, is not really for the individuals, although that is how it is delivered, in very small doses. The bailout is for the rest of us.

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D.C.: In relation to the GSE bill, the basic question is, why do we regulate financial institutions, such as banks and GSEs, in the first place. In order to protect the financial system and the taxpayer. Dodd's bill is a "sham" as it limits capital and portfolio regulation to the protection of the GSEs themselves. Please name me any other public company we regulate primarily for the benefit of their shareholders, and not for the public?

Steven Pearlstein: That is just not true. No other safety and soundness regulator -- including bank regulator -- is tasked with protecting the entire financial system from systemic risk. That is why Hank Paulson, the Treasury secretary, has called for a super-regulator (the Fed) to assume that responsibility. The task of a safety and soundness or prudential regulator is to simply make sure the regulated institution is managed in a safe and sound manner. And that should apply to Fannie and Freddie's regulator.

Now, having said that, I have to say that I can't imagine there being a very big difference between preventing Fannie and Freddie from getting into financial trouble, and preventing Fannie and Freddie from getting the financial system into trouble. Call me uncreative, but I can't imagine a way in which you get the systemic problem while Fannie and Freddie remain safe and sound. And if that is true, then simply providing for safety and soundness of Fan and Fred should be plenty of protection for the system as a whole.

So really, I don't think your point -- which is taken right out of Sen. Shelby's talking points -- is really very valid. Because they are a hybrid, we have to regulate Fan and Fred in a way that allows them to raise private equity capital but still requires them to be run in a safe and sound manner that does not abuse their government backing and serves the larger public purposes of making housing more affordable and assuring a steady supply of capital to the mortgage market. Are there tradeoffs involved in running and regulating such a company? Of course. Which is why you want to make the regulator very powerful and give him broad discretion, without prescribing too much in the legislation. Sen. Shelby wants to micromanage this through legislation rather than letting a regulator do his job.

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Houston, Tex.: In your estimation, what are the chances that we see Fannie or Freddie nationalized before this is all over?

Steven Pearlstein: Slim.

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Washington, D.C.: There seems to be an odd dichotomy where on the one hand politicians are talking about stabilizing the housing market (a.k.a stopping price declines) and on the other hand talking about the need for affordable housing. Considering the still unaffordability of housing in the D.C. area, aren't these two mutually exclusive?

Steven Pearlstein: I think we've talked about that today. Yes, let prices decline, but don't let it get to the point where you get this uncontrolled, downward spiral that overshoots badly on the way down and takes the economy with it.

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Arlington, Va.: OK, how does Fannie Mae losing $2.2 billion help to solve the mortgage crisis?

Steven Pearlstein: Who said it does?

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Corona del Mar, Calif.: What is the status and prognosis for this legislation? How can I keep track of it?

Steven Pearlstein: Read newspapers.

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Washington, D.C.: Minority rights groups are rightly concerned about the higher rates of foreclosures in their communities. However, these same minorities are still much more likely to be renters than owners. Do they not see that propping up the market is really a wealth transfer from the haves (current owners) to the have nots (priced out renters)?

Steven Pearlstein: They don't, and maybe they should.

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Washington, D.C.: Will there be a mortgage 'amnesty' brokered by the Feds if foreclosure keeps up?

Steven Pearlstein: No. Bad idea. Only Hillary thinks about such things.

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Washington, D.C.: Why were the politicians so silent during the boom years when it was clear that problems were brewing? Were they really blinded by all the good times? They really had an opportunity to avoid this disaster even if it would have been unpopular. Being a leader means doing what is best not what is most popular.

Steven Pearlstein: Blame investment bankers, brokers, mortgage bankers, regulators, rating agencies even the press. But this is not something that politicians are charged with, except to the extent that they kept beating the drums of deregulation.

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Arlington, Va.: How long does it typically take for a housing bubble to completely deflate? Will proposals in Congress that provide taxpayer assistance to homeowners who agreed to loans beyond their means simply prolong the housing recovery? In other words, rather than housing prices adjusting within a year or two due to the glut of foreclosed homes for sale, will these proposals stretch that time frame out to 5 years or more?

Thanks.

Steven Pearlstein: I believe the bill now backed by Frank and Dodd will actually accelerate the necessary adjustment and repricing process. That's why it is worth doing.

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Columbia, Md.: You say in your article the housing bill isn't a bailout. I say it is and am very unhappy about bailing out most people who made bad decisions. I wonder what the bill does about the people down the block who cashed out and bought themselves two $30,000 SUV's and now have a hard time making payments?

And if we do bail out enough people before long we will need another bill to finance first time homebuyers who can't afford new homes because the last polices kept the prices up too high.

We have simply over invested in housing in this country.

Steven Pearlstein: We have overinvested in housing. But what you are really saying is that we should just let the markets work this out and let the chips fall where they may. Normally, that's right. But when you get bubbles and mass dislocation, you get bad dynamics often that take down innocent people. That's why a bit of well-structured, targeted intervention, as distasteful as it may be, is on balance a better idea.

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Anonymous: I just do not see how this really helps a person that could not afford their base note and taxes. It's more than just interest rates isn't it? How do you reconcile those that possibly overspent in the foreclosure dilemma and others that wisely avoided the $600-800K mega house on a household income of $125-150K? Maybe I don't get it, but I guess in layman's terms it seems like those that overspent are going to be allowed to keep their homes. Admittedly, I wanted the $600K home too, but the $4K mortgage note turned me away, also knowing the $300 electric bill or $400 gas were not far away.

Steven Pearlstein: Again, you have to stop moralizing about this and look at it in a very practical way. Yes, they overspent, but since they borrowed most if not all of the money for the house, what we can really say is that the lender overlent. And in this case the lender is going to take a pretty significant haircut that, in the end, foregoes foreclosure and allows the owner to remain in the house with a long-term mortgage he can afford. He probably didn't have any equity in there in the first place, so there is really no way to "punish" him financially anyway. He could just walk away. This way, you avoid the social costs of large numbers of foreclosures in a single place.

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Upper Marlboro, Md.: What is being done to help those of us who are struggling but choosing to forgo food and gas and luxuries in order to make the house payments. I have not missed a payment, but my house is worth $125K less than when I purchased it. If a lender would reduce my mortgage to that amount and I could make THOSE payments, I could actually contribute back to the economy. Wouldn't a plan like that actually help the economy overall instead of just focusing on those in trouble?

Steven Pearlstein: If you were facing foreclosure, the lender would have to make a very practical judgment: will he wind up with more money foreclosing or by reducing principal or interest charges? And if he will be better off renegotiating the deal, he will. Will that be unfair to you, who didn't overpay and overborrow? I suppose so. But looked at from another angle, it doesn't concern you. That's his deal and that his lender doing what is in the best interest of the lender. Let's tone down the judgmentalism, shall we? Life is unfair in all sorts of ways. This one is relatively minor.

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Arlington, Va.: Why should my tax dollars help to bail out a home owner who over extended himself to buy a house he could not afford? How would you sift through the owner occupied foreclosures to weed out those who falsified incomes in order to buy those houses? Maybe if we let the market work prices will drop and this rational, hard working, law abiding, savings in the bank tax payer will finally be able to afford a house in the city I work in.

Steven Pearlstein: There is very little, if any, tax money involved here. It will depend on lots of factors that are unknowable at this point, but let's just say that the amounts of taxpayer money involved are de minimus. And the margin of error on the estimates is so large that it could just as easily wind up being a GAIN for the government as a LOSS on the cost of insuring these refinanced mortgages, since there is a bigger insurance fee paid by the homeowner along with refinancing exit fees and upside if the house is sold.

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House-Flipper vs. House-Liver: As a loan officer I know that many house-flippers have taken out loans that they represent as "owner-occupier" to qualify for the lower interest rates. It's much more common than you realize. What's to stop them from getting the benefit of this proposal as well? The FHA will have to staff WAY UP to perform its due diligence or a lot of "owners" will get a nice reduction in their debt and then can refinance the house again or flip it at a lower price and make a nice profit. How naive can Washington be?

Steven Pearlstein: Look, anyone who buys a house and lives in it in expectation that the value will go up and it is a form of equity building is, by some definition, a speculator. That's most of us who buy homes. But that's not the speculator that is in the mind of people when they hear politicians talk about "bailing out speculators."

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Vienna, Va.: Suppose I have a mortgage that's about 100% LTV of the property value. Suppose that I'm keeping current with all of my mortgage payments, but I'm strapped and many of my other bills are falling behind. I just make sure the mortgage gets paid, and everything else is secondary, so my credit is taking a hit.

Do I understand the proposed legislation (and the other programs already in existence) not to provide assistance to me because I'm not delinquent on my mortgage? If that's the case, isn't it economically rational for me to let my mortgage payments slip for a couple of months?

Steven Pearlstein: You'll hurt your credit score and you'll not live up to the standards you set for yourself in life. You'll also lose some of the upside as the value of your house increases, which it will, eventually. This is not such an attractive deal that people will do that. And the FHA is actually empowered to set standards to filter out people who do that.

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Richmond, Va.: While I agree that much of the administration's opposition to the House legislation is rubbish, it nevertheless seems to resonate with some segment of the population. The blogosphere seems awash in schadenfreude mixed with self-righteousness and indiscriminate condemnation of those being caught up in foreclosures. The notion that if no action is taken we run the risk of a kind of real estate death spiral seems to have escaped their consciousness.

Steven Pearlstein: The blogosphere includes this web chat, apparently.

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Atlanta, Ga.: The reason I am angry with the GOP stance on foreclosure assistance is that it effects me, too! I just heard on the news today that for every foreclosed home in a neighborhood, it knocks off $5000 in value on the other homes. So, even though I am not part of this mess, I am, as I watch my home value drop.

Steven Pearlstein: Voila! Thank you.

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Anonymous: SP: "you can imagine some clever investment bank buying these, packaging them and selling them"

Don't we have enough mortgage-based derivatives of unascertainable value floating around? Won't another one just be throwing good money after bad?

Steven Pearlstein: Not all securitization is bad. In fact, much of it is very well done and benefits investors, lenders and borrowers by spreading risk and lowering cost of funds. Let's not throw the baby out with the bathwater.

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Life is unfair in all sorts of ways. This one is relatively minor. : Mr. Pearlstein, I must disagree with you. When the dot.com bubble burst we didn't find a away to prop up share prices or help investors who had bought high and were stuck with worthless stock. We let the chips fall and those who had made poor investment decisions suffered the cost. Billions in paper profits were wiped out and the country survived. This is no different. Those who bought more than they could afford should suffer the same fate!

Steven Pearlstein: They will suffer plenty.

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Troy, N.Y.: So banks (and their shareholders) have lost a lot of money. Bear Stearns was given away in an arranged marriage to JP Morgan. Now the government wants to help people keep their 'homes.' Or are they really the banks' homes? Many people actually own their homes. I'm a student, so I rent. Having to rent is not a crime. According to the CPI 'equivalent' rent has not risen much during the housing asset price bubble. Maybe making renters of these people is a better idea than prolonging their pain and loading this risk on taxpayers for the sake of their home 'ownership'.

Steven Pearlstein: I agree. More people should be renters and we should stop equating owning a home with the American Dream. We also subsidize owner-occupied housing to much, which bill is paid in part by renters. Not fair. Not economically efficient.

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Steven Pearlstein: That's all the time for today, folks. "See" you next week, I hope.

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