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Warren Buffett discusses the 2008 financial crisis, investment strategies, and the importance of confidence. He analyzes the causes and potential solutions, offering insights on capitalism and the US economy's future.
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Warren Buffett
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Interviewer: The main topic of the interview is the current financial crisis and the proposed government rescue plan.
Interviewer: Warren Buffett is the CEO of Berkshire Hathaway and is 94 years old. He will be retiring at the end of 2025.
Interviewer: He is widely considered the greatest investor of our time, if not of all time. He built Berkshire Hathaway into a trillion-dollar company and has a net worth of over $160 billion.
Interviewer: The introduction states that the interview is not an obituary but a moment to appreciate what Buffett means to all of us. It highlights his view of himself as an artist and his company as a painting, his representation of capitalism and America, and his obligation to stockholders.
Interviewer: The interview is taking place in San Diego, California, in 2008, during the height of the financial crisis.
Interviewer: Berkshire Hathaway has announced a $3 billion investment in General Electric, on similar terms to the Goldman Sachs investment.
Interviewee: Buffett received a call from a friend at Goldman Sachs about the potential for such an investment. He is familiar with GE, knows its management, and understands its businesses. He sees it as an attractive long-term investment.
Interviewee: Yes, Buffett looks at everything as part of his job.
Interviewee: Yes, Berkshire Hathaway has a significant amount of cash. Buffett believes it's a time when cash can buy more than usual because others are fearful. He emphasizes that cash is only king if it's used effectively.
Interviewee: Buffett's philosophy is to "be greedy when others are fearful and fearful when others are greedy." He states he has never seen people as economically fearful as they are currently.
Interviewee: The fear stems from the credit markets seizing up, worries about money market funds, and the significant movement of bank deposits.
Interviewee: Yes, it is being felt by auto dealers, furniture retailers, and jewelry retailers. He believes it will be felt even more significantly if action isn't taken.
Interviewee: He doesn't think it's perfect but believes it's better to be "approximately right than precisely wrong." He considers it precisely wrong to reject the plan, comparing the economy to a great athlete with cardiac arrest that needs immediate resuscitation.
Interviewee: He calls it an "economic Pearl Harbor," a phrase he has never used before and believes accurately reflects the severity of the situation.
Interviewee: Beyond the credit freeze and banks not lending to each other, he points to the sale of $40 billion in seven-day treasury bills at a yield of one-twentieth of one percent. This indicates a lack of trust and a tendency for people to hoard cash. He states the economy doesn't work without the lubrication of credit and trust, which has been lost. He also notes that major institutions are trying to deleverage, reducing their assets and liabilities.
Interviewee: The United States Treasury is the only institution with the capacity to leverage up and act as a countervailing force.
Interviewee: He believes the right things have been done, but no one fully foresaw the "tsunami." He felt the Fed did the right thing with Bear Stearns, hoping it would halt runs on other institutions, but it didn't. He prefers an ad hoc response to no response and believes Congress will do the right thing.
Interviewee: He believes the Treasury could not have credibly laid out the scenario and obtained the necessary tools from Congress months ago. It took a crisis like this for the situation to become clear.
Interviewer: There is resistance because many people view it as a "bailout of Wall Street," while they are struggling in their own economic lives.
Interviewee: He clarifies that the "patient on the floor with cardiac arrest" is not Wall Street but the American economy. He acknowledges that people may not understand this and dislikes the association of "Wall Street" with "bailout." He also expresses disapproval of executive compensation practices. However, his priority is to get the economy functioning again. He points out that shareholders of companies like Bear Stearns, Lehman, and AIG have lost significant amounts of money, and these shareholders include pension funds and investors across the country, not just Wall Street elites. He argues that focusing on assigning blame or individual compensation is less important than acting decisively.
Interviewee: He likens it to "economic Pearl Harbor," emphasizing the need for immediate action rather than prolonged debate or blame assignment.
Interviewee: Yes, it is a possibility. He notes that unemployment is already at 6.1% and that the decline in the value of residential homes and stocks has significantly impacted American families. He warns that if credit markets remain paralyzed and companies continue to focus on deleveraging, the situation could worsen considerably, with unemployment rising further.
Interviewee: He worries about whether it is "enough" but believes it is essential for the nation's and the system's confidence. He stresses the importance of acting swiftly, comparing it to not reacting to Pearl Harbor for weeks.
Interviewee: He has confidence in the people involved, specifically mentioning Treasury Secretary Hank Paulson and Sheila Bear. He praises Paulson's market knowledge and corporate understanding, and Bear's "magnificent job" in moving 8% of the US deposits seamlessly. He believes they have the right people to get the job done, but they need more tools and flexibility.
Interviewee: They need plenty of money and flexibility. He also emphasizes the need to tie the plan to market prices, stating that if the government buys mortgage-related securities and mortgages at current market prices, they will make money over time due to the government's staying power and low borrowing costs.
Interviewee: He believes taxpayers will likely get their money back, and possibly more, if the securities are purchased and sold intelligently at market prices. He would bet on it and likens the government's action to an investment, not spending.
Interviewee: Some have suggested an entity modeled on the Reconstruction Finance Corporation (RFC) from 1932. While Buffett sees a potential role for such an entity in providing liquidity and capital, he believes it wouldn't be large enough to address the current crisis. He also notes that setting up an RFC today would involve a cumbersome application process, whereas the current situation requires immediate action to address the drying up of markets like commercial paper.
Interviewee: He states that running Berkshire Hathaway is his job, but he is willing to offer advice to the government anytime he can be of help. He acknowledges that much of his advice may have been ignored in the past. He is participating in this interview to help.
Interviewee: Buffett describes derivatives as "financial weapons of mass destruction" that contributed to the downfall of AIG and were a factor in the problems of Bear Stearns and Lehman Brothers. He notes that AIG would be fine if they had never heard of derivatives, as they were a highly respected insurer. He explains that it was easy and tempting to write numbers on paper to report profits without capital requirements, leading to immense risks.
Interviewee: Buffett identifies an "incredible residential real estate bubble" as the biggest cause. He explains that for years, lending institutions, the government, and the media all believed that house prices would consistently go up, leading to a $20 trillion market financed with debt. This led to foolish actions and excesses.
Interviewee: A 20% fall in a $20 trillion asset would amount to $4 trillion in losses. When these losses land in the wrong parts of the economy, it can gum up the entire system.
Interviewee: There is an excess inventory of homes, though household formation helps absorb some of it. House prices soared beyond reason and were financed in "silly ways" with people lying about loans. This is the single biggest cause of the crisis.
Interviewee: He attributes it to human behavior driven by greed and the fear of missing out when others are getting rich. He describes a natural progression of innovators, imitators, and then idiots, where people follow the crowd even when it seems irrational. The ease of obtaining mortgages and the belief that housing prices will always rise amplified this.
Interviewee: People lost sight of appropriate risk and leverage because it paid off for a while. Leverage is a way for smart people to go broke if they make one wrong move. The reinforcing nature of seeing others succeed and the feeling of being part of a successful trend, like a party, can lead people to ignore the impending consequences.
Interviewee: He hopes it will loosen credit, stop the slide and panic, and restore confidence, which he believes is key to economic recovery. He likens confidence to oxygen – indispensable when present, but all-consuming when absent.
Interviewee: Confidence is essential for people to trust institutions with their money. When confidence is lost, the entire economy grinds to a halt. He compares the loss of confidence to oxygen being sucked out of the credit markets, requiring a "jump start."
Interviewee: He worries about the plan being "too little, too late." He believes the government needs to act on a big scale. While $700 billion is a lot of money, its effectiveness depends on buying distressed property at the right price, which should be based on market value, not original cost.
Interviewee: He is confident that confidence will return and that the country will be living better in 10 and 20 years. He believes the American system has immense potential for growth and innovation. However, he acknowledges that the current "athlete" (the economy) is on the floor.
Interviewee: The impact is significant, and similar problems are occurring around the globe as European banks were also involved in the same practices.
Interviewee: He looks for investments that are understandable, with fundamentally good economics, strong management he likes and trusts, and a sensible price. He notes that prices have become much more sensible recently. He is not worried about the country's long-term prospects but about anything that gums up its potential.
Interviewer: The new administration will face the challenge of continuing the recovery and possibly accelerating it, even after the immediate emergency is addressed.
Interviewee: He does not believe things will turn around in a couple of months, stating it's a mistake to mislead people. He expects the recession to get worse before it improves, with the turnaround potentially taking six months to two years, or even longer if necessary actions are not taken.
Interviewee: He stresses the need to "throw the resources at this that are necessary" and believes that if assets are bought intelligently at market prices, the US Treasury will make money. He also suggests that the Treasury Secretary's role is more critical than the Vice President's in making sound investment decisions.
Interviewee: Lately, they have been asking, "Will this work?"
Interviewee: He would hand something "pretty close to a blank check" to someone like Hank Paulson, emphasizing that the investment should be done through the Treasury and not debated by 535 members of Congress. He believes more latitude should be given.
Interviewee: Oversight is important but should be focused on ensuring the government is investing at market prices, not on political considerations like congressional districts.
Interviewee: The RTC was set up to liquidate assets inherited from failed savings and loans. This situation involves intelligently buying assets, not selling them.
Interviewee: Markets are not perfect and will always have excesses due to human behavior (greed, fear). He points to historical examples like tulip bulbs, internet stocks, and uranium stocks. While institutions can try to regulate, people will find ways around them.
Interviewee: He believes in mark-to-market accounting, stating that it's important to tell shareholders the truth about asset values, even if they are depressed. He thinks that deviating from market prices in financial statements can lead to significant trouble.
Interviewer: The argument is that assets are worth more than mark-to-market prices suggest, and therefore, current valuations do not reflect reality.
Interviewee: He reiterates that market prices are the reality, especially when the government is buying assets. He believes that while depressed prices can be explained and that assets may be worth more in the future, financial statements should reflect current market conditions to avoid fictitious values.
Interviewee: He welcomes the growth of other economies, stating that it's beneficial for the world and for the US in the long run. He believes it's better to live in a world where others' lives are improving, especially given the existence of nuclear weapons.
Interviewee: He notes that since the US consumes more than it produces, it must send something in return, often in the form of "little pieces of paper" (assets). As long as this imbalance continues, other countries will own a portion of American assets.
Interviewee: Yes, he believes it's terrible over time, reflecting consumption over saving. While productive capacity can grow enough to absorb this, the country will still be less well-off than if it had not incurred such deficits.
Interviewee: He anticipates more inflation in the future as a consequence of the measures taken to combat the present situation. He suggests a choice between future inflation and immediate economic recovery.
Interviewee: He believes unclogging credit markets is the most critical need. While another stimulus might be necessary, it should be directed towards lower and middle-income people. He notes that he himself is paying the lowest tax rate he ever has, which he finds "crazy."
Interviewee: He believes people in his situation should pay more tax, and others should pay less. He finds it "terrible" that income from investment is taxed at a lower rate than income from labor. He highlights that payroll taxes, which disproportionately affect lower and middle-income workers, are a significant source of government revenue that is often overlooked when discussing tax burdens.
Interviewee: He suggests putting the question of interest rates aside for now, focusing on getting the patient (the economy) up and walking first. He acknowledges that current actions may have inflationary consequences, but interest rates are currently at very low levels.
Interviewer: The interviewer suggests that either the tweaking of the plan or the fear generated by the failure of the previous vote likely changed minds.
Interviewee: It will be difficult to measure because the economy will likely worsen for a while. He likens it to resuscitating a patient – there won't be an immediate jump up. He acknowledges the political difficulty of voting for a plan that involves significant spending without immediate visible results.
Interviewer: The interviewer suggests that the lack of clear communication might be why Buffett is participating in the interview.
Interviewee: He points to President Roosevelt's ability to restore confidence, even without advanced economic theories. He emphasizes the need for real leadership to explain the situation and the actions being taken.
Interviewee: While he doesn't get easily afraid, he was taken aback when he watched the House vote fail and did not think he would see the day when a company like AIG couldn't clear its checks.
Interviewee: Everyone would have been exposed. He explains that the Treasury Secretary's initial hope was for the private sector to act, but when that didn't happen due to the scale of the problem, government intervention became necessary.
Interviewee: No, not even Berkshire Hathaway had the capacity to handle the situation. He notes that the Fed structured the deal well, putting themselves in a position to likely get their money back.
Interviewee: It would be "crazy not to do this," though it won't produce dramatic, immediate results. People need to understand that unemployment will likely rise, but the plan aims to prevent a worse outcome. He emphasizes that the system will work over time.
Interviewee: Once the economy is back on its feet, there can be discussions about modifying the "diet" or "exercise" of the system. He believes Congress might overreact in its attempts to prevent future crises, but better minds working together could lead to an improved system. He reiterates that the system was "pretty good over time" but went "crazy" with the real estate bubble, causing a domino effect.
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