Warren Buffett: Pretty Good for Government Work
nytimes.com
nytimes.com
Goldman Sachs in turn received $13 billion via the AIG bailout.
http://www.bnet.com/blog/financial-business/how-warren-buffe...
http://articles.latimes.com/2009/mar/21/business/fi-aig-gold...
Do you have 401K? I bet that has some money in Berkshire Hathaway and/or Goldman Sachs. Do you need to disclose that?
Anyone who who owns pretty much any public equity can say he/she benefited from government intervention.
Full, unnecessary disclosure: Long on BRK, GS, C, BAC and others.
Buffett has pledged to gradually give 85% of his Berkshire stock to five foundations. A dominant five-sixths of the shares will go to the world's largest philanthropic organization, the $30 billion Bill & Melinda Gates Foundation, whose principals are close friends of Buffett's (a connection that began in 1991, when a mutual friend introduced Buffett and Bill Gates).
http://money.cnn.com/2006/06/25/magazines/fortune/charity1.f...
Used to be people respected earning your own living, now all people seem to respect is compound interest.
Much of the money you have on hand when you die has already been taxed in one form or another. (If it hasn't, your death should trigger the much lower capital gains tax - that's how it works in Canada, for example.) If you've been working hard to ensure your wife and children don't want for anything in life, why in hell should the government take half of what you've earned and already paid taxes on?
I don't understand your bit about compound interest. The people in this community who are affected by the estate tax don't get there through compound interest, they get there through entrepreneurship and job creation. If you want to propose that the estate tax only affects passive income, I'd certainly be in favor.
And if your wife and children inherit 3.5 million tax free and half of everything else, they will be fine. I'm more sympathetic to the wife argument, if she was spending time with the kids instead of developing a career - the children have presumably had a good education, they should be able to make their own money if 3.5 million isn't enough.
RE: compound interest, if you don't understand that, then you really do not understand inherited wealth.
To avoid the creation of an aristocratic class.
The founding fathers had this specific aim in mind. Details here:
http://budiansky.blogspot.com/2010/10/adam-smith-thomas-jeff...
A relevant quote from the article:
[Thomas] Jefferson cited Adam Smith, the hero of free market
capitalists everywhere, as the source of his conviction that (as
Smith wrote, and Jefferson closely echoed in his own words), "A
power to dispose of estates for ever is manifestly absurd. The
earth and the fulness of it belongs to every generation, and the
preceding one can have no right to bind it up from posterity. Such
extension of property is quite unnatural." Smith said: "There is
no point more difficult to account for than the right we conceive
men to have to dispose of their goods after death."
The states left no doubt that in taking this step they were giving
expression to a basic and widely shared philosophical belief that
equality of citizenship was impossible in a nation where
inequality of wealth remained the rule. North Carolina's 1784
statute explained that by keeping large estates together for
succeeding generations, the old system had served "only to raise
the wealth and importance of particular families and individuals,
giving them an unequal and undue influence in a republic" and
promoting "contention and injustice." Abolishing aristocratic
forms of inheritance would by contrast "tend to promote that
equality of property which is of the spirit and principle of a
genuine republic."Trust babies destroy family fortunes more efficiently than estate taxes.
I have three children, ages 3, 2 and six months. If I were to die tomorrow, the cost of raising those kids and sending them to college would be something like $3.5M. So, I have a life insurance policy, as any responsible parent does.
But under the current law, the proceeds of my life insurance policy are subject to the estate tax.
Sure, if you're paining a hypothetical about a 24-year-old Ivy League graduate who just received news that his parents have passed and that he has inherited a $3M estate, it doesn't sound too bad if part of that inheritance is taxed.
But now imagine a toddler who just lost two parents and needs to be fed, clothed, sheltered and educated for the next 20 years... it's different.
That makes sense.
You know what doesn't make sense, though? Complaining about a "death tax" on the one hand while complaining about the budget deficit at the same time, yet maintaining that you're the political party of hard work, bootstrapping, blah blah. If you care about the latter two, don't spend your time going to the mat for Paris Hilton. If you consult some charts about income distribution in this country, you can conclude that the vaaaaaaaaast majority of the revenue collected under this tax comes from very large estates where the children would be set for life with 10% of it, and they're doing very very well with 3.5Mil + 45% of the rest.
Exceptional cases may be worthy of exceptions under the law, but that doesn't change whether the law makes sense in the general case.
I did a quick check at vanguard.com, and mutual funds that deal in intermediate-term bonds are yielding in the 6.5% to 7.5% range. So whoever gets guardianship of your kids would be able to feed, house, and educate them from an income stream of over $130K per year (presumably that income would be subject to capital gains tax).
I am sure that your untimely death would cause great suffering for your children, but I really don’t see them suffering in a financial sense.
I'm opposed to an aggressive estate tax too, but I can't believe those numbers; that comes out to more than $50k per year per child.
A lot of Buffet's money comes from insurance companies that sell life insurance intended to pay the inheritance tax. No tax, no need for that insurance....
What a guy. He advocates a tax that he won't pay and that results in money in his pocket....
Berkshire has a market cap of ~200B, buffet owns around ~45 billion of their stock so his actual investment was 5 * (45/200) = 1.125B. It's reasonable to think he might be swayed by 2.5% to 5% of his net worth, but his personal investment is not all that significant (for him).
If GS had failed, the taxpayer would probably have had to spend a lot more money on it.
You'd actually be punishing the rest of the US (and the world) more than GS (or any of the other giant banks) if you let them fail. That needs to be fixed, but the time to make a point about that probably wasn't in the middle of a global financial panic.
You're little comment about "THE WAY THE BANKING SYSTEM WORKS" is so insightful.
Everyone that doesn't support taxpayer bailouts of investment banks are ignorant of the banking system and can't comprehend how it works.
I'm not even going to bother with the rest. If you can't imagine any way for the government to fix the problem other than handing out public money to private companies you're a sheep.
If you disagree with that, please explain what you think would have happened if lots of big banks and insurance companies had failed.
http://voices.washingtonpost.com/economy-watch/2010/05/credi...
Also implying that Moody is corrupt is asinine. Yes, they made mistakes (what credit agency didn't during the housing bubble?), but they didn't break any laws.
I'll write a thank you letter to the government when the future of our nation isn't tied to the bad judgement of a few irresponsible companies.
- http://delong.typepad.com/sdj/2008/09/a-very-large-in.html
- http://www.nytimes.com/2009/09/12/business/12nocera.html?_r=1&hp
Sure there was:
http://www.nytimes.com/2008/09/23/business/worldbusiness/23k...
The Swedes actually solved this by nationalizing all the failing banks, wiping out the equity holders, restructuring and privatizing again. It ended up not costing much. In the US a bunch of bankers got huge bailout funded bonuses and the banks are far from solvent even now.
They had time to extracted pounds of flesh from bank shareholders before writing checks, time to design policies to force banks to write down losses and issue warrants to the government
2008 was different. After Lehman collapsed, the government had to make it's initial intervention overnight, and the full package took weeks to put together, not months.
Many in the US were simply asleep at the wheel, both in government and private sector.
Looking this up in Wikipedia it seems the crisis started in early 2007 and Lehman collapsed in September 2008. So there was a year and a half to plan a response.
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Financ...
Yes, there were plenty of signs of the sub-prime crisis.
However, no one expected it to cause an investment bank like Lehman to collapse. It wasn't until the day of the crash that the people begun to dig into how the mortgages had been repackaged and sold, and it still wasn't widely know how badly the ratings agencies had failed in their analysis of this.
(Ok, so it seems likely that Goldman had a fair idea and possibly went short Bear Sterns based on their exposure, but they weren't exactly spreading that information around)
http://archive.newsmax.com/archives/ic/2007/3/28/110709.shtm...
March, 2007
Hrmm...so let's see...4% of $14.14T = $565B.
TARP alone was 700B - i.e. approximately 5% and that seems to not have been enough - because the Fed spent an additional $1.4T.
How much more money did you want the US to spend? Obviously if it was as simple as nationalizing every single bank, they would have done that. But the US banking industry is much more complicated than any other country - much less Sweden's (with all due respect).
To whit, so far this year the FDIC has 'nationalized' more banks than they did 2009.
https://www.fdic.gov/bank/individual/failed/banklist.html
So they are kinda doing what you suggest, but just to show you how difficult such a task really is, they are still winding them down almost 2 years later.
If the banks had not been bailed out by TARP they could have been nationalized cheaply, restructured and relaunched. The equity holders would have been wiped out, as they should have been since their banks were broke, and the employees at these banks would not have extracted even more obscene amounts of money. By now you'd have functional banks driving the economy again. The amount of money isn't the issue here, it's the fact that it was used to prop up a failed system instead of used to restructure it.
>To whit, so far this year the FDIC has 'nationalized' more banks than they did 2009.
All of these banks are the small insignificant ones. None of the big ones have been restructured and most are still technically insolvent.
Everybody else, it was pittances - a few % here and there.
So that goes to show the amount of money needed. If they spent so much money and only got a few % of each bank, how much more money would be needed to purchase the entire banks altogether.
Not all of the banks the FDIC has nationalized are insignificant ones. It started with IndyMac which is no small bank.
The notion that the banks are still technically insolvent - says who? I think the markets are the best indicator as to the health of the banks. As far as I can see, their bond spreads over Treasuries have fallen significantly in the last few months and their stocks have been rallying.
So are you telling me that the markets (who are extremely sophisticated and thoroughly understand the banking industry) are being fooled by these banks?
I hardly think so.
BOA is up from it's low of $3, to $11.70. Citigroup (the most damaged of them all) is up to $4.17 from a low of $1.xx - the gov't owns the biggest stake in Citi than most other banks.
Yes, their prices aren't as high as it used to be, but these things take time.
The banks were propped up by TARP and so their market value remained high. Without it they were probably all insolvent and so the cost of owning them would be basically zero. Otherwise the market would have been able to finance the banks.
TARP was designed to feed money into banks in a very cheap way, the size of the wealth transfer from the taxpayer to Wall Street is staggering. Buffet himself got much better conditions than the Federal Government.
>The notion that the banks are still technically insolvent - says who? I think the markets are the best indicator as to the health of the banks. As far as I can see, their bond spreads over Treasuries have fallen significantly in the last few months and their stocks have been rallying.
There is now a quite explicit assumption that the federal government won't let the banks fail. With that and the Fed helping there's plenty of reason to think banks will continue to make money. That doesn't mean the crap on (and off) their balance sheets has stopped being crap.
>So are you telling me that the markets (who are extremely sophisticated and thoroughly understand the banking industry) are being fooled by these banks?
I'm saying the markets are now useless to value the banks because the value being judged includes the federal government as a crutch. There is no market pricing for the value of the banks on their own.
* The Fed creates money
* The money supply has shrunk greatly, so the Fed needs to create money anyway
* The money is not given out, but traded for Treasury securities
Saying the Fed spent money on banks suggests a fundamental ignorance on how these things work. If anything, the Fed spent money of the government, but that viewpoint is not accurate either, only less ignorant.
The money was technically given out - because they essentially purchased securities (not just Treasuries, but commercial paper, Mortgaged Backed paper, Gold, etc.) at significant losses to themselves in the short term - so that the banks can shore up their balance sheets.
My broader point was that the US Treasury could spend only $700B, because the Fed was there to further capitalize the banks. If you want to go ahead and be a grammar natzi, then feel free. But at the end of the day, the financial institutions were given approx $2.5T cash - in exchange for a variety of things (some securities on their balance sheets, to warrants for their own common & preferred stocks).
Although the Fed can create money out of thin air, the notion that it isn't spent (i.e. it has no cost to anyone) is a misguided notion because it typically has a greater cost to everyone than the Treasury doing so.
http://en.wikipedia.org/wiki/Obama_financial_regulatory_refo...
Once you believe in Capitalism, there will always be systemically important companies - whether it is Google, Amazon, etc. or Banks - that should something go wrong with them will require a bailout of some nature.
NB I really don't think that applies to Google or Amazon.
Not to mention those companies that rely on Adwords to drive traffic through their doors (both online and offline).
I can almost assure you that the markets would get very jittery and irrationality would likely spread to all sorts of other industries.
It is easy to take these things for granted.
Amazon is the same. There are thousands of mini-retailers that earn a living on Amazon. Amazon might even be more so - the equivalent of a Walmart going down....but almost worst.
At it's extremes, the beauties of capitalism lead to large firms that build ecosystems to entrench their positions - whose failure would be significant and potentially systemically dangerous. It is the nature of capitalism - it actually is very healthy for the system. Over time they eventually fade out and other large companies come and take it's place - e.g. the newspaper industry, telecom, etc. So you can't really escape it.
Of course, the libertarian purists argue that we shouldn't have sarbox and shouldn't bail companies out -- which makes me think that if they were in charge the last few years, my electricity wouldn't be working by now.
I do think, however, that if Google or Amazon failed there are some elements that would stay up - but it's more than just those elements.
It's the little things, like email for 200million people disappearing overnight. I can't even imagine the amounts of things that would be lost (receipts from sales, tax information, customer data, invoices, legal contracts, etc.). Much less just a major communication channel going dark. That alone would cause a dip in GDP (in my opinion).
Might be difficult to foresee, but so was the banking crisis.
The Justice dept. has very successfully broken apart companies in the past: http://en.wikipedia.org/wiki/Bell_System_divestiture http://en.wikipedia.org/wiki/Standard_Oil#Breakup
No government ownership is involved; one day you own 1 share of AT&T and the next day you own 1 share of the new AT&T and 1 share of each of the new baby bells.
I would argue the AT&T break-up allowed the first internet boom to happen. Can you imagine how hard it would have been to get a T1 provisioned if there had been no competition AND AT&T was offering a service just like what you were trying to start
If you put them all in one place, that bank would fail and still cause the same chain reaction, except the debt would fail entirely on the customers of the bank instead of the bank itself.
If you spread out the assets, then you'd just have lots of smaller banks fail instead of the larger bank. I suppose doing this could have spread the failures out over time.
As to who gets the "toxic" assets, who cares? They are all but worthless. Auction them off to whoever will buy them that way we no longer have this fiction that they will ever be worth anything. The US tax payer is now explicitly on the hook for these assets. The sooner we know what they are truly worth the better.
The government seems to have chosen instead to increase their power in handling these crises.
In 1931 the establishment thought they solved the problem and that things would get better soon. The collapse of the Austrian bank Creditanstalt proved them wrong and started a new series of problems.
Certainly many of those placing their bets on the collapse of housing bubble would not have gotten paid by AIG, but how does that cause the rest of the economy to collapse exactly?
Yes, your investments would certainly have experienced losses as the companies doing all the stupid things dropped in value once their folly was fully revealed. But isn't dumb behavior and blind faith in casinos supposed to be punished?
Instead of that righteous outcome, the costs are no being dumped upon millions who had nothing to do with all of the stupidity. And the reckoning has merely been postponed and perhaps will grow even larger now that they have been encouraged to continue taking foolish risks.
Personally, I think Warren Buffett knows better.
Simply put, the thesis is that the entire world economy would have collapsed. It would have started with most of the investment banks being unable to do business and shutting their doors. This would have caused a chain reaction other parts of the financial system since the big money-center banks provide much of the overnight lending liquidity for smaller banks (and each other). Banks would start failing at an incredible rate.
As the banks started to fail, the equities, bond and commodities markets would have collapsed. All these markets rely on short term lending, not just for leverage, but to underwrite transactions. Even if this were not the case, much trading volume would have dried up. This combined would have led to a crash in those markets.
Finally, and most importantly, most businesses rely on lines of credit and other short term debt facilities to finance day to day operations. They use this to smooth out the cash flow when buying raw materials/inventory, purchasing assets and meeting payroll. These would have all been effectively frozen. You would have either seen paychecks becoming worthless or massive layoffs within a few weeks to a few months of the initial bank collapses. By massive, I mean a spike of an additional 10% to 20% unemployment within a few weeks or months.
I won't go into the effect all this would have on currencies and international trade.
All told, it would probably have plunged the entire world into a depression that would have rivaled or exceeded the Great Depression of the 1930's. It likely would have been worse because of the interconnectedness of the world's financial and commercial systems today.
That said, the government had no real choice. I'm no financial system expert, but used to work in finance and even I can see that something was needed or else the system would collapse. Is it possible that you're letting your distaste of the financial system and players involved color your judgment?
The choice we faced was either cut off the leg or the patient dies when the gangrene spreads. No one likes cutting off the leg, but if the alternative is that you die, I think the choice is obvious.
It's unlikely, since I don't have any distaste for finance. In most threads I'm the solitary defender of the financial sector.
As I said, it's easy to make up a scary story of doom. The scary story assumes that everyone will try to continue doing everything they previously did before the banks collapsed, and then give up rather than do things differently. Or perhaps the assumption is that the way things are now is the only way things could be. Either way, I'm unconvinced.
Dear Sammy Children have to trust that their elders carry the wisdom of thier age and thoughtfully apply it when faced with trying circumstances. We trust that you will do the right thing and protect and safeguard our future. For each generation to leave a legacy that enables the next generation to continue to have a chance prosper and pursue its dreams. During the financial turmoil culminating in the financial crisis of 2008 you broke that trust. You sold out future generations to save a priviliedged few. You lied to the people to hide your failures and to protect your own fortunes. In order to avoid facing difficult problems and dealing up front with the people of that time, you chose to steal from future generations so you could continue with the graft, greed and lies upon which you and the favored select few built your empires. All the while just shifting the burden of your selfishness to us, your children. Well thank you for bankrupting our future! Now we are now saddled with debt that can not possibly be repaid. We have have limited hope of growing and developing ourselves and providing for our families. There is little opportunity for building our own dreams because we are overwhelmed with tax burdens, failed governement services, scarce and expensive resources, as well as world turmoil and general social unrest. Our currency, tattered and beaten, has been left a former shell of what it once was worth. People have largely given up because there's little incentive to build something of your own when most of the fruits of one's labor must go back to you Sammy to pay for past excesses or to help the masses of less fortunate that now exist b/c jobs and oppotunites are few and far between. So I hope you, your nephew Warren and the other priviledged few got to party it up while it was good because if there is a god you'll all rot in hell for your shamelessness.
Signed your destitute and dejected grand child
I agree that you cannot expect unbiased information from anybody these days. But it's not fair to single out Mr. Buffett, as he certainly isn't the type of rich man you want to paint with that brush.
Critics have concluded that modern Austrian economics generally lacks scientific rigor,[10][12] which forms the basis of the most prominent criticism of the school. Austrian theories are not formulated in formal mathematical form,[108] but by using mainly verbal logic and what proponents claim are self-evident axioms.
[10] Caplan, Bryan. "Why I Am Not an Austrian Economist". George Mason University. Retrieved 2008-07-04. "More than anything else, what prevents Austrian economists from getting more publications in mainstream journals is that their papers rarely use mathematics or econometrics, research tools that Austrians reject on principle...Mises and Rothbard however err when they say that economic history can only illustrate economic theory. In particular, empirical evidence is often necessary to determine whether a theoretical factor is quantitatively significant...Austrians reject econometrics on principle because economic theory is true a priori, so statistics or historical study cannot "test" theory."
[12] White, Lawrence H. (2008). "The research program of Austrian economics". Advances in Austrian Economics (Emerald Group Publishing Limited): 20
[108] Walker, Deborah L.. "Austrian Economics". Library of Economics and Liberty. Retrieved 2010-01-23.
The most obvious and best known recent example is game theory, which John Nash famously won the Economics Nobel for: http://en.wikipedia.org/wiki/John_Forbes_Nash
The 1947 book "Foundations of Economic Analysis" is worth looking at. The table of contents - replicated in Wikipedia (http://en.wikipedia.org/wiki/Foundations_of_Economic_Analysi...) - will give you a good starting point.
I have seen several mathematical "proofs" that not only god exists but that he is catholic. Is that science?
What does the artifact of being mathematically formulated have to do with something being science?
behavioral economics uses quite a lot of math alongside psychology.
Common sense can't be true, because there is no formula for it?