Warren Buffett explains the credit crisis to Charlie Rose | Hacker News Reader

Warren Buffett explains the credit crisis to Charlie Rose

mathoda.com

102 pointsmathoda64 comments

Finally a bit of economic analysis that's actually worth upmodding, unlike the "Bankruptcy is the answer" retardation.

Thank you for posting this, as off-topic as it might be.

I'm quite sure the comments will get overrun by Ron Paul supporters claiming Warrent Buffet has a vested interest in the bailout, all the banks should be liquidated, etc. Before you make that comment, please read this paragraph carefully:

Time is of the essence: “I mean, if Pearl Harbor came along, you could have said the planning was wrong by the military ahead of time or maybe the battleships shouldn’t have all been in the harbor and all that kind of thing. … I mean, the job is Pearl Harbor. And you better not spends weeks and weeks and weeks trying to assign blame or deciding on a complete plan for fighting the whole war, you know, and letting a committee decide where the battleships should go and all of that. You better spring into action with the best people you have. … it’s very important that the determination of the US Congress to do what is is needed be made evident this week and by the actions of most of the members.”

Blame, putting culprits in prison, figuring out how to stop this from happening again, all this will come. But first you have to stop the economy from free-falling into a depression. Priorities, people.

I'm not going to repost all my arguments about this, they're all already in this other thread: http://news.ycombinator.com/item?id=319646

Yeah, that's what I've thought. Blaming kind of made sense when things weren't collapsing, helps us fix the system. But now, blame is the least useful thing, and people rejecting the bailout just because it looks like getting rich people off the hook or because they don't want to pay for other people's mistakes is completely ignoring the real issue of economic meltdown. That meltdown will affect everyone no matter how financially responsible they are.

I tend to agree, but the Pearl analogy doesn't quite hold. Suppose, for whatever reason, in WWII the US and Japanese were originally allies, and there were high level Japanese military officials working in the Pentagon. Then it becomes clearer that proceeding incorrectly could cause far more damage than proceeding slowly but cautiously.

Unfortunately, the perceived "character" issues that the White House has is working against the US in this time of crisis. The WH is suspected by some of using "emergency" situations to gain power, and some folks are suspicious that they may try to do it again.

There are a lot of people for whom the phrase "George Bush has a plan to fix this" doesn't inspire confidence.

Meanwhile : http://www.marketwatch.com/news/story/whos-profiting-crisis-...

I agree that bankruptcy is not the answer. What I question is the $700 billion amount and the time frame in which the money will be used.

There is a lack of confidence that must be fixed. It seems like a smaller amount of money could be used to fix the confidence problem and get the "wheels of credit" turning again. There may also be a need to purchase some distressed securities. With confidence restored, it seems like financial institutions could step back into the picture to buy low and sell high.

In my opinion bankruptcy would be a good solution, if those who made wrong decisions went bankrupt. Unfortunately, it seems impossible to limit the bankruptcies to to just those companies.

An interesting question is to what extent counterparties are responsible for the bad decisions of their trading partners. I think they are responsible to some degree, because they should and could have checked the credit worthiness of their opposites.

But as the chain of counterparties gets longer, there is just no visibility as to the risks you are exposed to. And at that point it becomes a systemic question. That's the point where the government has to come in and stop things, or even better, not inflate a credit bubble to begin with.

>It seems like a smaller amount of money could be used to fix the confidence problem and get the "wheels of credit" turning again

The wheels of credit are turning, just not for the real estate sector:

http://mjperry.blogspot.com/2008/09/new-banking-data-wheres-...

Fears of the credit market freezing up and plunging us into a depression are just that: fears.

So let me get this straight. You are in favor of using taxpayer money, from the pockets of people who are actually hurting or soon will be, to save the skin of the very people whose questionable practices got them into this mess?

What kind of fucked up priorities are those?

No, I favour using money, from wherever it is available, to save all our skins.

Sure that makes sense, but many experts will tell you that purchasing all the bad paper will not save the banks.

We still get a depression AND we've spent 700 billion.

The better alternative is to pick a few winners, re-capitalize them, and let everyone else fail. That's both cheaper and more likely to succeed.

You might overestimate how much the of that taxpayer money comes from the poor people who are suffering. Some of these bank executives we love to hate might pay more taxes in a year than the average american pays during a lifetime.

But if ones includes the inflation tax that they (Banks, etc.) directly benefit from by getting the fait funny money first before the rest of society and it’s results on everyone, this may not be true. There are more poor and middle class that have the inflation tax steal from them (for which most don’t understand the how of it) in addition to the direct tax that takes to support the preplanned central banking scheme that benefits the few. When you add to that the mal-investment which makes decisions skewed for the poor or middle class trying to get ahead, one may be able to make a even stronger case against the preplanned ordered centrally controlled economy and a better case for a more market based one with sound money.

Buffet mentions a crisis of confidence in the markets as a reason for the bailout. But what is the cost to society of the loss of confidence in the government? What will happen to people's faith in our political system if this bill passes despite the opposition of the American people? What will be the effect on the people once the realization sets in that their government only represents the ultra rich?

I think it'll be much worse than letting the current "crisis" play out without instigating the biggest coerced transfer of wealth in history from American taxpayers to a few people on Wall St.

I don't see the money supply contracting by a third like it did during the Great Depression. There are several different accounts of the Great Depression, but all of them agree that the monetary contraction was one of the biggest causal agents.

This "Pearl Harbor" talk is baseless fear mongering. The numbers I've seen for growth, employment, and lending activity in all non-real estate and non-financial sectors has been downright normal. Over 200 economists from good universities have signed a letter urging Congress to act slowly and deliberately. I believe the "Bankruptcy is the answer retard" that you speak of is a professor at Harvard.

This is not Ron Paul supporters speaking, this is level-headed people that are urging our representatives not to act rashly out of fear (again). If you think a repeat of the Great Depression is likely, perhaps you should learn something about it. Until you do, you can go easy on the self-righteousness.

Edit: Here is a blog with some links that show bank lending is up through the month of September. Several indicators have hit all-time highs.

http://www.marginalrevolution.com/marginalrevolution/2008/09...

I like the oracle of Omaha as much as the next ripe-from-college-finance-student, but I can't side with the faithful teacher on this one.

Too many of us are calling this a depression where we should be calling it a correction. That's not to say corrections aren't messy -- they are -- but it's absolutely necessary if you're to return equilibrium to the markets. Til now prices have been artificially inflated by interventionist government policy. That's inefficient (it undermines the price mechanism) and it's unsustainable.

Government intervention isn't the answer. It might stave off a correction in the near-term, but it can't stop a correction in the long-run. Better for Washington to do nothing, which is to say, better to let the price mechanism do its work and restore natural equilibrium to the markets.

And please be fair: The "Bankruptcy is the answer" argument is hardly retardation (as you've put it). The article you're referring to captured the opinions of 166 economists of the Harvard/Yale/Princeton/UChicago ilk. You may not agree with it's conclusions but for God's sake man, don't call it retardation.

You can call it whatever you like, that doesn't mean a thing to the people in the bread lines.

What people seem to be failing to understand is that the "near term correction" is going to be huge, regardless of whether or not there's an even bigger one in the future. We need to get through the first one to reap the benefits of missing the next one.

Or, we can try to avoid the current concerns as much as we can, and use the time we've bought ourselves to reform our system and negate the need for that larger one down the road.

Sorry, your post is just completely wrong because this is not a market situation. The government regulates banks through the FDIC, and implicitly underwrites the insurance that is granted to savings accounts. Therefore people have absolutely no incentive to pick "safe" savings accounts, where there savings are loaned out to "sure bets". Instead, if the bank has been covered by the FDIC, the only thing that matters to a consumer is the interest rate--he/she doesn't have to consider risk.

This is one of the problems of being fresh out of college. You not only know all of these models for things -- you actually believe in them -- like they're some sort of independent thing that has worth beyond its use as a glorified guesstimation metric. I don't mean that in a patronizing way -- I was exactly the same.

Buffet's kind of a champion of what you might call really-existing markets. I don't think he sees the US economy as a grand experiment where "health" exists independent of the people that are its constituents. A market is better where, as he says in the interview, 3 million extra people don't lose their jobs.

???

Ron Paul supporters claiming Warrent Buffet has a vested interest in the bailout

First, Buffet does have a vested interest in the bailout. I'm not sure why you would contest that. I'm not even going to bother citing it, as his massive investment in Goldman is well-known to everyone actually paying attention.

Second, the "all banks should be liquidated" bullshit is a pathetic straw man argument.

Third, the Pearl Harbor analogy is wrong on two counts. A) The similarities between one country attacking another and businesses failing are...tenuous, if existent at all. B) Even if the analogy was sound, the United States lollygagged for many months after Pearl Harbor, and then sprung into action by...invading Africa. Okay, we still won the war, even though something like 80 percent of our resources went to Europe. Had we busted the budget going full force to Tokyo, Germany would extend to the Urals.

Blame, putting culprits in prison, figuring out how to stop this from happening again, all this will come.

I'm sure your prophecy skills are as good as Paulson's (who a few weeks ago claimed the system was "sound". That's a 700 billion dollar miscalculation. The greatest error in the history of the world?) But, I'm inclined to believe that the bankers' next instruction to our leaders isn't, "Now put us all in jail." Just a hunch.

If one were to see buffet taking a completely selfish stance on this, we'd expect to see him supporting the market crash. After all, he's got more money than anyone to buy up all these penny stocks and make even more money during the recovery.

I'm worried that he does support the bailout, because clearly we're all missing how bad this actually is.

Beware of geeks:

Beware of geeks with clever computer models: “I mean they had all these types from Wall Street, you know, and they had advanced degrees, and they look very alert, and they came with these — they came with these things that said gamma and alpha and sigma and all that. And all I can say is beware of geeks, you know, bearing formulas.”

As a corollary, beware of geeks who think they know the right course of action for Treasury right now.

It's a good quote here by Buffet, amazing one can repost in the thread like that word-for-word and cop 15+ Karma points for it. All the non-Geeks here mod this one up?

Using Buffet's analogy, why bother innovating when one can just imitate? On the extreme, the imitators resent the innovators and hate the idiots. The innovators see the imitators as an unfortunate evil.

I don't think you're quite understanding what he's saying there.

It's just a fancy way of saying the data can be made to support any opinion, so beware of something that has all this data to back it up, but still smells fishy on the surface.

I sort of know what Buffet means. It's like in the late 90's with regards to Long Term Capital Management hedge fund:

"At the beginning of 1998, the firm had equity of $4.72 billion and had borrowed over $124.5 billion with assets of around $129 billion. It had off-balance sheet derivative positions with a notional value of approximately $1.25 trillion."

http://en.wikipedia.org/wiki/Long-Term_Capital_Management

Eventually most of this was lost within a few months of volatility caused by events not taken into account by its computer models, and the fund was ultimately liquidated, losing its investors much of their $1 Billion investment.

The fund used models determined by some of the smartest around including economics Nobel prize winners. This team background then enabled them to raise a lot capital, which was subsequently extremely levered.

From how I understand it, another problem of LTCM (besides for the flaw in the model not taking into account an extremely rare occurence) was due to the fund venturing into different types of trades that weren't fully thought-out once all the arbitrage opportunities ran out in the program's designated purview.

Another aspect of Buffet's hesitancy with "black box" trading can be found in this hedge fund manager's interview: http://news.ycombinator.com/item?id=310284, that is, the programmers doing the modelling generally have the same type of educational backgrounds and thus the trading patterns and performance of their 'boxes' are all similar, thereby giving none a competitive advantage over the other.

At the end of the day, simplifying things, is it better to trust a brain and its computer extension or just a brain? In Buffet's case, being the equivalent in investing of grandmaster Garry Kasparov in chess, he sticks with his brain. Anyone else might want to run with the computer if they can't get shares in Berkshire Hathaway. I think LTCM were just very unlucky and a bit reckless, but could have done very well, if only they had more conservative exit points in winding up the fund.

But, the main gist of my previous comment was that it didn't add much to the thread in terms of discussion, but rather just brought a point in the article to people's attention. And just from that, I couldn't see all the mod points justified. I guess this goes back to my style of modding which is: "I'll mod this up or down, but only if it's under or over valued." ;)

I modded it up. I'm a geek. We poke fun at ourselves to keep our egos in line.

No, really, you can grab almost any answer you want from data if you tweak the algorithm. Throw in some misplaced incentives for the geeks and the traders and voila! you have a flawed model telling you housing can only go up up UP!. Snake oil comes in many forms.

Innovators != Inventors

What do Warren Buffet, Paul Graham and Hugh Hefner have in common? Each buys an undervalued asset at its undervalued price, sprinkles it with some fairy dust and then sells it at a premium once the potential has been realized. One does it with stocks and securities, the next with startup founders and their ideas, and the last with women.

In the case of Hefner, I think you are confusing silicone for fairy dust ...

Hef just uses photoshop and his bed. Graham gives everyone a good lunch and some networking support. Buffet just gets the most alert people to brighten up and prod the execs in despair.

aka Capitalism

Except Warren doesn't sprinkle with fairy dust - or sell.

He does however buy good businesses at discounts to their true long-term value.

I am no Buffet expert but know he is a value investor and buying distressed assets has been a way for him to obtain value. He likes to keep existing management.

Yeah, you've got the flavour right.. although... he tends to not buy distressed assets so much as assets that the market thinks are distressed.... a solid business (i.e. non-distressed) is very important to him. Maybe I'm just playing with definitions, but here's an example:

American Express was guilty of fraud, and things looked really bad for them, because their business is based on trust - surely their future bleak, thought Wall St. Their stock price tanked (this is just the opinion of the market; it may or may not correspond to reality). But Warren Buffett went down to the supermarket, and observed people: in fact, they still trusted American Express, in the operational sense that they still used it. The fraud didn't affect Amex's business at all.

So he put half his wealth (or something like that) into it, and made a killing... by buying a non-distressed asset at a distressed price.

And here, price is just another word for opinion.

Sorry to go on, I just like talking about it.

We know now, that the reason AIG was bailed out, is because European banks had $300 Billion or more in credit protection, and that the Euro banks are even more highly leveraged than US, Canadian, and British banks.

It was French finance minister Christine Lagarde who personally begged Paulson to keep AIG going.

See: http://www.telegraph.co.uk/finance/comment/ambroseevans_prit...

My personal view is not that bankruptcy is the answer; just that it will be the inevitable result.

The only question is whether a few large Wall St. firms will go bankrupt, causing pain to many other financial institutions and governments, or whether America itself will go near-bankrupt as a result of taking the losses on themselves.

And no, I don't have a lot of respect for Buffett, ever since he fought the inheritance (death) tax being repealed, which is after all double taxation, and from which his company personally benefits.

His insurance companies make billions on pricy insurance sold to small and medium sized business owners who are nearing the end of their life (you buy the insurance so that when you die, the company does not have to be liquidated in order to pay the IRS).

What double taxation, if you buy stock at 10$ and it's worth 100$ when you die that gain is never taxed.

I encourage you to actually know what you are talking about before posting.

If I have $1 million in cash when I die, my heirs have to pay taxes on that, even though I paid taxes on it when I originally earned it. You cannot net out the capital gains and just pay tax on that, everything is taxed.

Your heirs didn't earn that money, so they're only paying taxes once. You pay once for earning it, they pay once for "earning" it via your departure from this earth. But presumably if you have lots of money, you've already set up trusts, paid for college, given lifetime gifts, etc. so your heirs are already pretty far ahead of the average person.

Seems like a perfectly good way to encourage at least a tiny amount of wealth redistribution in a society where wealth is not very well distributed at all.

It could be setup like that but it's not. You don't pay capital gains at the time of death and the people you give it to don't pay when they receive it so only some of the money is ever taxed.

PS: The really sick thing is giving stock to a charity: "By doing so, you never have to calculate gains nor list the sale as income on your tax return. Moreover, if the stock was held more than a year (long-term gain), you get to itemize the charitable deduction at fair market value on the date of gift." (http://invest-faq.com/cbc/tax-cap-gains-basis.html)

To find out why this is messed up calculate what happens when you give 100$ to charity now vs buying 100$ in stock that is worth 10x a much in 20 years. I had an aunt who was audited and ended up getting close to a million back because of this stuff.

Plus, you're ignoring the fact that there is a credit (which can be thought of as an exemption), which is different year-to-year, but not less than $1,000,000. I don't feel like going through all the details, but you can easily research this.

People need to read up on this stuff. There is a ton of FUD surrounding this issue.

I encourage you to not use an unnecessarily aggressive tone when posting ;)

First off I never spoke about cash I said the gain in the value of a stock that you buy is not taxed. (http://invest-faq.com/cbc/tax-cap-gains-basis.html) My point is covered under "You inherit a security" but reading the whole thing is useful.

Second, in you only leave 1 million in stock to your child they pay zero tax on that.

PS: There are a tun of way's the tax code helps high net worth individual. If you have 1billion in capital gains you pay 15% before deductions, but if you're a contractor making 10$ an hour you pay more than that to SS and Medicare let alone the rest of the tax code.

Earn money, pay tax. Save money, pay tax on the interest. Buy stuff, pay sales tax. Die, pay tax again.

I'd prefer just a single tax. Get rid of the unfair ones like inheritance tax which stops people getting on the housing ladder etc.

Old money fears new money. I was going to say old wealth fears new wealth, but with PG’s input on wealth… I think it would be better to say money. Or maybe even perhaps large money fears small money that has ingenuity that may become large money. Buffet knows where to stop his competition before it becomes a serious problem – Monopolist, or should say cartelist or oligopolists always have… sometimes I wonder how many wealth creators by innovation understand, or even think this as true.

Buffet + Rose = win

What to people think about Buffet's post-investment media presence? Is he expending trust-capital by pushing for the bailout when he has $X billion dollars freshly invested?

On the contrary, I think he's banking on the fact that many people are scared but trust his judgment because of his track record. Sure he might profit from the bailout, but he has also put up $8B and counting when everyone is worried about liquidity. He's putting his money where his mouth is.

As Clinton said on Letterman, all the people that bet against America lost. He's betting on America.

(I love that attitude and I'm not even American)

Or he’s betting that he will get to run the last two rolls of the dice at the game of taking America by monopoly that he is playing, like a 11year old kid, once they have boardwalk and park place along with most of the other important ones, you can’t stop the game without a temper tantrum, maybe in this case one will not be allowed to walk away from the game.

So do I (an also am not American). I love the attitude, I have endless admiration for the US of A.

He'll profit because he just bought dollar bills for 20 cents (or whatever amount less than a dollar). That's what he does. Like he said "It’s the kind of stuff I love to do. I just don’t have 700 billion. Maybe we could go in it together."

He also was saved 6.5 billion from the bail out of Fanny/Freddie. He also has made his fortune from insurance, which one might say is like banking, a big benefactor of the ‘game’. Would you buy insurance or food first if prices fall and you are out of work? He would lose in that environment, too granted, (did you notice he switched into food lately right around when he went on a buying spree in one of the safest of fiat currency:-) but the real gain is in the upside of knowing what society will need and having it with less competition:-), it only gets better…. Giving him credit he did offered to buy one percent of the 700 billion, (though not first lost position) or without his friends picking which ones...

> The US government can borrow money very cheaply, and buy mortgages at fear driven low prices, which should allow it to make a profit from the rescue, if it buys at the market price:

Is anyone reminded of the concept of doubling down on your bet when they see this? I guess it is strictly correct although I don't like the chances of the goverment buying at market prices though.

"And so you get what I call the natural progression, the three I’s: the innovators, the imitators, and the idiots."

Everybody just kind of goes along. And you look kind of silly if you disagree.

It definitely is not easy to resist conformity, Buffett claims that his ability to do this is one of the main reasons for success (he's a contrarian)

Hehe: "And all I can say is beware of geeks, you know, bearing formulas.”

I’m irritated by this knee-jerk anti-bailout reaction (”$700bn to the fat cats!”). Check this diagram from the BBC (http://newsimg.bbc.co.uk/media/images/45062000/gif/_45062415...)

There is no $700bn going into some Wall Street bankers pockets. First off, $450bn of this bailout money is conditional.

Also, see that arrow pointing from the Banks to the Gov’t? That’s a stake in the banks being given to the taxpayers. So you’re not just losing money, you’re gaining an asset, and the chances are, at a very good price.

There’s a chance the US Gov’t could end up making a profit out of the situation when the housing market recovers, which it inevitably will. This credit bust is definitely a mess, but this doesn’t mean there won’t be any credit in the future. We need to think 5-10 years into the future. Things will recover, they always do.

The closest thing to this I’ve ever studied were the currency crises that happened in Asia in 1998 (indeed they were my savior in my final international economics exam). The big lesson I learned was that self-fulfilling prophecies can occur in the markets. If everyone loses faith in a currency, then it will crash, even if nothing has fundamentally changed.

The same thing can happen with banks. If we think some are going to fail, sell its shares, then we can help make it fail. So to counter-act that you need some pretty aggressive action, and even if it isn’t perfect, people are misunderstanding that doing nothing could be much, much worse.

If this credit problem is not solved and confidence restored, then it is easy for the effects to spill over to the main economy. The worst would be for otherwise healthy firms to stop receiving credit, be forced to lay people off in a downturn, add to unemployment, and then just make the whole macro condition worse for everyone. Credit plays a vital role in smoothing out consumption and investment cycles - so the banks that facilitate this and are otherwise healthy need to be backed up.

That's started happening in the UK (http://www.telegraph.co.uk/finance/financetopics/financialcr...). If unemployment rises sharply, then things will get really bad.

"People should always know better. I mean people people don’t get they don’t get smarter about things that get as basic as greed and you can’t stand to see your neighbor getting rich. You know you’re smarter than he is, and he’s doing these things, you know, and he’s getting rich, and your spouse is getting unhappy with you because you aren’t doing pretty soon you start doing it. And so you get what I call the natural progression, the three I’s: the innovators, the imitators, and the idiots. And that’s what happens. Everybody just kind of goes along. And you look kind of silly if you disagree."

That is the "free market" at work. And why I shake my head in disbelief at people who think/expect the free market solves problems.

He seems to be making the argument:

  1. The US government can borrow money at extremely low rates
  2. Purchasing mortgage-based securities at the current market price will eventually make you a lot of money
  3. So.. the government should leverage up and buy 700 Billion worth

This sounds awfully similar to the advice given to people buying homes during the real estate bubble. "Buy the biggest house you can get a loan for.. it'll be worth more tomorrow anyway, so you can just sell it and make money!"

Thanks for this post. I am glad to see that we aren't going into bankruptcy any time soon.

Warren Buffett I feel knows money better than the teacher stuck up in a office somewhere.

SO do all these economy guys not believe in not intervening in economies any more?

They've always believed in both, depending on which you ask.

Warren Buffett has been in favor of higher taxes and stricter regulation for about four decades. So I guess "these economy guys" isn't a very useful classification, at all.

he says that only the govt can buy lots of stuff right now, private companies all need to back off.

but we saw an article here yesterday saying he just invested 8 billion in GE and something else.

contradiction?

Yep, though resolved by his reminder that he doesn't have 800 billion sitting around, and that he's one of the richest guys in the world.

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