Warren Buffett

NBC won't tell you, but I will. Obama just turned the corner on the economy, and I don't mean in a good way.

"What is required is a commander in chief that's looked at like a commander in chief in a time of war," Buffett said.

The coverage of his interview on CNBC is remarkably devoid of long quotes, and if you saw the interview, you'd know why--Buffett was singing a funeral dirge, predicting high double digit unemployment, but more importantly being distinctly, if mildly critical of the Obama administration's response to the crisis.

The media coverage is remarkable consistent--only reporting the most mild criticism and contrasting it with Obama administration official's arguments for patience as well as the inevitable point that the president is still popular.

Well, they have to say something, don't they? Buffett is actually a latecomer to the party, but he's nevertheless a bellwether. His criticism, like Walter Cronkites criticism of the Vietnam war, is a sign that Obama's policy, and its arguments, have failed.

Just as important; the issue has turned from who is to blame for the situation (why Bush of course!) to who is to blame for not solving it.

What we're seeing her is the establishment of a media meme, not unlike the infamous 13 words in Bush's 2003 State of the Union address. The effect built over several months, but it marked the moment when the media turned from a largely suppportive-slash-timidly critical role, to the recently concluded pogrom against Bush. Notably, that controversy was also a matter of important players (the CIA) breaking ranks.

Think I'm overstating the case? Consider that as the consensus about our economic prospects are congealing, the media is getting comfortably quoting the most extreme doomsayers. Nouriel Roubini vaulted to prominence by predicting the current economic climate, and is currently predicting a 36 month recession.

The real question here is what the Obama administration will do? Clearly their hope was to push through a far-left political agenda under cover of a massive economic crisis (which incidentally, they screamed bloody murder about after 9/11, when they thought Republicans were doing the same...). The economy would recover by the end of the year, or early 2010 at the latest, leaving them well-positioned for the mid-term elections.

There are signs that Obama has an escape hatch in place.

US Treasury Secretary Timothy Geithner is practically alone on the job, working night and day to cope with the worst economic downturn in decades.

Of the 15 key Treasury Department positions that require Senate confirmation, only one has been filled. Stuart Levey, a leftover from the previous administration, who as under secretary of the treasury for terrorism and financial intelligence, is not central to the crisis management however.

Its more than a little odd that Geithner has no staff when the President has comfortable majorities in Congress, unless of course Obama is setting up a scapegoat. Its hard to imagine a better one--already reviled as a tax dodger, with no political constituency to back him up, he's a perfect patsy.

That's hardly going to be enough though. Obama is faced with an policy U-turn more drastic that Clinton's embrace of welfare reform in the nineties. His assets are a compliant state media who could spin tax cuts for the rich for their Messiah, but the liberal-left base would not be fooled. Destruction of the free market system is a religious tenet. Obama would be creating serious political problems for himself and the party.

The decision requires someone who can be brutally honest with themselves about political realities. Bill Clinton was well-suited to his similar dilemma, coming from a mixed political environment where success was based on that skill. Obama's political education couldn't have been more different. He's been groomed for success by mentors since his earliest days at Columbia. His decisions have always been about how to avoid choosing any evil by voting present, disqualifying his opponents and message control. In all likelihood, Barack Obama has never had to make a real choice.

My guess is that he'll go with what he knows, which will be to try to disqualify his critics and avoid having to change anything in his program, hoping that the predictions are off-base.

It truly is a historic presidency--no one has ever raised the draw bridge within the first 100 days.

This is a portion of an interview of Warren Buffett conducted by Susie Gharib of Nightly Business Report. You can read more at this link.

SG: There is considerable debate as you know about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again, where do you stand on that debate?

WB: Well I don’t think the worry right now should be about the next one, the worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and its not going to be soon, but its going to get done.

SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?

WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.

SG: But are we creating new problems?

WB: Always

Are Hank Paulson's Bailouts a Bad Deal for Taxpayers?  Bloomberg wanted to find out, so they crunched the numbers and discovered that Paulson Bailout Didn’t Give Taxpayers Buffett’s Terms. 

Today on Bloomberg's Morning Call, Erik Schatzker reported the following: 

Let's say somebody came to you with an investment idea, put down twice as much as the previous guy for securities worth 75% less - you'd probably say "No Chance!" but as an exclusive report by Bloomberg shows today, that is exactly what happened to U.S. taxpayers when Congress gave Hank Paulson the authority to bail out the nation's banks.  Take the case of Goldman Sachs.  Back in October the Treasury Department invested $10B in Goldman and in exchange got warrants worth $882M.  Warrants give holders the option to buy shares at a set price by a certain date.  Compare those terms with the ones Goldman gave Warren Buffet a month earlier.  Buffet, the Berkshire Hathaway Chairman, invested $5B - half as much as the Treasury Department - and got warrants worth $3.6B - four times as much!  Now consider this:  it's not as if Goldman drove a hard bargain.  Paulson, the former Goldman CEO, set the terms for taxpayers.  Again, remember - invest twice as much as Buffet for 75% less. 

Joseph Stiglitz, the Nobel Prize-winning economist, says "If Paulson was still an employee of Goldman Sachs and he'd done this deal, he would have been fired."  The only advantage taxpayers have is our warrants are good for ten years while Buffet's expire in five.  That means we get a longer period for Goldman shares to gain value.  Treasury has invested in 174 banks since the bailout bill was passed.  Had Paulson set the same terms for all of those deals as the ones Buffet got from Goldman, taxpayers would receive $48B in dividends over the next five years.  Roger Altman, Chairman and CEO of Evercore Partners and former Deputy Secretary of the U.S. Treasury and Clinton advisor was asked if we should look at this as the American taxpayers getting a raw deal? 

"I don't think it is," replied Altman, "and the reason is that the goal that the Treasury had and the Federal Government had in establishing the TARP and investing or infusing capital into a wide range of financial institutions was and is very different from the goal Warren Buffet had in investing himself.  Buffet's goal, and it ought to be, is solely a good return from an investment point of view [for his shareholders].  But the Federal Government's goal was to stabilize the financial system. And the more onerous the terms of the Federal investments, the more difficult it would be to stabilize the financial system.  So did the Treasury get the last dime from the point of view of dividend or warrant related return that it could have gotten?  Probably not, but that wasn't the objective of the program.  The objective of the program was to stabilize the financial system and avoid, in the words of the IMF executive director, a 'systemic meltdown'.  So I don't think the two purposes are the same and I don't think it's fair to compare the two."

There are two problems with Altman's apologetics for Paulson's incompetence:

1. One of the benefits of selling this to the American taxpayers is thatthe taxpayers WOULD get a return on this money. 
2. When the Clinton Administration loaned Mexico $12.5B to ward off its 'systemic meltdown' in 1994, the terms were so "onerous" that Mexico paid the loan back three years ahead of schedule.  According to the New York Times almost exactly 12 years ago titled Mexico Repays Bailout by U.S. Ahead of Time:

In the end, Mr. Clinton said, the United States ran a profit of more than half a billion dollars on the loans.  That money, which American officials said would go toward deficit reduction in the United States, is above the interest the cash would have earned had it remained in the Federal Reserve's emergency stabilization fund, which was originally designed to steady the dollar rather than the currencies of allies.

Stiglitz is known for challenging Adam Smith's invisible hand (the principle that an individual pursuing his own self-interest tends to also promote the good of his community as a whole).  He explored the implication of information imperfections on both market economics and political economy (an area in which I tend to agree with him).  The theories that Stiglitz and others helped develop explain why unfettered markets often not only do not lead to social justice, but do not even produce efficient outcomes.  Stiglitz said:

"The real debate today is about finding the right balance between the market and government. Both are needed. They can each complement each other. This balance will differ from time to time and place to place."

It certainly does not appear that the right balance between the market and the government has been discovered in the 21st Century as of yet.  However, it does appear that Paulson decided to simply give money away to his cronies with not even as much consideration for the profitability of the transaction as was given in the Clinton Administration.  This is an abject travesty, and kudos to Bloomberg.com for having the intellectual curiosity to investigate and confirm what many of have suspected ever since the House Republicans changed their votes and the bill was rushed over to the Bush White House.

Barack Obama's chief economic advisor, billionaire investor Warren Buffett, unleashed a howler which is a thousand times worse than Phil Gramm's "whiners" remark.

Gramm suggested we stop complaining about economic hardship.

But Buffett suggests that it will be unavoidable and we ought to get used to a permanent level of quasi-recession.

I know Barack Obama thinks pretty highly of Warren Buffett's economic wisdom. The so-called Oracle of Omaha has helped persuade Obama that higher taxes will have no effect on economic growth. Obama mentions it in his book, The Audacity of Hope. And in a recent New York Times interview, Obama said the following: "If you talk to Warren, he'll tell you his preference is not to meddle in the economy at all—let the market work, however way it's going to work, and then just tax the heck out of people at the end and just redistribute it."

But I wonder if Obama also buys into this little bit of Buffettology that the billionaire unleashed at a symposium on the U.S. indebtedness to promote I.O.U.S.A., a new documentary: "Even if we grow at 1 percent per year, we double the GDP per capita in 75 years. The pie will grow enough that everyone will get more of the pie."

http://www.usnews.com/blogs/capital-commerce/2008/8/25/obama-adviser-buffett-to-america-youre-rich-enough.html

One word, Warren : NOT!

James Pethokoukis points out that one inevitable result of accepting such tepid long term economic growth will be the Social Security Trust Fund will be fully depleted by 2030, and as their annual mailer cheerfully predicts, massive tax hikes or benefit cuts will be required at that point.  

Now let's look at the other results herein. U.S. GDP is about $14T/year and China is about $4T/year http://en.wikipedia.org/wiki/List_of_countries_by_future_GDP_estimates_(nominal)

In 2013 China is estimated to reach $7T.  Even assuming a slow down over time, let's assume a maturing Chinese economy continues to gain $600B/annually in economic performance. Do the math. The US is outpaced by China within a generation.

Now if the US managed a 4% growth rate, due to our larger existing economy we would stay well ahead of the PRC indefinitely.   Even a 3% rate keeps us well ahead of the PRC over the relevant time horizon. 

Over a 20 year period 4% growth yields a $30T US economy, 3% growth yields a $25T US economy  1% growth yields a $17T US economy. That will be smaller than China's by 2030, with massive and unpalatable geopolitical consequences for the nation.

Perhaps the principal behind the GEICO lizard ought to think about this one again.  With health care inflation running at double digits, what a 1% overall growth rate means is that other sectors of the economy will need to shrink outright to pay for health care. Then, with less investment in infrastructure---educational, public works and industrial----our national productivity goes down, thus creating a self-fulfilling prophecy.

What good is it to promise public services when the overall economy will grow so slowly as to make it impossible to pay for them? What good will be open borders if we have a stagnant economy?

Consider this as well; historic U.S. population growth from 1960-2000 averaged about 1% per year. http://en.wikipedia.org/wiki/U.S._population#U.S._Population_Growth and this is not expected to abate in the next generation http://www.census.gov/compendia/statab/tables/08s0010.pdf

A 1% annual GNP growth coupled with 1% population growth means arithmetically living standards will never improve ( Given the aging population this also means young working people can expect lower wages and higher tax burdens).  

I look forward to the next Obama ad for the swing states in the Rust Belt

"My ecomomic advisor promises to have America be a second tier world power with a stagnant standard of living"  

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