Buffet's advice to President Obama
posted by Realist Theorist @ 3:00 AM
Warren Buffet is not a supporter of a real free-market. He's for a "mixed economy", and thinks the government ought to be taxing him more, redistributing his money to the poor. He talks about an "ovarian lottery" being responsible for much of his own success (I guess he's either read John Rawls, or simply picked it up second-hand). As a super-rich self-made man, he's a prime example of the "sanction of the victim", asking to be hurt. Neither is Buffet great on economics. Here too, he has bought in to a standard the Keynesian/Monetarist mixture.
So, when Buffet gives advice he's not saying how we can get to a thriving free-market; rather, he's really saying: "Here is how we can get to a more stable mixed economy that does not cross the line into stagnation or a downward spiral". He did this yesterday, appearing on CNBC for a 3-hour special. Since he is somewhat influential, I thought some readers may be interested in what he said. There's much to dislike in what Buffet says, but I want to present his views in this post; a critique can wait.
I'm going to paraphrase. Also, be warned that I'm going to read between the lines, but I do so with my full sense of honestly. [For what is probably a good transcript: see Gurufocus, but I got my summary from watching the show.]
With all those caveats, here is Warren Buffet's advice to Obama:
Do not demonize people: Do not portray businessmen as evil. People are getting the impression that every big bank is like Citibank. This is false. If people act on that false assumption they'll do the wrong things and ask for the wrong things to be done. This false impression destroys the very confidence we need at this point. [RT, using a Buffet example, but extending it: Imagine a set of generals launching the invasion of Normandy, and one general does something wrong. Now, imagine the President starts criticizing generals as a group, commentators speak of "Main Street vs. Military Street", while Congress starts holding hearings where general are called from the front to testify and then criticized for not flying back commercial. End-Aside] It is not fair, and it undermines good people. We need good people at times like this: we do not need villains, we need victories.
Drop all the other noble goals: Ever the altruist, Buffet thinks it's a good long-term goal for the government to help people with health care and to raise taxes on the super-rich. However, he says, now is not the time. The idea of "not wanting to waste an emergency" is a poor notion; that's like a president saying he does not want to waste a war. This is not the time to do things that the GOP is strongly against. For now, forget about health-care and about raising taxes on the rich. This is a time to focus on the single task at hand, with a sense of unity. You cannot expect unity on things people strongly disagree about. So, you have to drop that part of your agenda. Also, unity is not helped by demonizing people. Even the stimulus should not be the main focus: it should be all about fixing the financial system.
Some goals aren't even worthy: Card-check is a bad idea. Secret ballot is a good idea for unions too. As for global warming, Buffet does not express an opinion. If we want to prevent carbon-emissions, he agrees that some type of tax will be required. However, we should be honest that this is a tax on consumers. He owns huge utility companies, and the state utility commissions will simply pass that tax on to consumers. His top men who run his utilities tell him that cap and trade is a bad idea.
Clarity and predictability are vital: It has been some months now and we do not have clarity on what the government will or will not do. People will stay partially paralyzed, waiting, until they see more clarity and predictability of direction. Smaller details of any plan do not matter as much as having a clear plan that people can count on, without the rules being changed on them. Also, one cannot get this clarity from lower officials. The president is the one who has to make the large strokes absolutely clear, by stating them and committing to them.
We're mostly done enough: The previous administration stepped in and pushed money into banks, money-market funds and AIG. Buffet supports most of what was done. He thinks that the government should continue to guarantee bank deposits (even over the current $250k number) and also guarantee bank debt. However, he does not think banks need more government money. In his view, the most important thing is to create an environment where the good banks, like Wells Fargo, can grow their way out of this on their own. (Buffet is a large shareholder in Wells Fargo.)
Curtail "mark to market": The biggest risk he sees to banks is if the government forces banks to take new capital at today's low share-prices. The immediate cause will be if the government thinks the banks have too little capital. In turn, the immediate cause for that will be if the government uses "mark to market" to calculate that banks have too little capital.
Buffet is a strong supporter of "mark to market" for accounting. He thinks it should not only be reported in accounting footnotes, but should be the primary figure. Let management's estimates be in the footnotes; and let shareholders decide whether to believe management. However, he also thinks the government should not use "mark to market" alone, when calculating legal capital requirements for banks during a panic. In a panic, that forces banks into being viewed as unrealistically worse than they really are. It creates the basis for government to put in more capital where no more is really required; and, in doing so, the government undermines private capital. Instead, the government should modify its (very recent) rules on using MTM to calculate capital-requirements and make them clear. While doing so, it should guarantee that if the capital turns out to be really inadequate, it will nevertheless guarantee depositors and bank-debt.
Finally, Buffet thinks the country will come out of this and grow to even wealthier times. However, the choice is between years of struggling and finally emerging despite government action, or having government set an environment that let's banks and other companies to grow out of the current state more quickly.
RT again: That's the summary.
Buffet is not making any call for radical change. He fully supports much that got us into this mess. He ignores much of the government-caused mess that brought us to where we are. In effect, he's suggesting we fix things so that we leave something for the politicians to mess with. Buffet's message is: don't kill the goose that lays the golden egg. While he is no radical for capitalism, his interview basically makes the case that Obama should not be a radical anti-capitalist.
Yet, while there are many things to disagree with, I have to admit that when the general on the war-path is calling for business to be cut to shreds, it is heartening (in a "choose the lesser evil" way) to hear one sage from the general's side say: "let's just cut off a finger or two; we'll have time enough to do the rest later when they stop wiggling". Unless one thinks we must head to apocalypse first, it is a good sign that some voices are not so radical.
So, when Buffet gives advice he's not saying how we can get to a thriving free-market; rather, he's really saying: "Here is how we can get to a more stable mixed economy that does not cross the line into stagnation or a downward spiral". He did this yesterday, appearing on CNBC for a 3-hour special. Since he is somewhat influential, I thought some readers may be interested in what he said. There's much to dislike in what Buffet says, but I want to present his views in this post; a critique can wait.
I'm going to paraphrase. Also, be warned that I'm going to read between the lines, but I do so with my full sense of honestly. [For what is probably a good transcript: see Gurufocus, but I got my summary from watching the show.]
With all those caveats, here is Warren Buffet's advice to Obama:
Do not demonize people: Do not portray businessmen as evil. People are getting the impression that every big bank is like Citibank. This is false. If people act on that false assumption they'll do the wrong things and ask for the wrong things to be done. This false impression destroys the very confidence we need at this point. [RT, using a Buffet example, but extending it: Imagine a set of generals launching the invasion of Normandy, and one general does something wrong. Now, imagine the President starts criticizing generals as a group, commentators speak of "Main Street vs. Military Street", while Congress starts holding hearings where general are called from the front to testify and then criticized for not flying back commercial. End-Aside] It is not fair, and it undermines good people. We need good people at times like this: we do not need villains, we need victories.
Drop all the other noble goals: Ever the altruist, Buffet thinks it's a good long-term goal for the government to help people with health care and to raise taxes on the super-rich. However, he says, now is not the time. The idea of "not wanting to waste an emergency" is a poor notion; that's like a president saying he does not want to waste a war. This is not the time to do things that the GOP is strongly against. For now, forget about health-care and about raising taxes on the rich. This is a time to focus on the single task at hand, with a sense of unity. You cannot expect unity on things people strongly disagree about. So, you have to drop that part of your agenda. Also, unity is not helped by demonizing people. Even the stimulus should not be the main focus: it should be all about fixing the financial system.
Some goals aren't even worthy: Card-check is a bad idea. Secret ballot is a good idea for unions too. As for global warming, Buffet does not express an opinion. If we want to prevent carbon-emissions, he agrees that some type of tax will be required. However, we should be honest that this is a tax on consumers. He owns huge utility companies, and the state utility commissions will simply pass that tax on to consumers. His top men who run his utilities tell him that cap and trade is a bad idea.
Clarity and predictability are vital: It has been some months now and we do not have clarity on what the government will or will not do. People will stay partially paralyzed, waiting, until they see more clarity and predictability of direction. Smaller details of any plan do not matter as much as having a clear plan that people can count on, without the rules being changed on them. Also, one cannot get this clarity from lower officials. The president is the one who has to make the large strokes absolutely clear, by stating them and committing to them.
We're mostly done enough: The previous administration stepped in and pushed money into banks, money-market funds and AIG. Buffet supports most of what was done. He thinks that the government should continue to guarantee bank deposits (even over the current $250k number) and also guarantee bank debt. However, he does not think banks need more government money. In his view, the most important thing is to create an environment where the good banks, like Wells Fargo, can grow their way out of this on their own. (Buffet is a large shareholder in Wells Fargo.)
Curtail "mark to market": The biggest risk he sees to banks is if the government forces banks to take new capital at today's low share-prices. The immediate cause will be if the government thinks the banks have too little capital. In turn, the immediate cause for that will be if the government uses "mark to market" to calculate that banks have too little capital.
Buffet is a strong supporter of "mark to market" for accounting. He thinks it should not only be reported in accounting footnotes, but should be the primary figure. Let management's estimates be in the footnotes; and let shareholders decide whether to believe management. However, he also thinks the government should not use "mark to market" alone, when calculating legal capital requirements for banks during a panic. In a panic, that forces banks into being viewed as unrealistically worse than they really are. It creates the basis for government to put in more capital where no more is really required; and, in doing so, the government undermines private capital. Instead, the government should modify its (very recent) rules on using MTM to calculate capital-requirements and make them clear. While doing so, it should guarantee that if the capital turns out to be really inadequate, it will nevertheless guarantee depositors and bank-debt.
Finally, Buffet thinks the country will come out of this and grow to even wealthier times. However, the choice is between years of struggling and finally emerging despite government action, or having government set an environment that let's banks and other companies to grow out of the current state more quickly.
RT again: That's the summary.
Buffet is not making any call for radical change. He fully supports much that got us into this mess. He ignores much of the government-caused mess that brought us to where we are. In effect, he's suggesting we fix things so that we leave something for the politicians to mess with. Buffet's message is: don't kill the goose that lays the golden egg. While he is no radical for capitalism, his interview basically makes the case that Obama should not be a radical anti-capitalist.
Yet, while there are many things to disagree with, I have to admit that when the general on the war-path is calling for business to be cut to shreds, it is heartening (in a "choose the lesser evil" way) to hear one sage from the general's side say: "let's just cut off a finger or two; we'll have time enough to do the rest later when they stop wiggling". Unless one thinks we must head to apocalypse first, it is a good sign that some voices are not so radical.
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> "Buffet is not making any call for radical change. He fully supports much that got us into this mess. . . . Yet, while there are many things to disagree with . . . it is heartening (in a "choose the lesser evil" way) to hear one sage from the general's side say: "let's just cut off a finger or two" . . . . [and] it is a good sign that some voices are not so radical." (Bold added, and pardon the hasty elisions.)
As a student of history (not economics), I think you have identified a fact worthy of further consideration. Some individuals, such as the President of the US, are in positions of great power. They do not, however, exist in a social vacuum. That is why I, when deciding for whom to vote, do not look only at an individual candidate. It is also important to look at the movement in which he is a member or perhaps even one of the leaders. (Politicians are usually not ideological movement leaders, but rather implementers.) Even the most powerful person, such as a president, can do no more than his supporters are willing and able to implement.
This is why I admired an analysis of McCain and Obama that I saw last year, but disagreed about stopping with the analyst's conclusion that they are equally destructive and then deciding not to vote. If two candidates are equally bad, one needs to next examine their followers--especially their most intellectually or economically powerful followers (not their most "extreme" followers). Obama, e.g., was supported publicly by numerous wealthy people, even in innovative and productive areas of the culture such as the software industry. The question should arise: Why? Did they expect to have a "moderating" influence? If so, are their expectations realistic? (As a counter-example, the rich in Germany in the early 1930s who thought being elected would moderate Hitler were not being objective.)
My purpose is not to defend President Obama, whose ideology I despise, but to suggest a tool that might help in watching the Obama administration's actions unfold on the stage of history. Some observers have already noted that Obama is, so far, largely continuing (in amplified form) the "principles" of the Bush administration. We will see how much influence men such as Buffet have.
As a student of history (not economics), I think you have identified a fact worthy of further consideration. Some individuals, such as the President of the US, are in positions of great power. They do not, however, exist in a social vacuum. That is why I, when deciding for whom to vote, do not look only at an individual candidate. It is also important to look at the movement in which he is a member or perhaps even one of the leaders. (Politicians are usually not ideological movement leaders, but rather implementers.) Even the most powerful person, such as a president, can do no more than his supporters are willing and able to implement.
This is why I admired an analysis of McCain and Obama that I saw last year, but disagreed about stopping with the analyst's conclusion that they are equally destructive and then deciding not to vote. If two candidates are equally bad, one needs to next examine their followers--especially their most intellectually or economically powerful followers (not their most "extreme" followers). Obama, e.g., was supported publicly by numerous wealthy people, even in innovative and productive areas of the culture such as the software industry. The question should arise: Why? Did they expect to have a "moderating" influence? If so, are their expectations realistic? (As a counter-example, the rich in Germany in the early 1930s who thought being elected would moderate Hitler were not being objective.)
My purpose is not to defend President Obama, whose ideology I despise, but to suggest a tool that might help in watching the Obama administration's actions unfold on the stage of history. Some observers have already noted that Obama is, so far, largely continuing (in amplified form) the "principles" of the Bush administration. We will see how much influence men such as Buffet have.
When I heard that Buffet was doing this show I was scared to death. Usually, he is awful as you point out, and I figured that if he came out in sympathy with the current socialist onslaught, we would be dead. After reading your post, I'm glad I was wrong. I agree with your characterization and I thank you for doing an excellent job summarizing this. I think that given Buffet's political leanings and pragmatism, this was the best we could hope for. It might slow Obama down slightly and at least buy us some time.
On the other hand, could you imagine the effect, if someone like Buffet were to give a principled defense of capitalism and call the Obama's to the carpet? He could instantly change the dynamic and this spirit would reverberate through the business and political world.
When you think of it this way, it is the Buffet's of the world that are destroying us - not the Obamas - by sanctioning their destroyers.
On the other hand, could you imagine the effect, if someone like Buffet were to give a principled defense of capitalism and call the Obama's to the carpet? He could instantly change the dynamic and this spirit would reverberate through the business and political world.
When you think of it this way, it is the Buffet's of the world that are destroying us - not the Obamas - by sanctioning their destroyers.
Yes Doug, I agree. Chewing on the Buffett interview I was wondering what analogy would fit the case. I came up with one that was unsatisfactory, but let me share it first: I imagined Buffet as the someone who fed a vicious dog that is turning on a a group of prisoners. Buffet, while sympathizing with the dog's intent, is trying to call it off. He wants the dog to be more selective; and anyway it would not be practical to maul the prisoners to death.
Of course, the problem with the analogy is that folks like Buffet genuinely think they are supporting a moral cause. It is mostly altruism -- rather than power lust -- when he says that the government should control and redistribute wealth (quickly adding that it should be within limits). Secondly, apart from his role as deg-feeder, he is also an obedient prisoner. The classic sanction of the victim.
Far from being a vicious person, Buffet seems like a personable avuncular guy who would genuinely want to see other people succeed. Yet, this very aspect is disarming. I agree completely that without people who think like Buffet, folks like Obama will be impotent.
Of course, the problem with the analogy is that folks like Buffet genuinely think they are supporting a moral cause. It is mostly altruism -- rather than power lust -- when he says that the government should control and redistribute wealth (quickly adding that it should be within limits). Secondly, apart from his role as deg-feeder, he is also an obedient prisoner. The classic sanction of the victim.
Far from being a vicious person, Buffet seems like a personable avuncular guy who would genuinely want to see other people succeed. Yet, this very aspect is disarming. I agree completely that without people who think like Buffet, folks like Obama will be impotent.
I suppose it is only fair to add that I admire "Buffet the businessman" so far as one can make divide a person that way. In his business he shows a rational approach that keeps out rationalism and peer-pressure, and he does this superlatively. I'm even own a tiny few shares in his firm.
That's a funny analogy - kind of crazy but I get it - I agree that he is an amazing businessman. I am a big fan of his in that sense - I guess that is what makes it even more frustrating - how are we going to get the rest of the world behind capitalism if we can't convince the world's premiere capitalist - it is a symptom of pragmatism. He just doesn't think in principle about politics - classic
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