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 demonise 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 criticising 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 criticised 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.