Now Warren Buffett Says the Emperor Doesn’t Even Have Any Underwear
March 9th, 2009 . by economistmomYikes–what happened to Warren Buffett, the self-declared Pollyanna? From his interview on CNBC this morning:
BUFFETT: …The economy, ever since we talked in September, we talked about it being an economic Pearl Harbor and how–what was happening in the financial world would move over to the real world very quickly. It’s fallen off a cliff, and not only has the economy slowed down a lot, people have really changed their behavior like nothing I’ve ever seen. Luxury goods and that sort of thing have just sort of stopped, and that’s why Wal-Mart is doing well…
…you never know what’s going to happen, but I would not have–I would not have thought there could’ve been a much worse case than what has happened…
And I’ve never seen the consumer or the Americans just generally more fearful than this. And they’re also confused. And you can get fearful very quickly, but you don’t get confident, you know, in five minutes. You can get fearful in five minutes, but you won’t get confident for some time. And government is going to play an enormous factor in how fast it comes back. And if you’re confused and fearful, you don’t get over being fearful till you aren’t confused. I mean, the message has to be very, very clear as to what government will be doing. And I think we’ve had–and it’s the nature of the political process, somewhat, but we’ve had muddled messages, and the American public does not know what–they feel that they don’t know what’s going on and their reaction, then, is to absolutely pull back.
BECKY [Quick, CNBC anchor]: So there’ve been a lot of fingers of blame that have pointed in a lot of different directions. But you’re saying the message from Washington has been confused or…
BUFFETT: Well, I think it’s the nature of things…
…we went wrong originally because we had a belief that–and everybody had the belief. I had it, the government had it, mortgage lenders had it, borrowers had it, media had it, everybody thought house prices could go nothing but up and–or at least they couldn’t go down a lot. And once you had that belief–and it was nationwide–it didn’t make any difference what you lent on the house because if the guy couldn’t pay, you’d sell it at a profit anyway or you wouldn’t lose much money. So you had 11 trillion of residential mortgage debt built on this theory that who was borrowing it, what their income was really wasn’t that important because the house itself had to go up in price. And when that tumbled and houses which might’ve been worth 22 trillion at the peak are worth maybe four or five trillion less, A, it’s a huge amount out of people’s net worth. It’s the biggest asset most people have. And then secondarily, all of these instruments that were built on it, which people didn’t understand too well, started toppling to various degrees in value and then that exposed other things. I mean, it was like, you know, some kid saying, `The emperor has no clothes.’ And then after he says that, he said, `On top of that, the emperor doesn’t have any underwear either.’ You know. I mean, various layers have been–and they interact. When people get scared, they change their buying habits. When they quit buying as much, people lay off. We are in a very, very vicious negative feedback cycle…
And what does Warren worry about in terms of how the 535 members of Congress and the Obama Administration are working to fix the crisis?
People–when you have a Pearl Harbor, you have to know the nation is going to be united on December 8th to take care of whatever comes up. And we have little squabbles, otherwise we put them aside and everybody goes to work on defense plans, we start building planes, we start building ships, even though they’re not going to be ready tomorrow, people join. The Army doesn’t blame the Navy because there were too many ships in Pearl Harbor, and it shouldn’t have happened. The Army doesn’t say, `Well, it was your fault, so we’re not going to send our troops.’ None of that sort of thing. We got united, and we really need that now…
you didn’t have–start congressional hearings on December 8th, you know, that were going to last for weeks while all of the commanders and the various people were in various ways pilloried or taunted or whatever about `Why in the world did they let this happen?’ and the Republicans didn’t say, `You Democrats have been in since 1933, and it’s all your fault.’ None of that. I mean, people said, `We’ve got to get something done.’ And they–and they trusted their leadership to do it and put aside mostly the partisan stuff…
Guess the policymakers have a lot of work to do to get back to those good ol’ Pearl Harbor days of shared sacrifice and common good. Otherwise we’ll all be caught without our clothes on.
It doesn’t refute what Buffett has to say but the first Congressional hearings on Pearl Harbor began on December 9, 1941. There were nine different investigations over a period of five years.
Also, angry crowds of people formed around the White House, resulting in bullet-proof glass being installed in the windows as a defensive measure.
Historical events often become much prettier from a distance.
Buffet commits the classic false analogy. We’re not at war.
However, read Winston Churchill’s books on WWII, there were a lot of policy disagreements back then. For one to start, Harry Hopkins and George C. Marshall flew to London in early 1942 to argue for an immediate cross channel invasion. Churchill’s response was hilarious.
My sense is that many of Warren Buffet’s moves from the fall are out of the money, or less in the money than he would have predicted. So I think in the classic “where you stand|sit sense” that the Buffet thesis is changing here, based on his own ‘experiential empirics’ but my read of the above is that he is still more or less consistent with the CNBC piece from the fall that is cited. Albeit he is growing impatient with partisanship as Berkshire’s net worth, and/or cash position is/are south of what he might otherwise prefer. That position is a natural indicator to look towards if you are lucky enough to have the Buffett dashboard in front of you. I think the analogies here are useful and coherent.
As for the other comments they are educated and good to remember, but eventually the Army & Navy, and the Democrats & Republicans all played nice in the face of a total crisis, albeit a war.
Buffett is basically saying this is looking more and more like a total crisis and partisanship is thus less and less palatable. Dave’s comments are worth a second look in this regard. If Washington cannot entirely refrain from partisanship, then might they/we depreciate the value of the exercise, much as those investigations from December 9th 1941 and forward, did not impact our ability to address the larger crisis.
Accountability sure, but the first order problem is larger. Buffet addresses this when he mentions that everyone is culpable in mortgage morass that began our current period of experienced unpleasantness.
After taking a look, Buffett made a few other WWII analogies (that might relate to the fiscal responsibility issue):
That is a very insightfull citation to add Jim.