TRANSCRIPT/VIDEO PART TWO: Three Hours With Warren Buffett - Live From Omaha

THIS IS PART TWO OF "THREE HOURS WITH WARREN BUFFETT - LIVE FROM OMAHA" ON CNBC'S SQUAWK BOX WITH BECKY QUICK, FRIDAY, AUGUST 22, 2008.

IT IS AN UNEDITED TRANSCRIPT AS PROVIDED BY BURRELLESLUCE.

GO TO PART ONE OF THE TRANSCRIPT

BECKY QUICK, co-anchor (Omaha, Nebraska): But we're in Omaha this morning, folks, for the world premiere of a new documentary that's resonating with Americans from Wall Street to Main Street. It is appropriately titled "I.O.U.S.A." Let's take a look.

(Clip from "I.O.U.S.A.")

QUICK: The man you just heard is David Walker. He served as comptroller general, and he plays a major part in this documentary. He's joining us this morning on set. And, Mr. Walker, thank you for being here today.

DAVID WALKER (Former U.S. Comptroller General): Good to be with both of you this morning.

QUICK: All right. Well, we were just listening to what you were talking about, a major problem that you've laid out. How serious and drastic is this problem, in your view?

WALKER: Well, I--it talks about four deficits, the film does. The budget deficit, the savings deficit, the balance of payment/trade and the leadership. I think they're all a problem. But the biggest problem's the leadership deficit. We have too many people today focusing on short-term issues, not enough trying to take on structural problems to try to help make sure that our future is better than our past.

QUICK: Mm-hmm. Warren, you said at the beginning of the show you didn't necessarily agree with everything, but you do agree with taking a longer term look at some major problems out there.

WARREN BUFFETT: Absolutely. I admire what Dave's doing, that he--the future does not--has not had much of a constituency in this country in recent years and, you know, it's because the electoral cycle's shorter than the policy cycle on many issues, and it's hard to get worried about what's going to happen 10 or 20 or 30 years out. And we're feeling the effects of that in energy and, obviously, every fiscal decision you make today has an impact forever, really...

QUICK: Yeah.

BUFFETT: ...in the country. So I--like I say, I admire--I admire Dave and Pete Peterson in terms of what they've done here.

QUICK: David, you've been looking at the budget and studying these things for about a decade and a half and being really aware of every single thing that happened as the nation's chief auditor. When did you really get worried that things were headed down a terrible path?

WALKER: You know, I came in as auditor general of the United States, or the comptroller general, in 1988, and things were going pretty well. You know, we had tough budget controls in place, the economy was doing pretty well, we were moving to surplus, we had surpluses for four years in a row--although only one of them without the Social Security surplus. In 2002 the budget controls, the statutory ones that were in place that helped us take us from deficits to surpluses expired, and Washington totally lost control. It was more spending, enhanced entitlements, more tax cuts. Out of control.

QUICK: Is there a sense that right now--with American people facing some tougher times, with an economy that's in crisis, is there a sense that this is a message that's starting to resonate?

WALKER: Well, first, I've had the good fortune of being able to go to over half the states, over 40 cities...

QUICK: Right.

WALKER: ...over the last two years talking directly to the American people with others about this. They get it. The question is, do people in Washington get it? The risk is, is that, clearly, as Warren said, there are things that need to be done today. We do have challenges today. People are hurting today, and we need to do some things to deal with that. But we must also deal with our structural, systemic problems and not exacerbate the long range by doing things that might be good today but further mortgage our future.

QUICK: What--in short order, what would you like to see done if you had a wish list, maybe three things that could get done right away?

WALKER: Well, for the presidential candidates, I'll give them two things.

QUICK: OK.

WALKER: Number one, publicly acknowledge that we're in a $53 trillion hole that gets deeper 2 to 3 trillion a year even if we balance the budget--unfortunately, we're headed the wrong way--and that they'll make addressing that a priority. And secondly, for them to endorse the need for a capable, credible and bipartisan commission to make recommendations to the next president and the next Congress for an up or down vote; things like budget controls, Social Security reform, round one of tax reform and round one of health care reform. That would be a tremendous positive step.

QUICK: Warren, what do you think about that?

BUFFETT: Well, I think I--probably the second point I agree with more fully. I think that you've had situations like the Greenspan commission on Social Security...

QUICK: Right.

BUFFETT: ...back in 1982. There are times--usually commissions are a waste of time. I mean, you know, the report goes in a drawer someplace and--I mean, just think of the last six or eight that you can recall and how much came out of them. But there are occasions and, frankly, a time of recession would make the country more receptive. And you would need--you would need people on them that, in effect, the president couldn't ignore after the report came in. But there's--it makes perfectly good sense to have people that are smart, that care about the future of the country sit down. There are things we can do to improve ourselves always, and the time might be ripe for something like that.

QUICK: Mm-hmm. Dave ..

WALKER: You know, we've got to learn how to walk and chew gum in Washington. You know, we need to be able to do more than one thing at a time. And that's why a commission is particularly critical, because we need to make progress on reinstituting budget controls. Social Security reform is easy. We can do that if we go about it the right way. Health care is the real challenge. And we do need tax reform, too. So if we had the right kind of commission with an up or down vote--and that's what's different from a number of the other recent commissions--then we could make progress on multiple fronts, and that's what we need.

QUICK: Have you reached out to the two campaigns? I mean, you said you've been across more than half the country. What about the two political candidates right now?

WALKER: Yes. I met with the top economic policy advisers of both of the campaigns--they both happen to be friends of mine--to help them understand where we're coming from in the foundation, what we believe is important. And I'm hopeful that the general election campaign will make fiscal responsibility and intergenerational equity a higher priority. But we'll wait and see.

QUICK: OK. You say that you're hopeful that the campaign will push that. Does that mean you didn't get a great reception from either one of these two when you sat down with them?

WALKER: Well, you know, that means most politicians like to gain votes rather than lose votes, OK? And that's why I think it's unrealistic to expect that they're going to get to a great level of specificity about, `Well, this is exactly what we're going to do to Social Security or taxes or health care.' That's why this proposal acknowledging the problem, endorsing this type of commission is the right way for both of them, because then they don't have to get into the specifics but yet they then have an ability to take on the issues after they're president. And for the sake of our country, our children and grandchildren, they need to.

QUICK: All right, Dave, we're going to talk more about the film later this morning. We'll also be joined by Pete Peterson coming up. But thank you for getting up early with us to talk about this right off the bat. And we'll get back to you just a little bit later this morning.

WALKER: Great.

QUICK: Again, we also have Warren Buffett who's with you this morning. We'll be talking more about "I.O.U.S.A.," but also the state of the economy. We're going to talk about the "Oracle of Omaha," where he's investing in the stock market right now--at least we'll try and get that out of him. Some of his investments, his thoughts on the state of the banking system. Stay tuned, this is a very special edition of SQUAWK BOX right here on CNBC.

WHAT HAPPENED TO FANNIE & FREDDIE?

QUICK: All right, welcome back, everybody. As we mentioned a little earlier, the movie "I.O.U.S.A." premiered across the country last night, and we got the chance to host a live town hall in Omaha that was simulcast to theaters across the country last night. Our CNBC team was on the ground at some of those theaters across the country. They got the chance to catch up with crowds from the East Coast to the West Coast. And, Warren, a lot of them heard you were going to be at this town hall meeting, and so we had our cameras ask some of those people some questions that they wanted to pose to you. Are you ready?

BUFFETT: I'm ready.

QUICK: All right. Let's get to some...

BUFFETT: Where's the popcorn?

QUICK: Oh, there--they didn't provide popcorn quite this early...

BUFFETT: All right.

QUICK: ...but we do have some questions that are coming up. Let's get to the first question for Mr. Buffett.

Unidentified Man #1: Do you think there's a characteristic about American democracy that leads to American debt?

QUICK: A characteristic about American democracy that leads to American debt. What do you think?

BUFFETT: Well, there's nothing inappropriate about having debt in America. I mean, Berkshire has debt, and it's helped us grow over time. And it's when debt gets out of control that you worry. But the American democracy, it's always fun to spend a little more than you take in, and that applies to individuals, it applies to governments. And in a $14 trillion economy, having debt that's 60-odd percent of GDP is not inappropriate. It wasn't inappropriate when we had 120 percent of GDP in debt after World War II, because we had to fight a war.

QUICK: Although you can't expect to maintain deficits like that endlessly.

BUFFETT: Yeah, you can expect to maintain a deficit that's a given percentage of the GDP. I mean, Berkshire can expect to have debt forever, and the larger we get in terms of our equity and earning power, the more debt we can sustain. And I don't think our shareholders would want us to operate--take on some rule where we're going to operate debt-free in the future. So it's--what you worry about is when the debt starts spiraling out of control, when it goes up year after year after year as a percentage of GDP, because eventually when that occurs people--if you try to borrow money around the world in your own currency, the world will say no. That's what happened in South America in the past, it happened in the--in the Asian arena. We are able to borrow money in dollars. The world trusts the dollar. If we tried to run our debt up to 3- or 400 percent of GDP, nobody would want debt denominated in dollars.

QUICK: OK. Let's take another question. This one comes from Irvine, California.

Unidentified Man #2: Hey, Mr. Buffett, I would like to know what is going to happen with Fannie Mae. Are they going under?

QUICK: That was, again, what would be the best investment to hedge against the upcoming debt crisis?

BUFFETT: Yeah. Well, I would say I don't think there's going to be an upcoming debt crisis, but if you believe that fiscal activities that the government will get out of control and that we will get on a situation where the debt skyrockets, you will have, obviously, you'll have inflation--significant inflation. No government likes to pay back its debt in dollars that are equivalent to the kind they took in. The best thing you're going to have is develop your own talent. I mean, if you're the best doctor in town, if you're the best teacher in town, if you're, you know, the best salesman in town, you'll do well no matter what the currency does.

QUICK: Mm-hmm.

BUFFETT: I mean, you will get your share. So investing in yourself is always the best thing. Now, second best thing is to own products or stocks that have products that don't require much capital investment, because you don't want to be--have a lot of required capital investment during inflation; where they have very little capital investment but they are sort of a royalty on whatever the current price level is in the country. I mean, if you take--I don't know what product you might buy regularly, but what--whatever you use for your hair or...

QUICK: (Unintelligible)

BUFFETT: You're not going to change that if the price level doubles.

QUICK: Right.

BUFFETT: And if they don't have to build new plants or anything, they just ride along that curve.

QUICK: OK. And very quickly, that Irvine, California, question, I think we heard the wrong one. The Irvine question, another one he was just asking about was what's going to happen with Fannie Mae? Are they going under?

BUFFETT: Well, in a sense they've gone under in that--in that they only are existing because the federal government has said that they're going to back up their obligations, so that...

QUICK: Right.

BUFFETT: ...from a standpoint of an independent entity, it--it's--the game is over on that, pretty much. And that does not mean the Fannie debt or the guarantee on Fannie mortgages is bad. Fannie Mae's an important institution in the--in the United States. But they priced risk wrong.

QUICK: Mm-hmm.

BUFFETT: They did some things in accounting that were bad, they tried to obtain goals that couldn't be achieved, and in the--and they leveraged up to an extent that was kind of crazy and certainly was crazy to do it with the assets that they were using the leverage for. So essentially the equity got wiped out.

QUICK: OK. We're going to take a quick break right now, but folks, when we come back we're going to talk about Warren and Bill's excellent adventure. We'll get the inside story of your summer expedition with Bill Gates. You just went this week to look at the tar sands.

BUFFETT: True.

QUICK: All right. We're going to talk about all of that when we come up, and we'll be checking in with questions from more viewers across the country, too.

Unidentified Man #3: I was very curious, in your recent 10-Q, that you had not purchased any bank stocks, very surprised that you had not jumped on that in July. I was wondering how low they have to go before you're interested.

BUFFETT'S TRIP TO THE CANADIAN OIL SANDS

Announcer: This is a special edition of SQUAWK BOX live from the Holland Performing Arts Center in the heart of beautiful Omaha, Nebraska. Now, once again, here's Warren Buffett and Becky Quick.

QUICK: Welcome back, everybody, to this special edition of SQUAWK BOX. We've been talking all morning long with Warren Buffett of Omaha, Nebraska, since we're live in Omaha today. And, Warren, we've covered a range of topics, but there has been an awful lot of people who are interested in the trip you made this week. On Monday you headed up with Bill Gates and you got to take a look at the tar sands. What happened?

BUFFETT: Well, what happened was Bill and I talked some months ago about just how interesting the whole thing was from a geology standpoint and from the standpoint that that represents one of the few big upcoming sources of more oil production in the world, or very few. And we both thought we'd understand a little bit better if we went up and looked at it than simply by reading about it. So on Monday six of us, Bill and a few other fellows--the Kiewit company arranged it. They're--they've done a lot of construction up there. And we went up to northern Alberta and we saw a very big mining-type project. There are two ways that they recover oil from the tar sands. And then we went to this in situ project also, and we had some perfect people explain a lot about how it worked both from a economic standpoint and from a physical standpoint.

QUICK: Uh-huh. And was this something that you came up with, that Bill came up with, your friend, Walter Scott, from the Kiewit company? Who came up with the idea?

BUFFETT: Well, Walter Scott arranged it for us.

QUICK: Right.

BUFFETT: Walter's a whole lot smarter than I am about what goes on in mining and all of--anything to do with the real world. I'm good with numbers. And so he arranged the trip for us. But it was something that Bill and I cooked up by--a couple of months ago when we were talking about the tar sands. We said why don't we go up and take a look? And so we found a date when six of us could do it. Walter arranged the trip. We had some wonderful people up there in Alberta at both projects that explained how the things really work, the costs involved. And they just couldn't have been more helpful.

QUICK: OK. So having seen that, there's already been a lot of people who've been speculating that you must be interested in investing in this arena. Are you?

BUFFETT: No, no. I go to the movies, but I don't buy movie companies. I mean, I--I'm always interested in understanding the math of things and understanding as much as I can about all aspects of business. And what I learn today may be useful to me two years from now. I mean, if I understand the tar stands today and oil prices change or whatever may happen, I'm--I've got that filed away and I can--I can use it at some later date. And that's really the wonderful thing about investments is your knowledge is cumulative. So if you learn about coal or you learn about retailing or something, 40 years you--it's useful at some point.

QUICK: Wait, does that make you think that an investment in a tar sands company, somebody who's making--taking advantage of that would not be worth it at $120 a barrel for oil?

BUFFETT: Well, the biggest variable in whether it's a good investment is the price of oil. Now, it's important to know how much they can get out and what their costs are going to be and what the capital costs--all of that is important and that fits into it. But you still have to figure out what your own feeling is about what oil's going to be selling for three years from now or five years from now. Because you could be the world's greatest mining engineer, but if you were wrong about the price of oil in a big way it would negate all that knowledge. So it--I can tell you that if 100--if you had $120 oil from now till, you know, 50 years from now, that the tar sands would be--would work out very well. But I don't know the answer to that. And I may form an opinion at some point, and I've got it--I'm prepared to form that opinion now.

QUICK: But you are not actively looking right now to invest in any of these companies?

BUFFETT: Do I have a buy order this morning? The answer's no.

QUICK: OK. Warren, we have a lot more to get to with you this morning. When we return, we're going to be speaking more with Warren Buffett. Again, this is a big day. We've still got two hours left and we've still got two big stories coming up. Again, I'm here live with Warren Buffett in Omaha. We're also going to be covering everything that's happening with the Olympics. Carl is standing by live in Beijing. This is day 13 of the Olympics, coming to an end. We'll have more SQUAWK in two minutes.

CLICK HERE FOR PART THREE

Current Berkshire stock prices:

Class A:

Class B:

Questions? Comments? Email me at [e-mail]