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

THIS IS PART FOUR 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, PART TWO, OR PART THREE OF THE TRANSCRIPT

BECKY QUICK, co-anchor (Omaha, Nebraska): Coming up, we will have much more from the "Oracle of Omaha." He has lots of wisdom to share with all of us. In fact, just listen to this.

WARREN BUFFETT ON TAPE FROM LAST NIGHT: It has not paid to sell America short since 1776, and the time to start is not 2008.

(Announcements)

QUICK: All right. Welcome back, everyone, to this special edition of SQUAWK BOX. We are live in Omaha, Nebraska, and we are fortunate enough to be joined this morning with Warren Buffett. He's got to be the world's most celebrated investor. Warren, we want to thank you for joining us here this morning.

BUFFETT: I'm enjoying it.

QUICK: Well, we have a lot to talk about. If you take a look at what's been happening with the Federal Reserve, with the challenges they've been facing, what kind of job, what kind of ratings would you give the Federal Reserve up to this point?

BUFFETT: Well, I--I'm inclined to give anybody that takes on a tough job like that a pretty good rating. I mean, they get the toughest problems of the world thrown at them. And in my job, I wait for easy pitches. I mean, I--you know, somebody can say Microsoft at 27 or General Motors at 10 and I don't have to swing. I--there's no called strike in my business. So I wait--I could wait a year and get one pitch I like and swing. And so I wait for the easy ones. And in the Federal Reserve position, you have to take on the toughest problems. There are no obvious answers, there's trade-offs. And when I--when somebody that's very bright, very public-spirited takes on the job, I'm disinclined to ever criticize.

QUICK: Do you think the Federal Reserve has gotten inflation under control? Do you think that they've focused a fair amount on the economy?

BUFFETT: No, they've got a tough problem. I mean, with these dual goals of essentially stimulating growth and at the same time containing inflation, they're in direct conflict. And the temptation is, since the lack of growth is apparent today and the inflation tends to kick in later on, to ignore the inflation aspects. It's a very tough balancing act and it can't be done perfectly. And like I say, I couldn't do it perfectly and I don't think anybody can, but I admire the people that take on the job. I admire Bernanke, I admire Greenspan. That doesn't mean I think they were always right. It's--I think they're thought to have more power than they really do have. I mean, Ben Bernanke does not have any magic wand that's going to create--enable people that have borrowed too much money on their homes or people who've lent unwisely or the banks that are too leveraged, that doesn't go away easily.

QUICK: We talked earlier this morning about Fannie Mae and Freddie Mac and some of the major problems facing those two institutions right now. In your opinion do these stocks, you think, get wiped out?

BUFFETT: Well, there's certainly a reasonable chance of that because they wrote insurance at the wrong price. And if you write insurance and write--we write insurance at the wrong price, you know, we're going to go broke. I mean, it--when you write insurance, you make a promise. In their case, they guaranteed the credit of trillions of dollars worth of mortgages and they charged a service fee for doing it--an insurance premium you can call it--and they got the wrong price for it. And then they--their other activity, which is to run a very large sort of hedge fund with a carry, where they lend money long and they borrow money in various ways, they had a spread on that. And that works fine as long as the spread's maintained and they've done some things to protect that, but it doesn't do well if the assets crumble on them, and they've had some crumbling. So they got into trouble the way people have historically got into trouble both in terms of running a carry trade and both in--and in terms of writing insurance at the wrong prices. And there is no easy cure. You can't tear up your old insurance contracts. And they can--they keep existing because they've got the federal government behind them. And the federal government should be behind them, excluding the equity portion.

QUICK: You own shares of Fannie Mae, Berkshire Hathaway did, up until when, about 2001?

BUFFETT: We were the largest shareholders of Freddie Mac in the--in the United States, and around 2000 or 2001...

QUICK: Yeah.

BUFFETT: ...it became so apparent to me that they were intent on trying to report quarterly gains to please Wall Street, and there are all--if you've got the government behind you and you can borrow money in unlimited amounts, you can report earnings for any given quarter that you want to. I mean, the chickens don't come home to roost till later. And the management was intent on that. They started doing things on the asset side they shouldn't have done, they made promises they shouldn't have made, and so we got out.

QUICK: All right. If--is there anything that would ever convince to you get back in, or would these companies have to be completely recapitalized and reset up?

BUFFETT: It would--it would--it would take a much different situation.

QUICK: (Unintelligible)

BUFFETT: You need--if you run an institution with enormous leverage, you need somebody with a fiduciary gene running it. And they had a peculiar problem in that they were trying to serve two masters. And then Congress was telling them push the money out and foster housing in every way you can, don't require as much in down payments, make--you know, all kinds of things, take on projects that they wouldn't have taken on for an economic reason. And Wall Street was saying deliver us 15 percent earnings gains every quarter. And they tried to do both of those things, and in the end they're going to do neither.

QUICK: When you take a look at the United States and its stock market compared to what you see overseas right now, where--what makes you most excited when...

BUFFETT: Well, I see values in all arenas. I mean, we try to look for the best ones, but there's no magic to any given market and things are cheaper than they were a year ago in markets here and in markets around the world. So everything is more attractive, generally speaking, both here and in Germany and the UK and Korea and you name it. And I just try to look for the things I understand the best and that also are selling for less than I think they're worth.

QUICK: The dollar has gotten much stronger over the last month.

BUFFETT: Right.

QUICK: Is that a trend that you think can or will continue?

BUFFETT: Well, it won't continue if over the next five or 10 years we run very large current account deficits. Now, exports have been doing well lately. I mean, the country is remarkably innovative and resilient. I mean, we are going to export 12 percent of our GDP this year, and in 1970 it was 5 percent.

QUICK: Mm-hmm.

BUFFETT: So people who think that America is not in the game are totally wrong. But we have been importing like 17 percent of GDP. If we have that gap and it continues, the dollar over time will get weaker. Not necessarily next week or next month or next year, but it will get weaker over time. You can't run persistent, huge current account deficits for decades and not have consequences.

QUICK: But you don't have any bets against the dollar right now.

BUFFETT: Not right now.

QUICK: You've taken them in the past. At the moment, nothing?

BUFFETT: That's right.

QUICK: You have any currency plays right now?

BUFFETT: None--no direct currency play. We own stocks in companies in other countries, but no currency plays.

QUICK: OK, let's take a couple questions from people that we were listening from last night. Again, we've been spending the morning with you, but last night we did have CNBC crews who went out to some of the theaters across the country that were previewing "I.O.U.S.A." We got a chance to catch up with some of the people there and ask them a few questions. Let's start out with one question that's coming from Chicago.

Unidentified Woman: Hi, Warren. Identifying the debt problem and coming up with a solution seems like an easier task than motivating Congress. What would you suggest that we do to help motivate a shortsighted Congress?

QUICK: OK. That's, again, going back to how do you motivate a shortsighted congress. What would you suggest?

BUFFETT: It's very tough. I mean, in the end, can I name a politician in the last 20 years that said, `My campaign is I'm going to increase your taxes a lot and come close to closing the budget deficit.' And since nobody wants spending cut--they all want the other guy's spending cut...

QUICK: Mm-hmm.

BUFFETT: ...and, you know, we'll have to increase taxes. I--Walter Mondale tried it in 1984 without much success. Now, what I do with politicians is I ask them what they believe in and will work for that a majority of their constituents oppose. Now, if they give me an answer to that, I know they really believe that. I mean, I don't get long answers to that question. But what they...

QUICK: I bet you don't.

BUFFETT: Yeah, no. But that's the real test of what they believe in. Anybody's for anything that gets them elected, so if they--if they say, `I'm for lowering your taxes,' or `I'm for bringing all kinds of things to my district,' or `earmarking things,' you know, of course they're going to say that. And they'll say that whether they believe in it or not because it keeps their jobs. Now, the question is what do they believe in that might endanger their job if in--if done?

QUICK: What did Barack Obama say when you asked him that question? You're supporting him.

BUFFETT: Yeah. I'm not going to ask him that question.

QUICK: You haven't asked him that question.

BUFFETT: No, I didn't--I didn't--I didn't put that one to him.

QUICK: Why not?

BUFFETT: I didn't feel like putting him on the spot that way.

QUICK: But he got your support anyways.

BUFFETT: Well, I have a choice of two candidates...

QUICK: Right.

BUFFETT: ...and I support Barack and I think that on balance he will be better for America. Although I admire John McCain as an individual, but I think that Barack would be better. But I will--I can tell you that both candidates are not addressing things in the campaign that are important issues, because they feel it'll cost them votes.

QUICK: What do you think is the most important issue that's not being addressed by either campaign?

BUFFETT: Well, I think in the--certainly in the financial area. Now, they've both made certain proposals on taxes, but in terms of the realism of what would happen in terms of closing budget deficits or something of the sort, I don't think they really want to get that specific about it now.

QUICK: OK. I think we're going to have more on this conversation--a little bit more about what's happening in the election, what you think about the ideas of a windfall profits tax, and we'll talk about all of those issues in just a little bit coming up. Meantime, though, we're going to take a very quick break and let you catch your breath. You can have a sip of your Cherry Coke. You, too. Anyway, folks, we'll be right back with much more from Warren Buffett on his home turf right here in Omaha, Nebraska.

WHO WILL BE BUFFETT'S CATCHER AT FENWAY?

QUICK: Warren, you couldn't hear what Steve had just been talking about, but he did say that one point coming out of Jackson Hole is that this rise we've seen again in the dollar--rise that we've seen again in oil is clear evidence that the Fed does not have everything under control when it comes to inflation. What do you think about that?

BUFFETT: Well, the Fed doesn't have--but even without that fact, I mean, the Fed's got real problems with inflation and have got it in commodity prices. I--every business we have, but some of them in a dramatic way, are getting cost increases thrown at us. I just was looking at the reports for July on certain businesses, and we're trying to push through price increases ourselves. And our margins are getting squeezed in certain major businesses simply because we don't get price increases as fast as we're getting them. But we're pushing up prices.

QUICK: So you see it going right through? Which...

BUFFETT: Sure it's going to go through.

QUICK: Which businesses are the toughest to get them through?

BUFFETT: Well, it's tough, and we're in various things connected with residential housing.

QUICK: Right.

BUFFETT: Take carpet, for example...

QUICK: Right.

BUFFETT: ...or insulation. These things all have a huge energy base to them. I mean, carpet is oil, and weekly we get these price increases thrown at us and they're usually effective immediately, whereas we have trouble with our retailers getting them to say, well, 30 days from now or 60 days from now. And we don't want to--we don't like telling a retailer that you can have your price increase tomorrow. So there have been increase after increase in prices and our margins are still going down, and that's happening--if you take brick, that's natural gas. I mean, there's all kinds of areas where it's happening. Food it's just--it's pouring through.

QUICK: But does that mean you were not surprised by that very hot PPI number that we just...

BUFFETT: No, I wasn't surprised at all.

QUICK: You weren't.

BUFFETT: No. I--in fact, if anything I feel that the CPI has been sort of understating what's been going on. We are in an--we are in a economy that is going to see significant--and is seeing significant inflation. The only--the only people who aren't getting much inflation are blue-collar workers and the middle class in terms of their income. So they are getting squeezed like crazy.

QUICK: Would it--does that mean you expect to see more PPI increases and eventually see that showing up in the CPI as well?

BUFFETT: It has to, but--yeah. They--the cost of living is going up and, you know, unfortunately, the prices of houses going down and there's--there are problems in the economy. We will get through this. But as Paul Volcker mentioned in the movie last night, the problem with inflation is if it gets ignited, it gets very hard to put at a--at a--at a point. I mean, Paul Volcker had to go in with a 2x4 to the economy in the early '80s and we had inflationary expectations built in to a terrific degree.

QUICK: Mm-hmm.

BUFFETT: And if that happens again, we've got lots of troubles.

QUICK: Warren, we teased earlier that we were going to mention something nobody had heard about just yet. We know that you're a huge baseball fan, but you also have a big day coming up. What is that big day?

BUFFETT: It's a--it's a huge day for all of baseball, actually. On September 9th in Fenway Park I will be starting. And--but more important than that--because I've thrown out the first pitch other times--but this time I brought my secret weapon.

Warren Buffett throws out the ceremonial first pitch before tonight's game between the Kansas City Royals and the Texas Rangers
Warren Buffett throws out the ceremonial first pitch before tonight's game between the Kansas City Royals and the Texas Rangers

QUICK: Which is?

BUFFETT: Jack Welch is going to be my catcher.

QUICK: Jack Welch is your catcher.

BUFFETT: Yeah. I mean, can you imagine being able to pitch with Jack calling the pitches? And, I mean, anything he calls for. I've got--I've got a fastball, a curve, a sinker, you know, a spitball, a knuckleball, a sidearm delivery. And if Jack calls for any pitch, including the ball that bounces four or five times before it gets to the plate, I'm going to throw it.

QUICK: You're going to throw exactly what he calls for.

BUFFETT: So if I--if that's the pitch, it's because Jack called it.

QUICK: All right, we'll all be watching that. That's coming up, again, you said September 9th.

BUFFETT: September 9th, right.

QUICK: OK. Folks, we still have a lot more to come this morning. You have not heard the last from Warren Buffett yet. We'll get much more on his holdings, what he's thinking about buying and selling, maybe. We'll also talk to him about the economy. We'll get to the election and much, much more. Plus, don't forget, Carl is live in Beijing as day 13 of the Olympics comes to an end. We are going for the gold this morning. This is a special split edition of SQUAWK BOX live from America's heartland and from China. It's all coming up when we come right back.

CLICK HERE FOR PART FIVE

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