Warren Buffett: I Haven't Seen As Much Economic Fear In My Adult Lifetime - Charlie Rose Interview

Warren Buffett:

Yeah, I think you’ll have plenty of scrutiny as how the money’s invested. I mean, just like the RFC. When the RFC operated, people knew which institutions they were buying preferred stock in. And it worked very well.

Charlie Rose:

But is this different from the Resolution Trust Company because they are talking about securities, not real estate?

Warren Buffett:

Yeah, well Resolution Trust Company was set up to liquidate a bunch of assets that the government had inherited because the savings and loans went broke. So the savings and loans went broke, the government stepped in, paid off depositors, and now they’re left with this mass of assets to sell. We’re not talking about selling here, we’re talking about buying intelligently. They were selling what they got handed to them by a bunch of savings and loan operators that had in many cases had done some very dumb thing. But their job was to liquidate it. And they liquidated. This is an entirely different proposition.

Charlie Rose:

You have said to me before that capitalism is not a perfect system. It may be better than all the other systems, but it’s not a perfect system. You talked about it in terms of some of its failings. People are looking at this now and saying, you know, excesses of capitalism, number one, markets that don’t work. And there’s some people in certain countries are pointing a finger at us and saying, “See, we told you, the markets will not always deliver for you.”

Warren Buffett:

Markets aren’t -- people do, as long as you have markets, you’ll have excesses. People went crazy with tulip bulbs. They went crazy with the South Sea Bubble, they went crazy internet stocks, they went crazy with the uranium stocks back when I was first getting started. I mean, you know, you’re not going to change the human animal. And the human animal really doesn’t get a lot smarter. Now, you can you know you can have institutions that put curbs on that in various ways, and actually what the banks, you know, they have various capital ratios and that sort of thing, but the banks got around them, I mean, they set up sieves and that sort of thing just to get more leverage. People love leverage when it’s working. I mean, it’s so easy to borrow money from a guy at X and put it out at X [inaudible].

[talking simultaneously]

Charlie Rose:

-- going up, you’re --

Warren Buffett:

Yeah, but you don’t get the X plus one back, if you still have the X on the other side you’re in trouble.

Charlie Rose:

There is this, too, accounting. You have strong feelings about accounting and mark [spelled phonetically] to market. Tell me where you are on that issue.

Warren Buffett:

A lot of people disagree with me on this, I believe in mark to market. I think that accounting in 1974 Charlie, it was either 1974 or ’75, we owned a bunch of common stocks at Berkshire Hathaway. I told our shareholders what the market was. And we used that. I said I think these things are worth a lot more than market. And I think we’re going to make a lot of money out of it. But this is what they’re worth today. And I don't think anybody gets hurt by telling the truth on that sort of thing. And I think that once you start saying we’re going to peg these things at some price that isn’t market, God knows what a financial [talking simultaneously].

Charlie Rose:

[inaudible] these people make that argue against you will say the assets are worth much more than mark to market says and therefore --

Warren Buffett:

They’re not worth it today.

Charlie Rose:

-- therefore we’re not seeing a reality.

Warren Buffett:

Well, but that is the reality. And that’s the reality of what they’re going to sell them to the Treasury for. You know, I --

Charlie Rose:

You get market.

Warren Buffett:

You get in a lot of trouble when you start putting fictitious numbers --

Charlie Rose:

On value.

Warren Buffett:

-- on value. I mean, you can explain the fact that these are depressed prices, you know. We think these assets are going to be worth a lot more. And I think that case can be made in certain situations. But I think to just say, you know, we're going to say a dollar of cash is worth $2 all of a sudden, it isn't worth $2. It's worth a dollar today. And I think once you start putting phony figures into financial statements, you get in a lot of trouble. And we've seen so much of that in the last 20 years.

Charlie Rose:
Is it getting worse?

Warren Buffett:
I don't think it's getting worse. I think people -- what people want to do is make it get worse. [laughter]

Charlie Rose:
But what would you reform about that in terms of the way the accounting process -- you'd keep mark to market?

Warren Buffett:
The rule [unintelligible]. I mean it's -- it's a nightmare to administer some of this sort of thing, but I want to tell the shareholders of Berkshire, to the percent we own marketable securities or things for which there are market, even if those markets -- I want to tell them what it's all about. As a matter of fact, I've already written a section in the annual report for next year explaining why I think in one case that the figures on our balance sheet as calculated are wrong. But it's the standard way of doing it. It's holy writ. The SEC wants us to do it that way, and we'll do it that way, and I'll explain why I think it's wrong and shareholders can read it and see whether they agree with my logic or don't.

Charlie Rose:
You -- when you look at the prospects for this country, there are other people who argue, you know, that America, as good as it is, lives in a world today and there are books being written in which our supremacy, our primacy will now have to be shared. That we may still own as much of the pie as we had, but other people will own a lot more.

Warren Buffett:
That's great. You know, I want our -- I want our pie to grow all the people, but if some other guy's pie is growing a little faster, that's terrific. It will be good for us in the long run, and I mean there are, you know, six and a half billion people in this world. And it's great for 300 million to keep enjoying more and more property, but I think it's terrific if, you know, the remainder do. And I think if they can learn something from us in terms of our system, and I think they have, they are learning more about how to unleash the potential of their citizenry to turn out more goods and services that their citizens want or that we want, I think that's terrific. And that's -- you know, I think it's much better to live in the world where those around you, particularly when some of them have nuclear bombs, I think it's much better to live in a world where their lives are getting better also.

Charlie Rose:
Yeah. But you mean you look at that. So when you look at China today, and you look at some Asian countries and the amount of American debt they have, how much does that concern you in today's economic circumstances? And are they losing some of their confidence in America? And does that pose a huge problem for us?

Warren Buffett:
Well, somebody's buying these treasury bills at 1/20th of one percent. I mean the -- we -- [talking simultaneously] consuming about $2 billion a day of goods and services beyond what we're producing. In other words, the rest of the world sends about $2 billion a day net of something. We got to send them something in return, don't we. So we send them little pieces of paper. That would be nice if they stuck them all under a mattress, but they got to buy something with them. Sometimes they buy a treasury note, sometimes they set up sovereign wealth funds. They can do all kinds of things. They can buy our companies here. As long as we consume more than we produce, and we trade away little pieces of the country daily, they're going to own something. Now, they can't run from American assets. I mean every day the rest of the world is going to have about two billion more of American assets than we have, as long as they sell us these goods.

Charlie Rose:
Because we're borrowing two million dollars --

Warren Buffett:
Yeah, and they want to sell us these goods.

Charlie Rose:
But you don't believe that's good. I mean you believe that an increasing current accounts deficit is bad.

Warren Buffett:
I think it's bad.

Charlie Rose:
And it reflects American's consumption ideas rather than its savings ideas.

Warren Buffett:
Yeah.

Charlie Rose:
But how does that change?

Warren Buffett:
Well, I laid out -- it's kind of a Rube Goldberg plan a few years ago, which I don't like myself, except I like it better than the alternative, which is what we're doing. But we've actually been pretty good on exports. I mean we are exporting 12% of our GDP now roughly. That was five percent many years ago, a much smaller GDP. So the rest of the world really likes our stuff pretty well. It's just we buy so damn much of what they produce. And I think -- I think that should be something addressed by -- I don't think it's the most pressing problem now at all. We are trading away a little bit of our country all the time for this access consumption that we have over what we've produced. That is not good. I think it's terrible over time. But our country's productive grows enough so we actually can do that, and we'll still be better off. We just don't be as well off as if we hadn't done it.

Charlie Rose:
What's all this going to do to the price of the dollar?

Warren Buffett:
It could be very tough on -- inflation could be a very -- is a likely consequence out of what's going on now. Right now, we are in effect making a -- to some extent, making a choice between future inflation and getting our -- getting off the floor. And we're likely -- we're likely to have more inflation in the future as a consequence of the things we do to fight the present situation.

Charlie Rose:
Senator Obama, who you support, I think, I don't want -- to be clear on this, but made an economic speech today, talks about another stimulus program. Is that essential at this time?

Warren Buffett:
I think the biggest thing we need now is to unclog the credit markets, and we may need another stimulus -- if we do, it's -- it should go to the lower and middle-income people. I mean the truth is, I've never had it so good in terms of taxes. I am paying the lowest tax rate that I've ever paid in my life. Now, that's crazy. And if you look at the Forbes 400, they are paying a lower rate, accounting payroll taxes, than their secretary or -- whomever around their office. On average. And so I think that actually people in my situation should be paying more tax. I think the rest of the country should be paying less, the 95 percent that Obama talks about or maybe even a little higher than that. But I think that a stimulus plan should really be geared to the people. You know, you've got -- you've got, what, 24 million households, 1/5th of the households of the United States, you have earning $21,000 a year or less, on average of close to four people, three people in those households. Two and a half they will actually probably. But just imagine living on 21,000 a year, Charlie, 22,000 a year. I mean you have 20 percent of the population doing that. So you don't have to worry about guys like me. I would push purchasing power -- you push out $1,000 of purchasing to those people, it's going to get -- it's going to get spent. And it needs to be spent. They need it. And it should come, to some extent, from guys like me.

Charlie Rose:
… what about the capital gains tax?

Warren Buffett:
Well, you know, the capital gains tax is 15 percent now. So I sit there in my office and I make a lot of money by capital gains, and I pay 15 percent, and I pay no payroll tax on it.

Charlie Rose:
Right.

Warren Buffett:
The woman that comes in, takes the wastebasket away, she's paying 15.3 or whatever it is on payroll tax alone. I mean it is -- I never had it so good.

Charlie Rose:
So therefore the capital gains tax should be changed to 18, 25, 30?

Warren Buffett:
I think it's terrible for people in effect to say that income from investment should be taxed at a much lower rate than income from labor. I mean I just think that you're going to -- we're going to spend 3.1 trillion, something like that, this year. We're going to only raise about 2.6 trillion or something like -- you're going to raise it from somebody. You know. Now, who you're going to get it from, you're going to get it from me and you, or you're going to get it from, you know, the people that drive the taxis, bring me here. Whatever. Maybe. I mean you got to get it from somebody. And, you know, everybody is against paying tax. I feel the same, everybody feels that way. But if you want a government that's going to do the things we ask our government to do, you've got to get it from somebody. And over the years, the last -- particularly the last six or eight years, they've taken less and less from a guy like me. Now, you know, everybody likes to talk about how the top one percent pays this percent in income, but the income tax, we'll say 1.3 trillion. The payroll taxes are over 900 billion. That 900 billion, that doesn't come from me. I pay it on the first hundred thousand or something like that. But that comes from the people in my office. And they are paying 900 billion -- nobody ever talked about that when they talk about what the one percent is paying. I love to tell how I'm suffering because one percent we're paying 25 percent of the total. We're not paying 25 percent of the total taxes on individuals. We're paying maybe 25 percent of the income tax, but the payroll tax is over a third of the receipts of the federal government. And they don't take that from me on capital gains. They don't take that from me on dividends. They take from the woman who comes in and takes the wastebaskets out.

Charlie Rose:
You mentioned inflation. The possibilities of inflation. Are you therefore -- do you have a position on what interest rates -- what the fed should do about interest rates?

Warren Buffett:
Well, I think that's almost -- for the time being, just put that aside and we'll get to that after the patient is up and walking. It's interesting, though. I mean we are -- what's going to happen -- things we're doing are going to have some inflationary consequences. But, you see, interest rates, you know, very low levels, including the long rates.

Charlie Rose:
When we watch this, I mean you and I are having this conversation today. The senate votes tonight. House may vote. People I talked to today believe it's going to pass. Whatever happened to change minds either in the combination of what they did with the plan and tweaking the plan, or B, some people got so scared by the failure of the vote last time that it brought home a danger of not doing anything.

Warren Buffett:
Yeah.

Charlie Rose:
All right. How will we measure the progress, whether this is working or not? What's the indicia?

Warren Buffett:
Yeah. It's going to be tough because the economy is going to be getting worse for a while. And it might fall off a cliff if this doesn't pass. But nobody will ever know that if it does. And so what they will not see immediate reaction. I mean, we'll be pounding on the guy's chest, you know, on the floor, and you know, he's not going to just jump up all of a sudden. So it makes it tough. I mean, it's tough to be in the legislature, you know, and vote for something and then people say, well, you voted all this money and you know, it's all getting spent. It isn't getting spent. It's getting invested. But it's all getting spent. Nothing's happening. You know, how could you have done that? You haven't done anything for me. I mean, you go through all of that. And that's going to be tough. And it takes -- what it really takes is leadership that knows what it's all about and can explain what it's all about. And that people will believe --

Charlie Rose:
But hasn't that been missing, though --

Warren Buffett:
Sure.

Charlie Rose:
-- leadership that can explain what it's all about?

Warren Buffett:
Absolutely.

Charlie Rose:
And the reason you're here and the reason I want to have a kind of fireside chat with you, it is that somehow it hadn't gotten through, the idea --

Warren Buffett:
When the president of the United States goes out at, you know, 8:00 o'clock in the morning and then his own party votes gets him 2 to 1 in the house, you know that somehow a message isn't getting out. It takes real leadership. I mean Roosevelt didn't -- you know, when he came in, he didn't print any money. Well, he actually may have done [unintelligible], but he -- it wasn't like, you know, you've got the greatest economics professor in the world or anything else. But he did restore confidence. And they did a lot of thing. And you needed it. You needed to jump-start the economy. It took a long time. I mean, the world did not change, you know, in 1933 or '4. But we put in things like the FDIC. I think the FDIC was one of the great inventions of the American [unintelligible].

Charlie Rose:
Well, they had to tweak that in terms of his bill, did they not?

Warren Buffett:
Yeah. They were -- and --

Charlie Rose:
[unintelligible] extended five-year.

Warren Buffett:
They're going the right direction, yeah.

Charlie Rose:
Roosevelt also said the only thing we have to fear is fear itself, which is clearly the fear that exists in the country. Tell me when you worried the most of all the things that you have seen over the last three weeks, say. I mean how about in the last month, when did you say, my God, I never knew it could get to this point?

Warren Buffett:
Well, I don't get that afraid in a sense because I really do have faith in both -- I know the country works extremely well. You know, but when it isn't clogged up. And I know that Congress will do the right thing. But I will tell you, when I watched the House vote the other day, I wasn't afraid because I -- I still felt something would pass. But I -- we are going through a very, very tough period. And, you know, I did not think I would see the day when, you know, an AIG would not be able to have its checks clear.

Charlie Rose:
If AIG had failed, would fold man sacks have been exposed and at risk, JP Morgan would have been --

Warren Buffett:
Everybody would have been exposed, Charlie. Everybody.

Charlie Rose:
So why was there even a question of not rescuing AIG at that time?

Warren Buffett:
Well, I think what people understand there probably -- well, they were hoping the private sector would do it.

Charlie Rose:
Right.

Warren Buffett:
I mean, that's the same way I would behave. If I were the treasury secretary or head of the Fed, you know, I would try to scare the hell the out of the private sector and say, you better save this because you're going down with the ship. So you guys save it. And I went as long as I could worrying if they didn't save it, I'd come in.

Charlie Rose:
Well, did that in fact happen during this crisis in which the secretary of the treasury said you better save this or we'll all going down?

Warren Buffett:
I think certainly --

Charlie Rose:
You better put up some cash right now.

Warren Buffett:
I think that they hoped the private sector would come in. And the private sector tried to come in until they saw the size of the problem. I mean, from were people on that weekend that thought they'd had a solution. And then the hole kept getting bigger and bigger. And all of a sudden became apparent that 20 billion wouldn't do it and 30 billion wouldn't do it and 40 billion wouldn't do it. So it got beyond anybody's ability to certainly to do it in a short period of time.

Charlie Rose:
There was not enough capital available other than from the government.

Warren Buffett:
It's an unknown situation. You have the derivative book, [unintelligible] AIG financial products, you know. Nobody's every heard of it except it was a terrific profit center. You know, you could manufacturer earnings out of it, do all these things. And I will guarantee that you the top management -- and I'm not knocking them for this. I don't think I could have done it. They couldn't get their minds around it. I bought a company called General Reinsurance in 1998 that had a similar but much smaller operation, had 23,000 contracts in it.

Charlie Rose:
And you had to get rid of it.

Warren Buffett:
I got to get out of this. It cost me 400-and-some million dollars in benign -- in a benign situation. But when this was not a benign situation. If AIG had tried to unwind their derivatives books. I don't know. It would have hit every institution in the world.

Charlie Rose:
And there was no private capital to come in and do that.

Warren Buffett:
Not big enough.

Charlie Rose:
Not even Berkshire Hathaway.

Warren Buffett:
No. Not even Berkshire Hathaway. I mean, if I thought 5 or 10 billion would have bought me a good deal, and I could have done that, I'd have done it.

Charlie Rose:
They were --

Warren Buffett:
I'm not bashful.

Charlie Rose:
[unintelligible] was within reach.

Warren Buffett:
Yeah.

Charlie Rose:
But 85 billion might not have been.

Warren Buffett:

No, no. And the Fed structured that thing very, very well. I mean, they have put themselves in a position --

Charlie Rose:

Yeah.

Warren Buffett:

-- where they are very likely to get their money back; maybe more. They participate 80 percent -- I mean, they drove tough terms. I mean I want to hire the guy that made that deal. He’d fit in well at Berkshire.

Charlie Rose:

A lot of people look at you and Goldman Sachs and GE saying I want to hire the guy that made that deal for you.

Warren Buffett:

No, Tim Geithner did a better job on this one.

[laughter]

Charlie Rose:

So we come down to the close of this conversation and you have been warning us about certain kinds of things. I hear from this conversation too this plan is essential now. Otherwise we’re in a very, very difficult place and each week we go beyond not doing something we get deeper and it becomes more irreversible.

Warren Buffett:

And, yeah, whoever said, you know, an ounce of prevention is worth a pound of cure understated it and I you know a pound of cure that’s delayed another six months is going to need a ton of cure later on I mean it would be crazy not to do this. It will not produce dramatic results though in the economy. That’s what people have to understand. You’re going to see unemployment go up. You know, you’re going to see lousy earnings in many businesses. And they’re not --

Charlie Rose:

You’re going to see people unemployed.

Warren Buffett:

You’re going to see more people unemployed. But the difference Charlie if we bottom this thing out at seven percent unemployed versus nine percent, that’s three million people, that’s three million people that if we do it wrong you know lose their jobs unnecessarily in my view I mean you know I’ve never been unemployed. I’ve never been very fully employed either but just think of what it’s like, you know, to go home with a mortgage payment you know and kids and everything else. My dad had that happen to him in the early ‘30s. It you know you don’t want to create three million people more unnecessarily. But I don’t think you --

Charlie Rose:

That’s the depression --

[talking simultaneously]

Warren Buffett:

It really is. And you can’t help some increase from this point. I don’t want any viewer to go away think a magic wand exists in Congress. So they’re going to see some more bad news. But if we do this, we’re doing the right thing. And if -- the system will work over time. There’s no -- we got a wonderful system.

Charlie Rose:

Okay, but I mean let me come to that in the end. Do we need to do anything about the system? And beyond the emergency of the moment, the urgency of the moment, come January, about the system, lots of talk about regulation as you know and finding the right balance, lots of talk about whether government involvement is an idea we need more of rather than less of, rethinking sort of what President Reagan brought to fore.

Warren Buffett:

Once we get the [unintelligible] back, we can [unintelligible] changes [unintelligible], exercising [unintelligible], we can do all of that sort of thing. And you know if I got any good ideas out of that or I think they’re good ideas, I’ll be glad to contribute them but the system will probably overdo some other things. I mean, the nature of democracy is such that when there’s this -- there’ll be this revulsion, obviously, toward -- that’s never going to happen again, so we’ll probably attack it in various ways that don’t make sense. But I -- that’s what Congress is for. And that’s what advisors are for. And I’m all for getting the best minds you can get to work on that kind of thing. Like I say, I don’t think it’ll be done perfectly. Maybe we’ll end up with a little bit better system. But the end, we had a pretty good system over time. But when we went crazy, and we did go crazy on residential real estate, it set things in motion that just -- the dominoes started toppling.

Charlie Rose:

Thank you for coming.

Warren Buffett:

Thank you, Charlie.

Charlie Rose:

Pleasure to see you.

Warren Buffett:

Enjoyed it.

Charlie Rose:

Warren Buffett. We’re in San Diego. My thanks to the people at KPBS here. A conversation here about the crisis that we all face, and hearing from a man that a lot of people want to hear from. And I’m pleased that we were able to join with him here. Thank you for joining us. See you next time.

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