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TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 5

This is part five of the preliminary transcript and video clips of Warren Buffett's appearances on CNBC's Squawk Box on Monday, March 9, 2009.

Previous transcripts: Part One, Part Two, Part Three, Part Four

JOE: Let's get back to Becky Quick who's live in Omaha this morning with the legendary investor Warren Buffett. Becky ...

BECKY: You know, Joe, one of the other big stories of the morning is what's been happening with the Big Three in Detroit. A lot of questions there and President Obama's car czars are meeting there today to try and get a handle on whether or not they're going to be loaning more money to GM and to Chrysler. There were some comments made over the weekend, Warren. Senator McCain, again, on the Sunday morning talk shows, talked a little bit about GM and his opinion was to let GM go bankrupt. This is a huge question. What would you do if you were in President Obama's shoes right now with GM?

BUFFETT: Can I use a lifeline? Phone a friend...

BECKY: Phone a friend at this point?

BUFFETT: ...that's a tough one. I mean, that is very tough.

BECKY: Yeah.

BUFFETT: But you have this situation where we have 250 million cars and light trucks on the road. Year after year we produce maybe 15 million or something like that because there's a lifetime to the 250 million, sort of a normal cycle. But we got down last month, you know, a little over nine million. So you are in a terrible, terrible, terrible period for the--for the carmakers every place. GM has a lot of--or the auto industry, the domestic auto industry has a lot of legacy costs. They did some dumb things in the past because they had a business model in mind that doesn't exist anymore. The union bargained for those things, you know, they feel entitled to them, they made a deal, you know, and they've got hundreds of thousands of retirees dependent on it and all sorts of things. So you need a new business model somewhat. You also need a recovery. It isn't just the business model. And I would say net I would come down on--if they modify the business model to adapt to the reality of a 13 million car a year and we'll do better than that in the future in some years. If they adapt, have a business model that works with that I would get them through this period. I would not expect to have a business model that works at nine million units because it isn't going to work at nine million. On the other hand, we are going to sell 13, 14, 15 million units a year sometime in the future.

BECKY: But you think you can get that business model, one that works without going into bankruptcy?

BUFFETT: That's the tough thing, and that's the challenge of the administration, the management and the unions working together. And I understand--the present managements didn't get us into this situation. There's no use getting mad at, you know, at the people now running the Big Three. There's no use getting mad at the union. They bargained for what they've got and, you know, these people, they counted on it. It won't work going forward and there have to be modifications made and people at all levels have to have a stake in that if--they should--they should try to accomplish it outside of bankruptcy. I mean, the American people do not need, you know, America's sort of hometown industry going into bankruptcy now. But I--they need a--they need a new business plan. It shouldn't have to be a business plan that works at nine or 10 or even 11 million units. It has to be a business plan that works at 13 million. We'll get back to that. It's the same thing as in housing, Becky.

BECKY: Mm-hmm.

BUFFETT: You know, we have a million and a half too many houses around now, you know. You own--you have household formation over here creating demand for houses, and you have people building houses. For a while we were building a million and three-quarters or something like that and household formation was a million three, and two-thirds of the people that form houses want to live in their own house so maybe you had demand for a million, and guess what happened? We had too many houses. Now we've got the housing construction down to 500,000 new permits or something like that. We're using up the million and a half units. But we have to work our way out of it and we have to work our way out of the car situation.

BECKY: Well, you bring--you bring up the housing situation. And Bob from Seattle, Washington, wrote in. He's got a question where he says, "Do you believe that the American economy of the last 10 to 15 years has been a house of cards? Won't the cries for more lending and more borrowing just rebuild that same house?"

BUFFETT: It was--it was not a house of cards, but it was an economy that was benefiting from leverage--leveraging up.

BECKY: Right.

BUFFETT: And when you leverage up, it's very pleasant. I mean, you can build more houses than people are buying, you know, and--or the natural demand is for and you'll get people speculating in them and you'll get people lying in order to get into houses they can't afford. And so the percentage of people besides the American households that lived in their own house went a little bit and it went up a little bit because those people really didn't have the income to do it. Now it has to go down. But it was not a house of cards at all. I mean, we have an economy that really works. We're in a store where a woman walked out of Russia, you know, 90 years ago almost and she came to the United States, saved $500--it took her 16 years to do it--this is the largest home furnishing store in the United States, it does $400 million. Nobody walked out of the United States to go to Russia and ended up with a $400 million store with $500. This woman couldn't read or write, but she worked within the American system. She gave better--people better deals, she worked harder than anybody else, she was smart and she built an enormous success that employs thousands of people. America works, and America was--has been working the last 10 years, but we just did some very dumb things in terms of leveraging up.

BECKY: You're talking about Rose Blumkin who built the Nebraska Furniture Market.

BUFFETT: Yeah, market--yeah. Nobody walks out of the United States to go to Russia.

BECKY: Let's talk a a little bit about the housing industry itself. There are people who say this entire crisis started because of the housing industry.

BUFFETT: I agree.

BECKY: David Paterson, the governor of New York, wrote an opinion piece in The Wall Street Journal over the weekend, and he said, "The mortgage plan that the president has proposed is the right one." Do you agree with that?

BUFFETT: Well, I don't even know all the details, but I would say that the administration ought to be willing to listen to very prompt suggestions on ways to make it a little bit better. But--and I don't know that he even needs it, but I'm just saying they ought to be open-minded about that. But they ought to have a plan. And the idea that it benefits some people that maybe shouldn't be benefited, you know, to me that's, again, like after Pearl Harbor saying it was the Navy's fault so the Army and the Marines and all aren't going to join in and help, and the American people shouldn't do it because the Navy should stew in their own juice or something like that. We need to get the housing situation straightened out. Now the biggest--the big problem is we've got about a million and a half too many houses sitting around now. And the vacancy rate is up a couple percentage points on that and 2 percent of 80 million homes is a million six or something like that. We have to work through that. And we will work through it, but we'll work through it--we can't--we can't create a lot more households. We can't tell the 14 year olds to all get married and start having children so we can have more households. So we got to--got to sort of work with the normal demographics here. But we will have a million three hundred thousand households for them. Nine hundred thousand of those will want to move into their own houses netting everything out and we'll have some housing destroyed. So we can sop up the demand. We're lucky we have population growth. When Japan gets--got in trouble, they didn't have population growth. We have population growth. There's going to be demand, there's going to be more houses in the United State five years from now than now. There'll be more in 10 years than five years. So we can sop it up. But we can't do it in a week or a month or a year. It just doesn't happen. We--and I think that having a mortgage plan somehow gets payments for those who can make them down to a reasonable percentage of their income, which is where it should have been in the first place, is not crazy. I mean, we have an interest in solving that particular problem. And we shouldn't finger-point.

BECKY: Does that mean we're not the next Japan? We're not talking about 20 years of a stagnant market?

BUFFETT: Not 20 years at all, no.

BECKY: Are we talking about 10 years? What...

BUFFETT: Well, it just--it depends. Frankly, the best thing that could happen--I'm in the brick business, I'm been in the carpet business, I'm in all these businesses which are getting hurt by the lack of new construction. But the lack of new construction is an important ingredient to this. If you've got too many houses and you've got a certain growth and demand--if demand is going to grow by X per year, and if you...(unintelligible)...the next houses you're going to--you're going to improve the situation and we--you got a choice. You can either--you can either blow up a billion and a half houses or you can create few houses than natural demand sops up. And I would say that, you know, you can work your way out of it in a couple of years probably, two to three years.

BECKY: Two to three years, which is very different than what...

BUFFETT: Don't--well, it just depends how many are constructed. We really...

BECKY: Yeah.

BUFFETT: ...the new housing starts have really gone down. I think the last figure's around 500,000 or something like that annual. And that makes a big difference. That didn't happen for a while. I mean, it was--they had to slow down the machine.

BECKY: Joe, I'm sorry, did you want to a question in here?

JOE: Yeah, I want to go back to something Warren said quickly, Becky, and that was that--and we don't hear this enough--that in the past 10 years, Warren, you said that things basically did work in the economy. That the free-market economy--we seem to look back now and think that over the past 10 years that every step we made was a misstep that led to this crisis where we are right now. And I know you weren't a big fan of the Bush tax cuts, but you can't throw out the baby with the bathwater, can you, in terms of--maybe there needed to be more regulation, but overall why are we in this mess right now?

BUFFETT: Well, we're--the biggest reason we're in the mess, you know, is we did leverage up the country and we essentially made a huge bet on housing, but that led to all kinds of other instruments. And--but net over the 10 years a lot of things were--happened that were right and over the next 10 years a lot of things will happen that are right. The--this machine is gummed up right now and it's gummed up by a lack of confidence and that makes people scared and, I mean, it feeds back and forth and it's a vicious cycle.

JOE: Did...

BUFFETT: That will be broken--that will be broken. I'll guarantee it'll be broken, Joe. I think it'll just be broken...

JOE: Doesn't...

BUFFETT: ...sooner if...

JOE: Doesn't the freedom inherent in a free market give you enough rope to hang yourself a lot of times? And maybe we can look at it that way? I mean, how do we make sure that greed--greed has been involved with every bubble that we've had over the past 500 years and we've had a lot of them. And if...

BUFFETT: Yes.

JOE: ...you're in a free market, you're going to have enough rope to hang yourself, no?

BUFFETT: Yeah. Well, you--yeah, you want me to have enough free rope to hang myself, you just don't want me to have enough rope to hang the whole country. And...

JOE: Right.

BUFFETT: ...we'll always--I mean, failure is part of the American system. But you don't want to create conditions where failure becomes--of such large institutions becomes contagious, produces fear, all of those sort of things. But that'll happen occasionally. There's no question about it. Free markets overshoot, they do some things that are wrong. They work better than anything else, but they have to--in certain arenas they have to be looked at because there are areas where people--where what you--what you do that's stupid can be contagious throughout an economy.

JOE: Hm.

BUFFETT: You don't--you don't--you don't want--I have no desire to leave the market system at all. But you do need government and you particularly need government at a time like this.

"STOCKS WILL BE WORTH MORE OVER TIME"

BECKY: That's right, we do. We also have questions from lots and lots of viewers so we'd like to get back to some of those e-mails. They've been coming in all morning long.

And Warren, I'd like to start with one right now from Tom in Vero Beach, Florida. His question is, "Given that Berkshire Hathaway primarily buys stocks, if you felt the Dow was going to slide to 2,000 would you state your thoughts publicly, or would you feel an obligation to keep those thoughts private?"

BUFFETT: I would never have a feeling that the Dow is going to go to 2,000 or 12,000 or 4300 or 20,200. I don't--I know over time it will go higher. I mean, American business will be worth more over time. The dollar will be worth less. They'll be retained earnings that build up values. There will be more people in this country and they'll have more buying power. Stocks will be worth more over time. I have no idea where they'll go in between. For all I know, that farm I bought, you know, 20 years ago, it may have bobbed around 8, you know, $1800 an acre, 1200, I don't even know anything about that. I just know that the farm, over time, will produce 120 bushels of corn, you know, per acre, etc. So I've never tried to predict stock prices.

BECKY: You know, it was interesting. I made a comment earlier that the Dow was at 6626 and when I did, you made a comment about it, too.

BUFFETT: Yeah. When it was at 6626, at the start of 19--the last century, 1900, it was at 66. So it's gone up 100 for one. And we had the Great Depression, two world wars, the flu epidemic, the nuclear bomb, the cold war. I mean, you name it. At least 15 years in that 100 years looked terrible and five or six of them looked, you know, almost disastrous. And in the end, this system works extremely well. And--but it doesn't work well every day or every week or every month and there are times when government needs to be a very big factor to make sure it starts getting back on the tracks. But it will work. I will guarantee you that the Dow will be a lot higher. I'll have no idea about the numbers or anything else, 10 or 20 years from now. I have no idea. You know, 2,000, 8,000, they're all numbers.

BECKY: A lot of viewers wrote in and had specific questions about your investments. David wrote in and says, "You've committed financing for Dow Chemical's acquisition of Rohm and Haas Company. What are your thought on the upcoming lawsuit and whether or not the deal should continue to move forward?"

BUFFETT: Yeah. Well, I can't comment on that. The lawsuit will either happen or it won't happen. I guess they're going to decide pretty soon on that. I mean, any deal that was made last summer, you know, like they say in golf, every putt makes someone happy. But all of the sellers are happy and all of the buyers are unhappy. And you know, the deal would not be at the same terms now and incidentally, we committed to buy $3 billion worth of preferred. That is not a good commitment. I mean, it's good in the sense that we're going to do it, as I've told the CEO of Dow, I said, you know, our 3 billion will be there if Ben Bernanke runs off to South America with Paris Hilton. I mean, they'll have the money. I mean, but the--was that--is that a smart deal today? No. No. But conditions have changed and conditions change for Dow and Rohm and Haas in a huge way. And what looked like a deal that was--they liked at Dow and that it could be financed reasonably well and the Kuwaitis were going to enter into a partnership with Dow, all kinds of things. But the world has changed like nobody ever believed it would and so obviously, it's not only, you know, not only not a good deal now, I mean, it may not be a doable deal now. Our commitment, which was--looked smart at the time, looks dumb at the present time. But that's the way the world is.

BECKY: OK. One of the changes in the world has been what we've seen in the treasury markets and K. Hart writes in and says, "If the much talked about bubble in the Treasury market burst, would money market accounts, which are exposed to Treasuries, be adversely affected?"

BUFFETT: No. The--you'll always--you'll get your dollar back, it just won't buy as much and if we get enough dollars out there and you can go to a Web site and look at what is happening with M1 and M2, they don't talk about it anymore, but the--we are going--we are doing things that are going to put a lot of inflationary pressure on at some later date and we're going to do more things like that and that's the right thing to do, actually. I wish we didn't have to do it, but it's the right thing to do and--but in economics, you can never just do one thing. I mean, if you do something, it has consequences and that's why they always say you never get a free lunch. But it's better to have the lunch we're having now even if we pay later than have no lunch at all.

BECKY: All right. Brian from Santa Rosa, California, writes in. He says, "I'm a 33-year-old lawyer who has never taken a business class in my life. Nevertheless, am I crazy to think that many, if not most, blue chip stocks at current valuations represent the opportunity of a lifetime?"

BUFFETT: Well, I don't know if I would say the opportunity of a lifetime, but I would say that most people who buy companies, believe they're well capitalized. You don't want to buy somebody that's leveraged to the hilt in this situation because they may not to get to play out their hand.

BECKY: Mm-hmm.

BUFFETT: But if you buy a cross section of good equities, generally well capitalized companies, you'll make money over 10 or 20 years. I haven't the faintest idea where you'll be in 10 months, but it really doesn't make any difference. When I bought that farm, I have not gotten a quote on it yet. I bought a quarter of interest in the Omaha Royals, I've never got a quote on it. I look at the attendance figures, I look at see if the billboards have ads on them and all that sort of thing, but I took to the performance of the Omaha Royals or the farm to determine whether I made a decent investment. That's the way people really ought to look at stocks. They have a hard time doing it because they get these quotes thrown at them every day. Forget the quotes. Look at the business.

BECKY: Although right now a lot of people are facing--focusing on those quotes.

BUFFETT: Sure.

BECKY: Richard from New York City writes in. He says, "In the annual report for 2008, you say that `Now our book value far understates Berkshire's intrinsic value.'" He wants to know, "would you care to be more specific how `far understates' should be interpreted?" For example, do you mean 30 percent?

BUFFETT: Do we have a number? Yeah. Well, the answer is I won't give you a number, but I will tell you, for example, that here's See's Candy that we bought in 1972 and we paid $25 million for it.

BECKY: Mm-hmm.

BUFFETT: It's worth a lot more than 25 million. But in terms of knowing numbers on different businesses, you know, Geico's worth far more than we paid for it, but others aren't worth far more. On balance, book value does understate intrinsic value, but I--who knows how much?

BECKY: OK. Harold from Williamsville, New York, writes in. He says, "You said recently that Treasury Bonds and cash equivalents are going to have very bad times in the not too distant future. Does that imply that you like gold and silver and the equities underlying them?"

BUFFETT: No. It applies I like good businesses.

BECKY: Mm-hmm.

BUFFETT: You know, if the dollar becomes way--worth way less, we will sell See's Candy for more money. I mean, it won't be more real dollars, but we--if somebody's willing to give up 15 minutes of their labor or half to buy a pound of this or to buy six cans of this, they'll do the same thing and it won't make any difference whether shark's teeth are being used for money, basically. So the best--well, the best assets you can have during inflation is your abilities. I mean, because if you're the best doctor in town or the best lawyer in town or the best broadcaster in town or whatever it may be, you will always command a certain percentage of the resources of society. So your own talents are the most important thing. But if you don't have any talent like I do, you try to buy into other people's talents. And you know, this is the best candy. This is the best soft drink, as far as I'm concerned, and it will be that way 10 years from now. And whatever the value currency is, we'll get our share in that--in terms of that value at that time.

BECKY: You mentioned before when we were talking about the mortgage plan that it may help some people that it shouldn't.

BUFFETT: Of course.

BECKY: But that's something we need to suck up and understand at this point. But it does lead to other people who have questions about whether they're being penalized for doing the right thing. In fact, Bob and Lani in Rapid City, South Dakota, write in. They say, "We are conservative South Dakotans. We are now saving more, but the government wants us to spend more. Are you `short' or `long' on our strategy to `pay all your personal bills promptly and always live within your means'?"

BUFFETT: Well, I've always followed that myself, so I'm with them 100 percent on that. But in terms of 100 percent, I mean, you don't want to get behind the eight ball. I mean, if you are, you've got to work your way out, but it's always better. You know, Ben Franklin wrote that, you know, hundreds of years ago, the--you know, earn a dollar, spend 99 cents, result happiness, you know. Earn 99 cents, spend a dollar, result misery. And--but in terms of the inequities, if I were a--had been a client of Bernie Madoff's and fortunately I never heard of him, but let's say I was a client of Bernie Madoff's. I'm in the middle of Lake Michigan with him. We're in a boat together. Bernie's at the other end. I've just lost all my net worth. I see this hole spring up at his end of the boat. Am I supposed to cheer? No. I mean, in the end, you know, I want to save Bernie, too. I mean, not because I really want to save him, but I--you know, there is no way to divorce myself from what's happening on the other end of the boat. And this thing is covering--going to cover the whole boat. There's no question about it. So the people who have behaved well are going to find themselves taking care, to some extent, of the people who didn't behave well.

BECKY: Right.

BUFFETT: And in Pearl Harbor, the Army, you know, undoubtedly was not as responsible for those boats being in the harbor there all exposed to an attack and kind of sleeping through it as the Navy. But does that mean the Army holds back? No. You've got to be in there.

JOE: Hey, hey, Warren, Becky's really, you know, she's nice and deferential to you and everything. I just want to let you know that there are times she gets really mad because she's been one of the people that have paid her mortgage and she always points out she's never bought new bedroom furniture because she...

BECKY: Oh, stop already.

JOE: And you're in a furniture store! You and Warren are...

BUFFETT: We're not going to last--we've locked the doors, Joe.

JOE: You can...

BUFFETT: We've locked the doors, Joe. She is not getting out of here until we clean her out.

JOE: Becky, tell Warren you're mad that you've done all the right things and all these other people are going to get bailed out.

BECKY: Oh. I'm not nearly as mad as is as many times you've complained for me. But yes.

BUFFETT: There's nothing wrong with being mad, Joe. It's just you can't--there's times when you're made about something that you've got to overcome the emotion because...

JOE: Give her a deal on a new bedroom set and then we won't have to hear it anymore. You're in a furniture store.

BUFFETT: We give deals to everybody, even including guys named Joe Kernen.

JOE: All right.

BUFFETT: We'll open an account for you.

JOE: All right. Thank you.

TRANSCRIPT AND VIDEOS CONTINUE WITH PART SIX

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