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