This is part seven of the preliminary transcript and video clips of Warren Buffett's appearances on CNBC's Squawk Box on Monday, March 9, 2009.
ANNOUNCER: He's the world's most famous investor, and today Warren Buffett is answering your questions. This is a special presentation of SQUAWK BOX, live from Omaha, Nebraska.
BECKY: Welcome back to SQUAWK BOX here on CNBC, first in business worldwide. We are just one hour away from the opening bell on Wall Street. The futures are under some pressure this morning, but we are letting our viewers get a chance this morning to ask Warren Buffett their questions on everything that's been happening out there, from the economy to investing. And right now we'd like to get to some more of your e-mail questions. Mr. Buffett, again, thank you for all your time this morning.
BECKY: Brent from Morrison, Colorado writes in, he's got a question very specifically about what's happening with taxes. He says, "Which do you think's more valuable to the economy right now? Raising taxes or lowering them?"
BUFFETT: Well, I think that on people making anything less than a lot of money, I think lowering taxes is a good idea. Now, bear in mind, we're going to spend 3.6 trillion or something like that in the next year. I mean, somebody has to get taxed, and nobody likes to be taxed, so--and I've expressed my views probably in the past that I think that guys like me have gotten off too light and they--just generally, and the IRS just came out with something the other day that the 400 top Americans in 2006 in terms of their taxable income paid at a rate of 17 point something percent, which was the lowest since they've ever started the figures, and they had 29 percent about 12 or 13 years earlier. So I think that too much has been done for me and too little has been done for the people that work here at the Nebraska Furniture Mart. But I don't--we're going to be huge gap in revenue and another 100 billion that helps the people at the lower end I am basically all for whatever the number may be. I don't think anything that helps me is needed one bit in terms of this economy. So I think that, as we move forward, I hope that the tax system gets more equitable, at least as I see it, in terms of treating the people that don't happen to be born just wired the right way and everything. They're paying higher rates than I pay just because I'm good at capital allocation.
BECKY: Is that something that you think should be taken on immediately? Or do you think it needs to wait until the economy gets through the roughest patches?
BUFFETT: I think, on balance, we ought to defer most of the things that cause people to get very riled up. I think we ought to--I think the message out to continuously be, `We are in an economic war. We're going to solve this together. We're not going to use it as a way to get all kinds of changes made.' And I might like to see a change in the tax code and maybe--but right now I'm for doing the part that helps the people that are the worst off and whatever doesn't cause--whatever doesn't pull us apart. And I don't think we should have lots of things now that cause us to become disunited. We have a common interest and a huge objective, which is to get this economy working well, and that will take people working together.
BECKY: Richard from Forestdale, Massachusetts, writes in his question, number 334 is "Some have opined that the Federal Reserve must, at times, be the lender of last resort. Are the Fed and the Treasury now the spenders of last resort?'
BUFFETT: Well, the Fed--that's a good question. The Fed has become--I think the Fed of New York, for example, had 9 billion of deposits from banks throughout the country a year ago. Now they have 450 billion. I mean, they have become--can you imagine that? That is a huge change in behavior by banks. They have become the intermediary, almost, for banks. I mean, the Fed is the one place where everybody goes. They can print money, you know.
BUFFETT: I mean, basically, so the--they are the--they have a huge role to play in this, and I think they've been playing it well. I congratulate Chairman Bernanke. I mean, he did some important things when he needed to do them, and he should be given a lot of credit for that.
BECKY: Joe, you have a question as well?
JOE: Yeah. I'm just thinking of other things.
BECKY: I know where you're going.
JOE: No. I kind of feel like I'm a pesky little gnat. I've got one more--one more thought, Mr. Buffett, and that has to do with, you know, trying to narrow the--what we've seen between the haves and have nots, and I know that you think that, you know, that certain people have been treated too well, others not enough. Some say that EFCA and card check would narrow the disparity. In other words, having unions have more of a say, more companies unionized. Is that a good idea? Or do you think, as a business owner, it would be a negative for the economy?
BUFFETT: I think the secret ballot's pretty important in the country. You know, I'm against card check, to make a perfectly flat statement.
JOE: That's great, thank you. Appreciate it. OK, Beck.
BECKY: I didn't expect that short of an answer either.
JOE: I know. I liked it. I mean, I liked that he gave me an answer. I'm not saying either way how I feel, but I liked that we got it from Warren.
BUFFETT: We have loads of unions at Berkshire, and I mean, dozens and dozens and dozens at our various companies, and I understand the reasons for unionization, I mean. And by and large, I think certainly the people that are in unions have not been well treated by the tax code that we've had all the time. I think card check is a mistake. I think that...
JOE: I think it's important for--to hear from things like that. We all support the president, obviously, and we all want to get out of this mess that we're in right now, but that doesn't mean that people like you and people that he admires and listens to can't point to certain things and say maybe that's not such a great idea and that's why we have this dialogue. Right?
BECKY: All right.
BUFFETT: Yes, sir.
JOE: Very good.
BECKY: All right. Let's bring in another question from a viewer. Steven from Brookeville, New York, writes in, and this is circling back in a way to some of your comments on the banks earlier, but he says, "President Obama recently stated that buying stocks is a potentially good deal if you've got a long-term perspective on it. So if President Obama were asked about whether buying bank stocks," and Steven lists stocks like Citibank, Bank of America, Wells Fargo, JP Morgan, "Is it a potentially good deal for those with a long-term perspective? What do you think he would say about that, and how would you respond to that question?"
BUFFETT: Well, I don't know what he would say.
BUFFETT: He doesn't consult me on his portfolio. I would say that if--well, there's certain banks that are basket cases. I mean, here are--here are 3600 banks since 1934 that the FDIC, one way or another, banks and saving institutions, they've had to bail out.
BUFFETT: But they didn't bail out the stockholders. So you can--you can lose everything if you buy stock in a bank, and you should be able to lose everything. You just shouldn't lose anything if you loan them money or a deposit. So the question is, whether banks, which have terrific earning power going forward, will be forced to sell stock at ridiculously low prices. And if you take the great majority of banks, which will do fine earning their way out of it, although they'll be more names on this list, you know, a year from now. But if they don't have to sell stock at distressed prices, I think a number of them will do very, very well. I mean, and we own some bank stocks, and I like owning them and I like owning them in the quantities we own them. And the only fear I have, frankly, is that in some kind of a situation, they might be forced to issue a lot of common stock and they don't need to do it. They've reduced their dividends, so they can build equity and they'll build equity at a very rapid rate with the spreads that exist now. So the banking system largely will cure itself. Citigroup may be a special case. I mean, and I'm afraid that in a sense, the American public has sort of taken its view of all banks from what they read about Citigroup all the time. But there are 7,400 banks or something like that in the United States and most of them are just fine. You look at the banks around Omaha, you know, they are not going broke. We had a bank in Loup City, Nebraska, go broke about a month ago, and we'll have another bank go broke someplace in Nebraska, you know, in the next two or three months. But, by and large, they're in good shape, and they are putting on assets with spreads that are terrific.
BECKY: You said that the banking system will take care of itself, that it will earn its way out of this.
BUFFETT: Most of it.
BECKY: Does that mean you think the American taxpayer money that's already been spent on these banks is good? That we'll get that money back?
BUFFETT: I think it's good with overwhelmingly most of the banks, but I think that we're--a good bit of the money is, you know, I think, I think it's--it can be questionable in a few cases, yeah. It can be questionable in a few.
BECKY: You're talking about AIG and Citigroup are some of the names.
BUFFETT: Well, you're--we're talking about anything you want to talk about.
BECKY: AIG and Citigroup are the big names that pop up.
BUFFETT: Yeah. Well, AIG isn't a bank, but there's a lot of money in there.
BUFFETT: And it was a huge risk to the system, and it shouldn't be--conditions shouldn't be allowed to recreate itself in the future. But the very fact it shouldn't be allowed to recreate itself in the future, does not that mean that the wrong thing was done in terms of stepping in there in September. That was the right thing. That weekend, you know, we had Lehman and Citi--I'm sorry, AIG was the same weekend Merrill, which got bought by B of A that weekend, but the dominos were lined up. They were lined up and they were huge dominoes, and it's a good thing that they didn't start toppling.
BECKY: OK. I want to get to a question that came from an investment club of seventh and eighth graders who invest $1 million in fake money every year. This is the Grizzell Middle School Investment Club in Dublin, Ohio, and the question is, where do you think gold will be in five years and should that be a part of value investing?
BUFFETT: I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot--and it's a lot--it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.
BECKY: There's another question that came in from Keith in Rolla, Missouri. We talked a little bit earlier about GM. You said there needs to be a different plan that's put into place. Do you think it can happen outside of bankruptcy? But his question is, "If GM files for bankruptcy, how will that affect Ford and Chrysler?"
BUFFETT: It would be tough. I mean, Ford has tried very hard to stay out of the government operation, but it would affect the whole economy and I--and particularly now. And I--that's why net I think it would be a mistake to let it go that way, but I think the government ought to hammer out everything it can to make the business model viable at a 12 or 13 million unit a year, and we'll see what they do on that.
BECKY: OK. If we want to get back to some questions, again, about TARP and things that have gone through, there's a question that came in from Jeff in Stockton, New York, who said, "Wouldn't it have been a better idea when the $700 billion TARP was passed by Congress to give it to us?" He means, we the people. "Example, if $30,000 for married couples, 15,000 to singles, get put back into our economy, it'd be up and running." He thinks he can buy a house, purchase an automobile, put money in our banks. People have asked a lot of questions like that. Would it have been better to give everybody $30,000, $100,000?
BUFFETT: Well, the math is a little off because there's close to 120 million households and TARP was 700 billion, so if you divide 120 million, it comes out to a little less than $6,000. But if you could've restored--it was essential that people believe in the financial system. The machine won't work without that. If they believe in that and you're just going to send out $6,000 to every household in the United States, I'm not sure that would've been better for economic activity. But I am not inclined to look back and say this would've been better than that. I mean, if there had been four fewer ships in the Pearl Harbor, then Pearl Harbor would've been better, probably so. We'd have four more to go out, you know, the next day. But forget it. You know, we've got to go forward.
REDUCE CHARITABLE TAX DEDUCTIONS?
BECKY: Welcome back, everybody, to this special edition of SQUAWK BOX. We are live in Omaha, Nebraska, at the Nebraska Furniture Mart with Warren Buffett. And by the way, we do have a programming note for you. Coming up this evening we have a special with the highlights of today's Ask Warren edition of SQUAWK BOX. You can tune in to CNBC Reports. This is The Billionaire Next Door: Restoring Trust. That's coming up tonight at 8 PM Eastern time.
In the meantime, though, we have plenty more questions that have come in, and, Mr. Buffett, we'd like to get to some of those, as well. Starting off with this, there's a question that came in from Greg Martin in Roswell, Georgia. He says, "How do we best prepare for the inflation that will result from the stimulus, and how severe do you expect it to be?"
BUFFETT: It's hard to tell how severe it'll be. There will be things that government and Federal Reserve can do years from now that will try to counteract it. But we are certainly doing things that could lead to a lot of inflation, and the best asset during inflation is your own earning power. Anything you do to improve your own talents and make yourself more valuable will get paid off in terms of appropriate real purchasing power. If you do something well, whether you're a major league baseball player, you know, whatever it may be, if you're a good assistant, whatever it may be, that's the best asset. The--in my view, the second best asset is a good business. And you might own one yourself, but you might own it through equities.
BECKY: All right. Hendrick writes in from Del Ray Beach, Florida, and says, "Is America considered cheap in the eye of international investors when considering products, whether it be retail, wholesale or goods in general?" And they want to know if now is a time to export.
BUFFETT: Well, you...
BUFFETT: You want exports, obviously, to grow. And incidentally, people lose it because the trade balance figures and how much we import. The exports of the United States were 5 percent of GDP if you go back to about 1970. You know, they're about--they got up to about 12 percent. So we make a lot of things the world likes. A lot. Twelve percent of 14 trillion is not a small number. We--we've been very good at that and it's important that we stay good at it, and it's important that, you know, we also import from other countries. But we want to do things to encourage trade and exports. And like I say, we haven't done a bad job on that, it's just we went kind of import crazy and consumption crazy over the last 10 years.
BECKY: All right. Bill writes in from Louisiana. He's got a question about the new tax policy. He says, "Giving to charities is such an important issue for both you and Bill Gates. I know you don't base your giving on tax policy, but the new policy seems to penalize charitable giving." What's your thought on that?
BUFFETT: Well, it'd be--the proposal, I think, reduces the value of deductions to some extent.
BUFFETT: Interest deductions and everything. I think you have to look at the whole integrated policy. And in the end if people can only deduct 28 percent, you know, instead of 36 percent or whatever it may be...
BUFFETT: ...on charitable deductions, you know, I--everything has a--I don't think that's the end of the world. I don't think it'll change--that'll change charitable giving. I think how well the economy works will change charitable giving big time, and I think the best thing for charities in this country is to get the economy working well. And I--the people I know generally, it is not a huge factor, the amount of the deduction. Some people play games with it and all that. I've got $6 billion of carryover--$5 billion of carryovers on charitable deductions. I'm not going to get to use any of them. I mean, it doesn't make--but it doesn't make any difference. I mean, if you're inclined toward philanthropy, I--the difference between 28 and 35 or 6 is going to make a difference, you weren't going to be very charitable anyway.
BECKY: Right. Joe, I know you have a question, as well.
JOE: And along the same line, we can pick and choose different things. And a lot of the e-mailers, actually, and Becky's probably seen them, too, have asked this: Mr. Buffett, on cap and trade, a lot of people think that that's going to hurt the overall economy. And I know you've got Conoco--a stake in Conoco, you've got utilities. Is that the right--do you support cap and trade, that provision of the--of the budget?
BUFFETT: Well, yeah. As you know, that hasn't been enacted yet or anything. But it is part of the budget that was put out the other day that--giving effect to it. Anything you put in that effectively taxes carbon emissions is--somebody's going to bear the brunt of it. In the case of a regulated utility, the utility customers are going to pay for it. I mean, it's going to become, in effect, a tax which we have decided is needed because the market system doesn't really appropriately penalize something that hurts the future but doesn't really hurt us tomorrow morning. But that tax is probably going to be pretty regressive. It'll be determined by individual public utility commissions state by state what customers it gets passed through to. But if you put a cost of issuing--putting carbon into the atmosphere, it--in the utility business it's going to be born by customers. And it's a tax like anything else. If--in terms of ConocoPhillips, it would be less direct, anything of that sort. Or in terms of industry generally.
BUFFETT: But in terms of the utility industry, it'll be passed through.
JOE: And the coal industry, make it tougher. Are--then are you saying that we should not do that at this point?
BUFFETT: Well, I think--I think we should evaluate it in terms of the economy when we get to that point, but I think we should get the economy straightened. I think job one, job two and job three is the economy, Joe. I think--I think the future does have to have a constituency. I mean, if the market system is going to produce something that over 100 years or 150 years really will change the world in a big way, you better have something that forces the market system to adapt to that reality in the future. Whether the cap and trade--our own guys at MidAmerican Energy, I--who are very smart fellows and who you could have on to talk to about it, generally do not lean in favor of cap and trade. But they would be better to explain the reasons than I. One way or another, society will pay for it, though.
JOE: Yeah. I'm going to take that as against cap and trade.
BECKY: Warren, there's another question that came in from Vishal in India, who writes in, "Charlie Munger describes you as a learning machine. What would be the biggest lesson you've learned in 2008?"
BUFFETT: Well, I've learned that--I would say in 2008 it's been re-emphasized to me the dangers of extreme leverage, whether it's on an individual basis or whether it's societal. And leverage is a lot of fun on the way up, and what it produces on the way down when carried to extremes, whether individual--I mean--I mean the tragedy of somebody on a credit card, which is leverage, what it does to marriages, all kinds of things. Now, when you get where the entire economy, or much of the economy leverages up in a way that embodies societal dangers when it has to deleverage, I think we should have learned a lesson on that. And if you're--if you're dealing--there are a lot of things in life where you don't know whether it's just a little too much or a little too little, but I think we've learned that we want to err on the side, next time, of not allowing people to go on--or big institutions to get as unchecked on leverage as we have allowed them to do here recently.
BECKY: Warren, there are many people who have written in and asked a question somewhere along the lines of do you worry about the idea that we have scared away an entire generation of investors? Will they be afraid to get back in and invest after everything they've seen that's happened?
BUFFETT: We have changed people's consuming behavior and investing behavior big time with what's happened since the economic Pearl Harbor, and there's no question it's going to take people time to get over that. So the answer is they're going to--they're going to spend their money somewhat differently for quite a while, they're going to invest their money somewhat differently for quite a while. In the end, in--if you--if you're a saver, you have--you're going to invest. Now, if you decide to put it in the government securities at practically no yield, you're going to lose in terms of purchasing power. I mean, you still face the problem. So I would hope people would draw the right lessons from this, but there's no question they've had a scar on their psyche, which affects how they're going to behave for a while. And you're seeing that right now.
BECKY: You've talked about what you would like to see President Obama and Congress do to solve this problem. What would you like to see corporate America do, CEOs?
BUFFETT: Well, you know, I think corporate America--you know, I think the idea of complaining about taxes, complaining about this and that and all of it, I think corporate America has plenty of room to behave better. Now, actually, I think they hit bottom in the 1990s. I think there has been some improvement in behavior since then. But corporate--part of the reason, and it's just, you know, maybe a small part, but part of the reason that companies leveraged up like crazy and all that sort of thing is they started--big financial institutions said, `We can increase our earnings X percent a year, and we can--every quarter will be better than the corresponding quarter here.' You can't do it. It--you know, you're going to play games if you do that, and you're going to create SIVs and things to get around capital requirements, and you're going to get into liquidity put options. You're going to get into all these things to play games to get better numbers. You're going to have black boxes, you know, whether it's at AIG, which turned into black holes later on, because you can pull numbers out of those black boxes and you don't have--and for a long--for a while you can get away with it. But I think corporate America has behaved terribly in terms of their attitude toward the sanctity of the numbers they report, and I--it was worse in the 1990s, but I hope they get over that.
BECKY: What about average Americans? What should we be doing?
BUFFETT: I think the average American should be doing everything he can to keep his head above water, basically. I--we have changed the savings pattern just dramatically by the six--the American people just changed it themselves. They didn't get any admonition from the president or anybody else to do it, they just got scared so they're saving. I think that by and large people, to the extent they can, should--they certainly should avoid credit card debt. You know, I mean, I can't make money borrowing money at 18 or 20 percent. We have credit cards. I mean, the American public wants credit cards. So our furniture store issues credit cards and, you know, it's part of the landscape. Just don't be part of it yourself. They--there's--I tell students this all the time. You can't borrow money at 18 or 20 percent and come out ahead. I can't--I'd go broke. So the stay away from debt as much as possible. When you get amount for a reasonable down payment, you find a home you like, buy it. But don't do it till you can handle it. And take on obligations you can handle, avoid the others.
BECKY: Very quickly, are you more optimistic or less optimistic than you were just over six months ago when you told us we were in our economic Pearl Harbor?
BUFFETT: Well, I'm optimistic in the sense that we got past that, and the government did some of the things that were really needed and they did them fast. I am somewhat pessimistic--I'm not pessimistic about it long term. This country will work fine even if we screw it up. But it's important in terms of the speed with which we get back to our potential, it's very important that people work together. And I think the divisiveness and everything bothers me, and the idea of--I understand Congress and their responsibilities, but they really have to realize this is something different. And the--and the president has to do his part in respect to that, too. And so I--I've been--I've been very pleased, actually, in September with the immediate response, because it saved the system to some degree. I've been kind of disappointed as we've gone along in sort of we can't quite get our act together and we can't really get the American public to understand what's happened, what needs to be done and all of that. So I think there's a communications job to be done.
BECKY: All right, Mr. Buffett, we want to thank you very much with your time for us today. You've been very generous.
BUFFETT: Thank you.
BECKY: We appreciate it. And our thanks again to Warren Buffett. That's it from Omaha. We'll see you tonight on CNBC Reports. And, Joe, see you very soon, too.
JOE: All right, thank Mr. Buffett very much for me, too, for all that time. Appreciate it, Becky. Make sure you join us tomorrow. "Squawk on the Street" is next.
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