BECKY: That tells us a little bit about how far we've come in this economy. But, warren, you look at a lot of different factors in the economy. This is a particularly difficult time to try and figure out what's going on. Where do you think we stand right now in the economy?
BUFFETT: Well, actually, it may not be quite so difficult. A couple of months ago when we talked, I said we were seeing little bits of improvement here and there, but it was pretty spotty. In the last couple of months, in most of our basic businesses, we have seen real strength, so the economy has picked up I think a lot of strength in March and April. It won't be translated into huge changes in unemployment soon, but the economy is starting to move.
BECKY: Where do you see it? Which businesses?
BUFFETT: Well, we see it particularly in our businesses that supply other businesses across the spectrum. Now, IGCAR, we sell these small cutting tools that are used in big machine tools whether at Boeing or General Motors or heavy industry all over the world. And we have seen a really huge pickup in March, started in December. It was gradually improving just a little bit. And it really has taken off.
And we have a company that handles the distribution of electronic components down in Fort Worth. It sells all over to everybody in sight. It has been booming. I mean it's huge. We're glad we've got inventory because it's flying out the door. And that's going to thousands of customers all over. So there has been a real change in the last few months.
BECKY: This is more than just rebuilding inventories?
BUFFETT: Yeah, it is more. We can't rebuild our own inventories because it's moving so fast. No, it's much more. Nobody wants a big inventory of cutting tools or even electronic components because they are putting them into products right now. They are manufacturing right now. So there's a big pickup. I don't mean we're back to where we were three years ago or anything of the sort. But the economy is moving. Incidentally, that's what I would have expected in this world.
The American economy is an amazing engine of growth over time. And we may try to mess it up occasionally. And we go to excesses and we make mistakes and all of that. But if you look at the history of the country, I mean this country works. It's a mistake to bet against it.
BECKY: Is this a sharp "V" snapback recovery?
BUFFETT: It's a pretty big snapback. "V" conveys you get back to the top quickly. But it's a long way -- it's very different than some saucer-like thing that is very elongated. It's a real movement.
BECKY: Most of what you have mentioned, though, these businesses are industrial businesses. Do you see it in your consumer lines as well?
BUFFETT: We see it to a degree in consumer lines. I mean at NetJets, our jewelry business and all, those are coming back. People have regained confidence. They were paralyzed, you know, a little over a year ago. And our customers flying on NetJets, they still own the planes, they were still paying the monthly fee. They just weren't flying as much. They weren't buying jewelry.
All that, we're seeing a pickup in. It's not back to where it was, you know, two or three years ago, but behavior has really changed.
BECKY: We talked to Mohamed El-Erian and you know him.
BUFFETT: Yeah, sure.
BECKY: He's got a theory that PIMCO has been focusing on about the new normal, about consumers not going back to the same rate of spending. They have got a lot of debt they have taken on. Their house prices have not come back. Is that a fair and valid assessment of the economy as well? And how do you match that up with what you are talking about?
BUFFETT: Well, for years what you might call the normal was just leveraging up more and more, so it was getting to higher layers. I don't think that's going to happen. But consumers, you know, the ones that can handle like to spend. I mean we saw them this weekend at our furniture store, you know. In a week, we sold $35 million worth of goods. That's a lot of goods to move in Omaha, Nebraska in a week in a home furnishing store. We saw a lot of jewelry sales. The American public over time is going to spend money. What we don't want them to do is keep leveraging up like they did and everybody refy-ing houses and taking money out of their houses and using it to consume. I don't think you need to worry about the American consumer over time.
BECKY: Not worry about them over time. But you just mentioned that you don't think the unemployment picture is going to improve drastically any time soon.
BUFFETT: It takes a while. I mean we are net hiring people at Berkshire. Last year we were letting people go every month. I don't know toward the end of the year exactly the figures. Now, we're hiring people. But, you know, they talk about jobs. We have jobs when we have demand for our goods. We're not going to hire somebody to stand around. So the best jobs program is demand. And demand is coming back. And that means we hire people.
BECKY: Corporations were dealing with incredibly high productivity numbers where they were squeezing more and more out of their employees. Do you think businesses across America are in a position where they have to hire?
BUFFETT: Well, we have to hire sometimes. I mean when the Burlington is moving 173,000 carloads, they need more people than at 155. I hope it goes to 200,000 and we'll need a lot more. But that's happening at some of our businesses. Not all of our businesses, but some of our businesses.
But the unemployment rate comes down slower than the rate at which business improves. So it's going to take a while on that. And residential housing is still very poor. I mean our brick business, our insulation business, those businesses have not taken off because, as I said in the end report, there's an overhang of inventory in residential housing. I think that will be gone within a year.
BECKY: Senator Bond has a question as well. Senator.
SENATOR BOND: Thank you, Becky. Mr. Buffett, you talked about we're doing well lest somebody messes up. And you're right and I agree with you. There's basic strength in the economy. But I'm very worried that the small businesses are not hiring and growing. They are worried about taxes going up. They are worried about the interest rates. And I would appreciate your view on whether we are looking at paying much higher interest rates on the debt we're running up. We just saw that advisers are saying that governments that are running deficits are going to have to start paying higher interest rates.
When are the Chinese going to start demanding significantly higher interest rates on U.S. credit spreading high interest rates throughout the economy?
BUFFETT: It's certainly hard to imagine deficits like we have been running or other countries have been running being consistent with low interest rates over time. So, you know, if you could really run deficits of 10 percent on GDP and not have anything bad happen, people would have figured that out a long time ago. It's too much fun to do.
But there will be a price to be paid for the medicine that we used in order to break out of our panic situation, the huge deficits. And, you know, our Congress, but governments around the world are going to have to come to grips with how they bring down those deficits or people will get very afraid of lending money. Who wants to lend money to somebody that is going to follow a long-term policy of running deficits 10 percent? It's unsustainable over time.
And if you can borrow in your own money, what you have is you sowed the seeds of terrific inflation down the road. And if you borrow in other currency, eventually people quit lending you money.
SENATOR BOND: That message needs to go to the administration as well as Congress. I hope they will listen to you.
BECKY: I believe Melissa has a question as well. Melissa.
MELISSA LEE: Yeah. Mr. Buffett, I wanted to get back to the issue of Lloyd Blankfein, if we can for just a moment. I understand that you have confidence in him as a CEO. And he certainly has done a lot for shareholders during the financial crisis. But is it possible at this point in time in Goldman's history when it's soul-searching and trying to signal a culture change at the company that perhaps it would be best for the company to have a new CEO?
BUFFETT: You know, he's going through a tough period. But incidentally, Goldman Sachs, as I remember back around 1970, there was, you know, a big problem about Penn Central and the commercial paper and there was another problem when Gus Levy was in charge then. John Weinberg was in charge some years back when something connected with the Boesky Trading caused a problem with Goldman Sachs.
I mean you run a business for 140 years, you're going to have problems from time to time. But listen, I'm sure we've got problems at Berkshire. We have 260,000 people working for Berkshire. Can you imagine that, you know, we can have a city of 260,000 people and nobody is doing anything wrong?
BUFFETT: All we hope is we find -- I think it would be a terrible mistake to do anything with Lloyd.
MELISSA: Well, it is interesting because he is the only financial company CEO to sort of have survived the financial crisis. You had said earlier to Becky that if Lloyd came to you, you'd say absolutely stay on. If Goldman's board came on and said we are thinking about replacing Lloyd, you would say no, keep him?
BUFFETT: I would disagree with them.
MELISSA: You would disagree with the board?
BUFFETT: I don't think Goldman's board has any notion of doing that. And, you know, when we put $5 billion into Goldman in September of 2008, which was not the easiest time to invest in anybody, we had been approached by the management of numerous other large financial institutions, including large investment banks and we turned them down.
BUFFETT: So I felt the best about Goldman in terms of not only its business operation but in its risk control.
MELISSA: Some observers, Mr. Buffett, might compare this to your investment in Solomon in 1987 when you took a 12 percent stake. Is that fair? Because that certainly is going around the trading floors. There are comparisons of Goldman's structure versus Solomon's structure during the crisis in 1991.
BUFFETT: Well, in the case of Solomon, there was no question when I got called back there in August of 1991, there was no question something very wrong had been done, but it had been done by a bond trader. And then the top management did not report promptly at all the transgressions of this particular trader. And the real problem at Solomon was to essentially take away the stain that was on 8,000 people and place it properly on the stain of a bond trader that had broken a bunch of government rules.
But we knew exactly what happened. We found out exactly what he had done. He clearly had broken the rules. And we went down and presented all the evidence to the proper authorities. And we got rid of the guy and he went to jail for a short period of time. That's a different case than this.
JOE: Warren, the FT seems to think that Goldman at this point is making some moves to overhaul some of its practices as a precursor to a possible settlement. Do you think the SEC would like to settle? When you talk to Blankfein, has he asked you, do you think a settlement is the right move to make? Do you think it is?
BUFFETT: Well, sometimes it gets into a business decision regardless of how you feel about the merits of a case. But I have not talked to Lloyd about a settlement whatsoever. The SEC, historically, I think they'd like to settle most things rather than try them. But generally, in the judicial system, judges like you to settle rather than go to trial. So who knows how it will play out. But I do not see anything in the Abacus transaction -- and I have looked at it. I do not see anything in the Abacus transaction that would cause me to want to settle simply on the legal aspects of it. If it becomes a business decision, that's something for the board of directors of Goldman Sachs to figure out.
BECKY: Warren, over the weekend, you said if you had to bet your life on either higher inflation or lower inflation, you'd take higher inflation and potentially much higher.
BUFFETT: Yeah. We are following policies which will lead to inflation accelerating. There's no question about that. The question is whether we will change those policies before, you know -- you lit this fuse basically. And it's a long fuse. And you can change policies and, therefore, blow out this fuse that's going toward the dynamite. But if you don't, the dynamite -- it will get to the dynamite eventually. And countries that borrow larger and larger amounts of money in relation to their output, in their own currency, pretty soon -- at some point decide they don't want to pay it back with currency at the same purchasing powers. And the problem about inflation is it creates its own dynamic once it gets going. And we had that in late 1970s and it took Paul Volcker and a meat axe to stop it. And he was probably the most unpopular man in the United States for a period of time.
But we got to 15 percent or so interest rates for governments in a 21 percent prime rate. If Volcker hadn't come along, who knows what would have happened. So you don't want to play around with inflationary gain.
BECKY: But you were very much in support of the government taking the actions it did to stop and stem the financial crisis when it occurred. What have they done that you think has been too much? Or have they done anything?
BUFFETT: No, I think they went all in. And the American public needed to see they were going to go all in. When the whole world wants to deleverage, the only party that can leverage is the government. And the United States government did something perfectly proper. Whether they did it perfectly, nobody knows. But what became clear in the fall of 2008 is that the chairman of the fed and the secretary of the treasury and Sheila Bair at FDIC were willing to do extraordinary things to essentially prevent a panic. And they were the only ones that could do it. And I cheer them mightily for that. That was the medicine applied to a cardiac. And now we have to deal with the aftereffects of the medicine. We had unprecedented amounts of medicine so we may have unprecedented difficulties in weaning us away from the problems that result from that medicine.
BECKY: Jim Owens is the CEO of caterpillar. He has an Op Ed in today's "Wall Street Journal" where he lays out some of the things he thinks should happen to make sure America gets back on the right path. One of those is making sure we have a very strong and independent Federal Reserve. Another is that American companies should only be paying taxes on their American profits that they are kicking out. And that that would mean companies that have international operations could bring more back to the United States. Do you think that that is a good theory?
BUFFETT: Well, the second part of it, if you are talking about reducing taxes on corporations, which is what that is, you know, we have a huge gap between taxes and expenditures. And somehow that has to be narrowed. And it probably won't be narrowed by tax cuts. So I respect him enormously. And I know what he's talking about. But in the end, we are taxing 15 percent, not much more than 15 percent at GDP and we're spending 25 percent of GDP. That is not sustainable.
And the idea of cutting taxes on anyone or any entities from this level, you know, I mean I think that would be sending the wrong message about what we regard as the sanctity of our currency over time. If I were a bondholder in the United States and I saw that we were widening the gap by cutting taxes, that would bother me a great deal.
BECKY: If you -- I would say most people in this country realize taxes are going higher. But the debate is how much higher and who exactly is paying their share of the taxes.
BECKY: Is there a point where you get worried if taxes are raised to a certain level, whether that be against American corporations, whether that be taxes that are levied against the wealthiest Americans? Is there a point where you think there's a tipping point?
BUFFETT: Well, we have to eventually get the gap between expenditures and receipts down to maybe 2 percent of GDP. We can handle 2 percent of GDP and growth takes care of that over time, or 3 percent perhaps. But you can't have 10 or 12 percent.
And taxes, you know, everybody is going to scream. And if you cut expenditures, everybody is going to scream. And the question is whether Congress will have the will to do what needs to be done. And it won't be easy. I mean, you know, Russell Long said it, you know. Don't tax you, don't tax me, tax that fellow behind the tree. And that's the way we all feel.
But over time, we have been pretty responsible in this country. Since World War II, we came out with 120 percent debt to GDP. And we have brought that down into the 30s. I mean we were willing to keep our expenditures under control and tax. And we did exactly what is proper in the last two years, year and a half. We had to stem the panic. We had to restart the engine of America and we did. And now we've got to figure out what we do next.
BECKY: You mentioned two things, though. Also bringing down expenditures. And since that time, there have been a lot of new proposals that have either been put on the table or have actually passed and been put into action. Are those new expenditures going to get in the way of being fiscally responsible?
BUFFETT: Sure. You know, I mean it's easy to promise. And you can promise away the entire GDP, you know. But your promises don't grow more corn or turn out more automobiles. In the end, somehow like a family, like any kind of organization, you have to figure out a way so that your expenditures are in reasonable balance with your income.
And like I say, you can run a couple percent of GDP. But we have gone through a war of sorts, just like when we went through World War II. We ran up the debt enormously in World War II. Enormously. But we then followed the proper procedures after World War II to get it back in line with where it should be. We have to do the same thing after this economic war.
BECKY: Do you think we're on the right track?
BUFFETT: Well, I think it's just now is about the time to get started. I'd probably let the recovery go a little further. I'd want to be sure that we were gaining strength. And I would want the American public to feel we were gaining strength. I mean you need that to get the popular will. But it's something that has to be addressed soon.
BECKY: We are watching what happens when it's not addressed play out right now in Greece. There was an agreement over the weekend that the IMF and the EU will be stepping in to make those loans. It will come with some very strict austerity measures from the Greeks. But there are people today saying it still won't matter, it still won't be enough. The contagion will continue to spread and at the end of the day, this is just a Band-Aid on a problem that will continue to fester. What do you think?
BUFFETT: It's hard to tell. You have this unusual situation in the European Union where individual countries are sovereign in determining their budgets. They may get pressured by others, but they are sovereign in terms of their budgets but they can't print their own currency. We can print our own currency. We can always pay our debts in the United States as long as we borrow in dollars. We just keep printing more dollars. The Greeks can't do that or other members because they are tied to the euro, but they determine their own budget. It's going to be very interesting to see how this plays out because, you know, if you can sort of behave irresponsibly as one member and expect the other members to bail you out, that's an inducement, real inducement for everybody not to behave so well. So I don't know how it's going to come out in Europe.
BECKY: What about Portugal and Spain and even potentially Italy?
BUFFETT: Well, I don't know the countries involved. But you can say every member -- once one member sort of gets away with misbehaving to some degree in terms of their own budget and others bail them out, you know, that is the ultimate in moral hazard. That's what we talk about all the time in this country. And it's happening on a big scale in Europe. I don't know what will happen there. It's going to be an interesting movie to watch, but I don't know the ending.
BECKY: You have made bets on currencies in the past. How confident and comfortable would you feel with making a bet on the euro?
BUFFETT: I don't feel confident now in making a bet on any currency versus another, in other words, the euro, the pound, the yen, the dollar. I think all currencies are likely to lose value in terms of purchasing value. And if you are betting on one versus the other, you essentially are trying to guess which one will depreciate in value the most. But I don't like betting on the future purchasing power of any currency.
BECKY: You don't like betting on the future purchasing power of any currency. But would you say that the IMF and the EU have dealt with this properly to this point to try and jump in?
BUFFETT: I don't know how it's going to play out. They have to do something. And what they have to avoid is contagion and moral hazard. And who knows what's going on in the mind of bond investors all over the world. As we said here, when they see a situation where the credit defaults went to where they were went in Greece and all that, you know, predicting economic behavior gets very tough when you get into sort of uncharted territory like this. And like I say, I don't know the answer, so, therefore, I'm not making any bets.
BECKY: Warren, I'd like to play some sound from Charlie Munger. We spoke with him over the weekend. Charlie has a way of putting things.
BUFFETT: He does.
BECKY: To drive home points quite well. He talked a little bit about envy. He was talking about where the Street is headed, what can be done to try and bring the Street back into line. And I believe his comment -- again, I'm not sure if we have this right now in the control room. But this comment on envy that he had is one -- I'll read it to you if we can't find it. He said -- you have it right now? Let's play that soundbyte from Charlie Munger. And, Warren, you can listen in and see what he said.
CHARLIE MUNGER: Envy is a much more serious mischief-maker than greed.
BECKY: How so?
MUNGER: There's something in human nature that just can't stand even if you are making $5 million a year, that dumb bastard down the street is making 7.
BECKY: So those were his comments. He thinks envy is the biggest problem, not greed.
BUFFETT: Yeah. We saw a lot of that at Solomon. I mean you'd say how could a guy that's making 3 or $4 million a year be unhappy? And he's not unhappy until he finds the guy next to him who he thinks he's smarter than making a few dollars more. And as I always said, envy seems to me the silliest of the seven deadly sins. The other guy doesn't feel it. You just feel worse. You are sitting there with your stomach churning because you are envious. It doesn't make a lot sense.
I have always said, you know, if you are going to pick some sins from the seven deadly sins, go with gluttony and lust and you can have a hell of a weekend.
BECKY: But is there any way to legislate or regulate human emotions like that?
BECKY: Is there anything Washington can do?
BUFFETT: No, you can't do much. I tried on envy, various ways on compensation at Solomon. And I'm a failure at controlling envy. And you have to decide and you have to devise incentive systems for everybody that you work with.
And incidentally, that's one of the objections I have to the new bill on derivatives. I think it's a good thing overall, but I think that unless you change the incentives for the CEO and the directors of really large financial institutions, they have got all the upside and they don't have downside.
What director of any one of a half a dozen institutions we could name that have cost shareholders hundreds and hundreds and hundreds of billions of dollars who is really suffering financially? They may suffer in terms of losing prestige, but they are go away rich. The directors are still getting 200 or $300,000 a year. The CEO's still have their multiple houses and everything.
I would have something there if you run a large financial institution and you end up having to get saved by the U.S. Government, that you and your spouse are broke and that the directors pay a significant price themselves, not that drastic. And then you will change human behavior that way. You can change behavior by incentives, but you can't usually change behavior by sermons, although people try every Sunday.
BECKY: Do you have directors and officers insurance at Berkshire Hathaway?
BUFFETT: No. If Berkshire goes down, everybody goes down, and they should.
BECKY: Warren, just a final thought. Again, Goldman has been the biggest headline over the last several weeks. Where do you think we head next? What happens next at Goldman?
BUFFETT: Well, it's conceivable there's some settlement. There always is when two parties disagree on something like this. Otherwise, it plays out over a long period of time probably. You know, our Solomon -- Solomon took us nine months and four days. Nine months and four days. It felt like nine months and four days. Every day was painful. But it does play out over time.
BECKY: It does play out over time. Okay. Another question. One thing to take a look at is your thoughts on Moody's and the ratings agencies. You defended the ratings agencies or at least their business model over the weekend. Is this --
BUFFETT: Well, I said they have got a great business model. I mean they charge us a lot of money, and I can't negotiate it downward. I mean I can't say if Moody’s and Standard & Poor's want to rate Berkshire or I need their rating, I can't go to them and say: How about doing it for 10 percent less or I'll go to XYZ? They have got me. So they have pricing strength. And it's a business that requires no capital whatsoever. So here is a business with zero capital in it that has great pricing power. That doesn't mean I defend all their actions or anything, but it does mean that they have a terrific business unless it, you know, gets changed in some way by legislation.
I think they made the same mistakes that everybody else made. I think they had a model in their mind and actually a model on paper that said residential real estate can't fall off a cliff. And once they have the wrong model, they have got the wrong answer. But they were no smarter and probably no more stupid than most of the American public. And people may feel that they should have been smarter. I mean that was their business.
BECKY: All right. Well, warren, we want to thank you very much for joining us today. We appreciate your time.
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