Charlie RoseFrom our studios in New York City, this is Charlie Rose.Warren Buffett is here.As you know, he is perhaps the world's most respected investor.He's also chairman and CEO of Berkshire Hathaway.He has been on this program many times.I last spoke with him over a year ago at the peak of the worst economic crisis since theGreat Depression.At that time, he said that America had been struck by an economic Pearl Harbor.But much has changed since then, and he's here to tell us how he views a global andAmerican economy in recovery.His own company reflects the progress made in recent months.Last week, Berkshire Hathaway struck a $26 billion deal to buy all of Burlington NorthernSanta Fe Railroad, the largest acquisition in company history.He called the deal an all-in wager on the American economy.He's in New York for a town hall event that he held with Bill Gates at Columbia Universityyesterday.He graciously agreed to stay over in New York an extra night, and I am pleased to have agood friend of this program and a good friend of mine back at this table.Welcome.
WarrenThank you, Charlie.I'm pleased to be here.Great to see you.
Charlie RoseIt has been, certainly from the middle of 2008 to the middle of 2009, one incredibleyear.One incredible year.And one to a lifetime, I hope.Tell me about it for you.
WarrenWell, it really was an extraordinary time in this country.We came closer to a financial meltdown than certainly any time I've ever seen.And probably in certain respects, there was even more panic than the Great Depressionbecause it came on so fast and so unexpected.And the whole country wanted to deleverage, corporations, individuals, and fortunately,we had a government that responded.When we talked last, it was a little question of whether Congress would respond like theyshould.They did.They finally did.And I felt they would in the end.I mean, in the end, they come together for things that are this vital to the country.But we had the right people in Washington.If we'd had a group that had behaved like a deer in the headlights, that deer wouldhave gotten run over.So Paulson and Bernanke and Geithner were the right people at the right time, and youdon't know what might have happened if others had been in those positions of power.I can think of others.I'm not going to name them, but I can think of others where the ending would have beenwith us in the abyss rather than just peering down into it.
Charlie RoseYou made some investments during that period.
QuestionerRight.General Electric, Goldman Sachs.But you just pulled out the big elephant gun.Yeah, well, yeah, we may have used most of our powder.You said, I'd stretch to the last nickel for this one.Why did you do it?
WarrenWell, I felt it was an opportunity to buy a business that is going to be around for100 or 200 years, that's interwoven with the American economy in a way that if the Americaneconomy prospers, the business will prosper.It is the most efficient way of moving goods in the country.It's the most environmentally friendly way of moving goods.And both those things are going to be very important.But the biggest thing is, the United States is going to do well.We can't move the railroad to China or India, at least I haven't figured out how to do that.So it's a little like the song about New York.We have to make it here or we can't make it anywhere.But it does move a ton of goods 470 miles on one gallon of diesel.A train replaces 280 trucks on the road.It emits far less into the atmosphere that's damaging than truckings.And it moves 40% of the goods.And you have new port of entries like Houston that will bring in a lot of goods throughthe Panama Canal.And we're going to have more people in this country and they're going to be using moregoods over time.And sure, there's a bad year from time to time.In the next 100 years, there will probably be 15 bad years.And I don't know in what order they'll appear.But I also know the railroads will be essential to the country.
QuestionerWhen you called Charlie Munger and said, I'm thinking about this, did he say, writeon Warren?Or did he say, how about this?
WarrenWell, if Charlie, if Charlie said, write on Warren, I figured I had the wrong number.No, I mean, that would be the wrong number.That might be my wife.But Charlie, Charlie, Charlie, Charlie gave a kind of a low level grumble.And that is that is real endorsement for Charlie.But I mean, he also pointed out, it is said that, you know, there was this was a regulatedindustry.This was a regulated industry.This was an industry that was capital intensive.Very capital.This was an industry.You spend money unionized, it was unionized.You spend money in this business regularly every day.You're spending a lot of money repair track or, you know, add rolling stock, whateverit may be.So it's capital intensive.And and and it is it is regulated and it will continue to be regulated and continue to becapital intensive.
WarrenI think that what the service provided by railroads is so important in many ways. I mean, it it's the right way to move goods around the country to the extent that you can do it. And it's far, far more attractive in terms of global warming than than using trucks, for example. So it will be here. And if we get a reasonable return on the added capital investment, because it'll take out a capital investment, we'll do OK. Reasonable returns. Good enough. Reasonable returns. Good enough. I mean, you know, 50 years ago, I was looking for spectacular returns, but I can't I can't get them. You know, I mean, we have we have eight or 10 billion dollars to invest every year. And we're in the utility business. And it's the same thing there. I mean, when we build electric generation or something of the sort, we shouldn't expect a spectacular return. We're building things that are essential to society and and. People need our services. They really don't have any choice in the in the case of the electric utilities, for example, and sometimes in case of rail. And we should get a decent return on that. I mean, it's enough to encourage us to keep putting money into the business, but we're not entitled to spectacular returns.
QuestionerYou carry coal. Well, that's a that's a big one in terms of tonnage.
WarrenYeah. And if the fact we wean ourselves off coal, is that a big problem? Well, we will wean ourselves off coal over time. But we can't change 40 percent of electric generation that goes if comes from coal. We can't change that next week or next month or next year. But we will reduce it over time and we should reduce it. You can add other things to carry and changes. There will there will be more grain to move and there'll be more of all kind of chemicals or whatever it may be. There will be more things moving around this country 10 or 20 or 30 years from now.
QuestionerKnowing your idea about moats, is it a pleasing idea that no one is likely to get into the railroad business?
WarrenWell, if they want it, if they want to reproduce the Burlington Northern Santa Fe, it might take a hundred billion dollars or so and a hundred billion years, they'd have to be a real sport. And they also modernize today. Are they not? Enormously, enormously. The the the railroads, take a railroad like BNSF, they're moving far more ton, ton miles of product with less, less in the way of people, less in the way of fuel railroads become far more efficient over the years. There were there were a million and a half people employed in the rail industry after
QuestionerWorld War Two.
QuestionerNow there are about less than 200,000 in the United States and they're moving far moregood.So it's really become efficient.You watch those hundred and thirty unit trains double stacked.You had other railroad companies in your portfolio, right?You're selling them.
WarrenI've already sold them.Yeah, I've done that just to facilitate the transaction.I think I think they're good investments, but I would have held them if this hadn't happened.
QuestionerWhen you look at the future, there's also the argument made that that this is somethingthat goes with your philosophy today.Get out of cash and get into assets because we don't know what's going to happen to thedollar.
WarrenWell, cash is always a bad investment.I mean, when people said cash is king a year ago, I mean, that's crazy.I mean, cash wasn't producing anything and it was sure to go down in value over time.And then you always want to be sure you have enough.I mean, it's like oxygen.You want to be sure it's around, you know, but you don't need to have you don't haveexcessive amounts of it around.On cash, we will always have enough cash around, but anytime we have surplus cash around,I'm unhappy.I mean, I would much rather have good businesses than cash.And we found a chance in the last year or thereabouts to deploy.We came in with something over 40 billion in cash and we've got about 20 billion nowand we've had some earnings.So we put a lot of cash to work.And I like that.No, I'd much rather own a good business than have cash.And it is a hedge against the dollar.
QuestionerWell, you can say all assets are a hedge against the dollar.I mean, all you know is that the dollar is going to be worthless 10, 20, 30 years fromnow.
WarrenI say worth less, not worthless.Right.You want to watch that.But it will be, you know, and that's true of almost every currency that I can thinkof.The question is how much it depreciates in value.But cash, cash is not a place to have.Now why is that?Well, because the dollar is going to be worth less because we'll print more of them in relationto the amount of goods that are moving.You know, if we if we dropped if we dropped a million dollars of cash into every householdin the United States today, everybody feel very good except the people that investedin things that were denominated in dollars.There will be no tendency toward deflation in this country over time or in virtuallya tendency toward inflation.Absolutely.
QuestionerAnd in all the conversations we've had, I never thought that I would sit with you andwe would talk about a 50 to one split of the class.Stop.Right.I mean, this had to be a hard one or not.
WarrenI think I had a lobotomy one night and I didn't know about it.It is.It is not.It's not natural for me.But but it it was needed to facilitate the small shareholders of BNSF getting the samedeal as the big shareholders.
QuestionerWill it also qualify you for the S&P index?
WarrenWell, it probably makes it a little less, a little more likely over time that we getinsured and makes it easier for for S&P, because we're by far the largest company that's notin the index.And and we'll probably my guess is that they'll consider us more like that.I certainly wouldn't mind it, but I but I don't.But I mean, it's not it's not it's not on my wish list or it's not on your high lustlist.
QuestionerNo, no, no, no.
WarrenThe big thing is what happens to the value of the company and the shares will take careof themselves if we build value.
QuestionerWhen you when you look at that, the railroad business, it has a romance to it.You had a railroad track, I guess, in your attic, didn't you?
WarrenI still do.I still do.I hope they don't make me sell it for antitrust reasons.Take a look at this tape.My heart's beating faster.I'm watching that.I had to throw in Grace Kelly and Marilyn Monroe.I would have paid more.
QuestionerJ.P. Morgan also on the railroads, didn't he?
WarrenYeah.And he was facilitating.In fact, in fact, there was a huge fight over the northern Pacific, which is one of thepredecessor roads.And and you had you had two factions and Morgan was lined up on one side.
QuestionerYeah.No, no.He was he was very involved.
QuestionerLast night at Columbia, you said that the economic panic is over.Where do you think we are?
WarrenWell, I can tell you where we are today.I can't tell you what's going to happen tomorrow, but we've got 70 some businesses.So I get a lot of the panic is over.I mean, now money is flowing.I mean, because we're in a recession, there's not as much demand for money and money isn'tflowing to really dumb projects like it was a few years ago.But money is available now.And the panic is gone and credit for spreads have come down dramatically.That that panic that spilled over into the real economy last fall, really, as it's leftit's left real scars on the American public psyche.I mean, the the reset of how they spend their money and how they're thinking about theirfuture change in a big way last fall and that that has not come back.
WarrenAnd so in our businesses, they bottomed.But they're not.There are very few upticks.It's more or less flat right now, but it will come back.
WarrenCharlie, I don't I want to emphasize that.But it is.But it's not changed much so far.
QuestionerDo you have any sense of timing about that?
WarrenI really don't.I mean, you know, I keep watching and it will come back and people are not panicked anymore,but they're behaving differently than they did a year ago and they're more taking lessrisk.They're taking less risk and they're worried about their future.More people are.You know, they have they have seen something happen that they didn't know wasn't reallyin their scope of what they thought was possible.
QuestionerYou have said for a long time that we are too much of a consuming society, not enoughof a saving society.Will we now become a saving society?
WarrenYeah, we'll we'll probably become a saving society, but of course, the government demandsfor borrowing will be such that that even with a lot of borrowing from abroad, therewill be a lot of borrowing required from within the country.
QuestionerWhere is the consumer demand going to come from?
WarrenWell, it it will come back eventually.I mean, we you know, our system will still work, but but we have you know, we talkedlast year about the patient, you know, being on the floor with a with a cardiac arrestand and we're not out of the hospital yet, but we will come out of the hospital.The things that made America what it is have not disappeared and they will they will assertthemselves with time.But if you have way too many houses, you know, it's going to take time to work that off.If you've got a commercial real estate problem where people just borrow too much money andbought in at too low of cap rates and all of that, that does take time to work off.That's happened to us in the past, though, to it happened in the 19th century.It happened in the 20th century at various times, and we've always come back stronger.
QuestionerCommercial real estate is really in trouble.It's a mess.You're in the underwear business.You're in the ice cream business.You're also in utilities, right?There was even a depreciation in demand on the part of for electricity.It's amazing.We're in both Iowa and Midwest, and then we're also out in the Pacific Northwest and themountain states and and everywhere you expected to see a big drop in industrial demand.But if you take weather adjusted behavior of residential customers, it fell off.
WarrenAnd it was like nothing we've seen since World War Two.You know, it doesn't mean that it goes down 20 percent in residence or anything, but thiswas an absolutely different experience than anything we've seen since World War Two andresidential usage.
QuestionerIs one of the things that are going to come out of this crisis that the demand for products,somebody else is going to have to shoulder that demand, create that demand other thanthe American economy?
WarrenNo, the American the American economy will come back.It won't be tomorrow and it won't be exactly the same.But in the end, we have not we've not changed the American people in their capacity to innovateor their excitement about about becoming more prosperous and coming up with new ideas.Businesses will be formed.Businesses will expand, but not not much tomorrow.
QuestionerYou have said we may need more medicine, meaning more stimulus, more.
WarrenWell, we had a lot of medicine and we're going to have a lot of aftereffects from that.We'll talk about that.But the, you know, the stimulus was not perfectly executed.Nothing's perfectly executed.I mean, that shouldn't be criticizing.But why shouldn't it be criticizing?We don't learn from that.Oh, yeah.No.But I mean, I overall, if they get the job done, I don't believe in picking too muchat a given given actions.But, you know, there should have been more infrastructure in there and they hung a Christmastree on it.As I said, it's sort of like mixing a half a tablet fire with candy.I mean, it would have been better to leave out the candy and have the full ticket.
QuestionerBut do you think we need a new stimulus because the other one, the previous one, the onlyone was flawed?
WarrenNo, I think we can reserve judgment on that.I think just the holiday season will tell us something when it comes.And I would say that so far from what I've seen, you know, I don't think it's going tobe that that big a holiday season.But we'll know.We'll know that in a month.And let's see what happens on that.
QuestionerYou've also said that America will still be the best place to invest your money.
WarrenAbsolutely.In terms of American companies, in terms of everything.Yeah.I mean, you know, if you look back a couple hundred years, we've gotten where we are,not because we've gotten smarter or not because we work harder.We've got it because we found ways to unleash more of the human potential.And what does that?A rule of law helps.A market system helps.Equality of opportunity helps.
WarrenAll of these things that are still a fundamental part of the American system.As a matter of fact, the American system now is better than it was a couple hundred yearsago because until the 19th Amendment, you know, we had half the talent in the UnitedStates that wasn't entitled to do much.So we've got a great system.But what's happened is that the rest of the world, especially China and India and placeslike that, have grown and have enormous potential now and that are growing faster than we are.That's terrific.That's terrific.Yeah.It means the pie is bigger.Sure.The world is not a zero-sum game.I mean, if we had our choice of being an island of prosperity in a world of six and a halfbillion people, most of whom were struggling, or being the same country with other peopleprospering, the latter is much the better choice, particularly in a nuclear world.You do not want billions of people in nuclear combat, envying you and feeling that somehowyou've gotten all the goodies of the world.So we will grow slower relative to a China, significantly slower, but they're startingfrom a much lower base.But at some point, mid-century, they'll have a larger economy than we will.It's going to be a long time.
QuestionerYou don't believe that, though?
WarrenWell, larger on a per capita basis is a long way off.Not only per capita, but a larger gross economy.They'll have a larger gross domestic product than we will.If they have four times as many people as we have, they will have a larger overall economy.No, they will grow faster than we will grow, but they're starting from a much lower base.I mean, I'll meet some guy on the street today whose net worth will be growing faster thanmine on a percentage basis, but if I start with a big enough number, it'll be a whilebefore he catches me.This is also different for China.They now have certainly, you are invested in a Chinese automotive and battery company,of which the founder, a 43-year-old entrepreneur, is somebody that you would admire whereverhe was from.That's right.And some of the things...
QuestionerHe has a bit of you in him.
WarrenWell, he speaks Chinese, I don't know.That fellow's probably going to do remarkable things.He's the richest man in China now.That's right.But if he does remarkable things, that's going to be good for the United States.I mean, if he develops better battery technology, we will get it, believe me.Okay, but there's the question that's being raised.
QuestionerIn the past, the United States has always been on the cutting edge of technology. Your great friend Bill Gates made his testament to that. But are they developing the capacity? He's going to lead in batteries. Somewhere else, they say China's going to lead in solar technology. Somewhere else says they're doing more with it. I mean, is this... Well, we don't know. Are we looking at that hard reality?
WarrenIt's better to have the whole world, the talent of the whole world working on things like battery technology or whatever it may be. I mean, I'd like... If we can add the resources of a whole bunch of other people to help solve our problems, I'm all for it. If we get there first and they copy us, fine. If we get there first and we copy them, fine. I mean, it is not like they're going to be able to hoard the technology and we'll never see it. So, you know, I'd like to see the United States come in first on everything. But I don't think it'll be terrible if somebody in China or India comes up with something that enables this country to deal with its problems. We'll get the technology. It may very well be that the world will be waking up. I saw today that President Medvedev basically said in a sort of stern message to the Russians that we can't just depend on the export of oil and energy. We have to begin to think about how we restructure. All the things sound like an American speaking about the economic reality of today. And the reason he's saying that is because it's so darned obvious. I mean, you know, they did count on oil. They've been counting on it too much. But the beauty of it is, you know, we don't have a monopoly on the system. I mean, we can... A market system can exist elsewhere and that does cause people to work on things that other people want. You know, it's much better than having a central planner.
QuestionerWhen you look at today and what we face in terms of the job reality, are we going to have the capacity to create the kind of jobs or will we have to settle at a new unemployment rate that we're not familiar with?
WarrenNo. We'll create new jobs. I mean, we've been through all kinds of tough unemployment cycles, in the early 80s being probably the toughest. It really looked tougher for the... not in the finance world, but in 1981, 1982, you know, we were 10% unemployment and Volcker was applying, you know, a battle ax to the economy and people said, you know, Germany and Japan are going to produce everything.
WarrenWhat will happen with this country? We've created millions and millions and millions of jobs since then, you know. Who would have thought when Paul Allen and Bill Gates were down there in Albuquerque, you know, eating pizza, drinking Coke at two in the morning, you know, that they were a big part of our future. But that's going on right now. I mean, who would have thought the Google guys were doing what they were doing, you know, a few years back? We have... we can't predict what it'll be. I sat there in that room in Columbia last night with a thousand people. If we'd had the same thousand people back in 1790, I'd given some pep talk like this and they'd leave the place and they'd all go back to their farms and say, that's fine, but, you know, what the hell are we going to do, you know? If farm implements get better where there's no jobs, well, they wouldn't have been thinking about the automobile and the airplane and the electric, all of that. I can't tell you what it'll be, but I can tell you it'll happen.
QuestionerYou have also said and been very clear that you think in this conversation and every other one, you know, that we had to pour a lot of money at a crisis. And we may very well have presented ourselves with a problem that is as difficult as the crisis.
WarrenWell, when you use old medicines in unprecedented dosages and even invent some new medicines as we had to do last fall, you know, there are side effects and after effects. And probably they're somewhat proportional in certain ways to the extreme nature of the dosages. So, you know, we cannot keep running fiscal deficits like we are currently without having a lot of consequences over time. And $1.4 trillion for 2009.
QuestionerYeah, well, you know, even for a guy like me, I mean, a trillion gets my attention.
WarrenSo, you know, that has consequences. And we are not saving $1.4 trillion to finance that deficit. And we faced huge deficits in World War II, I mean, relative to the GDP then, to fight a war. And there were inflationary consequences after, even a little bit during the war. So inflation is inevitable because of the amount of money we've poured on the problem. And then the question is whether, and basically it's Congress. I mean, in the end, Congress is the one that determines the value of the dollar over time. If they follow policies that require us printing too much of it, monetizing debt and all of that sort of thing, dollars will become worth a lot less.
QuestionerSo Congress has to do what?
WarrenThey have to, once the economy is rolling again, they've got to apply some, you know,they've got to raise taxes.Now, the income will go up as the recession ends anyway.But they're going to have to close the gap between expenditures.They've got to find more revenues.They've got to.The expenditures is a harder thing to do than the finding the revenues, isn't it?
QuestionerWell.I mean, go ahead, tell me.Which is easier, cutting the expenditures or raising the revenue?
WarrenThey've got to do one of the two, because the gap between the two, you know, is as wideas the percentage of GDP.It's wider as a percentage of GDP than we've ever seen, except in wartime.It's now at what?Ten percent?
QuestionerYeah.That's exactly.Just a touch over ten percent, the gap.And that's huge.What's acceptable?Six?Five?
WarrenWell, no.It was at six during Reagan.No, no.We can work.If we have a gap of about two, two, two and a half percent, and we have sort of normalgrowth, then debt as a percentage of GDP doesn't grow.So the country gets more valuable over time, and we have more productive capacity.So we can handle more debt, but it should be proportional to, in a sense, the wealthand earnings of the country.And we can take a couple percent gap over time and have that debt not grow proportionally.The net outstanding is about 55 percent of GDP now.Nothing wrong with that.What you don't want to do is keep climbing.And at a point, it gets out of control, and interest on debt compounds and all of thatsort of thing.But of course, in good years, if you're going to average two percent, you better not havetwo percent be the base, because you'll get into years like this with ten percent, andit'll pull the average up a lot.
QuestionerThis question is asked frequently.Will at some point the deficit and the debt and the decline of the dollar get to a pointthat people who hold our debt will no longer want to buy it, and then we're in a crisis?
WarrenWell, the rest of the world doesn't have much choice, in a sense.I mean, if we, if our current account surplus, deficit, is 400 billion, we're handing 400billion of dollars to the rest of the world.They've got to buy something with it.And one way or another, they have to buy something in dollars.I mean, if they get those dollars and they buy government bonds of the United States,and then they decide to sell them to buy stocks, you know, they still get dollars when theysell the government bonds.
QuestionerThey can choose among assets.They can't really choose not to invest in the United States.But they can choose as to where else they go for new investments, can they not?
WarrenWell, in effect, if we're running a 400 billion dollar deficit, pick a figure, the rest of the world is getting 400 billion dollars worth of IOUs of one sort or another in the United States.Now, if they invest that in France, let's don't say the Chinese buy stuff from France, now France has got the dollars.I mean, the only way you can bring down that is to actually get rid of the current account deficit over time.But in any event...
QuestionerAnd that's having to do with the costs and savings, the consumption savings rate.But if you run a 1.4 trillion dollar deficit, even if you are exporting 400 billion dollars of IOUs and affect the rest of the world, that leaves another trillion.And you know, the domestic savers are not going to come up with a trillion.So these numbers are unsustainable over time, what we're doing.
WarrenIt is true, though, that if you keep flooding the world with your debt, and people see your fiscal policies are sort of out of control, they're going to get less and less and less enthused about your debt.And then one of two things happen, either you keep paying more and more to roll over that debt, or you start monetizing it like crazy.I mean, the Federal Reserve can buy the debt and issue currency for it, but then the currency gets worthless.
QuestionerCan you just describe the reality we're facing if we don't do something dramatic soon?Fairly soon.And we still want the economy to come back.I mean, we want to put out the fire, you know.But then make sure...So we'll worry about that later, after we put out the fire.Then we want to quit squirting water on those buildings.We have to know when the fire's out.How do we know that?That's my question.
WarrenOh, well, we will know.Unemployment will top out late.But we'll know when the economy's really coming back.But what will be the indication of that for us?Well, it'll be retail sales, it'll be automobile sales, it'll be when home construction starts coming back.And there'll be plenty of economic signs.They may be a little late in getting recognized, you know, the debt comes in a little late.But we'll know.We'll know.We won't know when the turn happens, but three or four months later, we will know it's happening.And it's inevitable that's going to happen in the next year or two, or later.
QuestionerWell, I like two better than one.
QuestionerBut when you say inevitable, that doesn't mean it can't happen earlier.
QuestionerI mean, what would you worry about that we might not come back the way we ought to, that somehow there have been repercussions from this that will have lasting impact?
WarrenWell, there'll be some lasting impacts of certain types. But in terms of coming out of it, I don't worry.
WarrenNow, if you had some big exogenous event, if you had a major, either by a country or by terrorists, sort of a 9-11 squared or something, a huge anthrax attack or something like that. Or oil went to $250 a barrel or something like that.
QuestionerOil goes to $250 a barrel.
QuestionerThere can be certain exogenous effects that could...
QuestionerSo that kind of thing would worry you the most.
QuestionerIt's likely to happen.
QuestionerOtherwise...
WarrenYeah, a huge... I mean, if for some reason another 5 million barrels a day of oil out of the 85 million barrels got shut off and more or less looked like permanently at the time, you know, there'd be a lot of disruption in this world.
QuestionerWhen you look at the lessons we have learned, one was, as you have suggested, way over leveraged.
QuestionerWe also experienced a bubble, a housing bubble.
WarrenWe will have other bubbles.
QuestionerWe'll have other bubbles.
QuestionerI'll guarantee you.
QuestionerAre we going to go back to the same kind of leverage?
WarrenNot for a while. We learn lessons and they last for a while, and the deeper the wounds, to some extent, the longer they last.
WarrenI was a beneficiary of that. I mean, I got out of school in 1951, and all my competitors were still worried about the Great Depression, and my memory wasn't good enough, so I had forgotten.
WarrenSo this will have an impact on thinking for quite a while in certain respects. But fear, greed, folly...
QuestionerNot going to change.
WarrenNo, we haven't.
WarrenWe haven't gotten rid of those.
QuestionerWe get smarter in all kinds of ways.
QuestionerWe don't get smarter emotionally.
QuestionerWhy is that?
WarrenIt's just the way the human animal is put together. The memory fades, and all of a sudden, the new temptation is there.
QuestionerYeah.
QuestionerPlus, being greedy can be fun for a while.
QuestionerLeverage can be fun when it works.
WarrenLeverage is one of those things that works 99 times out of 100, and when it doesn't, it's all over.
QuestionerHow do you explain the fact that you always enjoyed making it more than even spending it?
QuestionerYou enjoy making it and investing it, but not necessarily spending it.
WarrenWell, I have everything I want in life, so there's nothing to spend it on. I could have ten houses instead of one. Would I be happier?
WarrenNo way. I could have ten cars instead of two in the house. I wouldn't be happier. It would drive me crazy. I could have a 400-foot boat, and then I'd have a crew of 50 or 60, and some of them would be stealing from me, and some of them would be sleeping together. I mean, who knows what would be going on? If I wanted to be a ship's captain, I'd have gone into different professions. I have everything in life I want. And what you enjoy doing is studying where we are and understanding, trying to do the kind of analysis through conversations and reading and figuring out. I love working with the people I work with. I love just viewing the human scene, but I mean, I have an ideal life. I get to do what I want to do every day, and money can't buy any more than that.
QuestionerWhat do you think of value-added tax?
WarrenWell, I basically don't like it because it's somewhat akin. It isn't the same, but it's somewhat akin to a sales tax. It's regressive.
QuestionerYeah, it's regressive.
WarrenAnd, you know, we don't need more regressive taxes in the United States. That's why you don't like cap-and-trade.
QuestionerYeah.
QuestionerWell, that's right. In terms of the way it falls on people, absolutely.
WarrenI think that if we're looking for more money, we ought to look to guys like me. I mean, I am still paying a lower rate on dividends and capital gains than my cleaning lady is, you know, in terms of her payroll taxes to start with. And so I just think that we've gotten so far out of whack in terms of who's been prosperous in recent years, and most of the economy, most people have been left behind, you know. So we learned that a rising tide lifts all yachts, you know.
QuestionerBut there are not a lot of guys like you to start with.
WarrenWell, there are some.
QuestionerWell, but you're at the top of the list there with you and Bill.
QuestionerBut there is also this. What is an appropriate rate of taxation of people like you before, as some conservatives argue, you began to somehow inhibit growth?
WarrenYeah. Well, I worked through all kinds of systems of taxation. And I worked with rich people, you know, even in the 50s, but the 60s. And I worked with them when the top rate was 70 percent. I worked with them when capital gains rates were 39.6 percent. And not one of them said, you know, it's one o'clock, instead of working this afternoon, I think I'll go to the movies because my marginal rate is so high. I mean, if anything, they worked harder, Charlie. The reason I got rich is because they worked hard. I never had one person.
WarrenI had hundreds of people, you know, in the partnership. And not one of them ever came to me and said, Warren, I've decided to hell with it, 39.6 percent. I'm not going to invest my money. What would they do with it? Stick it under a mattress? Does that mean that the American system is, in a sense, a bit unfair and geared to the rich? Well, I think it has become more geared to the rich as time has gone by. And I think that the rich have, you know, obviously a disproportionate impact, you know, on how Congress behaves. And, you know, you have to have money and policy basically have to if you have a very rich country with a great number of super rich, you have to fight against a plutocracy. I mean, you know, the the Congress has to be your bulwark for the democracy, the principles of democracy to win out over a plutocracy. And we've done that well in this country. But it's a it's a constant fight. I mean, you know, K Street is not populated by a whole people, a whole bunch of people who represent my cleaning woman. And but if you look at the Forbes 400, you'll find that, you know, they find their way to K Street and it finds its way to them. Sure. They have multiple voices on K Street. Sure. They care. So what would you do about that? Well, it's always a problem. And you want a prosperous country, so you want a whole bunch of rich people. But you also want everybody to do reasonably well in something as prosperous as we have. We have forty five thousand dollars of GDP per capita in the United States. But we've got we've got almost 60 million people living in households where 20 the top income is 21000 or less. That's the top of the 60 million people. So we can do better. Now, we have done better over time. I mean, we put in Social Security and we've done things in the country that have worked in the direction of Medicare, Medicaid. Yeah. But a prosperous country should not just be prosperous for the people like me who are wired in a particular way at birth. No credit to me. But I happen to know something about capital allocation and wasn't, you know, I could have instead I could have been I could have been wired, you know, so I was, you know, a great ukulele player. But there's more money and you can be both. Yeah. Well, not this case anyway. But there's more money in what I do. And you don't want to mess up the market system that works to bring out of people what their best talents are. But the market system is not perfect in any kind of distribution wealth.
WarrenAnd taxation is a way where you get to the the excesses of what the market system producesand where you take care of the people that get the short straws in a country as prosperousas we are.Nobody should get a really short straw.You know, some people are going to hear you say that now and say, Warren's talking aboutsharing the wealth.There he goes.Yeah.Well, I'm talking about sharing the prosperity.There's no question about that.I am prosperous because of society around me.So if you stick me down in some poor country and I'll walk around saying, I allocate capital.And I'll say, so what?You know, what we need is a guy with a strong back, you know, and I don't have a strongback.Can you row a boat or something?Something like that.So so society.Listen, when a couple of middleweights find it out on pay-per-view this weekend, you know,and get forty nine ninety five from me or whatever it may be.And I can't remember their names.Two weeks later, you know, they are benefiting not not because of their own talent that much,but because some guy invented television and then invented cable television and learnedhow to change a stadium of fifteen thousand people into a stadium of three hundred million.So they benefit from society.We all do.And some like me benefit enormously from society.You know, I can't do it by myself.Stick me on a desert island, you know, and you do not want to be on that same island.
QuestionerThere is this also the Bush administration says that when the economic crisis came, theytreated it with a tactic which was doing what they did.They worry that what the Obama administration is doing is a strategy to put in place a differentattitude about the relationship between the government and the economy.
WarrenYeah, I don't think the Obama administration wants the government to take over the economy,but they did.They took on a situation and instantly I give credit to the Bush administration in thatlast four or five months of 2008.I mean, a lot of right things were done.I mean, when when George Bush said, you know, if money doesn't ease up, if money doesn'tease up, the sucker can go down.Now, that was one of the most profound economic statements ever made.I mean, he became the economist in chief, as far as I was concerned at that point.But they so I give them credit, too.But the Obama administration, they're not running General Motors because they want torun General Motors.I mean, it's like the Barack Obama group was a great itch to run the whole American economy.
OtherThey're doing well.
OtherHe might want to buy a railroad.
WarrenWell, that's going to be a fun game for me.
OtherBut go ahead.
WarrenThat's a good point.
OtherThey are doing what is necessary, in their view, to get this economy right.
WarrenAnd like nobody makes perfect decisions on this. And they're doing things I'm sure they don't like to do. I don't think they want to run General Motors, you know, or Chrysler or anything of the sort.
OtherOr own AIG?
WarrenNo.
OtherEspecially own AIG.
WarrenYeah. That is no fun.
OtherOr pop up Freddie and Fannie and all that sort of thing. So all these people who think that somehow there's some new idea about, and they usethe word socialism, but something else in terms of, you don't buy that.
WarrenBarack Obama wants a much more prosperous economy, embodying the principles that havemade it prosperous. But I think he does want to make sure that the bottom 20 or 30% does better than it'sdone in the last 20 years while the top has prospered so much.
QuestionerThat brings us to the question beyond whether Congress has the will or not. There is this idea, which is how do you create a new regulatory platform and architecture? And you've got, on the one hand, the administration comes in and says, let the Federal Reservedo it. Then you have Chris Dodd says, no, no, no, no, don't do that. And then Barney Frank says, I'm somewhere halfway in between. Where is Warren Buffett?
WarrenI am 100% for the independence of the Fed. I mean, if you have a central bank that is bowing to the will of Congress, either directlyor indirectly through some of the various mechanisms, it would be a disaster. It wants to be in on that monetary decisions or oversight or whatever. You've got to hope you've got a good Fed chairman and some good members. And we've done that generally. If Paul Volcker was, you know, he was essential to this country coming out of that 1979, 82period like we did. Ben Bernanke was essential to keeping us from going into the abyss last. We need an independent Fed. I think every country needs an independent central bank.
QuestionerBut does that mean they should be the regulator as well?
WarrenWell, everybody has to regulate. And banks do need regulation. Do we need one regulator, one big regulator that will?
QuestionerWell, if it was me, I would like it.
WarrenI mean, because you need you need somebody that doesn't have a big stick. I mean, left to their own devices, people will take on too much leverage. They may not this year or next year, but financial institutions, particularly if they're promising
Warrenthey're going to increase their earnings per share every quarter and they'll do off balancesheet things and all of all of these sins that were committed a few years ago.You know, Freddie and Fannie did a lot of them, too.And they were regulated by 200 regulated marching in the office every day.So we've had Congress regulate the two of the five or six most important financial institutionsin the United States.And it was a total flop.So it's tough being a regulator.But you want somebody that is independent, somebody that's got real muscle and hopefullysomebody that has an understanding of what you need to do to keep the system workingwell, too.And that's the Federal Reserve.I think they're good at it.They weren't perfect this time around.But Congress wasn't perfect either.But once the problem came, they responded and you had untold admiration for Bernanke.If he hadn't have had the authority he had.And maybe if he even hadn't thought he had a little more authority than he even did havelast fall.I mean, there's something to that, you know, I mean, you had to have somebody that wouldstep up, guarantee money market funds, you know, keep commercial paper flowing, do thesethings that not many people could have done.And certainly Congress couldn't have done them with the speed, you know, and speed wasabsolutely essential.I mean, you did not have a lot of time to save this patient.And they understood that.And they really understood it.And reacted and gained a lot of power and used it.There's also this, you cannot establish a particular leverage ratio.Can you?You can't say that 15 to one is as far as it should ever be.If you have a bank that owns nothing but short term government bonds, they can have 50 toone.And if you got them, you know, they've got a whole bunch of money lent out to other guyswho are leveraged in various ways and various speculative things.Five to one is too much.So pure numbers don't work.So what works?That's the problem.That is the problem.No, I mean, if you could just think a bunch of ratios out there, it'd be all over.But what works?I mean, it's the problem.Give me a possible way of dealing with the problem.I would like to have a very smart, strong regulator that understood the nuances of differentkinds of leverage and what it might mean.And one who would be willing not only to use those rules at individual institutions,but who would speak out to the country, can't speak out too often and have it meaningful,
Warrenbut who would speak out to the country about a generalized problem, because that's whatwe needed.It wasn't the fact that it was Bank A or Bank B or Bank C. What was happening was that youwere having a bubble that everybody was joining in and speaking out on that, which requiresa lot of guts.
And they even get ignored, although if it comes from somebody that is running the Fedor whomever, or the President of the United States, I mean, there can be people that willhave an impact on that.
QuestionerYou've said that you're not in favor of too much coddling and that you'd like to see thestick used more.
WarrenAbsolutely.
QuestionerTell us what you mean.
WarrenWell, what I mean is that if you run a financial institution, and it's financial institutionsoverwhelmingly that do tend to create the problems, because there's this aggregationof capital, if you run a financial institution that, in effect, can bring down the systemunless the federal government steps in, you get to that point, I think something verybad should happen to you.
I don't think you should walk away with a lot of money or even with 10% of your previousnet worth or anything of the sort.
And I think the directors who selected you and let you operate in that manner shouldhave some real downside.
I'm not for shooting them, but I think I want to make it painful for them.
QuestionerSo painful would be, what, they can't buy insurance?
WarrenNo.
Well, I would probably have, in terms of the very large financial institutions, that ifthey had to go to the government, and the government had to act, because there are goingto always be too big to fail institutions.
It drives regulators crazy, but that's the reality of it.
And if an institution comes in and says, if we go down, we're pulling the whole countrydown with us, I think that the directors and the CEO of an institution like that, I thinkthe directors say, you certainly have to give back, you know, they should, five times thehighest fee they've received in the previous year, because you're sitting around thoseplaces now getting $200,000 to $300,000 a year, you know.
And all I want for my $200,000 to $300,000 a year is somebody that is selecting and designinga compensation system for the person they put in charge, the CEO, who should be thechief risk officer.
And I want them to have a system that penalizes that person very, very significantly.
And if they don't create that kind of, if they pick the wrong person, or they let that
Questionerperson go off the reservation, I want them to pay also.All right.
So, let me just, you want there to be a penalty for directors who do not do their job.
But you recognize that there are going to be financial institutions that are too big to fail.
It has been and will continue to be.
And you can't simply say, we're going to let anybody fail, no matter how big, no matter what the consequences.
WarrenNo, we're not.
You've just got to have a mom-and-pop bank on every corner, and it isn't going to work.
QuestionerDo you think that the financial community has any sense of, of, I'm sorry?
WarrenWell, most of them didn't do it, I mean, in the sense that if you take the leaders of these institutions that got them in, a lot of them are gone.
Now, they're gone with more money than I would like to have them gone with.
But I think what's infuriating to the American public, if you take the people in Omaha, you know, they have, they have seen lots of unemployment.
They've seen, you know, many cases, their, their homes or their friends' homes foreclosed.
They've seen all this, these things happen to them.
And you know, nobody's gone to jail.
And as far as they're concerned, the leaders of institution A, B, or C that, that have in a big way contributed to these problems, you know, they may be worth $10 million instead of $100 million or something like that.
But they don't see anybody going to jail.
They don't see any, they don't see anybody being held very responsible for it.
And they don't believe that if they were in the same place, a much lower investment, that anybody would have come along and taken care of them.
QuestionerWell, yeah.
And, and they're right about that.
WarrenI mean, if I, if I have a tiny little business that fails, it doesn't affect the United States.
But if you have Freddie Mac and Fannie Mae and-
QuestionerOr AIG or Citicorp.
WarrenYeah.
And they, they would have affected.
I mean, we, we could not stand those dominoes falling.
And it drives people crazy that we couldn't, but we couldn't.
I mean, if those, if a few more dominoes had fallen, if that weekend of September 12th, the 14th or whatever it was, if one more domino that, uh, you know, Merrill Lynch going, Morgan Stanley would have been next.
The dominoes were so lined up and they were so big that it-
QuestionerWithout the government, they would have gone down.
They would have gone down.
WarrenBut bear this in mind.
They talk about moral hazard on this.
There isn't any moral hazard.
If you look at Citi, 90% of the market value has disappeared.
WarrenIf you look at Freddie Mac, 90% of the market value of the common, more than that.Look at AIG.Fannie Mae, AIG, all of them.So the stockholders have gotten totally creamed.The owners have gotten totally creamed.Uh, so it's not like anybody that was a stockholder of Citi or Freddie or Fannie or AIG or youname it is thinking, ha ha, you know, the system's going to save me because it didn'tsave them.It, it, they got killed.But the guys at the top did not get, you know, in most cases did not get killed and they'rethe ones that made the mistake.Should they have gotten killed?So it should have been harder.So how would the government have done that?I would probably have something with those kinds of institutions where no one got richfrom running an institution like that until about five years after they left.I mean, uh, I, I'd have had a very restricted and I have clawbacks and I, I, I'd be plentytough and I'd be tough on the directors if they hadn't put in those kinds of arrangements.They say that now.If you listen to the financial executives today, they say we're in favor of clawbacksand we've, we've instituted those kinds of things.I don't know whether they have, well, they, they've done some, but I'd probably squareit.You make it exponentially better.And I wouldn't let them buy against this sort of risk.I wouldn't let them buy directors, officer insurance, liability insurance.We don't have that at Berkshire.You know, I mean, if our shareholders are going to go down, I want me to go down withthem and the directors to go down with them.I mean, you know, we've taken on the job and, and, and, uh, you know, if the ship goes down,we should, we should not get the first light bulb.
QuestionerWhen you look at that year, this is a book by Andrew Osorio, it's a very good book.You're in there moments for you.I mean, you were at the other end of phone calls from people who, who wanted money andin some cases advice, but mostly money.They take money before there's a choice between money and advice, right?They'll take money.So they mostly wanted money.You know, are there moments you look back and what you said, no, that you might've saidyes.I mean, do you have any sense of, you just call you?I know you do.I mean, it's just like standing there at the plate.That pitch comes here.You got to have a second to decide whether to swing, you know, no, I know you're nota man to agonize, but I mean, have you, I mean,
WarrenOh, I could have done way smarter things.
WarrenNo, I, I did not optimize the period because you had money and they needed money and theywould have given up a lot for that money.
QuestionerYeah.
WarrenPlus the bottom of the market was six months later and it was significantly lower.So if I just save the money, just put in the market six months later, I'd have done waybetter than making these deals.But I didn't know that at the time.So you said I'm optimistic, but I'm not sure my optimism is justified.
QuestionerWell, I don't try and pick bottoms.I really, when something, when I got a call and it makes sense and I've got the money,I do it.You know, and I don't think I can do this better tomorrow or the next day or that sortof thing.And, but most of the things didn't make sense.But here's something else you've taught me as well.You don't get that many swings at the bat.Not with big sums.With big sums.Yeah.With big sums.You know, I mean, so if you look at, at Burlington Northern, I mean, is that, that was a big,that was a big sum.Yeah.Yeah.And it's, and you don't get bargains on things like that.It's not cheap.But that was a bargain.No, it's not a bargain.I didn't think so.That's what I'm asking.No, no, no, no, no.
WarrenBut it's a good asset to own for Berkshire over the next century.
QuestionerBut does it restrict how many, suppose tomorrow a great thing came along that you didn't know.Would you say, oh my God.
WarrenWell, it could happen.I mean, if the Union Pacific came along, it could happen.The prices could burn.But I don't worry, I don't worry about that sort of thing at all, Charlie.So we look back at this time, for one who loves, who loves understanding what's goingon and where it's going.You've said to me before, you know, you might sacrifice the last year of your life if somebodywould come along and say, Warren, I can tell you what the next 40 years are going to looklike.All the questions you have, I can answer.Or just let me watch.Just let me watch the next four years.The last year, you know, you don't get to be here, but the next 40 years you get towatch.So as we put a cap on this, we're going to come out of this okay, we've got some realproblems we have to deal with.The deficit is one.How we learn the lessons of this in terms of finding some kind of regulation that works.And have confidence that we got here because we had unique kinds of skills.Go back to 1776 and see what a few group of people did and where we are today makesyou an optimistic about America, but also optimistic about the world as the center of
Warrengravity moves to Asia.It's wonderful that the lessons we learned over the last couple hundred years, you know,are being absorbed in many parts of the world.I mean, people have seen success and they've had the sense to copy some of it and get intotheir own system, those ingredients that have done it for us, but we haven't lostthe ingredients.In fact, they're able to use the ingredients and not take it away from us.Every year of my life, I can sit down at the start of the year and write on a pad a dozenthings that were looming over the economy.When people say, I'm not buying stocks now because times are uncertain, I say to them,well, on September 10th, 2001, were times certain?Yeah, you thought they were certain, but you find out the next day they weren't.On October 18th, 1987, the day before the Dow took that 22 percent, things are alwaysuncertain in the short term.What really is certain is the things that worked over time will continue to work overtime.So the next day is always uncertain.The next hour is always uncertain.The longer term is pretty darn certain.
QuestionerWarren, thank you.
WarrenThank you.It's always great to see you.
OtherWarren Buffett for the hour.Thank you very much for joining us.We'll see you next time.