12 Dec 2009

Warren Buffett's financial crisis

The article that appears first in this google search is interesting : "In Year of Investing Dangerously, Buffett Looked 'Into the Abyss' " (I use the google link to the story because accessing it through their news service is free, thru WSJ not...)

Primarily, I found it interesting because of Buffett's involvement with the bailout and his inability to separate what is good for his business vs. what is good for the economy.
As the government swung into action, Mr. Buffett recalls, he gained confidence that the crisis would be resolved. A government guarantee of assets in money-market funds, which came days after the Reserve fund's troubles emerged, was a big step forward, he says.
A big step forward for whom? Why do we ask an investor what is good for the economy? Was his answer unexpected? If I and many of my friends were going to lose money if money market funds crashed, wouldn't I also think it's a great idea to have the government 'fix' them?

This reminds me of a survey about health care on UC Berkeley's campus. A few years ago, some tried to institute a campus-wide health fee to expand student health care access (longer hours, etc.). Surveys allegedly showed that many were in favor of the fee. However, many of those in favor were graduate students like me, and a lot of us have all of our fees paid by our departments. Of course we were in favor. Who doesn't want free money?

Bottom Line:
A) Short-term stock market health is not indicative of long-term economic health. B) Understand the underlying incentives of the person you are talking to.


  1. I don't think Buffett was unable to differentiate between what's good for his business and what's good for the economy as a whole. Sometimes they're the same thing (definitely possible in a company as diverse as BH). If the money market funds weren't backed up, yes, stock prices might have sunk lower, but they can always rise again. The problem is that a more precipitous drop to stock prices would have only exacerbated the credit/liquidity problem that was facing the economy. That, in turn, could be the straw the breaks the backs of various corporate camels. And, as Lehman Brothers demonstrated, breaking the wrong corporate camel's back could reverberate throughout the economy.

    A crisis, by definition, is a problem in the here and now. If you're driving your BMW and a car swerves into your lane, you worry about avoiding a crash. Replacing your muffler takes a back seat for a while. Sometimes it's okay to worry about the short term.

  2. I understand your point, but I still don't think there was evidence that this was the right thing to do. It may have lessened the short term pain, but how are we evaluating the tradeoff betwewen the short and long term pain? And the other issue is that of penalizing those that brought us here - those in the companies that were responsible ought to suffer, both as a penalty but more importantly to prevent this from happening in the future.


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