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Warren Buffett Has An Austrian Economics Moment

October 27, 2007

Tags Financial MarketsInterventionism

Remember that Citigroup, Bank of America Corp. and JPMorgan Chase & Co. have formed a superfund to bail out troubled structured investment vehicles (SIV). The US Treasury Department and Henry Paulson "back" this plan. What it amounts to is another move on the part of the Wall Street-government partnership to garner market "confidence," salvage credit markets, and bail out the banks. Heck, even Greenspan has conveniently warned against "propping up" the market. Here's a good Financial Times piece on Warren Buffett opposing the bailout.

"One of the lessons that investors seem to have to learn over and over again, and will again in the future, is that not only can you not turn a toad into a prince by kissing it, but you cannot turn a toad into a prince by repackaging it," Mr Buffett said during a visit to South Korea. "But very imaginative people in the securities market try to do that. If you have bad mortgages they do not come better by repackaging them. To some extent the chickens are coming home to roost for the mortgage originators and securitisers," he said. ..."I think there should be a requirement that before the securities are put into the new super-SIV, 10 per cent of the holdings should be sold into the market to people who are not associated [with the subprime problem]," he said. "That way we can be sure that they are being put in at appropriate market prices . . . They should give the market the opportunity to price the super-SIV themselves so we can see what they are really worth."

 

Real value instead of an artificially-inflated price — what a concept. What Buffett is saying is that this bailout amounts to nothing more than taking myriad SIVs and repackaging them as ...... SIVs. The problem with this is that special investment vehicles are set up as affiliated funds which are independent of a company's balance sheet. This means that the banks won't bear the risk associated with this junk. And Warren Buffett is a man who understands the balance sheet.How is this a government intervention? Of course, Treasury Department backing lends an air of credibility, along with a total endorsement of the plan. Thus, once again government steers investors toward selected investment vehicles through its advocacy of the nature and structure of the bailout. Government works hand-in-hand with the big guns on Wall Street to make sure they continue to profit, even in times of market distress. So the banks that helped to perpetuate the problem in the first place will now profit handsomely - with the government's assistance and approval — while negating the rick factor that is essential to making the markets truly "free." Why was Buffett in South Korea? He was visiting a company in which Berkshire Hathaway bought a large stake. Buffett knows the dollar is toast and thus is very negative on the dollar. He wants earnings and dividends in foreign currencies.

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