From an interview on CNBC. I’ve argued this kind of thing myself – here (pdf).
BUFFETT: What you have, Joe, you have all the major institutions in the world trying to deleverage. And we want them to deleverage, but they’re trying to deleverage at the same time. Well, if huge institutions are trying to deleverage, you need someone in the world that’s willing to leverage up. And there’s no one that can leverage up except the United States government. And what they’re talking about is leveraging up to the tune of 700 billion, to in effect, offset the deleveraging that’s going on through all the financial institutions. And I might add, if they do it right, and I think they will do it reasonably right, they won’t do it perfectly right, I think they’ll make a lot of money. Because if they don’t — they shouldn’t buy these debt instruments at what the institutions paid. They shouldn’t buy them at what they’re carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.
BECKY: Are you buying instruments like these in the market?BUFFETT: Well, I don’t want to leverage up. No one wants to leverage up in this thing. So, if I could buy a hundred billion of these kinds of instruments at today’s prices, and borrow non-recourse 90 billion, which I can’t, but if I could do that, I would do that with the expectation of significant profit.
JOE: But the government can do that. You can’t. And that’s why the private sector can’t, even you, can’t save the system.
BUFFETT: I can’t come close to it. But they have the ability to borrow. They can borrow much cheaper than I can borrow. They can borrow unlimited. They don’t have covenants. They don’t have — I mean, they are in the ideal position. So, for example, if I were hiring advisers, as I talked about doing to buy these things, I would tell those advisers, ‘Look it! People are buying these instruments to make 15 percent. So if you’re going to charge me any fees, I’m going to defer those fees until I get rid of these instruments later on. If I don’t make at least ten percent on my assets, you know, your fee goes down the drain. Because it should be a lead-pipe cinch to make 10 percent at the kind of prices that exist now. I wouldn’t try to write that into the legislation. I don’t think you should — I think they should punish, in many cases, the people — I would think they might insist on the directors of the institutions that participate in this program waiving all director’s fees for a couple of years. They should, maybe, eliminate bonues. They may wish to do some of those things. I don’t think you should try to write it into the instrument, though. I think that gets so damn complicated and ties people’s hands.
As Nick knows (see his op-ed in the Age in support of our proposal here) Joshua Gans and I have been arguing for a long time that governments need to irregularly intervene in key economic markets and provide the public goods of a minimum level of liquidity and price discovery. See here for a summary of our ideas.
Nicholas, how does Buffet’s approach stand if the assets (the houses) are overpriced by something like 30 or 50% before the bubble bursts?
And how does the injection of a trillion dollars of Fed funds play out in terms of inflation and the value of the dollar? Gee, a trillion here and a trillion there, soon we will be talking real money!
Someone has flagged Medicare as the next candidate for an injection of funds. Not surprising, the cost of health care has been projected to absorb the whole of the NSW state budget in a few decades.
Well that’s the trick Rafe, you have to try to make sure that central market makers don’t make the markets too high. Just like you have to hope that central banks with the power to set short term interest rates don’t screw it up. It’s a risk – like every other financial arrangement. One has to decide where one wants the balance of risks.
But the state is the best bearer of risk there is in an economy. We should build institutions to see that that capability isn’t ignored, but rather is prudently used. If it is prudently used, the state will make a lot of money for itself, at the same time as improving the functioning of the economy. It’s called ‘gains from trade’.