Sunday, March 01, 2009

Sensei and Grasshopper: Buffett's and Lampert's view on bail-outs

Over the past week 2 shareholder letters were released. Berkshire Hathaway's by Warren Buffett and Sears' by Edward Lampert. Buffett's status has already been sealed in the records as the best investor of all time and his letters are read for his insights on Berkshire, business in general, macro-economic conditions, political commentary, witticisms on life etc. He is now 78 years old, still runs Berkshire Hathaway, entertains business schools who make field trips to visit him, has arranged for the majority of his wealth to be donated to the Bill and Melinda Gates Foundation Charity, has supported the democratic ticket, and advocates for fairness of economic opportunity on tax issues such as estate tax, capital gains tax, and payroll tax.
Edward Lampert is a 46 yr old hedgefund manager who posted 18 years of extreme outperformance and formed Sears Holdings (inlcuding Sears and Kmart) when Kmart was on the verge of bankruptcy. The way he runs Sears indicates it could be the next Berkshire. In stark contrast to Buffett, Lampert is very reclusive partially due to the fact he was once kidnapped for ransom.

Below are some general commentary from both on the government's response to the economic crisis.

Buffett: "...Fear led to business contraction, and that in turn led to even greater fear.
This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.
Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.
Amid this bad news, however, never forget that our country has faced far worse travails in the past....Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead."

Lampert: "[Explains the inconsistencies and unintended negative consequences of government intervention beginning with Fannie and Freddie]...The two most important books that any student of current events should be reading in this environment are both by Friedrich Hayek, the esteemed Austrian economist. Based on events he witnessed beginning in the early part of the 20th century, Hayek wrote The Road to Serfdom as a warning to England and the United States against the damaging impact of socialist policies and The Fatal Conceit as a warning against heavy intervention in markets and society at large. Despite the almost universal belief today that more, but better, regulation is needed and that the role of the state needs to be not just temporarily larger, but permanently larger, Hayek’s writings and logic should give everybody pause as to the consequences of these actions.
As a country, we need to rebuild confidence and trust and to understand what happened. Whether by business or by government, the misdiagnosis of situations leads to poor prescriptions for rehabilitation and recovery. When the misdiagnosis is done at the federal government level and involves large parts of a national economy, the consequences can be swift and significant. The unintended consequences are often swifter and even more significant. As the leaders in our nation continue to evaluate and evolve the policies and rules of the game, we would all be wise to heed the cautions raised by Friedrich Hayek. I appreciate that the free market can be a difficult master and that there is an important role for government and regulators, but I hope that as we move forward the rules of the game and the methodology for changing those rules will be more consistent and fair than they have been over the past year. Those who desire to protect civil liberties in times of war appreciate the importance of laws protecting individuals and institutions. In times of economic and financial distress we need to be similarly vigilant in protecting economic and contract rights so that we can continue to have a system that functions properly. Attempts to threaten or eliminate those rights will chase away the capital and investment that our country needs to restore prosperity and to thrive in the future."

Lindsey (haha just kidding, she was standing 0ver me) - Hans


Michelle said...

Warren Buffett owns The Pampered Chef. I think he's awesome and very wise.

Anne and Joe said...

All of a sudden we here in the U.S. are crying "What is going on? Is this the change we voted for?" Well, yeah! 62 million of us voted for it. Republucans are just as guilty as Democrats. Rarely do I agree with Sean Hannity's drum banging, but he has said that if all of the politicians would take a plane out of the country for 6 months, things would get better on their own. Ditto! When people like Charles Schumer openly say things like '...the American people just don't care" and gets away with it, it is time for us all to wake up and vote these lifers out. See :