Gulag Blog

Tavakoli: Warren Buffett, Stop Using My Credit Card!

Stacy Summary:  From Janet Tavakoli.  Great piece.

• Warren Buffett, Stop Using My Credit Card! [PDF]

On October 25, 2009,  when BBC’s Evan Davis interviewed him, Buffett surprised me :  Click here to view the eight minute video.  It started out so well, but after six minutes the interview went sideways.  [Not shown in this clip Buffett said his $5 billion investment in Goldman Sachs’ preferred stock (plus free warrants) last year was, in part, a bet on a US government bailout.1 He thought the U.S. taxpayer got a good deal, but we got a worse deal than Buffett negotiated, and as I explain here, I feel taxpayers got chump change.]

@ 3:14 min: Buffett explains that if there were only 50 people on a fertile island, we wouldn’t take the five smartest people out of the 50 and give them the most money and tax breaks for trading rice futures and speculating:  “Hell no! We’d get everybody producing rice.  The idea that people that move money around are some favored class—and they are in this country, even in terms of taxes—strikes me as getting pretty far away from where we should be.”

@ 6:00 minutes: Buffett claims shareholder losses obviated moral hazard.  Not true.  In control frauds (first identified by William K. Black), financial institutions are destroyed, and shareholders lose.  Only the agents: CEOs, CFOs, and highly paid employees are enriched.  Unlike Buffett, these agents are “stewards,” not major owners.  Moral hazard remains an intractable problem.

@ 6:25 minutes:  Buffett claims taxpayers have not bailed out anybody, because tax rates have not gone up (yet), and “tax receipts are way down this year.”  Chinese and Japanese buying U.S. government bonds have bailed out financial institutions.  Not true unless we default or destructively print inflationary dollars. Tax receipts are down because of unemployment.  U.S. taxpayer credit bailed out financial institutions, and we will have to pay back our debts.

Imagine this scenario: Warren grabs my credit card and charges twelve suits.  When I object that I don’t want to bail out his wardrobe, he chuckles and says, don’t worry, you haven’t paid anything yet.  The bank that issued the credit card bailed out my wardrobe, and it hasn’t even had time to charge you interest on my purchase.

When I protest that I’ll have to eventually pay off both the balance and accrued interest, he tries flattery.  You are so productive that by the time you have to pay this off, you’ll have so much more wealth that you won’t even notice these charges.  You’ve always been good for it before, and you’ll figure out how to pay!

Don’t fall for it.

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