Friday, January 30, 2009

Putin's speech at Davos: An eye opener!

Putin's speech at Davos World Economic ForumAFP Photo / Fabrice Coffrini
January 28, 2009, 21:40

Putin's speech at Davos World Economic Forum

For the first time in the history of the Forum Russian politician Prime Minister Vladimir Putin will deliver the key-note speech.

Esteemed participants of the World Economic Forum,

Ladies and gentlemen,

I am grateful to the organisers of the Forum for this opportunity to share with you my considerations about what is happening in the world economy today, and to tell you about our plans and proposals. 

The world today has encountered the first really global economic crisis. Moreover, the speed at which the crisis manifestations are unfolding is breaking all records.

The current situation is often compared to the Great Depression at the end of the ‘20s and beginning of the ‘30s in the last century. To be sure, the parallels are actually visible.

Yet, there are principle differences. In the epoch of globalisation, the crisis has affected everyone – all countries irrespective of their political or economic systems. All of them are in the same boat. 

There is, I believe, quite a well-known concept such as “the perfect storm.” That is when the unleashed natural elements focus in one point of the ocean and continue to build up their destructive force manifold. The current crisis looks precisely like “the perfect storm.”

Responsible and well-versed people must prepare for such a storm. But even so, it comes unexpectedly. And that’s what has happened this time. The crisis was actually hanging in midair. However, the majority who were trying to get a bigger piece of the pie – a billion or one dollar – did not wish to notice the rising tidal wave. 

During the past several months, practically any statement that was made on the subject of the crisis began with rebukes addressed to the USA. I am not going to do that. 

I would only like to remind you that only a year ago, from this rostrum, we heard the words of American representatives about the fundamental stability and cloudless prospects of the US economy. But today, the pride of Wall Street – the investment banks – have practically stopped existing. For the past year, they have had to acknowledge losses far exceeding their profits for the past quarter of a century. This example alone reflects the real state of affairs better than any criticism. 

The time has come to see the light. We must calmly, and without gloating, try to look into the deep-lying causes of what has happened and to try to look into the future. 

As we see it, the crisis was triggered by a combination of several factors simultaneously.

This is the collapse of the existing financial system. It is the result of poor quality regulation. And as a result of this, huge risks were overlooked. 

This has been prompted by colossal imbalances that piled up over the recent years. First of all, this concerns imbalances between financial operations and the fundamental value of assets. This is the result of the increasing burden on international credits and the sources providing them. 

There was a serious malfunction in the very system of global economic growth – namely, when one regional center endlessly prints money and reaps the benefits; whereas, another center produces not very costly commodities and saves money that other states have printed. 

To this, I can add that in such a system, whole regions of the world, including Europe, found themselves on the periphery of global economic processes. And this means they were outside the framework of the key economic and financial decisions.

What is more, the benefits that were generated were distributed very disproportionately. In fact, such disproportions could be seen between layers of the population in individual countries and even in highly developed countries, as well as between different countries and regions of the world. 

For a significant part of mankind, comfortable housing, education and qualitative medical care are still inaccessible. And the world upsurge of recent years has not radically changed this situation.

And last, but not least – this crisis was triggered by elevated expectations. The appetites of corporations in regard to growing demand were unjustifiably encouraged. The race of stock market indices and capitalisation obviously began to dominate over raising productivity and the real efficiency of companies.
Unfortunately, elevated expectations existed not only in the business medium. They prompted a rapid growth of standards of individual consumption – first of all, in the developed countries.  And this growth, we must directly admit, was not backed up with real possibilities. 

This was a well-being that was not earned. This was a well-being in debts that will have to be paid off by future generations.

Sooner or later, this “pyramid of expectations” had to come crashing down – which is actually something that we have witnessed with our own eyes.

* * *

Dear colleagues,

It is common knowledge that during times of crises there is a strong temptation to seek simple and popular recipes. But if one treats only the symptoms of an illness, then in the final count, one can receive much graver complications. 

Understandably, the governments of all countries, the leaders of business must act with maximal resoluteness. Nonetheless, even in these force majeure circumstances, it is important to avoid taking steps for which we may be sorry in the future. 

That is why I would like to begin with what in our opinion, should not be done.  And what we in Russia intend to refrain from doing. 

One must not allow oneself to skid down to isolationism and unbridled economic egoism. At the “Big 20” Summit, the leaders of the foremost economies of the world agreed to refrain form setting up barriers in the way of world trade and movement of capital. Russia shares these principles. 

Even if amid crisis a certain strengthening of protectionism becomes inevitable, we will still need to keep the sense of proportion. 

The second possible mistake would be excessive interference into the economic life of the country. And the absolute faith into the all-mightiness of the state. 

Of course, the role of the state becomes more direct during crises – it is a natural response to the faults of the market. However, instead of improving market mechanisms there is always a temptation to enlarge the sphere of the immediate interference of the state in the economy. 

The flip side of the anti-crisis measures in almost every country is the concentration of the excessive assets in the hands of the state. 

During the time of the Soviet Union the role of the state in economy was made absolute, which eventually lead to the total non-competitiveness of the economy. That lesson cost us very dearly. I am sure nobody would want history to repeat itself. 

We should also be aware that for during the last months, we have been witnessing the washout of the entrepreneurship spirit. That includes the principle of the personal responsibility -- of a businessman, an investor or a share-holder - for his or her own decisions. There are no grounds to suggest that by putting the responsibility over to the state, one can achieve better results. 

Another thing – handling crisis must not turn into financial populism, into rejecting a responsible macro-economic policy. Unreasonable expansion of the budget deficit, accumulation of the national debt -- are as destructive as an adventurous stock market game.

* * *

Dear Ladies and Gentlemen,

Unfortunately, we are still far from fully fathoming the real scale of the current crisis. One thing though is obvious: the intensity and the continuance of the recession will largely depend on how precisely we will define the direction of our actions; and how coordinated and professional we shall be. 

The first step that we think is essential to take in the nearest future is to literally and figuratively draw the line under our past. It is  show-down time. We need to figure out the real state of affairs. 

The businesses need to write off their irrecoverable debts and “bad” assets. Yes, it is a very painful and unpleasant process. And not everyone does it willingly, having fears for their capitalisation, bonuses or reputation. 

But, avoiding clearing the balance means “preserving” and prolonging the crisis. I think that the writing-off mechanism must be effective and fit the realities of today’s economy. 

Secondly, together with clearing the balance, it is time to go free from virtual money, made-up reports and doubtful ratings. The understanding of the health of the world economy and the real state of things with corporations must not be made vague by illusions. Even if the authors of those illusions sit in the world’s largest audit and consulting agencies. 

The essence of our suggestion is that the principle of fundamental asset cost would be returned and put as the basis for the reform of audit, accounting and rating system standards. That is, the evaluation of this or that business must be built upon its capacity to generate the added value. We think that the economy of the future must be the economy of real values. How to get there? – That is the question put forward for all of us. Let’s work on it together. 

Thirdly, the excessive dependence on what is basically the only reserve currency is dangerous for the world economy. So it would be reasonable to stimulate a process of getting a number of strong reserve currencies in the future. It is time to start a specific dialogue on how to make the transition into a new model - smooth and irreversible. 

Fourthly, most countries keep their international reserves in foreign currencies. And they would want to be confident of their security. In their turn, the emitters of the reserve and accounting currencies are objectively interested to see that their money is in demand in other countries. 

That is, that mutual interest and mutual dependence are clearly in place. 

It is of vital importance that the countries responsible for the world’s reserve currencies offer more transparency for their credit and monetary policies. 

These countries should take up a commitment to be guided in those policies by internationally adopted rules of macroeconomic and financial security. 

And demand for such committed approach is pressing.

But beyond global finances, there are many other issues that are calling for a solution.

The unipolar pattern of the world economy that is completely outdated by now must be replaced by a new system based on cooperation of several big centres. 

But to avoid chaos and unpredictable behaviour in a multipolar world, we need to bolster the network of global regulators – working in full compliance with international law and multilateral agreements. This is why we are calling for a re-think of the role of leading international organisations and institutions.

I am convinced that we are able to build a more fair and effective economic architecture for the whole world. However, due to time restraints it’s impossible to outline all the details of the proposed structure in this short speech.

Still, it’s obvious that in such a system all the countries must have guaranteed access to the resources they need for life, also access to new technologies and resources for further development. The world must work out guarantees that would allow minimising the risks of a new economic crisis.

We need to continue the discussion of all these issues, including debates at such venues as the G 20 meeting in London.

The decisions that we are now making must not only respond to the current situation, but also address the demands of a new, post-crisis world.

While struggling its way out of the crisis, the global economy may face a shortage of energy resources. There will simply be no juice for the future growth.

Three years ago Russia held the G8 summit focused on global energy security. We called for mutual responsibility on the part of suppliers, consumers and transit states. I believe it’s high time for action. We need to launch a system of responsibility that would really work.

The only way to ensure a true energy security for the whole world is to forge an interdependency, including an exchange of assets, – but without discrimination or double standards. Such interdependency is something that is definite to bring about a genuine mutual responsibility.

Unfortunately, the existing energy charter has failed to become a working tool that could be used to solve problems.

I propose to work out a new international legal framework for energy security. If implemented, our initiative could have the same economic impact as the Treaty establishing the European Coal and Steel Community. That is, we will be able to unite consumers and producers in a common energy partnership that would be real and based on clear-cut international rules.

We all realise that sharp and abrupt price fluctuations for energy resources are a strong factor that destabilises the world economy. The current price collapse could lead to the increase in non-expedient consumption of resources.

On the one hand, investment into energy saving projects and alternative energy sources will decline. But on the other hand, oil companies will cut the spending for the oil extraction – inevitably prompting a fall. That, in its turn, will again lead to skyrocketing prices and a new crisis.

We must get back to an averaged price based on the balance of demand and supply. We need to make our market clear of speculations brought about by secondary financial instruments.

One of the key problems is the safe transit of energy. There are two ways to solve the issue and both of them must be used.

The first way is transition to universally recognised market principles of tariffs formation for transit services. They can be fixed in international legal documents.

The second way is development and diversification of transportation routes for energy resources. We have been actively working in this direction for a long time.

Only in recent years we fulfilled such projects as gas pipelines “Yamal-Europe” and “Blue Stream”. Life has proved their urgency and demand. 

I am convinced that such projects as “South Stream” and “Nord Stream” are equally vital for the energy security of Europe. Their total capacity is about 85 billion cubic metres of gas a year. 

“Gazprom” together with its partners, the companies “Shell”, “Mitsui”, “Mitsubishi” will soon start operating facilities for liquefying and transportation of natural gas produced in the area of Sakhalin Island. It is also Russia’s contribution to the global system of energy security.

We have been developing the infrastructure of our oil pipelines. The first phase of constructing the Baltic pipeline system has already been completed.

BPS-1 provides produces up to 75 million tonnes of oil a year.  Moreover, it directly delivers it to consumers through our ports in the Baltic Sea. In this way, transit risks are absolutely eliminated. 

At present the work for designing and construction of BPS-2 is under way. Its oil carrying capacity is 50 million tonnes a year. 

We intend to develop transport infrastructure in all directions.  The first stage of the Eastern Siberia – Pacific Ocean” oil pipeline is nearing completion. Its final point will be a new oil port in the Kozmin Bay and a refinery in the Vladivostok area. In the future, in parallel to the pipeline, a gas pipeline will be laid towards the Pacific Ocean and China.

* * *

I would also like to mention the effect the global crisis had on the Russian economy. It has affected us in a most serious way.

But nevertheless, but unlike many countries, we have accumulated substantial resources. 

And they expand our possibilities to assertively pass through the period of global instability.

The crisis has exposed the challenges we have. These are excessive orientation of export and the economy, in general, on raw materials and a weak financial market. There is a greater demand for the development of basic market structures, first of all, the entire competitive environment.  

We were aware of these problems and have worked for their consistent solutions.  The crisis just forces us to more actively move ahead according to the declared priorities without changing the strategy itself, whose essence is the qualitative renewal of Russia within the next 10-12 years. 

Our anti-crisis policy is directed to internal demand support, social security of citizens and creation of new working places. Like many other countries, we are reducing taxes on production, investing money in the economy. We are optimising state expenses. 

I’d like to reiterate that along with the measures of first response, we are elaborating a platform for post-crisis development. 

We are confident that the leaders of world economy rehabilitation will become those who will create attractive conditions for investments already today as well as those who will manage to preserve and strengthen the sources of strategically important resources.  

Therefore, the creation of a favourable entrepreneur ambience and development of competition, creation of a sustainable credit system based on internal resources and realisation of transport and other infrastructural projects are among our priorities. 

At present, Russia is already one of the biggest exporters of several food products. And our input to provision of global food security will only increase. 

We will also actively develop innovative sectors of the economy, first of all, those where Russia has competitive advantages in outer space, nuclear energy and aviation. In these directions, we have already been actively developing technological cooperation with other countries. The field of energy saving can also become a prospective subject for mutual cooperation. The increase of energy efficiency is just considered to be a key factor of energy security and future development.

We will continue reforms in Russia’s energy sector. We are implementing a new system of pricing for domestic consumers which is based on economically justified tariffs. This is important, among other things, to promote energy conservation. We will continue with our policy of being open to foreign investment.

I think that the 21st-century economy is an economy of people, not of factories. The intellectual aspect in the global economic development has grown immensely. That’s why we plan to concentrate on creating additional opportunities for our people to realise their potential.

Even today, we are a well-educated nation. But we need Russian people to get the best and the most modern education, to obtain professional skills which will be in great demand in the world today. Thus, we will develop educational programs for key professions in Russia with utmost vigour.

We will expand the practice of student exchange and organise internships for our students in leading universities and most advanced companies. We will create conditions for the best scientists, professors and teachers—regardless of their ethnic background and nationality—to desire to work in Russia.

History gives our country a unique chance. The way events unfold requires that we reform our economy and modernise our social sphere. And we are not going to miss this chance. Russia should come out of this crisis renewed, more powerful and more competitive.

* * *

Now I’d like to say a few words about problems that are not specifically economic—and yet, they are quite urgent under current conditions.

Unfortunately, more and more often we hear that increasing military spending will help solve today’s social and economic problems. The logic here is quite simple. Additional allocations for military needs create new jobs.

For reference:
The growth of military spending:
USA—$529 billion in 2006, $555 billion in 2007, and $583 billion in 2008. Experts expect $606 billion in 2009.
Great Britain—£27 billion in 2006, £31 billion in 2007, £34 billion in 2008, and £35.2 billion planned for 2009.
Germany—€23 billion in 2006, €24 billion in 2007, and €25 billion in 2008.
China—$38 billion in 2006, $44 billion in 2007, $58 billion in 2008, and a 17% increase in 2009 (around $66 billion).
Georgia (according to the Stockholm International Peace Research Institute)—$49 million in 2002, $80 million in 2004, $362 million in 2006, $592 million in 2007, and $1.104 billion in 2008.

At a glance, it seems to be merely a method to fight the crisis and unemployment. Perhaps, in the short run, such a measure may yield some results. But in reality, instead of solving the problem, militarisation pushes it to a deeper level. It draws away from the economy immense financial and material resources, which could have been used much more efficiently elsewhere.

I am confident that if we limit our military spending, at the same time strengthening global stability and security, this will definitely produce serious economic dividends as well.

I hope this point of view will prevail in the world. On our side, we are ready to work actively in the sphere of disarmament.

I would also like to draw your attention to the fact that the economic crisis may aggravate the negative tendencies that are present in global politics. The world has recently been confronted with an unparalleled growth of aggressive manifestations—Georgia’s adventure in the Caucasus, terrorist acts in India and the escalation of violence in the Gaza Strip. On the face of it, these events are not directly related, but their development reveals some common aspects. 

It is above all the inability of existing international structures to offer constructive resolutions to regional conflicts and work towards achieving positive results in settling inter-ethnic and interstate contradictions. Essentially, multilateral political mechanisms have yielded as little effect as the institutions of financial and economic regulation. 

Let us be frank: provoking military-political instability and other regional conflicts is also a convenient way of deflecting people’s attention from mounting social and economic problems. Regrettably, further attempts of this kind cannot be ruled out. 

We will have to make the system of international relations much more effective, more secure and stable if we are to prevent this course of events.

There are quite a few pressing issues on the global agenda where the interests of the majority of countries objectively concur. These include the need to overcome the world economic crisis, joint efforts to reform international financial institutions, improve mechanisms of regulation and achieve reliable security in the sphere of energy and diffuse the world’s food crisis, something that has not yet receded into the background. 

Russia is ready to make its contribution to the solution of top-priority tasks confronting the international community. We hope that all of our partners in Europe, Asia, America and elsewhere - I also have in mind the new US Administration, and we wish it success - will display an interest in joint and constructive work. 

Ladies and gentlemen,

The set of problems facing the international community is exceptionally complicated. It sometimes seems that it is simply impossible to cope with them. But as the saying goes, a journey of a thousand miles begins with a single step.

We must seek support in the moral values that have ensured the progress of our civilisation. Honesty and hard work, responsibility and faith in our strength are bound to bring us success. 

There should be no place for despondency. The crisis can and must be fought by uniting our intellectual, spiritual ad material resources. 

This kind of consolidation of efforts is inconceivable without mutual trust. This does not only concern participants in business life. Primarily this concerns states. 

Achieving mutual trust is a key task that all of us will have to pursue. 

It is trust and solidarity that will help us overcome existing difficulties, avoid numerous upheavals and achieve prosperity and well-being in the current century.

Thank you for your attention.

Brilliant speech-craft from a master statesman.   He lays out the groundwork for a Basel III, Energy Security, alludes briefly to Food Security, Russia's economy and the creation of complex mutual inter-dependencies for Security in this century.   He also alludes to the disproportionate dollars spent on military spending by various counties.  Quite a speech.   Worth reading several times.  

Wednesday, January 28, 2009

The New York Times

January 29, 2009

Report on Russia Missiles Suggests Gesture to U.S.

MOSCOW — A Russian news report on Wednesday that Russia is putting off its plan to deploy missiles near the Polish border raised speculation that the Kremlin is seeking ways to lower tensions with the United States now that a new administration has taken office.

The report, on the Interfax news agency, was attributed to an unidentified Russian defense official, and when contacted later in the day, other Russian foreign and defense officials in Moscow would not confirm or comment on it.

Interfax quoted the unnamed defense official as saying that, “These plans have been suspended,” referring to the Kremlin’s proposal to base Iskander missiles in the western region of Kaliningrad and direct them toward Europe.

The unnamed official was quoted as saying the Russian government had taken the step because Washington is not “pushing ahead” with the Bush administration’s proposal to deploy an anti-missile system in Poland and the Czech republic to defend against what the administration had said was a threat from countries like Iran.

Asked about the Interfax report, NATO said through a spokesman that if confirmed, “It would be a positive step.”

The Kremlin has sharply criticized the Bush anti-missile system, contending that it was aimed at Russia. Bush officials had sought to soothe Russian concerns, but ´the issue had damaged relations between the two countries.

While the official quoted by Interfax said the United States was not going forward with the antimissile plan, the Obama administration is in fact only reviewing the plan, and has not publicly rejected it.

And it would seem unlikely that the Kremlin would offer the concession of shelving the missile plan without first obtaining a promise from the Obama administration that the American plan had been canceled.

While the Kremlin remained silent about the issue on Wednesday, Itar-Tass, the government-run news agency, quoted an unnamed senior defense official as saying that any such reports in the Russian media about the Kremlin pulling back were “pure fiction, total nonsense.”

The unnamed official suggested it would be a mistake for the Russians to withdraw their threat unilaterally while the issue was still playing out.

In an interview with Bloomberg News on Monday, Prime Minister Vladimir V. Putin indicated that he was hopeful that the Obama administration would reject the Bush plan.

“We have heard signals concerning anti-missile defense, and we know that people close to Mr. Obama say they should not hurry and the issue demands further analyses,” Mr. Putin said. “We are glad to hear such statements. Beyond that, our proposal on developing those systems is still on the agenda.”

President Obama and Russia’s president, Dmitri A. Medvedev, spoke on the phone on Monday. The Kremlin said in a statement that the two leaders discussed “their intention to focus their efforts on renewing the potential of Russian-American relations, and on resolving issues in a constructive way.”

Wow - what is this world coming to?    :)   Gestures to the Greater Middle East and now peaceful gestures between US and Russia?   This must piss-off the military industrial complex no-doubt.   But I guess with one of the greatest financial crises ever facing the country - we can only show that much machismo towards the world, eh?    

Tuesday, January 27, 2009

Roubini: Nowhere to Hide and Nationalize

Roubini Sees ‘Nowhere to Hide’ From Global Slowdown (Update2) 
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By Betty Liu and Eric Martin

Jan. 27 (Bloomberg) -- Global stock market declines are increasingly correlated and emerging economies will follow developed nations into a “severe recession,” according to New York University Professor Nouriel Roubini.

Roubini said economic growth in China will slow to less than 5 percent and the U.S. will lose 6 million jobs. The American economy will expand 1 percent at most in 2010 as private spending falls and unemployment climbs to at least 9 percent, he added.

“There is nowhere to hide,” Roubini, an economics professor at NYU’s Stern School of Business who predicted the financial crisis, said from Zurich in an interview with Bloomberg Television. “We have for the first time in decades a global synchronized recession. Markets have become perfectly correlated and economies are also becoming perfectly correlated. This is not your kind of traditional minor recession.”

Roubini said the U.S. government should nationalize the biggest banks because losses will exceed assets, threatening to push them into bankruptcy. The banks could be privatized again in two or three years, Roubini said. The professor reiterated his prediction that U.S. financial losses will more than triple to $3.6 trillion and that global equities will fall 20 percent this year from current levels.

‘Zombie Banks’

“Nobody’s in favor of long-term ownership of the U.S. banking system by the government, but if you don’t do it this way, you end up like Japan where you kept alive for a decade zombie banks that were never restructured,” he said. “That’s going to be much worse. It’s better to clean it up, nationalize it and sell it to the private sector.”

Japanese policy makers hesitated in addressing a banking crisis in the 1990s and then struggled to revive growth and fight deflation in what is known as the “Lost Decade.”

Roubini recommended holding cash or short-term government debt and said high-yield bonds are cheap relative to U.S. stocks.

In July 2006, Roubini predicted the financial crisis. In February of last year, he forecast a “catastrophic” meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks with mortgage holdings and a “sharp drop” in equities. Since then, Bear Stearns Cos. was forced into a sale and Lehman Brothers Holdings Inc. went bankrupt, prompting banks to hoard cash and depriving businesses and households of access to capital.

Deeper Into Recession

The world’s biggest economies are sliding deeper into recession as the fall-out from the global financial crisis hobbles manufacturing output and punctures consumer spending from New York to Beijing. The U.S. economy probably contracted at 5.5 percent pace in the fourth quarter, the fastest in 26 years, a survey of economists showed.

Caterpillar Inc., Sprint Nextel Corp., Home Depot Inc. and ING Groep NV led companies announcing at least 77,000 job cuts yesterday as sales withered while U.S. jobless claims touched a 26-year high of 589,000 in the week ended Jan. 17. President Barack Obama is pushing congress to approve an $825 billion stimulus package to create 3 million to 4 million new jobs.

In China, the urban unemployment rate, which doesn’t include millions of migrant workers, rose for the first time since 2003 in the fourth quarter. The government is targeting a rate of 4.6 percent for the year, which would be the highest since 1980. The slowdown may destabilize the country’s communist government, Albert Edwards, a strategist at Societe Generale in London, said in a Jan. 15 research note.

To contact the reporters on this story: Betty Liu in New York atbliu17@bloomberg.netEric Martin in New York

Last Updated: January 27, 2009 14:00 EST

Geithner on Bailout Lobbying: NO

January 28, 2009

Geithner Sets Limits on Lobbying for Bailout Money

WASHINGTON — The Treasury secretary, Timothy F. Geithner, announced on Tuesday that he would crack down on lobbying to influence the $700 billion financial bailout program by the companies that are receiving billions in taxpayer funds.

Mr. Geithner, who was confirmed and sworn in on Monday, said that he would also set new limits intended to prevent political interference with the decisions about which firms receive bailout money.

The announcement followed several reports about efforts by corporate lobbyists and Congressional lawmakers to influence the program, including decisions about which banks should receive taxpayer money.

“American taxpayers deserve to know that their money is spent in the most effective way to stabilize the financial system,” Mr. Geithner said in a statement. “Today’s actions reaffirm our commitment toward that goal.”

The details of the rules — the text has not been completed — were not released. But in a news release, the Treasury Department outlined the Obama administration’s intent to prevent corporate and political lobbying to influence spending of the bailout program.

Among the changes will be rules to “combat lobbyist influence” over the bailout program, including restricting officials from “contacts with lobbyists in connection with applications for, or disbursements of” bailout funds, the department said.

The New York Times reported on Saturday that at least a dozen firms that received billions from the bailout program lobbied the government about the program in the final three months of 2008, according to a review of disclosure forms.

The new rules announced Tuesday will also “ensure that political influence does not interfere” with bailout decisions, “using as a model for these protections the limits on political influence over tax matters,” the Treasury Department said.

A Treasury Department spokeswoman said the tax safeguards that would form the basis of the new bailout policy include a federal statute prohibiting high-ranking executive branch officials from intervening in individual tax disputes, like ordering the Internal Revenue Service to conduct or terminate an audit of a particular taxpayer.

The safeguards include the agency’s refusal “to accept any political interference whatsoever in individual tax matters,” the spokeswoman said.

While such a policy would block high-ranking executive branch officials from steering bailout money to a particular bank, it was not immediately clear whether the rule would also prohibit Treasury officials from talking with lawmakers who are seeking help for banks in their districts.

The Wall Street Journal reported last Thursday that several lawmakers had tried to ensure that bailout funds would go to banks in their districts, although it said there was no way to prove that such efforts were linked to a later decision to give money to a particular bank.

Also on Tuesday, Mr. Geithner said that the Treasury Department’s Office of Financial Stability, in making reports to Congress about how it was disbursing the funds, would certify that each decision was based only on objective “investment criteria and the facts of the case.”

In addition, the department said that it would publish soon a detailed description of its investment review process and that only banks recommended by their primary bank regulator would be eligible for bailout funds.

The announcement on Tuesday represented the latest step by the Obama administration to make the bailout program more open and accountable as it moves to disburse the second $350 billion, following bipartisan criticism over the Bush administration’s handling of the first $350 billion of the bailout program.

The Obama administration has said it will step up monitoring of lending patterns by financial institutions that receive bailout money to make sure the money is being used to ease the credit squeeze. It also said it would seek to limit executive compensation at banks that receive future taxpayer help.

During his Senate confirmation hearings last week, Mr. Geithner said that the bailout program needed “serious reform” and pledged that the Obama administration would impose “tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering.”

He added: “And we are going to do that. This is an important program and we need to make it work.”

Geithner sworn in as Treasury Secretary

Timothy Geithner takes on the mantle of Treasury Secretary for the Obama Administration

Obama: New Tone with the Islamic World

The New York Times
January 28, 2009

Obama Signals New Tone in Relations With Islamic World

PARIS — In one of his first interviews since taking office, President Barack Obama struck a conciliatory tone toward the Islamic world, saying he wanted to persuade Muslims that “the Americans are not your enemy” and adding that “the moment is ripe for both sides” to negotiate in the Middle East.

His remarks, recorded in Washington on Monday night, signaled a shift — in style and manner at least — from the Bush administration, offering a dialogue with Iran and what he depicted as a new readiness to listen rather than dictate.

Mr. Obama spoke as his special Middle East envoy, George J. Mitchell, arrived in Egypt to begin an eight-day tour that will include Israel, Jordan, Saudi Arabia, France and Britain. Mr. Mitchell planned to meet President Hosni Mubarak.

In a transcript published on Al Arabiya’s English language Web site, Mr. Obama said he believed “the most important thing is for the United States to get engaged right away” and that he had told his envoy to “start by listening, because all too often the United States starts by dictating.”

“Ultimately, we cannot tell either the Israelis or the Palestinians what’s best for them. They’re going to have to make some decisions,” Mr. Obama said. “But I do believe that the moment is ripe for both sides to realize that the path that they are on is not going to result in prosperity and security for their people. And that, instead, it’s time to return to the negotiating table.”

Shortly after the interview was broadcast, an explosion on the Israel-Gaza border on Tuesday killed an Israeli soldier. A Palestinian farmer was shot dead, according to Palestinian witnesses, in retaliatory gunfire. The incidents were the first known fatal incidents since the Gaza fighting ended 10 days ago.

Mr. Obama said Israel “will not stop being a strong ally of the United States and I will continue to believe that Israel’s security is paramount. But I also believe that there are Israelis who recognize that it is important to achieve peace. They will be willing to make sacrifices if the time is appropriate and if there is serious partnership on the other side.”

He also said he believed it was “possible for us to see a Palestinian state — I’m not going to put a time frame on it — that is contiguous, that allows freedom of movement for its people, that allows for trade with other countries, that allows the creation of businesses and commerce so that people have a better life.”

But he also said the Israel-Palestine conflict should not be seen in isolation. “I do think it is impossible for us to think only in terms of the Palestinian-Israeli conflict and not think in terms of what’s happening with Syria or Iran or Lebanon or Afghanistan and Pakistan,” Mr. Obama said.

He spoke at length about America’s future relationship with the Muslim world, saying his “job is to communicate to the American people that the Muslim world is filled with extraordinary people who simply want to live their lives and see their children live better lives.”

“My job to the Muslim world is to communicate that the Americans are not your enemy. We sometimes make mistakes. We have not been perfect. But if you look at the track record, as you say, America was not born as a colonial power, and that the same respect and partnership that America had with the Muslim world as recently as 20 or 30 years ago, there’s no reason why we can’t restore that. And that I think is going to be an important task,” he said.

He drew a distinction between “extremist organizations” committed to violence and “people who may disagree with my administration and certain actions, or may have a particular viewpoint in terms of how their countries should develop.”

“We can have legitimate disagreements but still be respectful. I cannot respect terrorist organizations that would kill innocent civilians and we will hunt them down,” he said. “But to the broader Muslim world what we are going to be offering is a hand of friendship.”

He also said it was “important for us to be willing to talk to Iran, to express very clearly where our differences are, but where there are potential avenues for progress.”

He echoed his inaugural address last week when he said, “If countries like Iran are willing to unclench their fist, they will find an extended hand from us.”

He was not asked whether he would continue the policy of former President George Bush in refusing to exclude military action in the dispute over Iran’s nuclear ambitions.

This is nuanced and smart.   The war with terrorists was not going to be won without a strong PR campaign and with actions to backup the PR.   The terrorists have to be isolated and their support cut off.  

Monday, January 26, 2009

"Nationalization" now in the mainstream press

January 26, 2009
News Analysis
Nationalization Gets a New, Serious Look

WASHINGTON — Only five days into the Obama presidency, members of the new administration and Democratic leaders in Congress are already dancing around one of the most politically delicate questions about the financial bailout: Is the president prepared to nationalize a huge swath of the nation’s banking system?

Privately, most members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.

But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government’s role expands from a few bailouts to control over a vast portion of the financial sector of the world’s largest economy?

The Obama administration is making only glancing references to those questions. In an interview Sunday on “This Week” on ABC, the House speaker, Nancy Pelosi, alluded to internal debate when she was asked whether nationalization, or partial nationalization, of the largest banks was a good idea.

“Well, whatever you want to call it,” said Ms. Pelosi, Democrat of California. “If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.

“I’m not talking about total ownership,” she quickly cautioned — stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?’ ”

So far, President Obama’s top aides have steered clear of the word entirely, and they are still actively discussing other alternatives, including creating a “bad bank” that would nationalize the worst nonperforming loans by taking them off the hands of financial institutions without actually taking ownership of the banks. Others talk of de facto nationalization, in which the government owns a sizeable chunk of the banks but not a majority, with all that connotes.

That has already happened; taxpayers are now the biggest shareholders in Bank of America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent. But the government’s influence is far larger than those numbers suggest, because it has guaranteed to absorb the losses of some of the two banks’ most toxic assets, a figure that could run into the hundreds of billions of dollars.

Many believe this form of hybrid ownership — part government, part private, with the responsibilities of ownership unclear — will not prove workable.

“The case for full nationalization is far stronger now than it was a few months ago,” said Adam S. Posen, the deputy director of the Peterson Institute for International Economics. “If you don’t own the majority, you don’t get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It’s the mistake the Japanese made in the ’90s.”

“I would guess that sometime in the next few weeks, President Obama and Tim Geithner,” he said, referring to the nominee for Treasury secretary, “will have to come out and say, ‘It’s much worse than we thought,’ and just bite the bullet.”

So far the Obama administration has signaled that it is trying to avoid that day, and members of its economic team — among them Mr. Geithner and the president’s top economic adviser, Lawrence H. Summers — made the case during the Asian financial crisis in the 1990s that governments make lousy bank managers.

Indeed, the risks of nationalization they warned about then apply equally to the United States now. The first is that nationalization can prove contagious. If the Obama administration took over Bank of America and Citigroup, two of the largest banks in the United States, private investors could decide to flee from the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they could be next.

Moreover, Mr. Obama’s advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff.

“The nightmare scenarios are endless,” one of the administration’s senior officials said.

The argument in favor of nationalization, even a brief nationalization of a few months or years, is straightforward: It might be the only way to pull America’s largest financial institutions out of the downward spiral that makes it enormously difficult to raise the capital they need to keep operating.

Right now, many banks are reluctant to write off their bad debts, and absorb huge losses, unless they can first raise enough capital to cushion the blow. But they cannot attract that capital without first purging their balance sheets of the toxic assets. Japan’s experience proved the dangers of that downward swirl; the economy stagnated, new lending ground to a halt and the country’s diplomatic clout shrank with its balance sheets.

Nationalization could pull the banks out of that dive, at least temporarily, as the government injected capital, hired new managers and ordered a restart to lending. But some Republicans who bit their tongues when President George W. Bush ordered huge interventions in the market would charge that Mr. Obama was steering America toward socialism.

Nationalization, said Charles Geisst, a financial historian at Manhattan College “is just not a term in the American vocabulary.”

“We think of it,” he continued, “as something foreigners do to us, not something we do.”
It is also something foreigners do to themselves: the British have recently taken a majority stake in the Royal Bank of Scotland.

Some of Mr. Obama’s advisers have asked who the government would get to run the banks. Many of the most experienced executives are tainted by the decisions they made during the age of excess. And how would the government attract the best talent if it demanded that they take minimal pay — a political reality in the current environment?

Another option is for the government to buy the banks’ most toxic assets either through a giant fund, or, more likely, a federally supported bad bank designed to buy up troubled investments. But in that case, taxpayers might well be the losers: They would have all of the banks’ worst assets and none of their performing loans. And unless a deal is worked out to take a larger share of the banks whose bad loans are shuffled off to the government, the taxpayers would not have the chance to benefit by selling the shares back to private investors.

Moreover, cleaning up the banks’ bad assets, without extracting a heavy price for the bank managers, shareholders and their lenders, is exactly what Mr. Summers and Mr. Geithner warned against during the Asian financial crisis.

“We told the Asians that they had to be willing to let banks and companies fail,” said Jeffrey Garten, a professor at the Yale School of Management and a top official in the Clinton administration. “We warned that there was great moral hazard if governments just bailed them out.”

“And now,” he said, “we are doing the polar opposite of our advice.”

Eric Dash contributed reporting from New York.

I have been calling for a Nationalization since the middle of last year. It is obvious to everyone why banks have NO CAPITAL available. Where is all the private money - its on the sidelines (a lot of it is probably in Zurich) because everyone knows the king has no clothes. But here we are - hemming and hawing our way to a Global Depression because we dont have the balls to say yes we need to Nationalize these insolvent institutions. Even at this late hour - it is not too late. Declare a Bank Holiday and Nationalize these insolvent institutions. Wipe out the shareholders and their lenders. NOW. The Global Depression clock is now ticking. Tick, Tock.

Friday, January 23, 2009

Geithner on Yuan: More Analysis

Bond markets react wildly to blinding glimpse of the obvious
Thu, 01/22/2009 - 4:35pm

Felix Salmon reviews Tim Geithner's written testimony and concludes that, "Geithner's answers are highly diplomatic and content-free,"

The bond market, however, appears to disagree:
Mr. Geithner’s strong words on China have resulted in a sharp selloff in Treasurys. In testimony to Congress, Geithner wrote, in response to a question from Sen. Olympia Snowe, (R-Maine), that President Obama’s administration “backed by the conclusions of a broad range of economists - believes that China is manipulating its currency.”

“He came right out and said Obama believes China is manipulating their currency,” says Maryann Hurley, bond market strategist at D.A. Davidson, who notes that China’s economy is slowing as well. “It’s very easy to pick another country to be your whipping boy. In an era where we’re looking at deficits as far as the eye can see all we don’t need is somebody starting to dump our debt.”

As the FT's Krishna Guha and Alan Beattie write, "experts said the declaration could fuel trade tensions at a time of global recession and fast-rising unemployment."

I'm as concerned about this as the next guy, but let's be careful here and parse things out.
The bond market is conflating two issues here. The first is that Geithner said out loud what everyone knows to be true. And, to be sure, before the U.S. responds to currency manipulation, it has to say that it's happening. So Geithner's statement is a quasi-first step.

The second issue, however, is what kind of action Obama and Geithner are planning. Beattie and Guha suggest options like, "punitive import tariffs on Chinese goods."

This is where a closer look at Geithner's written testimony would be a good idea. Here are the two relevant passsages:

[W]e look forward to a productive economic dialogue with the Chinese government on a number of short- and long-tem issues. The Yuan is certainly an important piece of that discussion, but given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the US. The latest figures show that China's growth in 2008 was 9%, a full 4 percentage points lower than in the previous year. Because China accounts for such a large fraction of the world economy, a further slowdown in China would lead to a substantial fall in world growth (and demand for US exports) and delay recovery from the crisis. Therefore, the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home....

[T]he best approach to ensure that countries do not engage in manipulating their currencies is to demonstrate that the disadvantages of doing so outweigh the benefits. If confirmed, I look forward to a constructive dialogue with our trading partners around the world in which Treasury makes the fact-based case that market exchange rates are a central ingredient to healthy and sustained growth.

Two signals here. First, Geithner seems more concerned about China expanding its domestidc growth than with any manipulation of the yuan right now -- a conviction shared by Brad Setser, incidentally.

Second, it seems pretty clear that Geithner's first option on the currency issue is jaw-jaw rather than protect-protect. In other words, the bond market should have reacted more like Felix Salmon.

Daniel W. Drezner Permalink Comments? Login or register
( filed under:
Bretton Woods II Chimerica financial meltdown Geithner globalization)

Warren Buffets interview on PBS tonight - Full Transcript


Warren Buffett Interview
Warren Buffett Interview Transcript

Below is a short interview with Warren Buffett who was featured on the the PBS Nightly Business Report tonight.
PBS’ Nightly Business Report & Warren Buffett
Full Transcript of NBR Anchor Susie Gharib’s interview with Warren Bufffett
Airs January 22, 2009,

Nightly Business Report’s 30th Anniversary

SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?
WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20th that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations. On the other hand, I don’t think there’s anybody better than you could have had; have in the presidency than Barack Obama at this time. He understands economics. He’s a very smart guy. He’s a cool rational-type thinker. He will work with the right kind of people. So you’ve got the right person in the operating room, but it doesn’t mean the patient is going to leave the hospital tomorrow.

SG: Mr. Buffett, I know that you’re close to President Obama, what are you advising him?
WB: Well I’m not advising him really, but if I were I wouldn’t be able to talk about it. I am available any time. But he’s got all kinds of talent right back there with him in Washington. Plus he’s a talent himself so if I never contributed anything for him, fine.

SG: But I know that during the election that you were one of his economic advisors, what were you telling him?
WB: I was telling him business was going to be awful during the election period and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that. But he’s got the right ideas. He believes in the same things I believe in. America’s best days are ahead and that we’ve got a great economic machine, its sputtering now. And he believes there could be a more equitable job done in distributing the rewards of this great machine. But he doesn’t need my advice on anything.

SG: How often do you talk to him?
WB: Not often, not often... no no and it will be less often now that he’s in the office. He’s got a lot of talent around him.

SG: What’s the most important thing you think he needs to fix?
WB: Well the most important thing to fix right now is the economy. We have a business slowdown particularly after October 1st it was sort of on a glide path downward up til roughly October 1st and then it went into a real nosedive. In fact in September I said we were in an economic Pearl Harbor and I’ve never used that phrase before. So he really has a tough economic situation and that’s his number one job. Now his number one job always is to keep America safe that goes without saying.

SG: But when you look at the economy, what do you think is the most important thing he needs to fix in the economy?
WB: Well we’ve had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there’s no magic bullet on this. They’re going to throw everything from the government they can in. As I said, the Treasury is going all in, the Fed and they have to and that isn’t necessarily going to produce anything dramatic in the short term at all. Over time the American economy is going to work fine.

SG: There is considerable debate as you know about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again, where do you stand on that debate?
WB: Well I don’t think the worry right now should be about the next one, the worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and its not going to be soon, but its going to get done.

SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?
WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.

SG: But are we creating new problems?
WB: Always

SG: How worried are you about these multi-trillion dollar deficits?
WB: You can’t just do one thing in economics. Anytime somebody says they’re going to do this and then what? And there is no free lunch so if you pour money at this problem you do have after effects. You create certain problems. I mean you are giving a medicine dosage to the patient on a scale that we haven’t seen in this country. And there will be after effects and they can’t be predicted exactly. But certainly the potential is there for inflationary consequences that would be significant.

SG: We all know that in the long run everything is going to work out, but as you analyze President Obama’s economic plan, what do you think are the trade-offs? What are the consequences?
WB: Well the trade-off… the trade-off basically is that you risk setting in motion forces that will be very hard to stop in terms of inflation down the road and you are creating an imbalance between revenues and expenses in the government that is a lot easier to create than it will be to correct later on, but those are problems worth taking on, but you don’t get a free lunch.

SG: What about the regulatory system, is it a matter of making new rules or simply doing a better job at enforcing the rules we already have?
WB: Well there are probably some new rules needed, but the regulatory system I don’t think could have stopped this. Once you get the bubble going... once the American public, the U.S. Congress, all the commentators, the media, everybody else started thinking house prices could go nothing up, you were creating a bubble that would have huge consequences because the asset class was so big. I mean you had 22 trillion dollars probably worth of homes. It was the biggest asset of most American families and you let them borrow 100% in many cases of the price of those and you let them refi up to where they kept taking out more and more and treating it as an ATM machine.. the bubble was going to happen.

SG: But everybody is saying we need more rules, we have to enforce them, we need to go after every institution, every financial market. Do you think that new rules will do the trick or do we have enough rules that we just need to enforce them?
WB: Well you can have a rule for example to prevent another real estate bubble; you just require that anybody bought a house to put 20% down and make sure that the payments were not more than a third of their income. Now we would not have a big bust ever in real estate again, but we would also have people screaming that you’re denying home ownership to all these people that you got a home yourself and now you’re saying a guy with a 5% down payment shouldn’t get one. So I think it’s very tough to put rules out... I mean I can design rules that will prevent it but it will have other consequences. It’s like I say in economics you can’t just do one thing and where the balance is struck on that will be a political question. My guess is that it won’t be struck particularly well, but that’s just the nature of politics.

SG: You’ve said that we’re in an economic Pearl Harbor, so how bad are things really?
WB: They’re bad, they’re bad. The credit situation is getting a little better now. Things have loosened up from a month ago in the corporate debt market. But the rate of business descent is at a pretty alarming pace, I mean there is no question things have really slowed down.Peoples’ buying habits have changed. Fear has taken over and fear is a tough thing to fight because you can’t go on television and say don’t be afraid, that doesn’t work. People will get over it, they got greedy and they got over being greedy. But it took a while to get over being greedy and now the pendulum has swung way over to the fear side. They’ll get over that and we just hope that they don’t go too far back to the greed side.

SG: What’s your view on the recession? How much longer is it going to last?
WB: I don’t know. I don’t know. I don’t know the answer to these things. The only thing is I know that I don’t know. Maybe other people think they know, but I have no idea.

SG: The last time we talked, you said back in the Spring, you said the recession is not going to be a short-haul thing. What is your feel for it right now?
WB: It isn’t going to be short, but I just don’t know Susie. There’s no way of knowing.

SG: Berkshire Hathaway is in a lot of businesses that are economically sensitive, like furniture, paint, bricks. Do you see any signs of a pick up?
WB: No. No. The businesses that are either construction or housing related, or that are just plain consumer businesses, they’re doing very, very poorly. The American consumer has stepped back big time and it’s contagious and there’s a feedback mechanism because once you hear about this then you get fearful and then don’t do things at all. And that will end at a point, but it hasn’t ended at this point. Now fortunately our two biggest businesses are not really tied that way- in insurance and in our utility business we don’t feel that, but everything that’s consumer related feels it big time.

SG: Do you think that the psyche of the American consumer has changed, becoming more savers than spenders?
WB: Well it certainly has at this point and my guess is that continues for quite a while. What it will be five years from now, I have no idea. I mean the American consumer when they’re confident they spend and they’re not confident now and they’ve cut it back but who knows whether.. I doubt that that’s a permanent reset of behavior, but I think it’s more than a one day or one week or one month wonder in that case.

SG: Is that a bad thing?
WB: Well it just depends who the consumer is. I mean consumer debt within reason makes sense. It makes sense to take out a mortgage on a home particularly if you aren’t buying during a bubble. You are normally going to see house price appreciation if you don’t buy during a time when people are all excited about it. So I don’t have any moral feelings about debt as to how people should.. I think people should only take on what they can handle though and that gets to their income level…

SG: Let me ask it this way, with Americans saving more may be good for consumers, but is that bad for business?
WB: Well it’s certainly bad for business in the short term. Now whether it’s better for business over a 10 or 20 year period... if the American public gets itself in better shape financially that presumably is good for business down the road, but while they’re getting themselves in better shape, its not much fun for the merchant on Main street.

SG: One thing that Americans aren’t buying these days is stocks. Should they be buying?
WB: Well just as many people buy a stock everyday as sell one so there are people buying stocks everyday and we’re buying stocks as we go along. If they’re buying into a business that they understand at a sensible price they should be buying them. That’s true at any time. There are a lot more things selling at sensible prices now than they were two years ago. So clearly it’s a better time to buying stocks than a couple of years ago. Is it better than tomorrow? I have no idea.

SG: This financial crisis has been extraordinary in so many ways, how has it changed your approach to investing?
WB: Doesn’t change my approach at all. My approach to investing I learned in 1949 or ‘50 from a book by Ben Graham and it’s never changed.

SG: So many people I have talked to this past year say this was unprecedented… the unthinkable happened. And that hasn’t at all impacted your philosophy on this?
WB: No and if I were buying a farm, I wouldn’t change my ideas about how to buy a farm or an apartment house or a business and that’s all a stock is. It’s part of a business so if I were going to buy stock in a private business here in Omaha, I’d look at it just like I would have looked at it two years ago and I’ll look at it the same way two years from now. I look at how much I am getting for my money, how good the management is, how the competitive position of that business compares to others, how durable it is and just fundamental questions. The stock market is... you can forget about that. Any stock I buy I will be happy owning it if they close the stock market for five years tomorrow. In other words I am buying a business. I’m not buying a stock. I’m buying a little piece of a business, just like I buy a farm. And that doesn’t change. And all the newspapers headlines of the world don’t change that. It doesn’t mean you can’t buy it cheaper tomorrow. It may turn out that way. But the real question is did I get my money’s worth when I bought it?

SG: One of your famous investing principals is, “be fearful when others are greedy and greedy when others are fearful.” So is this the time to be greedy, right?
WB: Yeah. My greed quotient has risen as stocks have gone down. There’s no question about that. The cheaper something gets that you’re going to buy, the happier you feel, right? You’re going to buy groceries the rest of your life; you want grocery prices to go up or down? You want them to go down. And if they go down you don’t think gee I got all those groceries sitting in my cabinet at home and I’ve lost money on those. You think I am buying my groceries cheaper, I am going to keep buying groceries. Now if you’re a seller, obviously prices are higher. But most people listening to this program, certainly I, myself, and Berkshire Hathaway, we’re going to be buying businesses over time. We like the idea of businesses getting cheaper.

SG: So where do you see the opportunities in the stock market right now?
WB: That one I wouldn’t tell you about.

SG: Let me throw out some sectors and you just tell me quickly how you feel about these sectors.
WB: Susie, I am not going to recommend anything…

SG: Even in general, for example a lot of people now are looking at infrastructure companies, is that a sector that you find attractive?
WB: I wouldn’t have any comment. What they ought to do is look at businesses they understand. They‘d be happy owning for years if there was never a quote on the stock. Just like they buy in privately into a business in their hometown... They ought to forget all about what somebody says is going to be hot next year or the year after, whatever… because what’s going to be hot you may be paying twice as much for as something that’s not going to be hot. You don’t want to think in terms of what’s going to be good next year, you want to think of what’s a good business to be in and then buy it at an attractive price. And then you can’t lose.

SG: Do you see more opportunities in the U.S. compared to overseas?
WB: Well I am more familiar with the U.S. We have such a big market. I see lots of opportunities here and I see lots of opportunities around the world.

SG: Investor confidence was so shattered last year, what do you think its going to take to restore confidence?
WB: If people were dependent on the stock market going up to be confident they’re in the wrong business. They ought to be confident because they look at a business and think I got my money’s worth. They ought to be confident if they buy a farm, not on whether they get a quote the next day on the farm, but they ought to look at what the farm produces, how many bushels an acre do they get out of their corn or soybeans and what prices do they bring. So they ought to look to-the business as to whether to be confident compared to the price that they paid and they ought to forget about what anybody is saying, including me on television, or what they’re reading in the paper. That’s got nothing to do with whether they made a good decision or not. What’s got to do with whether they made a good decision, what kind of business they bought and what they paid for it.

SG: People are reeling from this whole Bernie Madoff scandal. What would you say to people who have lost trust in the financial system?
WB: They shouldn’t have lost... you don’t need to lose trust in the American system. If you decide to buy a farm and you pay the right price for it, you don’t need to lose faith in American agriculture you know because the prices of farms go down…

SG: But you know what I’m saying. People lost money last year in companies that they thought were rock solid. As I said the unthinkable happened and then on top of it, this whole Bernie Madoff scandal. It has undermined people’s sense of well being about our system. So what do you say to people who have lost trust?
WB: Well they may be better off not being in equities. If they’re really depending on somebody else and they don’t know anything about the somebody else, they’ve got a problem. They shouldn’t do that. I mean there are going to be crooks out there and this guy was a crook on a scale that we’ve never seen before. But you ought to know who you’re dealing with. But if you’re going to buy a stock in some business that’s been around for a 100 years and will be around for 100 more years and it’s not a leveraged company and it sells some important product and it’s got a strong competitive position and you buy it at a reasonable multiple of earnings, you don’t have to worry about crooks, you’re going to do fine.

SG: Is there any take away lessons from the Bernie Madoff story?
WB: Well he was a special case. I mean here is a guy who had a good reputation for 30 years or something, and the trust of a lot of people around him. So it’s very easy to draw assurances from the fact that if fifty other people that are prominent and intelligent trust the guy, that maybe you should trust him too. But I wouldn’t put my trust in a single individual like that. I would put my trust in a very good business. I would want a business that was so good that if a social guy was running it, it would still certainly do well and there are plenty of businesses that are like that.

SG: So are you saying that investing has gotten so complicated that investors should stick to what they know? Is that the take-away lesson?
WB: You should always stick to what you know. I say the “know-nothing investor” and there’s nothing wrong with being a “know-nothing investor”. I spend 60 hours a week, thinking about investments and most people have got jobs and other things to do. They can buy index funds. And they’re not going to do better then an index fund if they go around and trust some guy who’s promising them very high returns. If you buy a cross section of American business and you don’t buy it during a period when everybody is all enthused about stock, you’re going to do fine over 10 or 20 years. If you buy something with the idea that you’re going to do fine over 10 months, you may or may not. I do not know what stock is going be up 10 months from now, and I never will.

SG: What about Berkshire Hathaway stock? Were you surprised that it took such a hit last year, given that Berkshire shareholders are such buy and hold investors?
WB: Well most of them are. But in the end our price is figured relative to everything else so the whole stock market goes down 50 percent we ought to go down a lot because you can buy other things cheaper. I‘ve had three times in my lifetime since I took over Berkshire when Berkshire stock’s gone down 50 percent. In 1974 it went from $90 to $40. Did I feel badly? No I loved it! I bought more stock. So I don’t judge how Berkshire is doing by its market price, I judge it by how our businesses are doing.

SG: Is there a price at which you would buy back shares of Berkshire? $85,000? $80,000?
WB: I wouldn’t name a number. If I ever name a number I’ll name it publicly. I mean if we ever get to the point where we’re contemplating doing it, I would make a public announcement.

SG: But would you ever be interested in buying back shares?
WB: I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They’ve done it because they like supporting the stock…

SG: What are your feelings with Berkshire. The stock is down a lot. It was up to $147 thousand last year. Would you ever be opposed to buying back stock?
WB: I’m not opposed to buying back stock.

SG: Everyone wants to know your plans. What you’re going to do with all of Berkshire Hathaway’s cash, some 30 billion dollars? Is this now the right time to do a big acquisition?
WB: Well we’ve spent a lot of money in the last 4 months. We spent $5 billion on Goldman Sachs, $3 billion on GE, $6.6 billion on Wrigley, we’ve got $3 billion committed on Dow. We’ve spent a lot of money. We’ve got money left, but I love spending money. Cash makes me very unhappy. I like to always have enough and never way more than enough, but I always want to have enough. So we would never go below $10 billion of cash at Berkshire. We’re in the insurance business - we got a lot of things. We’re never going to depend on the kindness of strangers. But anything excess in that, I love the idea of buying things and the cheaper they get the better I like it.

SG: You’ve been talking about doing a big acquisition for a while now, what are you waiting for?
WB: Well we’ve spent $20 billion dollars... that might not be.

SG: I mean in terms of a company…
WB: Well we’ll wait for the right deal. We had a deal to buy Constellation for roughly $5 billion and then events with the French coming in meant we didn’t do it. But I was delighted to commit to that $5 billion dollars for Constellation Energy. And it could happen tomorrow. That one happened on a Tuesday afternoon I mean it happened like that. Constellation was in big trouble and we flew back that day, talked to the people at MidAmerican that Tuesday and made them an offer that night.

SG: It seems that you’re pretty optimistic about the long term future of the American economy and stock market, but a little pessimistic about the short term... is that a fair assessment of where your head is right now?
WB: I am unquestionably optimistic about the long term. I’m more than a little pessimistic about the short term, but that doesn’t mean I am pessimistic about the stock market. We bought stocks today. If you tell me the economy is going to be terrible for 12 months, pick a number, and then if I find something that is attractive today, I am going to buy it today. I am not going to wait and hope that it sells cheaper 6 months from now. Because who knows when stocks will hit a low or a high? Nobody knows that. All you know is whether you’re getting enough for your money or not.

SG: As you know it’s the 30th anniversary of Nightly Business Report. As you look back on the past three decades, what would you say is the most important lesson that you’ve learned about investing?
WB: Well I’ve learned my lessons before that. I read a book what is it, almost 60 years ago roughly, called The Intelligent Investor and I really learned all I needed to know about investing from that book, in particular chapters 8 and 20 so I haven’t changed anything since.

SG: Graham and Dodd?
WB: Well that was Ben Grahams’ book The Intelligent Investor. Graham and Dodd goes back even before that which was important, very important. But you know you don’t change your philosophy assuming you think have a sound one and I picked up I didn’t figure it out myself, I learned it from Ben Graham, but I got a framework for investing that I put in place back in 1950 roughly and that framework is the framework I use now. I see different ways to apply it from time to time but that is the framework.

SG: Can you describe what it is? I mean what is your most important investment lesson?
WB: The most important investment lesson is to look at a stock as a piece of business not just some thing that jiggles up and down or that people recommend or people talk about earnings being up next quarter, something like that, but to look at it as a business and evaluate it as a business. If you don’t know enough to evaluate it as a business you don’t know enough to buy it. And if you do know enough to evaluate it as a business and its selling cheap, you buy it and don’t worry about what its doing next week, next month or next year.

SG: So if we asked for your investment advice back in 1979 back when Nightly Business Report first got started, would it be any different than what you would say today?
WB: Not at all. If you’d ask the same questions, you’ve gotten the same answers.

SG: Thank you so much Mr. Buffett … Thank you so much, always a pleasure talking to you.
WB: Thank you, been a real pleasure.