Disputing Warren Buffett's Comments

Last night was Warren Buffett's day out on CNBC. The video clips can be seen here Warren Buffett Day On CNBC and Warren Buffett Day On CNBC II

Of course there are some who would NOT agree with what Buffett had said especially on what's needed to be done by Obama and his administration. One of the better comments wrote was posted by Jesse Come On Mr. Buffett.

• * I noted then, as I will now, that it is disingenuous at best for Buffett to be calling this an "Economic Pearl Harbor". (1) There is no external aggressor. (2) We are more like a drug addict or an alcoholic than a populus being attacked. (3) His metaphor implies we are not at fault - we just need to fight back against the force which is fighting us. In many, many ways this is not an appropriate metaphor. I understand that he is trying to convey a sense of urgency, and a need to put aside our differences to reach a good solution. But the gaping holes in the metaphor are so large that I am left with the impression that he is simply trying to scare us into following the prescription of Obama.
  
  * The majority of people fundamentally disagree with Geithner's plan. Many people, including myself, Paul Krugman, Nouriel Roubini, Simon Johnson (former IMF Chief Economist), Richard Shelby, Lindsay Graham, Chris Dodd, KS Fed Chief Thomas Hoenig (source), Calculated Risk, Barry Ritholtz, John McCain, Nassim Taleb, Chris Whalen, Elizabeth Warren (head of Congressional Oversight Panel), Josh Rosner, Alan Greenspan, Gordon Brown, Nancy Pelosi, Nassim Taleb, Joseph Stiglitz and Todd Harrison, believe the plan put out by Tim Geithner is FUNDAMENTALLY FLAWED. Warren Buffett is basically saying that we should shut up and do what Obama says. However this plan is, to our belief, fundamentally flawed and could bankrupt this country.

And Jesse points to the main source of the problem. DEBT!

• Our real problem is simple - too much debt.
  
  * 15%+ of aggregate demand (GDP) in the US in 2007 was from growth in debt (source) alone. It is as if I spent all of $100 in income, and then borrowed another $15 to spend it. When debt growth simply goes flat, that 15% of GDP will vanish. Debt goes flat when it gets way too large, and borrowers pull back. That is what is happening as we speak.
  
  * We foisted all this debt on the mistaken belief that housing prices, globally, were worth far more than they were actually worth (source). We then foisted a bunch more debt on a bunch of other things, like our corporations (source). Now that asset appreciation is going away.
  
  * We repealed Glass Steagall, which separated speculation from traditional banking, and which imposed leverage limits on our banks - leverage limits that had been place since the era of the Great Depression. Old restrictions capped us at 12x leverage. We ended up with 33x leverage (and higher!), leaving us vulnerable to even the smallest of shifts in valuation (source).
  
  * We had a global debt bubble - we can see this clearly in Japan (source), in Australia (source), in the UK (source), in Ireland (source), in Switzerland and Belgium (source), in the OECD as a whole (source).
  
  Debt is in many ways like a drug. It provides an up front "high" (cash) at the expense of the future (interest payments). At the beginning its impact is a lot stronger than it is later after repeated use. It can create addiction, where later on, doses are required simple to remain "even" (if you borrow interest over time, debt continues to rise, requiring debt simply to pay off the interest payments). If the dosage gets high enough in the blood stream it can be fatal.
  
  A person making $1000 per year can support $300 of debt a lot easier than $1000. But we are way worse than that. There are 116M households in the US, generating average income of $68k per year. We have $52T of total debt in our country. This is $450k per household. $68k supporting $450k of debt is extremely high, and is larger than we have ever had before (source).

Do read the rest of Jesse's comments and the of course the recommended solution: http://jessescrossroadscafe.blogspot.com/2009/03/come-on-mr-buffett.html