Wednesday, September 24, 2008

Buffett Supports Bailout; Says Gov't Will Make Money

In a long interview uninterrupted by commercials on CNBC this morning, Warren Buffett voiced his support for Treasury Secretary Paulson's proposed bailout. He also said the U.S. government will make a very good profit on the deal (15%+ rate of return), if it buys at market prices.

Fed Chairman Ben Bernanke stupidly suggested yesterday that the government should buy at significantly above market prices. Buffett said that is not a good idea.

Buffett didn't mention this, but I should point out that if the government follows Bernanke's stupid idea and pays above market prices, it would remove less bad debt off of bank balance sheets than if it paid market prices. (The higher the price, the less you can buy.) Bernanke needs a refresher course in microeconomics, since he's suggesting paying more than the equilibrium price.

Buffett also said that President Obama or President McCain should keep Hank Paulson as Treasury Secretary for the first year of their presidency. (I think Obama could probably do quite well with NJ Governor Jon Corzine as Treasury Secretary, if he wanted. Jon Corzine, a Democrat, was Paulson's predecessor as CEO of Goldman Sachs.)

Here is the full interview:
While on the topic of the bailout, let me point out that Carnegie Mellon University economist Allan Meltzer has his own proposal:
if they're going to do something, then what they ought to do is make loans, which the financial institutions have to repay with interest. And if you think — that's an idea which the Chileans have used in a bigger crisis than this for them in 1982, and it worked for them. People paid back the loans. They weren't allowed to pay dividends until they repaid the loans. They weren't allowed to take bonuses until they repaid the loans. I think that's the way — if we're going to do this, then that's the way we should do it.
Somehow, I doubt that if the government follows Meltzer's idea it will earn a 15%+ rate of return. However, I do like the idea of prohibiting dividend payments until the credit crisis has passed.

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