Warren to the Rescue

People are getting ornery about the financial rescue plan, known as “TARP”. Taxpayers of all stripes are voicing frustration and anger about the situation, which is understandable. For those folks, as well as those who want to learn more about the situation, I urge you to listen to Charlie Rose’s interview with Warren Buffett (http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett).

Over the course of sixty minutes, the Oracle of Omaha did what Henry Paulson, Ben Bernanke, President Bush and countless members of Congress could not: he explained how we got to this place, why government intervention is necessary and his view about where the US economy is going.

[The interview was recorded before the Senate vote, but Buffett assumed that it would pass and that the House would follow, when it votes later today. He was right--the Senate handily passed a TARP but did so by adding some provisions, some of which are good, other that were just pork. The interesting additions include an increase from 100K to 250K for FDIC limits, a suggested change to mark-to–market accounting rules and a $150.5 billion package of unrelated personal and corporate tax cuts.]

Back to Warren…one of the best analogies that he provided was comparing the US economy to a fine-tuned athlete that is in cardiac arrest--something must done quickly to revive the patient so that he can return to his previous form. Obviously as the athlete is lying on the ground, there is not time for discussing why he is in cardiac arrest--maybe he worked out too much, maybe he should have rested between workouts. Who cares? He’s lying on the floor and we need to get him out of harm’s way! No, the first priority is to treat him so that he survives this event. Note that Mr. Buffett did not say that the patient on the floor is Wall Street, it is the US economy—and therefore, we all have something to lose if the patient is left to wither.

In essence, while the patient is on the floor and his condition is unknown, financial institutions do not want to do anything--they don't want to lend to each other (who knows which bank will fail next?), they don't want to lend money to consumers (sure, you seemed like a good risk a few years ago, but today, who knows?) and they don't want to lend to businesses (your biz could be next if the bottom falls out!) And while the patient is in trouble, those who are making loans are demanding higher interest rates and raising the hurdles for qualifying.

And here is the ripple effect that nobody wants to talk about: while the patient is not functioning, credit dries up, municipalities can't finance projects (poof--there goes your after-school program and new roads), businesses stop earning as much money, they lay off more people, who then can't make mortgage payments and we start on a terrible downward spiral. That is what we are trying to avoid with the rescue plan.

For those who want the patient to suffer to curb his behavior, that does not seem reasonable right now. The Wall Street fat cat has suffered but he will not die. Maybe his net worth has gone from $25 million to $5 million, but he still has $5 million—he will be just fine. You on the other hand, could lose your job, watch your home equity erode, lose basic services and if you are lucky enough to have a retirement account, you may see value erode.

Let’s save the patient and then rehabilitate him. After all, as Mr. Buffett notes, the Americans are likely to be better off in ten years—but only if we don’t allow the patient to die on the floor without any assistance.