Warren Buffett on Bailouts

From op-ed letter in NYT:

When the crisis struck, I felt you would understand the role you had to play. But you’ve never been known for speed, and in a meltdown minutes matter. I worried whether the barrage of shattering surprises would disorient you. You would have to improvise solutions on the run, stretch legal boundaries and avoid slowdowns, like Congressional hearings and studies. You would also need to get turf-conscious departments to work together in mounting your counterattack. The challenge was huge, and many people thought you were not up to it.

Well, Uncle Sam, you delivered. People will second-guess your specific decisions; you can always count on that. But just as there is a fog of war, there is a fog of panic — and, overall, your actions were remarkably effective.

Uninformed Voters

From Bloomberg (10/29/2010):

"The Obama administration cut taxes for middle-class Americans, expects to make a profit on the hundreds of billions of dollars spent to rescue Wall Street banks and has overseen an economy that has grown for the past five quarters.

"Most voters don’t believe it. "

The Economist on the Auto Bailouts

From The Economist (8/19/2010)

"That does not mean, however, that bail-outs are always or often justified. Straightforward bankruptcy is usually the most efficient way to allow floundering firms to restructure or fail. The state should step in only when a firm’s collapse poses a systemic risk. Propping up the financial system in 2008 clearly qualified. Saving GM was a harder call, but, with the benefit of hindsight, the right one. The lesson for governments is that for a bail-out to work, it must be brutal and temporary. The lesson for American voters is that their president, for all his flaws, has no desire to own the commanding heights of industry. A gambler, yes. An interventionist, yes. A socialist, no"

Warren Buffett on Stimulus and TARP

From Ben Stein interview with Warren Buffett in  Fortune (10/19/2010)

"When would you start hiring a lot more people?" I ask him.

"When demand picks up," he says. "We don't hire because we get a tax break or because someone in the government tells us to. We hire when there's more demand for what we are making or moving or selling. It's that simple."

"Where will the demand come from if a business as big as yours is being so cautious?" I ask.

"It's already coming," he says. "It's already happening, and it will pick up. Look," he adds, "we needed a really big stimulus in the fall of 2008 -- a really, really big stimulus. We didn't get it. It was a miracle that Bank of America (BAC, Fortune 500) bought Merrill for $29 when it was probably worth 29 cents if left on its own for a few days. If that hadn't happened, everything would have collapsed. The whole commercial-paper market would have stopped. Every domino would have fallen. Berkshire (BRKA, Fortune 500) would have been the last, but it would have fallen too. Ken Lewis saved the whole system for a while, until TARP could rescue it. But now we're just going to get a very slow recovery because people are still scared. But we are seeing recovery, definitely."

"How about in housing?"

"That recovery is still a long way off. That market got way out of equilibrium, and it's going to take a long while for it to get fixed."

The Last Two Years and the 2010 Election

Employment - Job losses were  rapidly accelerating at the time of President Obama's election, but quickly stabilized soon after, and began to rapidly decelerate after the passage of the stimulus.  Less than one year after President Obama was elected, the United States experienced its last month of negative private sector job growth and since that time has experienced 9 consecutive months of private sector job growth.

Stimulus -  The stimulus was found to have significantly improved economic growth and employment according to the nonpartisan CBO.  The CEA, multiple economic studies and institutions, the president of the US Chamber of Commerce, the director of the IMF, and the majority of those surveyed by the Wall Street Journal forecasting survey and National Association of Business Economics, also found the stimulus to be beneficial.

TARP and Monetary Policy - Though frequently characterized as a give away to banks, these policies were consistent with the financial accelerator model proposed  by Ben Bernanke to understand financial crises. The effects of these policies were actually viewed as more beneficial than the stimulus according to an extensive study by Zandi and Binder on the recent recession.  TARP, once estimated to cost $356 billion, is now estimated to cost $66 billion and even is expected to earn a profit according to some estimates.

Spending, Deficits, and Debt - The current deficits and projected future deficits are not caused by out-of-control spending for the "Obama Agenda" but instead are caused by the Bush tax cuts, the economic down turn, interest payments, and increased military spending.  The Republican sponsored prescription drug benefit will cost more over the next ten years than the stimulus, the bailout, and healthcare reform combined.

Healthcare - The healthcare reform bill was not "rammed down the throats" of an unreceptive public but was supported by 55% of those expressing an opinion in a Gallup shortly after its passage.  The CBO found the proposals on healthcare put forth by Republicans would achieve little, and the Republicans themselves did not support some of their own positions previously nor did they make any other attempt to address the rise in future medicaid costs when they were in power but instead exacerbated the problem by passing the medicaid prescription drug bill after allowing PAYGO rules to expire.

Economy -  The stock market has improved approximately 65% since reaching its low a few weeks after the passage of the stimulus.  The improvement in the stock market under the Obama administration is one of the best 2 year improvements of any president since 1900.  Almost all other economic indicators have also rapidly improved.  Employment has lagged but this is always one of the last indicators to improve after a recession.

Summary  - Though some claim no distinction between the two parties, the evidence indicates otherwise.  The Democratic party's policies are grounded in reality and supported by mainstream economic thinking.  The Republican party for 30 years has put forth a view of economics that the overwhelming majority of economists view as "voodoo" economics and has resulted in an unprecedented increase in debt.  In the history of this country no major political party has shown such a lack of concern about debt or conducted their fiscal policy so completely divorced from contemporaneous economic thought, theory, and empirical evidence.  The Republican party's scientific views are equally suspect, and if the worse case scenarios of climate change come true, the current economic crisis will be remembered fondly.