Warren Buffett Speaks about Financial Crisis

Sara J Dufort

The world’s third richest man does not get that wealthy by not knowing anything about finances. Someone like this knows how to play the market, and Warren Buffett is no exception. With a net worth of 47 billion dollars, it is clear that he has figured out how to invest his money properly. Therefore, when Buffett has something to say about a financial crisis in the United States, people tend to take notice. Last week, several hours of audio were released from a May 2010 interview with the Berkshire Hathaway boss himself, Warren Buffett. While he touched upon many different topics, the most important were about what caused “the bubble,” when he saw it coming, and who contributed the most to it.

When asked about the origins of the bubble, Buffett explained that people began to believe that housing prices could not fall significantly. He explained that it was the biggest asset class in the country, and as the easiest asset class to borrow against, it created probably the biggest bubble in our history. What he meant by this was that people kept borrowing money for houses that they could not afford, and then banks continued to give these people money. The problem arose when it finally came time for those people to pay their mortgages, realizing they did not have the means to do so.

Sadly, even one of the richest men in the world could not see the financial collapse coming before it was too late. When asked about when he realized the crisis was coming, he simply said, “not soon enough.” He explained that Berkshire Hathaway talked about it at their yearly meetings, and at one point, they called it a “bubblette.” It was so small at the time that they did not even consider it a problem. He said that while he was aware of the internet bubble, he did not go out and “short the stocks.” If he had done something like that, it could have caused even more problems with the amount of personal wealth that he has.

However, when it comes down to who actually caused the crisis, Buffett said, “every aspect of society contributed to it, virtually.” The interviewer asked about rating agencies, bank management, and regulators, and each time, he believed that they all had a hand in causing the problem. An example he gave had to do with Freddie and Fannie May. He believed that if they simply said, “we will only accept mortgages with 30% down payments, verified income, and payments can’t be more than 30% of your income,” that would have stopped it. But the problem was that everyone was enjoying “the party.” No one realized that it was going to paralyze the American economy, and once everyone started to believe this, there was no turning back.

Whether or not anyone could have predicted the financial collapse is still up for debate. Many people argue that there were models that told everyone that there was going to be problem, but they just ignored the signs. Others say that the models are never right. We may never know if someone knew ahead of time, and did not tell anyone, but from what Warren Buffett said during his interview, it is clear that he believes people did.

We will always have periods of expansion and contraction according to the business cycle, but one can only hope that it will not be as bad as the one that we are currently recovering