Warren Buffett Explains Bubbles: But He Doesn't Know We Are In One

Mish

Buffet explains bubbles: "People see neighbors 'dumber than they are' getting rich."

Warren Buffett explains Why Bubbles Happen

>Buffett was asked by CNBC's Andrew Ross Sorkin if he is worried another crisis will happen again.

>"Well there will be one sometime," Buffett said in an interview for CNBC's "Crisis on Wall Street: The Week That Shook the World" documentary. The documentary airs Wednesday night at 10 p.m. ET/PT.

>"People start being interested in something because it's going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren't," he said. "And their spouse is saying can't you figure it out, too? It is so contagious. So that's a permanent part of the system."

That last paragraph perfectly explains Bitcoin. Most of those investing in cryptos have little idea how they work, or what they are even buying.

Buffet made no mention of the corporate bond bubble, the equities bubble, or even the crypto bubble. He does not see any bubbles now, at least that he mentioned.

Symptom or Cause?

Buffett confuses a symptom (rampant speculation) with the true cause

  • The Fed (central banks in general), keep interest rates too low, too long
  • Fractional reserve lending
  • Moral hazards like bank bailouts
  • Poor fiscal policies and massive government debt

In short, there is no free market in anything and thus no valid price discovery. There would always be speculation, but Fed policies and fractional reserve lending are the root cause of bubbles.

Mike "Mish" Shedlock

Comments (16)
No. 1-10
oudaveguy98
oudaveguy98

The moral hazard of rewarding the very people who lead organizations into financial ruin with their recklessness and bad decision making is truly repugnant. Watching the worst failures in the history of business walk away with taxpayer funded golden parachutes was an abomination and a true evil. Meanwhile, everyone else is punished so these miserable creatures can maintain an obscene and lavish lifestyle at our expense. Institutionalizing cronyism is one of the worst legacies of central banking.

Blacklisted
Blacklisted

There you go again. If only we ended the Fed, all would be fine. I don't know if you keep up this nonsense as a distraction from the real problem - career politicians and the favored laws they pass for their bankster donors, like rescinding Glass-Steagall so transactional banking could flourish; or really don't understand what you are saying. Search "fractional banking" at Armstrong to get educated.

Fractional v Transactional Banking | Armstrong Economics
Fractional v Transactional Banking | Armstrong Economics

A lot of people are jumping on board, claiming the problem is fractional banking and the private creation of money, which is somehow wrong, should be handed to government. Money has ALWAYS been private, for it is an agreement between two people to exchange whatever for some common item everyone else agrees to accept. That has been everything from seashells to gold. It has always been the people who decide. Even paper currency cannot circulate without the consent of the people. Fractional banking has been around for hundreds of years. So why is it only now that this is the great evil? The answer is simply - it is a diversion and not the problem. Fractional banking is taking $1 in deposits and lending it out many times. The new rage is to tout this as the creation of money by banks. Yet banks cannot create this type of money to pay their bills or taxes, because it is not really creating money out of thin air - it is merely leverage. Being dispassionate always leads to the answer. If fractional banking was the problem, then why do banks have well over $2 trillion parked at the Fed in EXCESS RESERVES? That means, they could lend that money out multiple times and leverage it into even $10 trillion. So why are they not lending? Welcome to the dawn of TRANSACTIONAL BANKING. If I were to be assassinated for something, it would be for trying to refocus the public's attention to this new development that is post-1991. Robert Rubin of Goldman Sachs sold the idea of TRANSACTIONAL BANKING, claiming it would make the banks stronger, for they would generate the loans, but then package them and sell them to someone else - i.e. 2007. This was the pitch to repeal Glass Steagall in 1999. If the banks didn't have these loans on their books, then they would not have the risk when the business cycle turned down. That meant the END OF FRACTIONAL BANKING. The banks would rather trade with your money (repeal of the Volcker Rule) than lend money out to create jobs (Fractional Banking). So while they have no problem if the people, as is the case in Iceland, demand that the credit decisions be handed to government because from their perspective, they do not give a shit. This is now about trading, not lending. Of course, the small regional banks will be wiped out in this manner. The big banks that profit from proprietary trading are the ones behind this disinformation. End fractional banking and you will not solve any problems, instead you're more likely to make matters worse. If we do not deal with the real issue, the wrongful repeal of Glass-Steagall, then we are only going to make the future darker, not more secure. JPMorgan Chase wants to charge fees to keep money in your account. They have become traders, first and foremost. Open your eyes and pick up the rug. That is where the dirt hides.

ML1
ML1

World has a bubble of bubbles right now...

ML1
ML1

Cryptos were and are essentially worthless.

Cryptos only rose because speculation, because they were used in illegal things like drug dealing and because Chinese used cryptos to get their money out of China without being stopped by the money prison China has for Chinese peoples money through currency controls and permits needed to send money abroad in large sums.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

To Blacklisted: Where the F did I say "if only we ended the Fed everything would be fine" - put more words in my mouth and I start deleting your idiotic comments Besides, it is clear you cannot even read. I specifically cited poor fiscal policy. The Fed does not control that.

Blurtman
Blurtman

Sadly, there is no such thing as fundamental value when it comes to stocks.

2banana
2banana

Obama's QE and ZIRP allowed those first in line to get insanely rich with no risk.

Like Warren who thinks himself a genius.

mike09
mike09

what can replace fractional reserve lending?

Carl_R
Carl_R

If those are the "true causes", why were there bubbles long before those "true causes" existed? At best your "true causes" are not causes at all, but things that encourage and facilitate them, making them more common.

The true cause can be easily expressed in one word: "Greed".

ReadyKilowatt
ReadyKilowatt

I don't know anyone getting rich off a speculative bubble. Except maybe in overtime due to the Colorado housing bubble, but that might actually be the real deal as those who can are fleeing California. Then again, if it's bubbles all the way down maybe we're all getting rich from them. Some just faster than others.


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