How Worried is Charlie Munger?

Answer: zero.

Ridiculously good interview on BBC

"What happened in America is that the people who were making money out of lack of wise restraints, just got more and more power by doing more and more lobbying, making larger and larger political contributions. And being aided by a certain ideological nuttiness which assumed that because free markets worked so much better than say Communism that it automatically followed that if there were no rules at al restraining financial conduct the economy would work better. And that's not so, the economy works worse if you allow unrestrained sin and folly in finance. That goes back all the way to the South Seas bubble." ... 

Both parties have wings that are full of idiots, that is the nature of the game. And the reason its worked as well as it has is that the people in the middle have learned to tune out the idiots on both sides. But every once in a while the idiots get in control. And that has terrible consequences.

We went way too far with financial deregulation, and people were making so much money and the economy was doing so well because it was being puffed up by this idiot boom and idiot expansion of consumer credit.

Your life for the next three weeks would be more pleasant if you went on heroin, but it would ultimately destroy you over the long pull, and that's what an economy does when it allows itself to be seduced by the potential from an idiot boom and allowing all this gross immorality and craziness to take over.

This of course echoes his comments at the Berkshire 2008 annual meeting

A lot goes on in bowels of American industry which is not pretty. A lot of my fellow Republicans got overdosed on Ayn Rand. They would hold that even if an axe murder happened in a free market, if it was in a free market then it was a wise development. I think Alan Greenspan did a good job on average, but he overdosed on Ayn Rand that whatever happens in free market is going to be alright. We should prohibit some things. If we had banned the phrase, “this is a financial innovation which will diversify risk”, we would have been far better off.

(note in the BBC interview he calls Greenspan a hero for being the only major figure to admit he made a mistake in the crisis)

This market regulation issue is nicely explored in John Kay's recent Wincott lecture

A more thoughtful account of the success of markets has three elements. Prices act as signals - the price mechanism is a guide to resource allocation rather than central planning. Markets are a process of discovery - an economy adapts to change through a chaotic process of experimentation. The third element is the capacity of the market to bring about diffusion of political and economic power. This is the most effective way to protect society from rent-seeking - a culture in which the principal route to wealth is not creating wealth, but attaching oneself to wealth created by others.

Modern economics and economic policy put too much emphasis on the first of these elements. But the second and third are probably more important. The result is that both supporters and critics of the market economy confuse policies that are pro-business with policies that are pro-market. That confusion has undermined the social and political legitimacy of the market economy, and has led to serious policy errors.

Market regulation has a lot in common with information security, in both cases its a question of trying to create policies that balance entrepreneurial creativity with some enterprise controls

Comments

[Slonob]

Alan Greenspan (1967):
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

http://www.usagold.com/gildedopinion/greenspan.html

[Gunnar]

Read "The Lords of Finance" you will find the worst economic crisis happened while the world was on the gold standard.

"Gold has no inherent value, only mystique" - Warren Buffett

As for deficit spending - do you have a mortgage on your house?

[Richard]

You purchase a mortgage on an asset betting that the value of the asset will increase over time at a rate greater than the cost of the financing. Government deficits inevitably go towards expenses rather than capital improvements.

As for regulation itself, that presupposes that a select, politically chosen body can select appropriate rules governing the billions of transactions that take place every day. Regulations don't scale and their very existence creates moral hazard as players increasingly expect a perceived omniscient third party to protect them from loss.

Any economy greater than your family budget is far too complex a system to be externally managed. There's never enough information to make informed decisions and the information at hand is often only gathered after the fact. Large complex systems require self organization to be successful. Free market principals do not lead to a Utopian ideal, but neither does Socialism, Communism, Corporatism, or any other "ism" system that mankind has developed. What the free market has done is put the choices at the lowest level possible, leading to the greatest free society the Earth has seen to date. Any other system is steeped in government power (force) and eventually becomes a tool for the enrichment of a select group of controlling special interests.

As for Buffet's claim of gold, read up on Ludwig Von Mises treatise on money and credit. You can get it at Mises.org for free. Only precious metals have met mankind's need for a generic store of wealth over time.