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Not Even Warren Buffett Can Escape the Economic Crisis

By: Steve Johnson

11/10/2008 - 33 Comments

Warren Buffett's business Berkshire Hathaway Inc (BRKa.N)(BRKb.N) said on Friday their third-quarter profit fell 77 percent.

The fourth straight quarterly decline hurt by weaker results from insurance underwriting and a big loss on derivatives contracts. Buffett is recognized as the smartest and richest investor in the world, yet he has not been able to escape the global market decline.  Buffett has also been making many investments in the last few months, committing more than $27 billion of Berkshire's money this year to make acquisitions, finance takeovers and invest in blue-chip companies such as General Electric Co (GE.N) and Goldman Sachs Group Inc (GS.N) that may prove to restore his business to profitability.

Warren Buffett is also a trusted economy advisor to President-Elect Obama.  Obama will need all the help he can get, as he studies pages and pages of economic bad news that is as broad as deep.  The biggest challenge for Obama is in deciding which decisions will help the economy at the right time.  Many of the economic actions of the government are extremely timely.  Many decisions will be good in the short-term, while creating bigger problems in the long-term. Yet, elected officials almost always make decisions for the present danger, leaving the long-term consequences for the next election to deal with.

But this time could be too much for the US government to handle, as the crisis has spread across the globe and has infected all major markets.  The changes in the market are happening so fast that governments are scrambling to understand what is going on and making decisions based in information that is changing every day usually results in making bad decisions.  If Warren is the smartest investor in the world and his profits fell by 77%, then how is he going to help Obama?

The business world is focused on profits, while the government is focesed on taxes and jobs. But the decisions they face contradict each other.  The forces of capitalism are driving asset (home, cars) prices down, causing consumer to pull back, and forcing businesses to cut jobs. The government wants to stop asset prices from dropping so that consumers can continue to spend money, but after more then a year of radical monetary policy actions, they have not been able to stop asset price declinesIn this environment, business decisions contradict government actions.   

For example, the government is upset with the banks for not lending more money.  The pressure on the banks that take Fed money to lend is causing banks to refuse to take Fed money.  There are so many better investment opportunities for banks right now that they don’t want to lend people money at low interest rates. Why lend someone a 6% loan to purchase a car or house, when you can buy up assets like commercial real-estate or a competing bank for 20 cents on the dollar?  The Fed is not happy with banks that are choosing to use their money for investments rather then lending to people, because if consumer confidence drops (which is already has the economy will drop even faster.

Warren Buffett is making decisions based on profitability, not jobs or taxes.  I think the best advice that Warren can give Obama is to let the chips fall and don’t get in the way of the market forces that are rearranging the entire economy.  But, that is not what Obama wants to hear nor is it even a possibility of actions he could take.  Obama has already committed to helping many special interest groups like unions – that are hindering businesses like GM, Ford and Chrysler from profitability.  America is fighting the forces of global capitalism that we helped spread around the world. 

The government is trapped between capitalism and the people, profits and jobs. Who will survive? More than likely, jobs will be supported by the government even at the expense of destroying the very foundations of our economy, paralyzing our prospects for returning to prosperity any time in the near future.  The right decisions for Obama will be impossible to make, because they are to turn on the very people that have elected him and tell them the truth - that the money is gone and everyone needs to cut back including the government, which includes cutting the government entitlement programs that he has promised.

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