Alice Schroeder: Munger Offers Odd Justice on BailoutBy
You've gotta love a man who speaks his mind, even when he's wrong. We "shouldn't be bitching about a little bailout" of the banks, Charles Munger, Berkshire Hathaway (BRK.A) vice-chairman and Warren Buffett's closest confidante, told students at the University of Michigan on Sept. 14. That's a strong statement, but Munger is one of the refreshing few who can be counted on to deliver his thoughts uncensored in words unminced.
Munger says the bank bailouts were "required to save your civilization." He suggested that burdening the economy with bank failures would have results similar to the economic collapse in Germany after World War I that led to the rise of Adolf Hitler. Meanwhile, "the culture dies" if you bail out individuals. People in economic distress should "suck it up and cope."
Apart from what some might consider his tasteless hyperbole, the problem is the false dichotomy it presents. The choice wasn't between the bailout or no bailout. It was between the bailout we financed, which didn't resemble capitalism in any known form, and a bailout more intelligently executed.
No one made us bail out shareholders along with the banks' bondholders. We didn't have to preserve institutions that are still too big to fail in any meaningful sense of the term. We could have propped them up temporarily, then recapitalized them as smaller, more manageable entities, with former equity holders assuming the cost of the risk they assumed.
We missed the chance to reduce systemic risk by comprehensively rewriting regulation for the financial-services industry. Instead of withdrawing government guarantees, we increased them. So there are plenty of reasons to complain about the bailouts.
To give him credit, I'm pretty sure if we gave Munger dictatorial power, he would have structured the bailouts more intelligently than what actually took place. In his remarks he wasn't defending the form of the bailouts, only their size. If anything, "it should have been bigger," he said. His reference to a massive bailout needed to ward off another Germany-style hyperinflation also wasn't necessarily hyperbolic. It echoed his partner, Berkshire CEO Buffett, whose ongoing theme is that we've experienced an "economic Pearl Harbor." Both men look at the situation as oddsmakers. By their logic, if the damage from too much stimulus is tolerable and the damage from too little stimulus is intolerable, the expected value of the outcomes reveals that we should run the lesser risk of overstimulating. This is throwing people off the lifeboat to keep it from sinking.
Munger's financial interests line up with his words. Berkshire has large holdings in Wells Fargo (WFC) ($8.5 billion), the U.S.'s biggest home lender, as well as a $5 billion investment in Goldman Sachs Group (GS). If that's not a coincidence, it's probably because he puts his money where his mouth is rather than the other way around. In choosing sides between the opposing interests that inevitably arise in commerce, Munger and Buffett identify with the lender, not the borrower; with the bank, not the depositor; and that's how they invest.
It's not surprising, then, that Munger focused on the vital role banks play in society when he said people should suck it up and cope. Maintaining the trust that binds creditors and debtors is essential to the security of a culture.
What's unfortunate about this concern about bad incentives is that Munger didn't extend it to qualify his support for the bank bailouts and the tremendous moral hazard they created. It may seem appropriate to reward the thrifty savers by securing their deposits while leaving feckless borrowers to fend for themselves, until you consider that the banks were the worst abettors of the feckless borrowers.
As for trust, financial institutions have so much leverage with their customers these days that the relationship is rarely based on reciprocal values. It's inappropriate that the requirement of trustworthiness should run in only one direction, in favor of the bank.
Munger's prescription for the foreclosed masses suggests the result would be a form of justice that does us all a favor. Bailing out homeowners would be "shoveling out money to people who say 'My life is a little harder than it used to be,' " Munger said.
I'm all for self-reliance, and this perspective on misfortune deserves some latitude, coming as it does from a man who was raised during the Great Depression. Munger should be applauded for saying what he thinks without fear of being thought politically incorrect. In the end, though, coming from a billionaire, "suck it up" veers a bit too close to "let them eat cake."