Charlie Rose Talks to David Einhorn

How does the global economy look to you right now?
The global economy, as I see it, is sort of in a period between two crises. We had a crisis in 2007-2008. Call it the private-sector banking crisis or the real estate bubble popping. But I think it's sort of laid the seeds for what will eventually turn out to be another crisis. There is a lot of unfinished business.

What sort of unfinished business?
Well, I think what we did in the last crisis in resolving it was—rather than go to the root of the crisis, tally up the damage, allot the losses, clean up, fix things, and move on—I feel like a lot of what we did was sort of sweep things under the rug and put short-term bandage fixes on things. And I think we managed to transfer a lot of the problems from the private sector to the public sector. I'm concerned that will eventually threaten the public sector as well.

In what way?
There were a lot of bad loans made, and we had an opportunity to recognize those losses, clean up the mess, set a base for future growth. Instead, what we decided to do was paper over the problems. We bailed out a lot of institutions. We bailed out a lot of people that had positioned themselves incorrectly. It's created a very, very large budget deficit. And it's created a monetary policy that is extremely easy, and it seems to be perpetuating itself in a way that I think is going to come to a tough spot.

What do you think of the Federal Reserve and quantitative easing?
I think essentially it's the wrong thing to do. I think it will be counterproductive. The goal of the quantitative easing right now is to raise the inflation rate. That's what they say. They think inflation is unacceptably low, and there is a great deal of concern about deflation. Let's talk about deflation for a moment.

Let's just say Apple (AAPL) fixes the components in the iPhone so that the battery lasts twice as long as before. Then Apple sells you that same phone with the same components with twice as good a battery for the same price. The way the economists look at that, they'll say that iPhone is 15 percent better than the old iPhone that you could have got at the same price—and that is deflation. What I don't understand is, why do we need to have a policy response to fight that behavior? Who is harmed by the fact that Apple can make an iPhone with twice the battery and sell it to you at the same price?

So you like Apple.
Very much. Apple is an interesting company because it has arguably one of the best brands in the country. It's growing at an enormous rate. And the growth effectively feeds on itself because when you buy one Apple product, you want to buy another because they're so nicely compatible. The result is that businesses, which for a generation essentially avoided Apple products, are adopting them now because of the demand from the employees. They come in with their iPhones and they say, "I want you to support this with my e-mail." That's a powerful growth story. With the introduction of the iPad, it's sort of reaching a critical mass right now.

What is it you like about what you do? Because you didn't set out to run hedge funds.
What I like is solving puzzles. I think that what you are dealing with here is incomplete information. You've got little bits of things. You have facts. You have analysis. You have numbers. You have people's motivations. And you try to put this together, decode the puzzle in a way that allows you to have a way better than average opportunity to do well. That's the best part of the business.

Did they take the right steps with financial regulatory reform?
I think what happened was Washington essentially said, "We will let Wall Street off the hook if Wall Street allows Washington off the hook." So I think that the reform doesn't go after any of the obvious issues identified in the crisis.

The political judgment seems to be that regulators didn't have the tools they needed.
I disagree. The problem was that the laws were not enforced. After Enron you had Sarbanes-Oxley, and there have been hardly any prosecutions under it.

You put in a tough anti-fraud law. The CEO has to sign there is no fraud. The CFO has to sign that the financial statements are correct. If not, there are going to be criminal consequences....But then they didn't enforce it. Once the bad guys figured out that the law wasn't being enforced, it effectively provided cover, because everybody said, "Look, we have the tough anti-fraud law. The fraud must have gone away."

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