Another Article on Warren Buffet's letter. Smart Money, Honest Voters by Gary North "You can't cheat an honest man." ~ Mordecai Jones Mordecai Jones was a character in The Flim-Flam Man, a 1967 movie starring George C. Scott. Jones was a small-time con man who roamed the rural South, cheating people out of their money – not much money, but little chunks. You might call his scheme "making it small with little scams." He was poor. He would sometimes live in an abandoned freight car. He had nothing to show for his life. But he liked his lifestyle. He would cheat people by persuading them that they were cheating him. "You can sell a man anything if he thinks it's stolen," he told his naïve young recruit. Then he would sell them junk at stolen goods prices. He was a total cynic. He thought he could con anyone, because he believed that everyone was a cheat, just as he was. He took advantage of their weaknesses. "Greed's my line. And 14-carat ignorance. They never let you down." PONZI SCHEMES Bernie Madoff was a big-city Mordecai Jones. He persuaded rich people – mostly Jews – that he could bring them above-market returns. They would get richer effortlessly. He sold them on something for nothing. They got nothing for something. He ran a Ponzi scheme, and the longer it went on, the bigger the stakes were. Medicare is a Ponzi scheme. Everyone who looks at the numbers knows this, especially the trustees. Social Security is a Ponzi scheme. The government knew that in 1935. The living proof was Ida Fuller. The Social Security System has posted the story of Ida Fuller on its website. Fuller paid in under $25, retired in 1940, lived to 1975, and collected almost $23,000. I first read about her in 1976. I clipped the newspaper story for my files. Beginning in 1976, I began calling this program a Ponzi scheme. By then, a few critics were calling it that, but not many. Today, it is a commonplace. It is not just a commonplace. Ida Fuller is the poster girl of the longest-running Ponzi scheme on earth. Today, tens of millions of Americans are either completely dependent on Social Security and Medicare or soon will be. Most voters know what the system is – a bailout for improvident oldsters – but they vote against any Congressman or Senator who dares say that the system is broke, and it has to be abandoned. The voters say, "I will be paid. Any politician who says otherwise is a dead man walking." You can't cheat an honest man. There will be a default, one way or another. The government will change the retirement rules. Those who have not saved, and whose children have not saved, will be abandoned to private charities. Do voters not know this? They know only that it will happen to those other people. It will not happen to them. If they are old enough, they are correct. If they aren't, it will. GREECING THE SKIDS Does anyone not think that the government of Greece will not default? If so, I have not read his analysis. Across the Web, there are articles on the bailout, all with the same message: Greece will not be able to avoid a default, because the employees of the government will not tolerate austerity at their expense. Greece will not get its deficit down enough to get its house in order. Yet Greece can still borrow money at less than 10%. Smart money, meaning big money, still flows into the coffers of the Greek government, where it is spent to buy off the government's employees and all the voters who are receiving government checks. The big banks that deal with the richest investors on earth still hand over money to the Greek government. They all know that Greece is close to default. They do not care. Why not? Because they know that the German taxpayers will bail out the Greek government, which will pay interest to the big banks, which will pay interest to the depositors. Everyone knows that the smart money can and will tap into the not-so-smart money to keep the system afloat. Why are the voters of Germany so stupid? For the same reason that American voters are stupid about Social Security and Medicare. Because they believe in the messianic state, which they believe can turn stones into bread. Wait a minute. It wasn't the Messiah who turned stones into bread. It was the devil who recommended this (Matthew 4). The Messianic state is the demonic state. But voters don't care. They want their lifetime guarantees. They are willing to pay for the present recipients' free bread, because they believe they are establishing a legal claim to future bread. But that bread will have to be made from stones. Voters want government-guaranteed safety nets. The smart money knows how to work the safety-net system. The not-so-smart money winds up paying, every time. You can't cheat an honest man. THE SMARTEST MONEY OF ALL Warren Buffett is the most successful stock market investor in history. On November 16, The New York Times ran an article by Buffett, "Pretty Good for Government Work." It was a letter to Uncle Sam. He referred to the meltdown in September 2008. He listed some losers – really smart money. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street's giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world's most famous insurer, was at death's door. That was when Hank "Goldman Sachs" Paulson announced the nationalization of the mortgage market – on his own authority. Congress remained mute. Then, in October, Congress ponied up $487 billion of borrowed money to bail out the big banks. The voters protested. Who cared? This was Congress. Here is how Buffett describes all this. Only one counterforce was available, and that was you, Uncle Sam. Yes, you are often clumsy, even inept. But when businesses and people worldwide race to get liquid, you are the only party with the resources to take the other side of the transaction. And when our citizens are losing trust by the hour in institutions they once revered, only you can restore calm. When we think of Uncle Sam, we think of the kindly old fellow in the goofy suit and the top hat. That was the cartoon that accompanied Buffett's article. But Uncle Sam is a man dressed in SWAT team gear, holding a machine gun. He goes to the smart money and says, "Lend me money. I can get it back for you easy enough." Then he goes to the Federal Reserve System, which creates money, and says, "Buy those Fannie Mae bonds. I'm good for the money." What he is really saying is: "You're good for the money." Dutifully, the Federal Reserve bought $1.2 trillion of mortgage bonds. It swapped liquid T-bills for toxic assets held by the smart money banks. Well, Uncle Sam, you delivered. People will second-guess your specific decisions; you can always count on that. But just as there is a fog of war, there is a fog of panic – and, overall, in September 2008 your actions were remarkably effective. I don't know precisely how you orchestrated these. But I did have a pretty good seat as events unfolded, and I would like to commend a few of your troops. In the darkest of days, Ben Bernanke, Hank Paulson, Tim Geithner and Sheila Bair grasped the gravity of the situation and acted with courage and dispatch. And though I never voted for George W. Bush, I give him great credit for leading, even as Congress postured and squabbled. Congress postured and squabbled, because there were only two views of voters regarding the bailout – described by a Democratic Congressman from North Carolina: "No and hell no." But Congress ate what John Boehner emotionally described as a mud sandwich. It always does. You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this mess – most prominently, for not battling the rot building up in the housing market. But then few of your critics saw matters clearly either. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly. But where did all those deluded people get the money to buy those overpriced homes? From the smart money. Where did they get it? From the fractionally reserved banking system. Only Austrian School economists sounded the warning. Nut cases all, the smart money all knew. So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through – and the world would look far different now if you had not. ~ Your grateful nephew, Warren This is smart money. They know where their bread is buttered . . . and who butters it. You can't cheat an honest man. One critic on The Street's site offered these cynical words of explanation. At the time of the crisis and today, the Berkshire portfolio includes a number of financial firms. As the industry stood on the brink of collapse, holdings such as Wells Fargo(WFC), US Bancorp(USB) and American Express(AXP) were seriously threatened. Also, it is difficult to forget Buffett's bet on Goldman Sachs(GS). Like other financial institutions, Goldman was on the verge of collapse as Buffett was stepping in. Thanks to government intervention and the shuttering of competitors, the company was able to survive and grow, earning the crown as King of Wall Street. Buffett's first rule for investing is "don't lose money" and in the event that the financial industry was allowed to crumble, Buffett's company would have likely suffered a massive loss. Instead, as a result of the government's decision to step in, Buffett was able to pocket billions. David Stockman, Reagan's budget director during Reagan's first term, calls into question the "world on the brink" scenario. The money market funds were facing a rollover problem of $2 trillion. He put on his accountant's green eyeshade and looks at the numbers. The numbers don't prove Buffett's scenario. There were $400 billion for Main Street firms, most of which had back-up lines of credit from banks. "Moreover, there is not a shred of evidence that any bank even threatened to default on contractual obligation to fund these back-up lines." Then there was another $1.6 trillion. About $1 trillion of that was asset-backed commercial paper: auto loans, student loans, credit card loans, meaning short-term liabilities that were mostly going to be paid off on schedule. That asset-backed market is now gone. But there are lots of loans still being made. What, then, was at stake in 2008? Because the securitized ABS market has now shrunk to a shadow of its former self, it can be definitively said that nothing was flushed down an economic black hole in the fall of 2008 or at any time since. Not one auto loan has even been denied and not one credit card authorization request has even been disapproved because the CP-ABS market disappeared. Instead, such loans are now largely funded and retained on the balance sheets of the banking system originators – which, drowning in excess reserves anyway, haven't broken a sweat. What has disappeared are the arbitrage profits that banks were raking off from foolish money fund managers who have finally seen that the "enhanced yield" they were obtaining from CP-ABS paper was not evidence of a better mousetrap – just their own cupidity. In short, the looming collapse was not a looming collapse of the economy. It was the looming collapse of the profitability of the big banks. He names them. The shareholders should have sustained the losses. There never was a crisis on Main Street. The panic was in the US Treasury Department where the clueless Hank Paulson was swamped with calls from his crony capitalist buddies like Immelt and his counterparts up and down Wall Street, but especially at Goldman Sachs (GS). Result: Thanks to the Geithner/ Paulson/ Bernanke claque, the needed financial cleansing and purge never happened. Instead, we've just drifted deeper into a statist regime in which Uncle Sam backstops, stimulates, underwrites, and meddles with every aspect of our broken capitalist machine. Uncle Sam wasn't our savior in September 2008. By the panicked actions of a few desperate men occupying high offices, he was empowered to become our destroyer. Thanking Uncle Sam is fatuous under any circumstance. But to thank the men who brought on TARP, bailouts, and the lunacy of ZIRP and QE is pure humbug. CONCLUSION Whenever I think of Mordecai Jones these days, I like to substitute a mental image of Hank Paulson. In the movie, Jones had a sidekick, a naïve fellow who finally bailed Jones out when he got caught. It cost him big time: jail time. He paid the price for Jones. For him, I mentally substitute an image of Ben Bernanke. The smart money always gets bailed out by the not-so-smart money. The not-so-smart money is there only because people believe in the safety net. That net does exist. It is there for the smart money. The not-so-smart money keeps letting Congress sell more debt on behalf of the smart money. But what happens when there are finally no more buyers of the debt, after it becomes clear to the smart money that Uncle Sam's debts exceed the ability of the not-so-smart money to keep paying – when the not-so-smart money lines up to get its share of the safety-net checks? At that point, Mordecai Jones will move to a new town, where his work will begin anew: an "emerging town." End This snippet says it all in my opinion. Snippet: At the time of the crisis and today, the Berkshire portfolio includes a number of financial firms. As the industry stood on the brink of collapse, holdings such as Wells Fargo(WFC), US Bancorp(USB) and American Express(AXP) were seriously threatened. Also, it is difficult to forget Buffett's bet on Goldman Sachs(GS). Like other financial institutions, Goldman was on the verge of collapse as Buffett was stepping in. Thanks to government intervention and the shuttering of competitors, the company was able to survive and grow, earning the crown as King of Wall Street. Buffett's first rule for investing is "don't lose money" and in the event that the financial industry was allowed to crumble, Buffett's company would have likely suffered a massive loss. Instead, as a result of the government's decision to step in, Buffett was able to pocket billions. Good Luck to all!