By: Alex Crippen CNBC an interview with Jack and Warren Buffett
JACK WELCH (Author, “Winning” and “Straight From the Gut”): Thank you.
BECKY: Morning, Jack. We thank you, Jack. We often come to you two when we need a little bit of historic perspective, when we’re trying to put events in some sort of perspective. And, Warren, when you heard the news about Osama bin Laden last night, what did you think?
BUFFETT: It felt good. It was joy. And my thoughts went back to 9/11, and I was actually watching CNBC, Mark Haines was on. I had a charity golf tournament going on, and ironically, I’d arranged for a number of the people who had come in from around the country, including the woman that ran Fiduciary Trust, to be at Strategic Air Command headquarters that morning. So they learned of the attack at SAC. And of course, later that day President Bush flew in there. So it was–it was originally shock, you know, anger, and then determination that I think hit every American at that point in sequence.
BECKY: Mm-hmm. And, Jack, I know that that was a day we’d been expecting to talk to you that morning, as well. What did you start thinking about as you heard the news coming out about Osama bin Laden?
WELCH: Well, today was a great thrill. I–to watch this morning, to see the people reciting the Pledge of Allegiance at ground zero puts chills through your body. It’s such a great thing to see the spirit of the American people rising. You know, this has been a tremendous 72 hours for the West. If you think of the economic problems the British had, and they’re going through these austerity measures, and to see the people in Trafalgar Square cheering last Friday, and the spirits of the flag of Britain all over the streets; and to see Americans in the streets now, it’s a wonderful thing for the West to see this confidence, this ability to rally. And it’s an exciting moment for all of us.
BECKY: Mm-hmm. Warren, Jack brings up a good point. We’ve had a lot of bad news that has hit us recently, a lot of troubling times, from the gulf oil spill, from the financial crisis, the economic collapse of this nation. Seeing something like this gives us all a little bit of hope.
BUFFETT: Yeah. Well, it’s always been a mistake to bet against America, since 1776. And, you know, we take our body blows from time to time, but this country always comes through. And when we get united, get out of the way. It–and we are–at moments like this you particularly see that. And of course, after 9/11 we saw it. But I’ve always had enormous faith in this country to do anything, whether it’s in economics or whether it’s in liberating people or whatever it may be. And this is just one more dramatic illustration of when the United States sets out to do something, it gets it done.
BECKY: Mm-hmm. Jack, there are some people who have pointed back to the death of Hitler and how this made them feel at that time, and how they’re looking at this through that prism.
WELCH: Well, I’m–you know, I think these may be true. But I don’t think that the death of bin Laden is quite going to be the end of things, as it was with Hitler.
WELCH: Let’s face it, there are a lot of cells all over the–all over the world today. The splinter groups that have been formed as a result of this. And somebody was talking a little earlier on your show about the fact that the uprisings in–for democracy in the–in the East are symbolic to–in some ways with this. Well, I’m not so sure of that. I’m not so sure that we know what we’re going to get from some of these uprisings. We’re not sure who’s taking over in what–in what area. I want to enjoy this moment. I’m thrilled for America. I believe in America as much as anybody alive. I’m so proud of the people that have worked in intelligence, you know. Very often when we’re out on a Friday night enjoying ourselves, we’ll–I’ll say to my wife, Suzy, you know, just think, somebody’s doing something right now to make this all possible for us. And we don’t know their names, we don’t know what they’re doing. They’re breaking up a cell in the UK, they’re doing something somewhere else. We have to celebrate all the people that work so hard in intelligence to keep our way of life going. But I don’t think that this is a moment like Hitler. I think Hitler was a period behind the sentence. I don’t think this is a period behind a sentence. I think it’s a great moment, but I’m worried about all the other splinter groups that are out there, Becky.
BECKY: Warren, do you think this is the end of something, or the beginning of something new?
BUFFETT: No. I–it’s–a mass murderer of almost incomprehensible dimensions has been eliminated, just as was the case with Hitler. But there are lots of people in the world that are going to have evil intent toward this country, and–as well as other people, and they’re not going to go away. And they’re going to continue to seek ways to hurt us, disrupt us, and I think our government has done really quite an amazing job. We don’t know what actions they’ve taken, but at the time of 9/11 I can tell you that a significant portion of the country was expecting another attack within a very short period. And being in the insurance business, I thought plenty about it, in addition to being a citizen. And I really thought we were going to get hit again. And the reason we haven’t been hit again, you know, we won’t know all the reasons. But somebody has done a lot of things right and–over the years, both administrations, to keep that from happening. But the desire to do us harm exists in the hearts of too many people around the world, and they’re looking for new ways to do it, and we need an ever-vigilant government, and I think we have one.
BECKY: Jack, we saw the aftereffects of what this did to the economy. We saw how people stopped spending, people were afraid to do things. We saw something called the terror premium that got put into the trading markets. Where have we come since that time? How much do you think that still exists? Have we become immune to it, or is it still very much an everyday part of our lives?
WELCH: Well, I think it’s an everyday part of our lives. But I think–I think to see moments like this, moments like these last 72 hours of victory, if you will, do wonders for the spirit, and they do build confidence. And people that have been battered by a loss of a house or are having problems with jobs feel better, they feel–they’ll have a quicker step in their–in their behavior. They’ll be–they’ll feel prouder to be an American and they’ll–it always helps, it always helps. Being in the winning locker room is a lot better than being in the losing locker room. And these people today and for the next days and the next weeks will feel a certain positive attitude that has to be helpful.
BECKY: Absolutely, Jack, couldn’t agree with you more on that. Warren, you see what happened–what’s happening with the economy. We have seen things turning up and picking up. What have you see recently, let’s say over the last several weeks, maybe even the last month or two?
BUFFETT: Well, the economy since the fall of 2009–and we see it from a lot of–through a lot of prisms–has been getting slowly but steadily better, and–not in residential construction, but in almost every other area of the economy we’ve seen fairly steady improvement. And the mood about that improvement has swung around quite volatily. Sometimes we were really quite good about the pace at which the recovery was going, and other times they got very discouraged. To me, it’s looked fairly steady, much more steady than the mood, and right up to the present, you know, we are seeing gains in the overwhelming majority of our businesses, but not in residential construction. And that has fallout beyond a bunch of people out building a house. I mean, that affects the carpet business and the insulation business and all of that. But this–I think the economy, considering the body blow that it took in the fall of 2008, has been doing quite well, and I think it will show up in the employment figures more dramatically than most people may feel when residential construction comes back, because it isn’t just going to be the people out building houses. You know, we’re going to feel it at our Furniture Mart, we’re going to feel it in our carpet business, we’re going–there’ll be–there’ll be a lot more thousands of people coming back when residential construction comes back, and I think it’s generally anticipated.
BECKY: OK. Joe, I know you have some questions, as well.
JOE: Well, I’ll stay–I was going to ask Jack something about Pakistan. But as long as we’re on this subject, Jack’s got all these–he knows what’s happening at Clayton and all the companies they own, as well. And, Jack, 1.8 percent, is that temporary? Were you–were you surprised that GDP was down there? And do you think that’s a temporary low? How are the businesses performing that you know about?
WELCH: Well, look, Joe, we–there’s no question, you know, over the last month the gasoline prices and food inflation have clearly hit some of our very short cycle businesses. Now, how much of this is permanent and how much of this is just a shocked. But there’s no question that dollars have been sucked out of the economy, $100 billion, in the–in the first quarter came out, for gasoline. And that’s a big number. And so the consumer in some of our restaurant businesses and some of our other businesses have felt this. And our numbers reflected, in the last half of the first quarter, a slowdown in several businesses.
JOE: Yeah. Knowing you as I do, I’ll get back to Pakistan. But I don’t know, it just–he was in a mansion, Jack, and it was right in the middle of town, and there’s army guys around. And I just can’t believe they didn’t know, and I don’t know what to do with Pakistan at this point. But I envisioned him in a cave, you know, eating grubs or worms or something. That’s not the case, and it makes me angry. I don’t know what we do with Pakistan.
WELCH: Well, I think your last–at the top of the show you had a gentleman up in Washington who made the comment, it would be like having somebody in a–in a mansion around the corner from West Point. That analogy is pretty damning.
JOE: Yeah. I–it’s just frustrating but, you know, I don’t know what you do. You can’t–you know, Pakistan we need more than we need to alienate them, I guess, and that’s what foreign policy is all about. But I thought maybe you’d have a Jack Welch rant about that. But we got to…
WELCH: Not today.
JOE: All right.
BECKY: Warren, what do you think about Pakistan and about the cooperation we’ve gotten to this point?
BUFFETT: I think we’re–we have to deal with Pakistan over the years in a way that’s in the national interest.
BUFFETT: And I don’t pretend to know all the nuances of day to day or year to year activities. But they are a player in the international scene, and they have weapons, and it’s up to the United States to figure out what’s in our interests and how to, in effect, deal with Pakistan in a way that’s consistent with our national interests over time. And I have no great insights into it myself as to how you play out that game.
BUFFETT: But that–I’m sure that people in Washington think about that daily and have way better information than I do.
BECKY: Warren, Jack mentioned that gas prices, gasoline prices are hurting the consumer. I think he cited $100 million that have been taken out of the consumer’s pocket over the quarter.
(Welch clears throat)
BECKY: What was that, Jack?
WELCH: No, go ahead.
BECKY: OK. But he talked about how that was really hurting consumers and how they’re seeing that in their consumer businesses. Are you seeing it in yours, too, a pullback from the consumer, an unwillingness to pay up?
BUFFETT: Well, you have seen some. And bear in mind, you know, we talk in this country and we say, you know, how unwise it would be to have a tax increase at this point in the economy. Well, this is a tax increase. I mean, when you–when you raise the price of gasoline, it’s a tax increase; the only difference is the tax goes to OPEC instead of to Washington. But it has exactly the same impact on the consumer as would a very major tax increase. And it hits–it’s regressive in the sense that it hits the bottom layer disproportionately. So we are sending tens and tens of billions of dollars–if the price, you know, goes up $20 a barrel and you’re importing, you know, 10 million barrels plus, and it’s a couple hundred million dollars a day, that is–they’ve just voted a tax increase on us at OPEC, and the money doesn’t go to the federal government. So it has an impact, there’s no question about that.
BECKY: Jack, is there anything that can be done about that? I mean, if you look at it from the government’s perspective, kind of hard to push back on oil prices. In the past, anything they’ve tried to do has not been successful.
WELCH: Well, I certainly don’t think that the suggestion that we kill the oil companies’ tax breaks for domestic drilling is going to do anything about lowering prices; in fact, it’ll raise prices as I see it.
BECKY: Warren, you agree with that?
BUFFETT: Yeah, I agree with that, mm-hmm.
BECKY: So the idea of a windfall profits tax is not one that you think actually helps for the United States?
BUFFETT: Oh, I–the real answer is to use–is to use less oil over time. And there are lots of initiatives in that direction. But we do not want to be paying a huge tax, I mean really huge tax daily, to OPEC, other producing countries and, you know, having our citizens forking out, you know, at the gas station. They’re just–they’re just–they’re just–it’s like filling out a 1040 for an American. And the way they–the way they get off that is to use less oil.
BECKY: Mm-hmm. Jack, you mentioned that this is something that makes Americans feel good, and when Americans feel good they tend to reflect that in the polls. This is very likely something that’s going to help President Obama’s polls, do you think?
WELCH: Yeah, there’s no question that there’ll be a short-term impact on the polls. Of course, the Obama administration has to look at history, and I’m sure they are. George Bush, after Desert Storm, had a 91 percent approval rating. Eighteen months later, Bill Clinton became the president. So these things, unless the whole thing comes together over a sustained period of time–if unemployment doesn’t come down, if housing doesn’t recover at all, if all these things happen, despite this tremendous accomplishment by the president, he’ll be measured 18 months from now on how people feel about themselves and their lives and their family’s lives.
JOE: All right. I…
BECKY: That’s a great–go ahead, Joe.
JOE: Beck, I know we’re going to touch on–with Warren, I think Jack’s not going to be with us for the whole hour. I’m not directing these to Jack for just to talk to him. But–and I actually want to hear from Warren, too, on this one. But we saw Bernanke last week, I know Warren already was–had enough of QE2, I think. I don’t know if I’ve ever asked you directly, Jack, about that, but I don’t know whether the benefits at this point are worth the costs of QE2. Did he convince you last week, Jack, that it…
WELCH: Not me.
JOE: Well, what do you think? I mean…
WELCH: Look. I just think free money in the hands of very smart people for too long is going to create something that’s not very pleasant. And I don’t know what it exactly is, but every time we give free money to lots of people who are very, very smart and know how to use it, you’ll end up with a bubble or a problem that we don’t quite see in front of us. Some people do, but I never have.
JOE: And Warren, there’s never–it’s–we always use the “Airplane” analogy. I’ve picked a bad day to quit smoking. The more that oil prices go up to hurt the economy, and some of them would tie the commodity inflation to QE2, the more that that causes us not to come out of this, you know, this slow period, the more they need to keep their foot on the gas. It almost seems like they’re, you know, like it’s a self–almost a circular. Like it’s self-fulfilling that they have to keep the pedal to the metal.
BUFFETT: They–I’m with Jack. I have–I’ve got a lot of admiration for Bernanke and I particularly have admiration for what he did in the fall of 2008.
WELCH: Me, too.
BUFFETT: But yeah. But I’m–on this one, I think–I think this is a medicine that’s being applied in huge dosages that may not be that effective and which can have a lot of side effects that will be hard to recover from.
BECKY: What would you rather see, Warren? Would you prefer if they were to take some action at this point, that the Fed wind down its balance sheet? Or that it actually raised rates? What’s more effective?
BUFFETT: Well, I don’t–winding down the balance sheet’s going to be interesting to watch.
BUFFETT: It’s one thing to buy 600 billion of securities, it’s another thing to sell it, you know. To whom is the line of Wall Street goes.
BUFFETT: But the–you know, I think we have done–made huge efforts on both the fiscal policy and monetary policy side.
BUFFETT: We’re running a federal budget deficit of 10 percent of GDP. That’s fiscal stimulus. It may not have come through something called a stimulus bill, but a dollar spent that the government didn’t raise except through borrowing or printing money is stimulus, by any other name. And with monetary policy, we, you know, we’ve had it close to zero rates now for a long time.
BUFFETT: I think the normal regenerative capacity of capitalism is vastly over-rated. I mean, we had–we’ve had 15 or so recessions in this country, and probably half of them are panics, as they used to be called in the 19th century and half of them occurred when nobody knew what fiscal or monetary policy was. But millions of people out there thinking about how to do things better tomorrow. I mean, when Jack was at GE every day, he was thinking about how all the divisions could be doing something better, more efficiently, the next day, new products and all of that. And that is what really moves this economy and I think it’s–I think it’s moving it right now.
BUFFETT: So I do not think–I do not think that–I don’t think fiscal and monetary policy–I think if you do them wrong, you can really mess things up. But I think the big factor in the continuation of the recovery will be the Steve Jobs of the world coming up with new products that nobody thought of before.
BUFFETT: And millions of Americans doing what people before them have done, trying to think of ways to do them more efficiently, new products. And capitalism works and I think we’re seeing it work.
BECKY: Jack, though, we still have that huge problem, you mentioned, of unemployment, that stubbornly high unemployment level. The government has done everything it probably could do from a fiscal perspective. The Fed has done everything it could do from a monetary perspective. So what needs to happen to try and attack that jobless rate?
WELCH: We need to get consumer confidence back. This thing that just happened yesterday is going to–is going to help. But we also need–Warren mentioned Steve Jobs. Innovation is the key to our growing our way out of this thing. We’re going to have to find ways to do things better because people have found ways during this recession to do more with less. There’s no question about that. We’re able to with productivity and other things, to do a lot more with fewer people. Now what we need and we always need, are innovative products that the world needs. It–innovative products are not coming from developing countries. Our lower cost products are coming from developing countries, but innovative products are not coming from those countries. Our job is to innovate, innovate, innovate in everything that we are doing. Look at Caterpillar’s results now from the stuff that they’re putting out. Look at–look at Jobs and this–he can’t make them fast enough. We need more of that and we’re going to get it. The American spirit on innovation has never been higher. The drive has never been stronger. On the other hand, there is this ability to do a lot more with fewer people. So without it, we don’t have a prayer. Without innovation.
BECKY: And Jack, just your final–your final thoughts on, again, last night hearing that Osama bin Laden was dead and had been killed by US forces.
WELCH: Look, I’ll get out of this conversation and you can get on with Warren. I’m–I am absolutely proud to be an American. I always am. I’m never prouder in moments like that. The president gave a great speech. He deserves all the credit in the world for what he–for what’s happened on his watch. And I hope it’s the beginnings of the kindling wood starting to burn and the American spirit after some real beatings since 2008 fights its way back and we’re all better off for it, so thanks for having me on.