Warren Buffett Explains Bubbles: But He Doesn't Know We Are In One

Buffet explains bubbles: "People see neighbors 'dumber than they are' getting rich."

Warren Buffett explains Why Bubbles Happen

Buffett was asked by CNBC's Andrew Ross Sorkin if he is worried another crisis will happen again.

"Well there will be one sometime," Buffett said in an interview for CNBC's "Crisis on Wall Street: The Week That Shook the World" documentary. The documentary airs Wednesday night at 10 p.m. ET/PT.

"People start being interested in something because it's going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren't," he said. "And their spouse is saying can't you figure it out, too? It is so contagious. So that's a permanent part of the system."

That last paragraph perfectly explains Bitcoin. Most of those investing in cryptos have little idea how they work, or what they are even buying.

Buffet made no mention of the corporate bond bubble, the equities bubble, or even the crypto bubble. He does not see any bubbles now, at least that he mentioned.

Symptom or Cause?

Buffett confuses a symptom (rampant speculation) with the true cause

  • The Fed (central banks in general), keep interest rates too low, too long
  • Fractional reserve lending
  • Moral hazards like bank bailouts
  • Poor fiscal policies and massive government debt

In short, there is no free market in anything and thus no valid price discovery. There would always be speculation, but Fed policies and fractional reserve lending are the root cause of bubbles.

Mike "Mish" Shedlock

Comments
No. 1-10
ReadyKilowatt
ReadyKilowatt

I don't know anyone getting rich off a speculative bubble. Except maybe in overtime due to the Colorado housing bubble, but that might actually be the real deal as those who can are fleeing California. Then again, if it's bubbles all the way down maybe we're all getting rich from them. Some just faster than others.

Carl_R
Carl_R

If those are the "true causes", why were there bubbles long before those "true causes" existed? At best your "true causes" are not causes at all, but things that encourage and facilitate them, making them more common.

The true cause can be easily expressed in one word: "Greed".

mike09
mike09

what can replace fractional reserve lending?

2banana
2banana

Obama's QE and ZIRP allowed those first in line to get insanely rich with no risk.

Like Warren who thinks himself a genius.

Blurtman
Blurtman

Sadly, there is no such thing as fundamental value when it comes to stocks.

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