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 (16)
No. 1-10
oudaveguy98
oudaveguy98

The moral hazard of rewarding the very people who lead organizations into financial ruin with their recklessness and bad decision making is truly repugnant. Watching the worst failures in the history of business walk away with taxpayer funded golden parachutes was an abomination and a true evil. Meanwhile, everyone else is punished so these miserable creatures can maintain an obscene and lavish lifestyle at our expense. Institutionalizing cronyism is one of the worst legacies of central banking.

Blacklisted
Blacklisted

There you go again. If only we ended the Fed, all would be fine. I don't know if you keep up this nonsense as a distraction from the real problem - career politicians and the favored laws they pass for their bankster donors, like rescinding Glass-Steagall so transactional banking could flourish; or really don't understand what you are saying. Search "fractional banking" at Armstrong to get educated.

ML1
ML1

World has a bubble of bubbles right now...

ML1
ML1

Cryptos were and are essentially worthless.

Cryptos only rose because speculation, because they were used in illegal things like drug dealing and because Chinese used cryptos to get their money out of China without being stopped by the money prison China has for Chinese peoples money through currency controls and permits needed to send money abroad in large sums.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

To Blacklisted: Where the F did I say "if only we ended the Fed everything would be fine" - put more words in my mouth and I start deleting your idiotic comments Besides, it is clear you cannot even read. I specifically cited poor fiscal policy. The Fed does not control that.

Blurtman
Blurtman

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

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.

mike09
mike09

what can replace fractional reserve lending?

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".

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.