Now, I propound my First Corollary of Economic ... Who to Listen To ... Ness. Or something like that. And it is this: "Listen to What Warren Buffett Says." Like a good economist, I have reduced this to an acronym: "WWBD". "What would Warren Buffet Do."
Buffett, for those who have only heard mention of his name, is the world famous investor who made his own fortune of $62 billion. It has been said that an economist who is not rich is like a man who gives advice about women, but has never even had a girlfriend. Unlike many economists, who are middle class at best, Buffett, following his own investment principles, is actually rich. He did it by doing what he tells other people to do.
Now the critics of Fannie Mae and Freddie Mac, the two government sponsored lending giants who recently failed, and who, before they were critics, were their apologists, say we need more regulation. But, as it turns out, Fannie and Freddie were regulated. Here is Warren Buffet, in a CNBC interview in August, pointing this out:
[S]omething called OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie and Freddie, someone to watch over them. And they were there to evaluate the soundness and the accounting and all of that. Two companies were all they had to regulate. OFHEO has over 200 employees now. They have a budget now that's $65 million a year, and all they have to do is look at two companies. I mean, you know, I look at more than two companies.Waddya wanna bet that the people who now see regulation as the solution are completely unaware that the two mortgage giants already were regulated?
...And they sat there, made reports to the Congress, you can get them on the Internet, every year. And, in fact, they reported to Sarbanes and Oxley every year. And they went--wrote 100 page reports, and they said, 'We've looked at these people and their standards are fine and their directors are fine and everything was fine.' And then all of a sudden you had two of the greatest accounting misstatements in history. You had all kinds of management malfeasance, and it all came out. And, of course, the classic thing was that after it all came out, OFHEO wrote a 350--340 page report examining what went wrong, and they blamed the management, they blamed the directors, they blamed the audit committee. They didn't have a word in there about themselves, and they're the ones that 200 people were going to work every day with just two companies to think about. It just shows the problems of regulation.
Read the whole interview. It's dynamite.