2014: If Buffett ran the Fed, what would his interest rate policy be?

AUDIENCE MEMBER: Good morning, Warren and Charlie. My name is Jason. I’m from Toronto and my question relates to the general financial markets.

We’ve been in an environment of virtually zero interest rates now for many years. In recent times, prolonged periods of low rates have led to asset bubbles, such as the housing bubble and, potentially, now a bond bubble.

If you were running the Fed, what would be your policy with respect to interest rates? Do you see a need for a hike? And what would be your time horizon for such a change? Thank you.

WARREN BUFFETT: Well, since it’s — you’re right about the — who would’ve guessed five years ago that you’d have had rates this low for this long?

You’re — I would say that I’m surprised at, really, how well things are going.

I don’t think I would be doing much differently. And I particularly say that because it’s worked so well so far. So I would like to say that I would’ve done exactly the same thing and take credit for it.

I’ve been surprised at how well this worked. But as I said last year, this is really an interesting movie because we haven’t seen it before. And what makes it interesting is also we don’t know how it ends. But, I think Ben Bernanke was a hero, both at the time of the crash — or the panic — and subsequently.

I think he’s a very smart man. I think he handled things very well.

What was interesting to me was when the minutes of the Fed from the period in 2007 and 2008 came out, it was interesting to me how a number of the members of the Fed were not getting it, as to what was happening.

That was really fascinating. It wasn’t — there were a lot of them that didn’t really understand, it seems that way, or some of them that didn’t understand just how serious things were.

And so I give particular credit to Bernanke, considering the fact that he was really not getting a cons — certainly not a unanimous view from those surrounding him, that the kind of actions he knew were necessary, were really necessary.

And yet, he went ahead with them. And in my opinion, did a masterful job. And from everything I’ve seen of Janet Yellen, I feel the same way about her.

We will see how this movie plays out. You know, I do not know the answer as to what happens if you keep rates close to zero for a very, very long time. And keep absorbing more and more of the debt issuance of the country because so far, we’ve tapered, but we’re still buying.

I’d be interested to hear Charlie’s thoughts on it.

CHARLIE MUNGER: Well, nobody, for instance, in Japan would ever have anticipated that interest rates would go way down and stay down for 20 years.

And nobody would’ve expected common stocks to decline by huge amounts and stay down for 20 years.

So strange things have happened. And they’re very confusing to the economics profession.

In fact, if you’re not confused, you really probably don’t understand it very well.

And at Berkshire, what I noticed is there aren’t many long-term bonds being bought.

WARREN BUFFETT: Yeah. We — well, you know, in 2008, I wrote an article saying, you know, that — everybody was saying cash is king. Well, cash may have been king if you used it, but cash was the dumbest damn thing you could possibly own, you know, if you weren’t going to use it.

And people cling to cash at — usually at the wrong times.

But it is — a zero interest rate policy has had a huge effect, both in rejuvenating the economy and — and in terms of asset prices.

It has not, in my view, produced a bubble. That doesn’t mean it can’t produce one. But this is not — this is not a bubble situation, at all, that we’re living in. But it’s an unusual situation that we’re living in.

Any further thoughts, Charlie?

CHARLIE MUNGER: No, I’m as confused as you are.

WARREN BUFFETT: Oh good. Good. (Laughter)

That’s why we get along so well.