“…So on a scale of 1 to 10, how big a mistake was it that
they let Lehman Brothers go?
I don’t think that was a mistake. You can’t save everybody.
That would have created unlimited revulsion in the body politic.
I probably would have let Lehman go, too.
Even though the market seized up very dramatically afterwards
and we had some of the most difficult shortterm
financial consequences of that failure?
We needed a total correction to a system that was evil and
stupid. You can’t have a rule that no matter how awful you are,
you’re always going to be saved. You have to allow some failure.
We don’t need all our bright engineers going into derivative
trading and hedge funds and so on. We need some revulsion.
How and why do you think economists have gotten this
I would argue that the economists have not been all that
good at working concepts of good and evil into their profession.
Nor do they understand, at all well, the economic consequences
of bad accounting.
In fact, they’ve made a profession of driving value judgments
out of the subject.
Yes. They say it’s not economics if you think about the consequences of good and evil, and good and bad business accounting.
I think what we’re learning is that when you don’t understand
these consequences, you don’t have an adequately skilled
profession. You have big gaps in what you need. You have a
profession that’s like the man that Nietzsche ridiculed because
he had a lame leg and was very proud of it. The economics
profession has been proud of its lame leg.
So in order to cure the lame leg, you would lean more
toward an approach to economics that takes human nature
If you totally divorce economics from psychology, you’ve
gone a long way toward divorcing it from reality.
The same could be said of psychology. If you divorce economics
from psychology …
That’s what’s wrong with psychology professors. There are so few of them that know anything about anything else. They
have this terribly important discipline that all the other disciplines
need and they can’t communicate that need to their fellow
professors because they know so little about what these
other professors know. This is not an unfair description of
much of academia.
You’ve often said that one of the keys to your success
has simply been to avoid making the garden-variety mistakes
that you see other people make.
Warren and I have skills that could easily be taught to other
people. One skill is knowing the edge of your own competency.
It’s not a competency if you don’t know the edge of it. And Warren
and I are better at tuning out the standard stupidities. We’ve
left a lot of more talented and diligent people in the dust, just by
working hard at eliminating standard error.
If you had to characterize a few mistakes that you see
executives making, which ones jump out at you?
An extreme optimism based on an inflated self-appraisal is
one. I think that many CEOs get carried away into folly. They
haven’t studied the past models of disaster enough and they’re
not risk-averse enough. One of the very interesting things
about Berkshire Hathaway is how chicken it is, how cautious,
how low is its leverage. But Warren and I would not have been
comfortable with more risk, entrusted with other people’s net
worths. There was no reason for our financial institutions to
stretch as much as they did, with the leverage, the shady people
and the compromises.
Let me play devil’s advocate. People might say, “Wait a
minute. I’m at bank A and I’m competing with banks B,
C, and D, and they’re running at higher leverage and
the system is willing to give them that additional leverage
and they’re making more profits. Unless I operate
at their leverage ratios, I can’t pay my traders competitively
and I will fail.”
You’ve accurately described the way the culture generally
works and you have seen in the present crisis how well it works
for the wider civilization when everyone insists on not being
left behind in lowering standards. I think the culture is simply
going to have to learn to work more the way Berkshire Hathaway
does, instead of the way Citigroup did.
Do we go back to the old partnership model?
It would be vastly better. The culture of Goldman Sachs as a
partnership was morally superior and better for the surrounding
civilization than the culture that came after it went public.”
There is much more to the interview, and you may not agree with all of his viewpoints. But that’s the fun part about seeking out new data and ideas.