Warren Buffett on the Fed: Bernanke Was a Hero

Photo: Matt Koppenhoffer, The Motley Fool.

Every year, thousands of investors flock to Omaha to hear the wisdom of Warren Buffett and Charlie Munger. For as long as six hours, with only one break for lunch, the two business legends take questions from investors, the press, and analysts. Appropriately for a shareholders meeting, the focus is the business of Berkshire Hathaway  (NYSE: BRK-A  )   (NYSE: BRK-B  ) , but it's not the only topic they discuss. This year, Buffett and Munger discussed Federal Reserve policy in response to a shareholder question.

Following are my notes on the shareholder's question, along with responses from Buffett and Munger.

Shareholder: In recent times, prolonged periods of low rates have caused problems. If you were running the Fed, what would be your policy on rates?

Buffett: Who would have guessed five years ago you'd have rates this low, this long? I am surprised how well it's going, I wouldn't do much differently, and I would like to say I'd have done the same since it's going so well. This is an interesting movie; we haven't seen it before, and don't know how it ends. I think [Ben] Bernanke was a hero at the time of the crash and panic, and subsequently. A very smart man, and handles things very well. When the Fed minutes came out then, it was interesting to me how the members of the Fed weren't getting it; some didn't understand just how serious things were. So I give particular credit to Bernanke, since he wasn't getting a unanimous view and went ahead with necessary moves. I feel the same about [Janet] Yellen, but do not know the answers to what happens if you keep rates close to zero for so long. I'll be interested to hear Charlie's thoughts.

Munger: Well, nobody, for instance in Japan, would ever have anticipated interest rates would go way down, and stay low for 20 years. And no one would have anticipated that stocks can go way down, and stay low for 20 years. And if you think you understand, you're not paying attention.

Buffett: In 2008, I wrote an article saying cash is king if you use it, but dumb if you weren't. People cling to cash at the wrong time. Zero rates have had a huge effect on rejuvenating the economy and asset prices. We are not in a bubble situation at all right now, but it is an unusual situation.

I really liked this comment from Munger: "If you think you understand, you're not paying attention." It's a succinct critique of the macroeconomic forecasters and Wall Street strategists that claim to know the future of interest rates.

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