Arnold Kling  

Gregory Clark, Aubrey de Grey, and Warren Buffett

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have little in common, but all were mentioned in today's Washington Post.

Robert J. Samuelson writes on Clark.


Clark's theory is controversial and, at best, needs to be qualified. Scholars do not universally accept his explanation of the Industrial Revolution. More important, China's recent, astonishing expansion (a fact that he barely mentions) demonstrates that economic policies and institutions matter. Bad policies and institutions can suppress growth in a willing population; better policies can release it. All poverty is not preordained. Still, Clark's broader point seems incontestable: Culture counts.

Joel Garreau profiles de Grey.

Why is it, when you bring up the idea of living forever -- even if robust and healthy, not drooling on your shoes -- some people just recoil viscerally?

"It's probably the majority that recoils viscerally," de Grey says. "It's what I call the pro-aging trance.

"Since the beginning of civilization, we have been aware that aging is ghastly and that aging is utterly inevitable. . . . So we have two choices. Either we spend our lives being preoccupied by this ghastly future or we find some way to get on with our miserably short lives and make the best of it.

"If we do that second thing, which is obviously the right thing to do, then it doesn't matter how irrational that rationalization might be. . . . It could be, well, we're all going to go to heaven. Or it could be, we're going to have overpopulation. Or it could be, it will be boring. Or, dictators will live forever.

"It doesn't matter what the answers are. It's so important for them to maintain their belief that aging is actually not such a bad thing, that they completely suspend any normal rational sense of proportion."

Elsewhere, this story says,


Buffett, one of the most successful and revered investors, sold a huge stake in the mortgage funding company before the manipulations came to light, and the government wanted him to explain why.

Buffett said he was troubled in part by a Freddie Mac investment that had nothing to do with its business.

...The government is trying to show that Brendsel's promises of double-digit earnings growth set Freddie Mac on a dangerous path, and Buffett said they were another key reason he sold.

...Asked by the judge, William B. Moran, whether he felt his concerns were vindicated, Buffett said, "I think they were fully vindicated."


I'm sorry, but this is BS. Freddie Mac's accounting scandal was that its earnings were understated. When you are understating earnings, you cannot argue that employees were under pressure to "make up numbers."

Moreover, the reason Buffett sold his shares was widely known. He sold because Freddie Mac decided to take on interest rate risk, and Buffett does not want to own stock in a company that takes interest rate risk. End of story. It had nothing to do with accounting. The accounting judgments in question were made well after Buffett sold his stock.

From 1970, when it was chartered, through the 1980's, Freddie Mac only created mortgage securities and sold them, avoiding interest rate risk. It did not hold a significant portfolio of mortgage securities. Fannie Mae, Freddie Mac's competitor, had a portfolio from the day it was founded, in the 1930's. Fannie got in trouble in the late 1970's, when the interest rate on its debt increased while its mortgage portfolio was earning a low rate of interest.

In the late 1980's, Fannie Mae developed a new funding strategy, using long-term callable debt. This allowed it to hold a portfolio with much less interest rate risk. Freddie saw this new strategy as both an opportunity and a threat. By copying the strategy, Freddie Mac could increase earnings with a relatively small increase in risk. By not copying it, the threat was (a) that Fannie Mae would completely dominate the mortgage market and (b) that Freddie Mac's shareholders would revolt. Freddie decided to go with a mortgage portfolio, Buffett said, "Now you are taking risks that I don't understand," and he bolted.

The end result was that Freddie Mac, by luck or skill, did very well with its mortgage portfolio. The scandal erupted when a new accounting firm caught the previous accounting firm understating earnings, as I described in the latter part of this essay.

Brendsel's story strikes me as something out of Kafka.

P.S. A commenter points out that Buffett didn't sell Freddie Mac stock until the year 2000. That means that he spent years whining about interest rate risk and did not do anything about it, because I remember executives talking about Buffett's whining, and I left Freddie Mac years before 2000.

It occurs to me that if he really boosted his position in 1992 and sold it in 2000, then he probably thought that Freddie would do better under Democrats than under Republicans. The fact is, that as government-sponsored enterprises, the primary risk for Freddie and Fannie (which he also sold in 2000) is political risk.

I was no longer with Freddie in 2000, but as far as I know, whatever financial risks they were taking at that point were the same that they'd been taking for several years. What was new was the prospect of a Republican President.


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COMMENTS (3 to date)
Dixie Chick writes:

Actually Mr Kling, it's not just Mr Buffett that is full of BS. Warren bought his stake in Freddie Mac in 1992 precisely when and because Freddie tried to emulate Fannie and started building its hedge fund/ internal portfolio. Buffett sold his stake (in the late 90s/ early 2000s) when Freddie's internal portfolio growth slowed. Important to get the facts right.

BTW, whose story is from Kafka -- Brendsel or Buffett?

Arnold Kling writes:

Dixie Chick,
I just looked up Warren Buffett's Chairman's letters. He first bought Freddie in 1988, then doubled his purchase in 1992, then sold in 2000. The letters do not explain his thinking in any of those instances. He sold Fannie stock in 2000, also, so it is reasonable to suppose that he was no longer bearish on the GSE's rather than specifically worried about Freddie's management.

He never had a significant holding in Fannie. If he had liked the idea of a mortgage portfolio, he could have taken a big position in Fannie any time he wanted.

I know from what I heard from executives when I was working at Freddie (I left in 1997) that Buffett did not like interest rate risk at all, and having a mortgage portfolio necessarily exposes you to interest rate risk. So it's somewhat mysterious to me why he was willing to hang on so long in the 1990's, but maybe up until that point Freddie's portfolio was small enough not to bother him. (They grew it very gradually.)

Frank writes:

It can become very bad if the dollar keeps weakening and oil prices rise without an end insight. I find some stock market news is either overhyped whether it is bad or good.

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