Charlie Munger, vice chairman of Warren Buffett’s Berkshire Hathaway, shares many of the plain-spoken ways of his more famous business partner. Munger also grew up in Omaha, Nebraska, and has the kind of charm that seems to come from trying to do things right by keeping them simple.
Over the weekend he had a parable he wrote published by Slate… and it’s outright depressing. He describes a nation, not unlike the US, that’s been the envy of the world since its inception. It has gotten that way by frequently, if not always, making good decisions and making them for the right reasons.
Yet, as the piece is entitled… “Basically, it’s over.” The nation has squandered so much success and so many good works that it now stands at the precipice of financial ruin.
Via Slate.com, here’s a passage from the parable:
“But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life.
“These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland’s citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called “the bucket shop system.”
“The winnings of the casinos eventually amounted to 25 percent of Basicland’s GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere).
“So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called “financial derivatives.”
“Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland’s currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.”
As the parable goes on, and as one would expect, Basicland does soon encounter hardship and the consequences are dear. In telling this story, Munger laments a time gone by, a simpler America with more honest work and clearer-cut morals.
Over time, as we’ve covered before, banking incentives shifted around in ways that have served to promote many negative outcomes… the kind that we’ve seen cause several large boom and bust cycles. Toward the end of the piece Munger describes that “the country’s credit was reduced to tatters.” Let’s hope it’s a fate that is not yet sealed.
Read the complete parable from Charlie Munger of Berkshire Hathaway in this Slate commentary.
Rocky Vega is publisher of Agora Financial International, where he advances the growth of Agora Financial publishing enterprises outside of the US. Previously, he was publisher of The Daily Reckoning, and founding publisher of both UrbanTurf and RFID Update -- which he ran from Brazil, Chile, and Puerto Rico -- as well as associate publisher of FierceFinance. Rocky has an honors MS from the Stockholm School of Economics and an honors BA from Harvard University, where he served on the board of directors for Let?s Go Publications, Harvard Student Agencies, and The Harvard Advocate.
the commentary is worthy of some contemplation but you have to dig beneath the surface….sure everyone is a casino junkie but why?
1. where did derivatives come from? they come from university educated financial engineers…but why?
2. why is there an incentive to seek risky returns? is it because unrisky investments pay too little? could it be that zero interest isn’t such a hot policy after all?
3. do taxes and regulation induce risky behavior? could both be so high that compensating returns are needed elsewhere?
4. doesn’t the fed induce bond speculation through open market operations?
5. isn’t tax policy tilted heavily toward rentier activity?
i think risky behavior is worth studying in depth…deploring the behavior is only half the battle toward remedy….
yet even the answers to these questions get us only half the way….why does the government need so much % of gdp? does pandermania and totalitarianism have any responsibility? does imperialism have a role?
Who the hill is Charlie Monger talking about morals? He’s the vice- President of BH? Well it’s pretty clear to anyone that they – Monger & Buffett – are NOT interested in returns and care about ethics, morals human rights. Yeah right!
There only difference between them and goldmans, is that goldmans understand derivatives. In fact, who cares if he’s right, I’m not even American
Well, you can risk anything you own. Private enterprises are controlled by law to do that. Bankruptcy law kicks in if the risk failed. Taxation laws take part of the success for the general benefit of society.
Except banks. Banks are the only enterprise allowed by law to risk up to 10 times their capital, and only with due diligence. Meaning 9 times on money they don’t own. That’s a whole lot of risks by anyone measure. That’s why banks are the only one backup by the state – the central bank, because they are inherently high risk.
Now when the banks started to risk up to 40 times the money they don’t own, and without due diligence, with the state bailing them out when their obscene ventures failed, well then Basicland gets what it deserves.
Tony asks some interesting questions. I’ll take a crack at a few:
Because the Academy prizes novel ideas above all else-that is how you get ahead in that environment: create and champion a new idea. A common source of new ideas is the fusion of different disciplines to create something new (mathematical world plus financial world equals derivatives). In the financial/economic world, there seems to be little thought given as to how these ideas will play out in the real world…but the real world seeks out the academy for ideas that can be turned into new financial products, possibly because this works very well in a lot of disciplines (mostly science/engineering) that require some kind of evaluation before marketing (e.g. developing a new material or drug or computer program). However, this seems to be disastrous in the financial world, where a lot of money changes hands before there is any understanding of the risks or benefits, and it seems to take a disaster to precipitate this understanding.
which relates to
2. why is there an incentive to seek risky returns? is it because unrisky investments pay too little?
I think it’s at least partly because people don’t know the risks are there. The regulation of financial products is lop-sided. The older ones that are understood are highly regulated (usually because of some historical disaster), whereas the newer ones aren’t because nobody has a clue what’s going on. So, I think heavy regulation in familiar areas leads many to just assume that unfamiliar areas are as well understood and regulated, even though this isn’t the case. A lot of people seem to have the idea that someone, somewhere is looking out for them…that they really couldn’t get their hands on something if it weren’t “safe”…so why wouldn’t they go for the higher return with funky new investment vehicle?
The irony of such statements, parables, etc. by Mr. Munger and some if his companions in finance, such as Marc Faber, is never lost upon me. These are men who never hesitated to exploit the system they now deem to be the root cause of our destruction. They condemn the very system they created and now pine for simpler times. They tell us it’s over…without taking any responsibility. They deserve neither the respect nor the admiration which is heaped upon them. We need to turn our thoughts and ears towards real solutions, not the folksy parables of men who have the luxury to never fear the wrecking ball they have put into motion
I wonder what this country is coming to when I drive by the casinos @ 7 am on Sunday Morning, at the parking lot is half full. Young people would rather play sports or be entertainers than to have a real, productive job.
Charlie is entombing himself in a sarcophagus of cliche. How many men, in their ninth decade, find comfort and solace in the whole, “apres moi, le deluge” posture? Answer, nearly all of them. Yeah, Charlie, you’re gonna die soon. And no, Charlie, the world is not going stop after you’re gone. There will be new innovation, new globalization, new growth, new technology and new Way-New stuff. It’s going to be fun, it’s going to be profitable, and in another century living standards, education, social justice etc. etc. will be higher. The trajectory is relentless. You can’t bet against life, Charlie — you’re gonna get crushed. So make yourself a mug of hot milk and go sit in the corner, okay? Some of us aren’t eighty, and we have to get on with the business of making the world. Sorry you won’t be here to see it.
Dean – quit talking out of your a$$ and learn a thing or 2 before opening your trap.
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