Warren Buffett explains Why Bubbles Happen
Buffett was asked by CNBC's Andrew Ross Sorkin if he is worried another crisis will happen again.
"Well there will be one sometime," Buffett said in an interview for CNBC's "Crisis on Wall Street: The Week That Shook the World" documentary. The documentary airs Wednesday night at 10 p.m. ET/PT.
"People start being interested in something because it's going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren't," he said. "And their spouse is saying can't you figure it out, too? It is so contagious. So that's a permanent part of the system."
That last paragraph perfectly explains Bitcoin. Most of those investing in cryptos have little idea how they work, or what they are even buying.
Buffet made no mention of the corporate bond bubble, the equities bubble, or even the crypto bubble. He does not see any bubbles now, at least that he mentioned.
Symptom or Cause?
Buffett confuses a symptom (rampant speculation) with the true cause
- The Fed (central banks in general), keep interest rates too low, too long
- Fractional reserve lending
- Moral hazards like bank bailouts
- Poor fiscal policies and massive government debt
In short, there is no free market in anything and thus no valid price discovery. There would always be speculation, but Fed policies and fractional reserve lending are the root cause of bubbles.