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Seth Klarman Questions Morality at the Federal Reserve

October 30, 2012 | About:
Seth Klarman recently released his third quarter letter for Baupost. The normally reserved hedge fund manager was highly critical of the Federal Reserve.

Klarman wrote:

"Finally, we must question the morality of Fed programs that trick people (as if they were Pavlov's dogs) into behaviors that are adverse to their own long-term best interest. What kind of government entity cajoles savers to spend, when years of under-saving and overspending have left the consumer in terrible shape? What kind of entity tricks its citizens into paying higher and higher prices to buy stocks? What kind of entity drives the return on retirees' savings to zero for seven years (2008-2015 and counting) in order to rescue poorly managed banks? Not the kind that should play this large a role in the economy."

Indeed there have been immediate consequences to the ZIRP policy. Insurance companies in particular have most likely taken risky bets in order to generate yield. Similarly, pension funds have been forced into the equity market as the bond market returns are so paltry.

It appears as though Klarman is in agreement with Nassim Taleb about the necessity of failure within the financial system.

"An environment where financial crises are seen to be a regular part of the landscape is one where people might actually take more precautions. People would maintain a margin of safety in all their decisions. Investment and otherwise, regulations would be well thought out and diligently enforced, and the unscrupulous and the incompetent would quickly fail and disappear from the scene. Modern day attempts to abolish failure only serve to ensure it, as moral hazard-- the likelihood that people's behavior changes in response to artificial supports or guarantees-- surges. Attempts to prevent or wish away future crises only make them more likely. Only by allowing, even welcoming, episodic failure do we have a chance of reducing the likelihood and magnitude' of future financial crises."

In other words, the FED has engineered an environment that is highly conducive to Black Swan type of events.

Rating: 4.6/5 (29 votes)


Koheleth - 5 years ago    Report SPAM
I'd love to get Seth Klarman and Warren Buffett on TV to debate the Fed. Warren has said the Fed's actions were necessary.

Matter of fact, put Seth, Warren, Ron Baron, Jim Rogers, Wilbur Ross, Prem Watsa, Daniel Loeb, David Einhorn and Howard Marks together. Let the best of the best investors ask each other questions for a change. Hello CNBC: I'd pay to watch that debate.

Vgm - 5 years ago    Report SPAM
"Warren has said the Fed's actions were necessary."

To be clear, Buffett said that the initial responses to the crisis by the Fed and the Treasury, as well as by Bush and Obama at the critical moment, were absolutely necessary in 2008-9 to prevent a complete collapse of the financial system in the US.

However, he has said on various occasions since, including in his op-ed piece in the NYT entitled 'Greenback Emissions' that he feels the further stimuli which have been provided by the Fed are dangerous for the future of the country and the economy. He predicts high inflation, unless the Fed can reverse some of its monetary easing.

He maintains that ongoing monetary policy has little positive impact and that what really brings things back is what he terms "the regenerative capacity of capitalism".
Koheleth - 5 years ago    Report SPAM
Correct. I should have been clearer.

However, I may be wrong here, but I believe Buffett has gone on record as endorsing Bernanke for another term at the Fed and has lauded him as a hero.

Jim Rogers on the other hand as essentially lambasted him as a failure and even incompetent.

I wonder to which pole Klarman now leans? Appears to be more in Rogers' orbit. Anyway, hence my call for all these very intelligent (and very rich) men to duel it out in debate so that little guys like me can learn from them.

I know it won't happen.
Vgm - 5 years ago    Report SPAM
Yes, Buffett has expressed support for Bernanke. He always remarks that Bernanke knows much more about the situation than he, Buffett, does - which is perhaps a typical bit of Buffett understatement. BB believes he can reverse things at the right time. WEB has his doubts.

I think something which has become clear is that the Fed has had to go it alone, with nothing coming from Congress to help the economy. QE is the most facile strategy.

I like your idea of getting people like Buffett, Watsa, Ross and Klarman round the table. I suspect we might get quite alot of agreement. Would certainly be fascinating.

(In my opinion, Jim Rogers is a blowhard and extremist. I pay him no attention.)

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