Warren Buffett Sun Valley 2012: Economy, Europe, LIBOR, JPMorgan, Simpson-Bowles Fiscal Cliff

Buffett reports 'flip-flop' from recent years: general US economy 'more or less flat' with growth 'tempered down,' but residential housing showing 'pickup' from 'very low base' for first time. Previously everything improved except housing; now reversed. Europe particularly concerning: 'last couple months and with some acceleration' things 'really started to slip pretty fast' after year without major slowdown. Rail freight up but retail (jewelry, furniture, carpet) generally down. Clayton Homes (largest US homebuilder) and real estate brokerage pending sales up but from low levels. Still believes 'it would take housing coming back significantly to move us generally significantly upward.'

Buffett skeptical of Fed's remaining tools: 'Chairman Bernanke would disagree with me and he knows a lot more about it' but 'when you have interest rates down to zero not only here but in the major countries in Europe' and '15-year treasury inflation protected TIPS security selling in a negative yield' with people 'willing to put their money out at a minus rate in real terms that's about as far as you can go.' Banks have 'enormous amounts of money at the Fed' earning quarter percent - 'lose money on that' so 'not happy having that money at the Fed' but 'just aren't seeing that much demand for loans.' Main problem: 'Congress is inept...paralyzed by the desire of each side to make the other side look bad' - 'hard for the Fed to offset the Congress in terms of changing public opinion.'

Buffett explains Europe's 'fundamentally flawed system designed some years back' that they've been 'trying to patch' for years. Problem: 17 people deciding 'where the patches should go.' Berkshire sold Spanish, Italian, French bonds 2 years ago (overly cautious but prescient). Core issue: 'trying to have a common monetary unit when you don't have somewhat common fiscal policies and cultures and work rules...just doesn't work.' Uses Kissinger quote: 'If I want to call Europe what number do I dial?' - no clear responsibility unlike US 2008 crisis with Bernanke/Paulson/President. Without 'printing press' it's 'different animal.' 10 years from now Europe working fine but path unclear and Euro 'certainly can't exist as originally designed.'

Buffett calls LIBOR manipulation 'big deal' - 'base rate for the whole world' including Berkshire's couple billion in auction rate municipals priced off LIBOR. 'Idea that a bunch of traders can start emailing each other or phoning each other and playing around with that rate' is serious. Not 'rogue trader' - lot going on in Barclays trading room. Bob Diamond 'very good executive' but 'had no choice but to go' when something this big happens. Litigation will be 'can of worms guaranteed' because millions of contracts tied to LIBOR but 'very asymmetrical' - losers sue, winners keep gains, intermediaries stuck. Like Solomon Brothers but Solomon was 'one fellow with one bond' while LIBOR is 'whole world...everything's tied.' Shakes faith in 'certain institutions' but not whole system - 'our system works over time.'

Strong Dimon defense: 'One of the best bankers in the world' alongside John Stumpf at Wells. 'If I owned a bank...and I could get Jamie to run it for me I would feel very happy.' Jamie 'understands banking he understands risk.' Loss 'significant' but with 'couple trillion dollar balance sheet you're going to have some losses some places' - JPM 'lost billions and billions and billions of dollars on loans' too. On regulation: 'Good reasons to restrict the activities that banks can be in' - supports Volcker concept though 'Charlie Munger is more Old Testament than I am.' Hedging interest rate risk, FX risk 'perfectly proper' like Berkshire's energy companies. Problem: 'one fellow' went 'off the reservation' turning 'hedging positions into speculative positions' - 'hedge on a hedge' creating 'Texas hedge.'

Simpson-Bowles warn fiscal cliff likely with devastating consequences. Bowles: 'I think we will go off the fiscal cliff' and if 'don't turn around very quickly and fix it shortly thereafter then I think it could be really a disaster.' It's '$7 trillion dollar worth of economic events' with 'at least 1 and a half percent decline in GDP next year...enough to put us back into recession.' This is 'not only the most predictable economic crisis history it's the most avoidable' if 'just come together put partisanship aside.' Healthcare core issue: '$2.8 trillion, 19% of GDP by 2020' while defense only 4%. '10,000 a day turning 65' - system 'on automatic pilot and will suck up all the discretionary budget' wiping out education etc. Their plan: '$400 billion we'd knock off' with 'not let it go up 1% over GDP...1% GDP a year.' Campaign: fixthedebtcampaign.org seeking 10 million signatures.

Despite warnings, Buffett closes with optimism: 'I'm a huge bull on the country I mean this country works over time and we'll do the right thing in the end...we just shouldn't wait till the very end.' Core conviction: 'I still think the luckiest person that's ever been born in the world is the baby born in the United States today and I'll stick with that and I love owning businesses in the United States.' Berkshire 'invest $9 billion almost in the United States...this year.' Historical perspective: system works - 'sitting here at Sun Valley in pretty good circumstances compared to a couple hundred years ago...not working any harder than they worked 200 years ago we're not any smarter but we live far differently so our system works over time.' Doesn't 'want anybody to get discouraged about how this world is going to turn out.'