Oracle or Tentacle?

Barry Ritholtz has a post on his Big Picture blog referencing Rolfe Winkler's "Buffett Betrayal" about the benefit to Berkshire Hathaway of recent government bailouts of financial firms. Personally, I don't think that this should be too surprising. Common wisdom is that Warren Buffett is a Graham and Dodd-style genius at value investing. Like most conventional wisdom, this is based on a kernel of truth surrounded by a number of complicating qualifications. My basic observation is that Berkshire Hathaway is largely dependent on expansionary credit dynamics. There is also a perception that Warren Buffett has achieved his above average results by diligent analysis focused on "the basics". Berkshire Hathaway derivative exposure revealed last year has given the lie to this fallacy. While it would be ignorant to deny that Warren Buffett is a savvy operator with excellent insight and management skills, it seems equally ignorant to ignore the facts that Berkshire Hathaway is dependent (however indirectly) on fractional reserve banking, a credit-based fiat monetary system, a financial regulatory landscape tilted in favor of the largest of institutions and implicit governments guarantees [this is not a new phenomenon as Buffett lobbied for a government backstop for re-insurers, a key component of Berkshire Hathaway's business structure, after major natural disasters such as Hurricane Andrew. This was an early version of privatize the gains (insurance premiums) and socialize the losses (large payouts due to disaster claims).] It is an interesting what-if scenario to speculate what would have happened if the US Fed and Treasury had not bailed out failed financial firms last year. But more importantly for investors may be what could happen if debt deflation returns in force in the years ahead as is quite possible. Just as the famous Delphi Oracle amassed enormous wealth which eventually vanished, Berkshire Hathaway could be destroyed when the fragile, and ultimately unsound, financial system which is dying, collapses.