May 6, 2023 - Economy

Buffett's warning on banking crisis: "Fear is contagious"

Illustration of a hundred dollar bill as pixels that are disintegrating.

Illustration: Aïda Amer/Axios

Warren Buffett on Saturday suggested that perverse incentives and messaging confusion are worsening the crisis that's buffeting the U.S. banking sector.

Why it matters: Rising interest rates have ricocheted across the financial system, figuring prominently in the failures of Silicon Valley Bank and First Republic Bank.

  • Although officials have moved to ring-fence the fallout, investors have been taking a run at the publicly-traded shares of other regional banks seen as vulnerable, like PacWest, WesternAlliance and Zion’s Bancorp.
  • The negative feedback loop has stoked fears that idiosyncratic reasons behind the demise of key banks – including Credit Suisse and Signature Bank – may endanger the entire system.

What he’s saying: At Berkshire Hathaway’s annual meeting, Buffett ominously suggested that “fear is contagious,” and consumers’ palpable fears about the safety of their banking institutions are making it hard to respond to the crisis effectively.

  • “If you have people worried about their money in the bank, you can’t run an economy,” the billionaire investor said, in response to a question.
  • “Here we are in 2023, and you actually see the FDIC pay off 100 cents on the dollar to everybody, and still you have people worried…and that just shouldn’t happen,” he said.
  • “The messaging has been very poor…it’s been poor by the agencies and poor by the press.”

The billionaire investor, also one of the world’s wealthiest men, is notorious for his bullish optimism about America in the face of widespread pessimism. However, Buffett demurred on the question of whether the banking system could, in fact, fail.

  • “It shouldn’t, I don’t think it will, but it could, and the incentives in bank regulation are so messed up and so many people have an interest in having them messed up, it’s totally crazy.”
  • The ease and ability to transfer money in the digital era is also making it harder for officials to get ahead of the crisis, he said. “That’s the world we live in, a lighted match can turn into a conflagration, or it can be blown out,” Buffett added.
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