Buffett vs. Greenspan

May 27, 2:29 PMDenver Business ExaminerWill Shanley

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Two financial heavyweights, Warren Buffett and Alan Greenspan, recently weighed in on the health of the U.S. economy. Buffett, the legendary value investor who ranks among the world's richest people, says the U.S. is already in a recession, one that will be longer and deeper than most pundits anticipate. Greenspan, the venerable economist who served for nearly two decades chairman of the Federal Reserve, says the "probability of a severe recession has come down markedly."

Buffett says we need to prepare for economic pain; Greenspan says the worst has potentially passed. Who's right? It says here that Buffett is, primarily for two reasons.

First, Buffett has no obligation to sugarcoat the truth. Buffett is a respected investor who, with billions in the bank, has little incentive to mask what he views as the truth. Greenspan, meanwhile, likely feels compelled to help soothe the market's concerns, in part because his legacy is at stake. A deep recession would undoubtebly reflect poorly on Greenspan's loose economic policy during the early part of this decade, which some economists blame for the boom, then bust, of the U.S. housing market.

Second, Buffett is so close to a variety of industries that his has an unmatched view of the U.S. economy. Buffett's holding company, Berkshire Hathaway, owns an array of companies, ranging from clothing (Fruit of the Loom), consumer discretionary (Ben Bridge Jeweler) and insurance (GEICO). Because of the diversity of his holding company, Buffett has a window in many segments of the U.S. economy. Buffett does not need to depend on economic models or estimates to draw conclusions about the nation's economic health; he can review the P&L statements of his portfolio companies as a bellwether. 

That said, the U.S. economy has yet to record two consecutive quarters of negative economic growth, the standard definition of a recession. If Buffett is indeed right, then we are closer to the start of a recession than the end.