War on Terror: The Economy

Warren Buffett is the emeritus president of the unofficial brotherhood of billionaire uber-capitalists. In New York and London, mere mortals of the investment world hang on the every word of this Yoda-like figure, known as the Sage of Omaha. Thousands revere the pithy aphorisms he delivers in the annual report of his company, Berkshire Hathaway. I have always thought most of them boil down to "many a mickle maks a muckle, ye ken", but I suppose they are none the worse for that.

Among its many interests, Berkshire Hathaway owns insurance companies that stand to lose more than $2bn from the World Trade Center tragedy. And Buffett's other businesses have been affected in variegated ways. Dairy Queen, the McDonald's-with-milk chain, had difficulty getting "crumbled cookie confection" across the Canadian border, according to the Wall Street Journal. Its carpet and rug buyers no longer want to go on buying trips to Pakistan and India. But the demand for rented furniture from companies dislocated in New York is soaring.

The point is that Buffett is not only the world's most consistently successful investor, he is also its most conservative. He evaluates risk and cash return with scientific precision. To rework one of his modified saws, he will always invest in a bird in the hand, unless certain that he will snag those two in the bush, and can evaluate what they will fetch when auctioned, and can measure the cost in lost revenue of waiting for them.

It was this visceral dislike for speculative transactions that dissuaded him from making any serious investment in internet or technology companies during the market frenzy of the late 1990s - which looks very astute now, but appeared less so at the time. However, even his apparently impregnable financial fortress has been shaken by the events of 11 September. So you can understand why investors on the whole are so shaken. If Yoda is cowed, what chance any other investor emerging from all this unscathed?

But it was something Buffett said in plain English, rather than in his guise as Jedi instructor, that particularly attracted my interest. "I think in the future, the government is going to have to be the ultimate insurer for acts of terrorism," he said. "An industry with very large but finite resources is not equipped to handle infinite losses."

You may think this is blindingly obvious. But it is no less important for that. Buffett is saying that the role of the state is not quite as insignificant as the proponents of globalised free market capitalism would like. Governments are now taking emergency action to remedy market failures prompted by the outrages. Britain has provided temporary insurance cover to its airlines, after the private sector imposed severe limitations. Without it, the airlines could not have flown. The Financial Services Authority, the UK regulator, is relaxing rules designed to keep insurance companies solvent, because these rules - which forced insurers to sell shares into a declining market - were having the paradoxical effect of undermining their solvency.

In the US, public money is propping up the airlines. Soon, ailing companies will bang on Gordon Brown's door claiming it is his national duty to save them from the knackers' yard. I am sure the Chancellor will lock himself in the bathroom, but the pressure to return to 1970s-style interventionism will be great.

And there has just been another sign of how far we have moved from that utopia of no economic cycles, in which the only role of central banks and governments was to raise the occasional eyebrow and shave a few basis points off the bank lending rate. The stock markets rose after statistics showed a shocking drop in US consumer confidence. Why? After all, only the astonishing propensity of US consumers to spend has kept their economy out of recession this year.

The answer is that investors decided the figures were so bad that the US government and Federal Reserve would be forced to flood the system with money, to stave off economic disaster. So much for the self-correcting, self-regenerating global economy.

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No bailout is for free, however. The world's bankers are being asked to sacrifice one of their fundamental rights, viz, to make stonking profits out of the instinctive desire of the super-rich to reduce their tax bills by moving funds to "offshore" bank accounts in countries with subnormal tax rates. (I am being slightly unfair, because these accounts are also jolly useful for spouses wanting to squirrel money away on the eve of divorce proceedings.)

International terrorists have apparently been moving hundreds of thousands of dollars across borders with impunity. So, ever the ruthless pragmatist, Brown is exploiting global panic about the allegedly complex financial networks of terrorist organisations to achieve his long-cherished aim of undermining the so-called offshore banking industry.

He would not put it quite like that. He just thinks that all bankers will now recognise that sharing information about their more dubious clients with the security services, or even the tax authorities, might not be such a bad idea. We have to keep an eye on all this. We do not want the government prying into our bank accounts willy-nilly, even if we think Brown is basically a good egg. So I am a little uncomfortable about a Home Office plan to "bug" UK bank accounts in the way that it can tap telephones.

But is it a bad idea to duff up an offshore banking industry that acts as a prop for insider traders, tax evaders, corrupt despots and money launderers? I shall not be manning the barricades in Zurich.

Robert Peston is editorial director of QUEST(TM); www.csquest.com ; e-mail rpeston@csquest.com

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