Munger: "Interest rate swaps have enormous dangers given their size and the accounting that has been allowed. But credit default derivatives took that danger to new levels of excess—from something that was already gross and wrong. In the ’20s we had the “bucket shop.” The term bucket shop was a term of derision, because it described a gambling parlor. The bucket shop didn’t buy any securities. It just enabled people to make bets against the house and the house furnished little statements of how the bets came out. It was like the off-track betting system."
"Derivatives trading, with no central clearing, brought back the bucket shop, because you could make bets without having any interest in the basic security, and people did make such bets in the billions and billions of dollars. Some of the most admired people in finance—including Alan Greenspan—argued that derivatives trading, substituting for the old bucket shop, was a great contribution to modern economic civilization. There’s another word for this: bonkers. It is not a credit to academic economics that Greenspan’s view was so common."
"I would argue that the economists have not been all that good at working concepts of good and evil into their profession. Nor do they understand, at all well, the economic consequences of bad accounting."
"They say it’s not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we’re learning is that when you don’t understand these consequences, you don’t have an adequately skilled profession. You have big gaps in what you need. You have a profession that’s like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg."
"If you totally divorce economics from psychology, you’ve gone a long way toward divorcing it from reality."
Munger: "We may be forced into much desirable change. If there aren’t a lot of new jobs in derivative trading, maybe the engineers will have to do more engineering. If you look at the history of Berkshire Hathaway, you will find that time after time we did something that I describe as turning lemons into lemonade. Part of my Berkshire Hathaway holdings came from a dumb investment."
Interviewer: "I didn’t realize you made dumb investments."
Munger: "I certainly did. I think it’s part of a life lived right that you learn how to make some lemonade out of your lemons."
The complete interview can be found here.