George W. Bush uttered 'the 10 most important words in the history of economics' during the 2008 financial crisis, Warren Buffett says — here's how they apply today

Reassuring the market

Buffett believes at the time the global economy had hit a moment of panic when it seemed U.S. money market funds were in jeopardy.

Money market funds are mutual funds that invest in highly liquid, near-term instruments such as U.S. Treasuries. They are insured by the Federal Deposit Insurance Corporation. In other words, they’re a place where people park their money for safekeeping. But when that sense of security was questioned, panic spread.

“Thirty-five million Americans at the start of September [2008] thought $3.5 trillion of their money was safe in money market funds,” Buffett said. “Then, in one week, they got worried about it.”

During this critical moment, he believes Bush’s words were a signal to Hank Paulson, Secretary of the Treasury at the time, and Federal Reserve chair Ben Bernanke that all options to secure the money market were on the table.

“Bernanke and Paulson could then say, ‘We’ll do whatever it takes,’” Buffett explained.

What it took to rescue the economy was an unorthodox program known as quantitative easing. Effectively, Bernanke and Paulson coordinated a series of actions, including the purchasing of securities, to inject money into the financial system. This lowered borrowing costs and increased the money supply.

From 2008 to 2015, the Fed’s balance sheet surged more than fourfold, to about $4.5 trillion, according to the Federal Reserve Bank of Philadelphia.

In other words, money loosened up.

Nowadays, however, investors seem to be witnessing this phenomenon in reverse.

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Quantitative tightening

The biggest challenge in recent years apparently hasn’t been the lack of cash, but too much of it. Money supply in the economy boomed during the pandemic, which may have been a key reason for heightened inflation, according to Christopher J. Neely, Senior Economic Policy Advisor, Federal Reserve Bank of St. Louis.

To tame inflation, Fed chairman Jerome Powell engaged in a quantitative tightening program in June 2022. In other words, money would be tightened up in the system. Since then, the Fed’s balance sheet has declined from nearly $9 trillion to $7 trillion.

Raising interest rates was also part of the quantitative tightening program. The Fed raised its benchmark interest rate from 0.25% to between 5.25% and 5.5%. On Sept. 18, interest rates were slashed 50 percentage points, the first change since July 2023. A further cut of 25 points was made on Nov. 7.

For ordinary savers, heightened rates meant better returns on fixed-income products. And for those seeking steady passive income, parking money in treasury bonds and money market funds could be fairly lucrative.