By Jonathan Stempel
NEW YORK (Reuters) - Warren Buffett said on Monday the U.S. economy had "fallen off a cliff" but would eventually recover, although a rebound could kindle inflation worse than that experienced in the late 1970s.
Speaking on CNBC television, the 78-year-old billionaire said the country is experiencing a "close to the worst-case" scenario of falling business activity and rising unemployment, causing consumer confidence and spending to tumble.
Buffett called on Democrats and Republican policymakers to set aside partisan differences and unite under the leadership of President Barack Obama to wage an "economic war" that will fix the economy and restore confidence in banking.
He urged policymakers and regulators to communicate their efforts better to the public, though he stopped short of major, specific policy recommendations.
"People are confused and scared," he said. "People can't be worried about banks, and a lot of them are."
Buffett spoke nine days after his insurance and investment company Berkshire Hathaway Inc said quarterly profit fell 96 percent, largely from losses on derivatives contracts. Berkshire's book value per share fell 9.6 percent in 2008, the worst year since Buffett took over in 1965.
RECOVERY COULD TRIGGER MORE INFLATION
Buffett said Americans, including himself, did not predict the severity of home price declines, which led to problems with securitizations and other debt whose value depended on home prices continuing to rise, or at least not plummet.
"It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either," Buffett said. "We want to err on the side next time of not allowing big institutions to get as unchecked on leverage as we have allowed them to do."
He said, though, that efforts to stimulate the economy could trigger higher inflation once demand rebounds.
"We are certainly doing things that could lead to a lot of inflation," he said. "In economics there is no free lunch."
The stock of Omaha, Nebraska-based Berkshire has fallen by half since September, with growth in some units such as auto insurer Geico Corp offset by weakness elsewhere, including jewelry retailers that Buffett said have "gotten killed."
Buffett said Berkshire will write less catastrophe insurance this year after investing roughly one-third of its cash in high-yielding securities issued by General Electric Co, Goldman Sachs Group Inc and other companies.
He also said the economy had been mere hours away from collapse last September when credit markets seized up, Lehman Brothers Holdings Inc went bankrupt and insurer American International Group Inc got its first bailout. "The world almost did come to a stop," he said.
While acknowledging that the economy "can't turn around on a dime," Buffett said it will be "running fine" in five years. "This country will work fine even if we screw it up," he said.
In morning trading, Berkshire Class A shares were down $1,705, or 2.3 percent, at $71,490. Their 52-week high is $147,000, set last September 19, Reuters data show.
BANKS SHOULD "GET BACK TO BANKING"
Buffett called on banks to "get back to banking" and said an overwhelmingly number would "earn their way out" of the recession, even if stockholders don't go along for the ride.
Saying that "a bank that's going to go broke should be allowed to go broke," Buffett nevertheless added that the "paralysis of confidence" in the sector is "silly" because of safeguards such as deposit insurance.
He said Wells Fargo & Co and U.S. Bancorp, two large Berkshire holdings, should appear "better than ever" three years from now, while the ailing Citigroup Inc, which Berkshire does not own, would probably keep shrinking.
Consumers, meanwhile, should reduce their dependence on credit cards, he said. "I can't make money borrowing money at 18 or 20 percent," said Buffett, whom Forbes magazine in October said was the second-richest American. "I'd go broke."
He said he still expects Berkshire's derivatives contracts, whose value depends on where four stock indexes trade a decade and more from now, to be profitable.
He said that over 10 years, "you will do considerably better owning a group of equities" than U.S. Treasuries.
Buffett also defended his imperfectly timed October opinion piece for The New York Times, where he said he was moving non-Berkshire holdings in his personal account to stocks.
"I stand by the article," he said. "I just wish I had written it a few months later."
(Reporting by Jonathan Stempel; Additional reporting by Lilla Zuill; Editing by Lisa Von Ahn and John Wallace)
