Warren Buffett Says Economy Has ‘Fallen Off a Cliff’ (Update4)

March 9 (Bloomberg) — Billionaire Warren Buffett, whose Berkshire Hathaway Inc. posted its worst results ever in 2008, said the economy “has fallen off a cliff” and that efforts to stimulate recovery may lead to inflation higher than the 1970s. The American public is fearful, confused and changing their buying habits, which is showing up at Berkshire’s operating units, Buffett said during an appearance on the CNBC television network today. While the recession will end and future generations will live better than their parents, the economy “can’t turn around on a dime,” Buffett said, adding that some inflation is appropriate right now. “We are doing things now that are potentially very inflationary,” he said. Buffett called on Congress to unite behind President Barack Obama, comparing the economic crisis to a military conflict that needs a commander-in-chief. “Patriotic Americans will realize this is a war,” he said. Berkshire’s shares have lost almost half their value in the past year as the bear market dragged down financial assets and the recession put pressure on profit from the company’s more than 70 operating businesses. The Geico insurance unit and Dairy Queen ice cream business have gained ground while the jewelry units are “just getting killed,” he said. Bailouts of the banking system and “quasi-banks” such as American International Group Inc. were necessary, even if everyone dislikes what’s been done to salvage the New York-based insurer, Buffett said. He favored insuring all bank deposits, and in response to a question about nationalizing lenders, Buffett said he doesn’t see any moral hazard in the U.S. seizing an institution when shareholders are already almost wiped out. Playing Games Companies used too much leverage and “played games” such as creating special investment vehicles to keep producing earnings growth, Buffett said. “Corporate America has a lot of room to behave better,” Buffett said. The nation’s richest people don’t need a tax cut, he said, although chief executive officers shouldn’t be “demonized” for using corporate jets that help them be more efficient. Berkshire owns NetJets, which leases private aircraft to corporate customers. Buffett was ranked the richest man in America by Forbes magazine in October. He transformed Berkshire, based in Omaha, Nebraska, from a failing textile maker into an enterprise with businesses ranging from ice cream and underwear to insurance and utilities. ‘Dumb’ Dow Deal Berkshire’s fourth-quarter net income fell 96 percent to $117 million, the firm said Feb. 28. Book value per share, a measure of assets minus liabilities, slipped 9.6 percent for all of 2008, the worst performance under Buffett’s watch, on the declining value of derivatives and the company’s stock portfolio. His company remains committed to its $3 billion equity investment in Dow Chemical Co., which the latter company plans to use in acquiring Rohm & Haas Co., even though the deal isn’t as attractive as it originally appeared, Buffett said. Midland, Michigan-based Dow, the largest U.S. chemical maker, agreed in July to pay $78 a share, or $15.3 billion, in cash for Philadelphia-based Rohm & Haas. “Our commitment, which looked smart at the time, looks dumb now,” he said. “Conditions changed for Dow and Rohm & Haas in a huge way.” To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.

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