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Buffett tells of the day the world almost stopped

WARREN Buffett said yesterday that the United States economy had "fallen off a cliff" but would recover eventually, although a rebound could rekindle inflation worse than experienced in the late 1970s.

Speaking on CNBC television, the 78-year-old billionaire also said that the economy was mere hours away from collapse in 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.

Buffett also called on banks to "get back to banking" and said that an overwhelmingly number would "earn their way out" of the recession.

"A bank that's going to go broke should be allowed to go broke," but customers should not worry about their insured deposits, he said.

Buffett said that there was a "paralysis of confidence" in banks, which he called "silly" because of safeguards such as deposit insurance.

Buffett spoke nine days after telling shareholders of his insurance and investment company, Berkshire Hathaway Inc, that the economy was in a "shambles" likely to persist beyond 2009.

Yesterday, Buffett said that the economy was experiencing "close to the worst-case" scenario.

He said that Americans, including himself, did not predict the severity of the decline in the housing prices, which then led to problems with securitizations, complex debt and other instruments whose value depended on home prices continuing to rise.

Buffett said that "five years from now, I can guarantee you that the machine will be running fine."

But an economic rebound could trigger higher inflation.

"In economics there is no free lunch," he said. "We are going to attempt to have a lunch that to some extent we're going to pay for later."


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