THE ORACLE OF OMAHA SPEAKS . . . "It's fallen off a cliff . . . people have changed their behavior."

WARREN BUFFETT:  "It's FALLEN OFF A CLIFF."

Warren Buffett to CNBC: Economy Has 

"Fallen Off a Cliff"

Posted By: Tim Tompkins, Lex Rex The Invisible Hand.

Topics:Warren Buffett

Companies:American Express Co | 

Berkshire Hathaway Inc.

Warren Buffett tells CNBC's Becky Quick the U.S.

 economy has "fallen off a cliff."

During a three-hour appearance on Squawk Box this 

morning (Monday), Buffett said economic developments 

have been very "close to the worst case" 

that he had imagined, although conditions would be far 

worse if the Federal Reserve hadn't stepped 

in last September.

Other highlights:

The economy "can't turn around on a dime" and a 

turnaround "won't happen fast."

Predicts unemployment rate in U.S. will go well above 

its current levels before the downturn ends.

But, five years from now, the economy will be running 

fine.  The strength of the American system will pull it 

through, just as it has many times in the past.

Democrats and Republicans should work together and 

not try to take advantage of the economic situation 

to achieve partisan goals.Inflation has the "potential" to be 

worse than the 1970s.

Most banks are in "pretty good shape" and can

 "earn their way out" 

of the current problems given the low cost of funds.  

Banks, however, "need to get back to banking."

Extremely important that the government make clear 

depositors won't lose their money if banks fail.  

Obama needs to make a 

"clear statement" in support of the banking system. 

Berkshire is restricted from buying more American Express

AXP 10.64    0.38  (+3.7%)   ]stock, but that doesn't 

mean it is not a "hell of a buy" at $10 a share.

Wishes he had written the 

New York Times "Buy American" piece

 a few months later, but stands by the basic argument 

that you'll do better over a ten-year period with stocks 

that you will with Treasuries.  

He said in the article he wasn't calling the bottom of the stock market, 

and he still isn't.

Buffett says derivatives are not "evil" and to be avoided 

at all costs, but they are "dangerous" and should 

be used very carefully.  

He still expects to make money on the long-term "put option"

 equity derivative contracts Berkshire has written. 

Housing market could work through, or "sop up," its 

excess supply in as little as three years if new construction 

is reduced to a level below natural population growth.

The U.S. economy was not a "house of cards" over the 

past ten years, but mistakes were made when 

it came to borrowing money.

Mark-to-market accounting should be retained, 

but regulators shouldn't use it so much to require insitutions 

to increase their reserves.

"Probably the uptick rule" is a good idea.

Mistake to "demonize" corporate executives for using 

private jets.  Having a jet has helped Berkshire make deals 

in the past.

Praises Ben Bernanke's leadership as Federal Reserve Chairman.

The Oracle Speaks . . . is Obama listening, or 

do we really care?

-Posted by Lex Rex