Buffett Says Economy Will Be ‘In Shambles’

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Buffett Says Economy Will Be ‘In Shambles’ for 2009
By Rick Levinson

Feb. 28 (Bloomberg) -- Billionaire Warren Buffett said the economy will be “in shambles” for the rest of this year as financial firms take losses tied to reckless loans made during the housing boom.

The Standard & Poor’s 500 Index will probably gain in three-quarters of the next 44 years, just as it did in the period since Buffett took over Berkshire Hathaway Inc. in 1965, he said today in his annual letter to the company’s shareholders.

While Buffett and business partner Charlie Munger can’t predict how stocks will perform in 2009, they’re certain “that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond,” he wrote.

Gross domestic product shrank at a 6.2 percent annual pace from October through December, the most since 1982, the Commerce Department said yesterday in Washington. Buffett said the consequences of the U.S. housing bubble are now “reverberating through every corner of our economy.”

Home purchases should involve an “honest-to-God down payment of at least 10 percent,” Buffett said. “Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective.”

Buffett endorsed efforts by the U.S. government to prevent the failure of financial firms including Bear Stearns Cos., which was sold to JPMorgan Chase & Co.

‘Immediate Action’

“Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown,” Buffett said. “Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.”

Buffett’s letter accompanied the release of Berkshire’s fourth-quarter results, in which net income fell 96 percent to $117 million on losses from derivative bets tied to stock markets. Berkshire shares have fallen 44 percent in the past year as the value of the firm’s top stock holdings dropped and losses increased on the derivatives.

By the fourth quarter of last year, “the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country,” Buffett said. “A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. - and much of the world - became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.”

To contact the reporter on this story: Rick Levinson in New York at rlevinson2@bloomberg.net.