The Federal Reserve should let the big investment banks go bust if they made unwise investment decisions, and investors should take refuge in gold, because the central bank has been "misleading" the markets, Marc Faber, editor and publisher of "The Gloom, Boom & Doom Report," told "Worldwide Exchange."

Fears that another major investment bank may get into trouble have hammered stocks recently but some analysts have said the major Wall Street banks were safe as the Fed cannot afford to let them fail.

"I think there's a good chance that the Fed itself will fail one day if they say 'We're not going to let you fail,' and the government will have to bail out the entire system," Faber said.

"If I'm a bad businessman and I go out of business, who's gong to help me?" he said. "But Bear Stearns and the Wall Street elite, because they are tied into the Treasury and the Federal Reserve and they have lunch together, it's a club and so forth, they're bailed out. It's a joke!"

"I think a lot of banks are already bankrupt … but they hide their rotten assets … in categories where you don't really need to value them," Faber said. "I think the financial sectors, by-and large, has much larger problems than is perceived by the investment community and the stock market to some extent is telling you that."

Even another big brokerage of bank failed, nothing would happen to clients' money since those assets could be transferred somewhere else," he said.

Buy Gold

Investors should go into gold as its price did not rise as fast as that of other commodities while the central bank keeps printing money, Faber said.

The Fed has been "misleading" investors on wanting a strong dollar, Faber said, as it kept lowering the interest rates. "When it comes to action, they show no concern about inflation."

He also blamed the central bank for forcing investors to abandon safe deposits in banks for riskier strategies by keeping rates so low.

"The Federal Reserve is the greatest speculator—they force people to speculate," he said.

"I think they should have stopped cutting rates at say 4 percent … you could stop cutting rates and pursue a tight monetary policy. You can take other measures, mop up liquidity," Faber added.

The world economy is sending signals of a major slowdown and demand for commodities apart from gold is likely to subside in the second half of the year, he said.

The Fed's loose monetary policy did not help an economic recovery, because the private sector was tightening lending conditions after years of relaxed policies, so the rate cuts had little effect, Faber added.

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