Markets do not trust the governments' plans to keep struggling banks alive and investors will only calm down when the companies with bad assets are allowed to go bankrupt, legendary investor Jim Rogers, CEO of Rogers Holdings, told CNBC on Friday.
"The way to solve this problem is to let people go bankrupt," Rogers said.
"Then you will hit bottom and then you start over. The people who are sound will take over the assets from the people who aren't sound and we will start over. This is the way the world has worked for a few thousand years."
The current rescue plans, which will force governments to issue more debt, print money and flood the markets with liquidity, will flare up inflation after the crisis is over and will create worse problems, Rogers warned.
"We're setting the stage for when we come out of this of a massive inflation holocaust," he said.
And the plans are unlikely to fend off a severe economic downturn, as the crisis starts affecting all walks of life.
"We had the worst excesses we had in credit markets in world history. We're going to have to take some pain," Rogers said.
"Many people bought 4-5 houses with no money down and no job… you think we'll just say well, that's too bad, we'll start over and nobody loses their job? Be realistic."
People should not look to the upcoming G7 meeting with the hope that the leaders of the strongest economies will find a solution.
"What they (G7 leaders) need to do is go down the bar and leave the rest of us alone," Rogers said.
Economies who did not take part in the subprime bonanza are likely to suffer along with Wall Street and the developed economies as the crisis unfolds, he warned.
"What about all the people in countries that minded their manners, saved their money, didn't get overextended and now all of a sudden they're being asked to bail out a bunch of guys on Wall Street who were incompetent at best and some of them crooks?"
"I thought it outrageous that anybody has to step in a bail out a bunch of 29 year olds driving Maseratis," he said.
There are not many safe havens in the volatile markets, he said.
"I have an enormous amount of cash and I've been using it to buy more Japanese yen, more Swiss Francs, more agricultural products… there's a liquidation phase going on, where everything is being liquidated. They're selling everything in sight."
"In a period like this the way you make money coming out of it is to own the things were the fundamentals have not been impaired," Rogers added.