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Warren Buffett to CNBC: Economy Has "Fallen Off a Cliff"

Warren Buffett tells CNBC's Becky Quick the U.S. economy has "fallen off a cliff."

During a three-hour appearance on Squawk Boxthis 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. (Slideshow: World's Safest Banks)
  • Berkshire is restricted from buying more American Express 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

CNBC will air a one-hour special The Billionaire Next Door: Restoring Trust tonight (Monday) at 8p ET.

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Questions? Comments? Email me at buffettwatch@cnbc.com