Governments have intervened too much in free markets since the crisis started, to the point that they are affecting the health of the world economy, Marc Faber, the author of "The Gloom, Boom & Doom Report" told CNBC Thursday.
Later on Thursday, leaders of the 27 European Union member states will discuss ways of strengthening fiscal discipline in the bloc and tightening financial regulation to prevent another economic crisis.
In the US, despite criticism about the way it handled the crisis, the Federal Reserve is set to become the most powerful financial regulator under a financial reform bill being discussed in Congress.
"I think that governments have become like a cancer, they have expanded in the financial system," Faber said.
"I think the biggest problem is too much intervention. Whatever the government touches is usually done worse than in the private sector," he said.
Markets usually give signals when something goes wrong but, if the government is to intervene, as is the case of the European Central Bank, the Federal Reserve and the Bank of England's bond buying, government intervention hides these signals, according to Faber.
"I think any government intervention has unintended consequences and is negative," he said. When there is intervention, "eventually the market will break the intervention and things will blow out."
Government stimulus packages create volatility in stock markets because they distort economic indicators, said Faber, who predicted that the US will implement another stimulus.
Supporters of past government interventions to boost money in the economy have said that without them the world economy would have been in much worse shape now, with unemployment much higher and more companies going bankrupt.
"Yes I am familiar with this line of argumentation," Faber said. "The Keynesians will all say … we would be in a depression now. But it's not clear to me that this is correct."
Gold, Stocks Better than Bonds
Some economists raise the spectre of deflation, but Faber pointed out that inflation in the UK is high and that food prices are rising by 20 percent in emerging economies.
"People who tell me about the big deflation in Japan, why don't they spend a day in Tokyo? It's still the most expensive city in the world," he added.
"At this level I'm not particularly interested in buying anything," he said in response to the deflation argument. "I buy gold, I don't know what else to buy."
Faber prefers to be invested in stocks rather than government bonds at this moment, because bonds have had a period in which they out-performed stocks and from now on, he predicted that bond yields will rise.
Stocks are "in a correction phase" and got very oversold two weeks ago, he said, adding that 1,170 points was the S&P's resistance level. Indexes are unlikely to hit the lows of March 2009 again in the near future, according to Faber.
- Watch the first part of Marc Faber's interview above and the second part here.
He reiterated his view that another, worse crisis may happen in five to 10 years, "when the whole financial system collapses" because the debt problem has been kicked down the road without actually being sold.
"I think US Fed, ECB and other central banks have no other option, they will continue to monetize and buy bad paper, period," Faber said. "The central bankers are precisely the ones that don't know that excessive money creation and excessive debt creation leads to a crisis down the road."
Europe's problems are bigger than the ones in the US, because in the US the economy has probably bottomed out, he said. If the S&P drops another 10 or 15 percent from its current level, "you can be sure they'll have another stimulus package," Faber added.
"The ECB will talk hawkishly, but act dovish, like the Fed in the US," he predicted.
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