The United States is facing an economic Pearl Harbor and has seen its economy “fall off a cliff,” said Berkshire Hathaway‘s Warren Buffett in a CNBC interview Monday. Now, according to the well-known investor, the country faces a choice of remaining confused and divided, or uniting under what must be done. “Fear is very contagious,” Buffet said. “I’ve never seen the consumer — or Americans — more fearful than this.” In fear, consumers have changed their spending and saving behaviors, which has in turn affected all other interacting layers of the economy, he said. “When poeple get scared, they don’t buy as much, and when they don’t buy as much, people get laid off,” he said. “We are in a very viscious feedback cycle. It will end…but how fast we get there depends not only on the wisdom of government policy, but the degree to whcih it’s communicated properly.” According to Buffett, the economy first went wrong because of the false believe everyone had — “I did, mortgage lenders did, borrowers did….” — that house prices had nowhere to go but up. The result was $11 trillion in mortgage debt based not on borrower qualification but the assumption home prices would rise. In reality, homes that might have been worth considerably more if the housing bubble had continued “are worth maybe 4 or 5 trillion less,” he said. Seeing as how a home is often the largest asset most people have, “a huge amount of people’s net worth” was lost. Although consumers are facing substantial losses — which communicate to losses on the part of businesses and the broader economy itself — the next step, Buffett said, is to unite as we did after the attacks on Pearl Harbor. Back then, no one blamed anyone for how many ships there had been in the harbor. Rather than hold Congressional meetings and try to pass pet projects as part of the war declaration, the U.S. people largely united to build new ships and aircraft and prepare for war. “We got united, and we really need that now,” Buffett said. But he acknowledged the economy can’t turn around on a dime. “We’ve had this great economic machine unlike anything anyone’s ever seen. And it started spluttering, and people said maybe we’d better slow it down,” Buffett said. Now with the economy so severely slowed — to 8.1 percent unemployment — it’s unclear how much further we have to go. Buffett would not estimate how much higher unemployment has to rise, as it “depends on the wisdom of our policies” to turn the jobless situation around, but he said it would get better. “In five years from now, I can assure you the machine will be running fine,” he said. Watch the interview. Write to Diana Golobay at [email protected].

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