Mind Buffett, Don't Panic.(Global Investor)(Warren Buffett)

Byline: Barton Biggs; Biggs, the legendary Wall Street strategist, is a managing partner at Traxis Partners.

A year from now, stocks, the dollar and U.S. inflation will be higher, and oil, gold, the euro and the pound will be lower.

Warren Buffett once said that being an investor is like being in business with a manic-depressive as a partner. There are times when your partner becomes wildly euphoric about the prospects for your business and wants to buy you out at almost any price. Then there are other times when he is down in the dumps, frantic to sell. As a rational person, Buffett says, you should buy when he's depressed.

Currently the equity markets of the world could use some Prozac. Gloom and doom are everywhere. The broad group of sentiment indicators we monitor register a very high degree of investor pessimism. Hedge funds in the United States and Europe are as defensive as they have been at major market bottoms, and the media are full of sour commentary.

The unwinding of structured finance centered in the U.S. subprime-mortgage market is causing an intensifying global credit crunch that threatens not only U.S. consumption but also consumer spending around the world. Already major banks, insurance companies and investment banks have confessed to huge write-downs of loans, which reduces their capability to extend credit and makes them risk-averse. The apparent cause is the continuing decline of home prices in America, but the real villains are greed and gullibility. The mortgage brokers, real-estate developers, banks and the investors who bought the paper were greedy. The buyers who assumed mortgages they couldn't service were gullible and stupid.

As usual in such circumstances, the perma-bears are emboldened, raving about the biggest credit contraction in 70 years and the threat of a deep global recession. Some are even saying the rest of the world will go the way of Japan; in other words, 16 years and counting of stagnant growth and deflation. Japanese stock indexes today are still more than 50 percent below their 1989 highs. The bears point out that the U.S., European and developing-country markets have declined only 10 percent from their highs, so they could have a long way to fall. The pessimists foresee an engulfing tragedy, as the credit crisis spreads to take down highly leveraged companies, trillions in credit-default swaps, the junk-bond market and real-estate bubbles around the world.

The bears are prominent, intelligent people, and they have to be taken seriously. That said, I believe they are exaggerating the problem. The Federal Reserve began to raise interest rates three and a half years ago, speculative activity in housing peaked in mid-2005, and then a year later house prices began to ...