“This bright new system, this practice in the United States, this practice in the United Kingdom and elsewhere, has broken down. Growth in the economy in this decade will be the slowest of any decade since the Great Depression, right in the middle of all this financial innovation. It is the most complicated financial crisis I have ever experienced, and I have experienced a few…Changes are going to have to be made” to the global financial system.”
–Paul Volcker, former Federal Reserve Chair, 1979-87
Straight talk from the best former Fed Chairman alive:
Former Federal Reserve Chairman Paul Volcker said the U.S. financial system, dependent upon securitization rather than traditional bank loans, is broken, and may contribute to the weakest expansion since the 1930s…
The former Fed chief projected “a lot” more losses from the collapse in the mortgage-backed debt market, after the more than $500 billion tallied so far, should the U.S., European and Japanese economies fail to pick up. He urged changes in financial regulations, echoing calls among sitting officials and legislators…
Volcker’s comments came after a government report today showed the U.S. unemployment rate rose to a five-year high as the economy lost more jobs than forecast in August. The report underscored concerns that U.S. consumer spending will weaken and push the American economy into a recession.
Fed Chairman Ben S. Bernanke said on Aug. 22 that financial turmoil has “not yet subsided,” and is contributing to weaker growth and higher unemployment. Policy makers will “continue to review” the Fed’s measures to ensure liquidity to determine “if they are having their intended effects,” Bernanke said.
Banks three decades ago accounted for about 60 percent of U.S. credit; that later declined to about 30 percent as securitization — where financial firms package assets into bonds and other instruments and sell them on to investors and other companies — spread.
I don’t expect to hear such talk from anyone currently associated with the Fed, but its still refreshing to hear blunt honest talk occasionally . . .
Volcker Says Finance System `Broken,’ Losses May Rise
Doug Alexander and Steve Matthews
Bloomberg, Sept. 5 2008