The retired former chief of the U.S. central bank, Paul Volcker, told a congressional committee Thursday that to avoid further financial crises there needs to be greater regulation of financial institutions.
Volcker told the Joint Economic Committee that markets must not be left so vulnerable that another breakdown would threaten the global economy. He advocated strong restrictions on high-risk activities that are not currently subject to regulation. Volcker headed the Federal Reserve from 1979 to 1987 and currently heads President Obama's Economic Recovery Advisory Board.
Volcker did not identify specific new regulations but he said measures are needed to tame the animal passions that sometimes overtake institutions and individual investors.
"What protections can we build into the system when those animal spirits become a little bit too buoyant in the future? And I think there are protections we can build in. And this is the time we ought to do it when the memory [of crisis] is very fresh," he said.
Volcker said consumers are living through a horrible period in which asset values and personal wealth are decreasing. He said the current crisis is unique in that all major economies are impacted.
"And the problem is not just in the United States. It's in the whole world," he said. "Production is declining outside the United States, from a high level. It is declining more rapidly than anything I've seen in my lifetime."
Volcker was born two years before the stock market crash of 1929. He told the panel that overcoming the financial crisis will cost more government money than the $750 billion already allocated to help U.S.-based banks. Agreeing with current Fed chairman Ben Bernanke, Volcker said a well capitalized and healthy banking system is vital for economic recovery. He said the global system remains under stress and is not yet stabilized. The global crisis began in August 2007 with a credit squeeze triggered by defaults in the U.S. home mortgage market.
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