By Steve Matthews and Doug Alexander
Sept. 5 (Bloomberg) — 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.
“This bright new system, this practice in the United
States, this practice in the United Kingdom and elsewhere, has
broken down,'' Volcker said today at a banking conference in
Calgary. “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.''
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
“It is the most complicated financial crisis I have ever
experienced, and I have experienced a few,'' said Volcker, who
has endorsed Democratic presidential candidate Barack Obama.
Volcker ran the Fed from 1979 to 1987, and engineered an
increase in interest rates to 20 percent to quell inflation that
exceeded 10 percent.
U.S. growth has averaged 2.3 percent so far this decade,
down from 3.4 percent in the 1990s. The current growth rate is
the weakest since at least the 1940s, when the government began
compiling figures on quarterly gross domestic product.
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.
Economists expect annualized rates of growth of 1 percent
in the third quarter and 0.4 percent in the fourth quarter,
according to the median estimate in a Bloomberg Survey in early
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.
“Changes are going to have to be made'' to the global
financial system, Volcker 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.
Volcker said he agreed with descriptions of the current
financial system as “dysfunctional. That is a polite way of
saying it failed.''
The U.S. government, not the Fed, should take the lead in
rescuing any financial institutions when “push comes to
shove,'' he said, echoing comments by former Fed Chairman Alan
The Fed rescued Bear Stearns Cos. from bankruptcy in March,
facilitating the firm's merger with JPMorgan Chase & Co. by
loaning against $29 billion of Bear securities.
Bernanke has also made central bank loans available to
nonbanks for the first time since the 1930s and lowered the
rates at which banks can borrow from the Fed.