The Empire 486

Volcker says US markets need more supervision

While massive government intervention has contained the nation's economic
crisis, structural reform and increased oversight of financial markets are
necessary to avoid a repeat of the "Great Recession," former Federal
Reserve Chairman Paul Volcker said Friday.

By BILL DRAPER

Associated Press Writer
KANSAS CITY, Mo. —

While massive government intervention has contained the nation's economic
crisis, structural reform and increased oversight of financial markets are
necessary to avoid a repeat of the "Great Recession," former Federal
Reserve Chairman Paul Volcker said Friday.

Volcker, President Barack Obama's top economic adviser, told business
leaders in Kansas City that a strong and independent central bank is
critical for monetary policy and financial supervision.

But the Federal Reserve's role has come under scrutiny for the first time
in decades, he said, as critics question whether the Fed should have
foreseen problems such as the subprime mortgage crash before they spun out
of control.

"We have lived through - are still living through - a financial debacle,"
Volcker said at a luncheon where he received the Truman Medal for Economic
Policy. "The debacle has been a part of - indeed a precipitating factor -
in a deep and potentially lengthy economic recession. It has been labeled
the 'Great Recession,' threatening something much worse."

He said the government's unprecedented intervention in U.S. markets has
raised some important questions, especially when bailouts of financial
institutions involved significant risk to taxpayers.

"Business as usual simply won't do, however attractive that may be for
those Wall Street lions who have become accustomed to huge compensation as
a kind of God-given right," Volcker said.

While he supports yanking the government safety net from investment banks
that engage in risky ventures such as subprime mortgages and the
speculative use of derivatives, Volcker has expressed little enthusiasm for
regulating the compensation of executives at big institutions that received
billions in government bailouts.

Instead, he sees the need to appoint one of the Federal Reserve's governors
as a "systemic overseer" who would monitor financial markets and identify
for potential threats to the economy.

That person, he said, would report directly to Congress but still maintain
a spot on the Federal Reserve Board.

"If the Federal Reserve supervisory role was less aggressive and less
effective than subsequent events suggest have been desirable and necessary,
let's indeed strengthen that function and ensure it receives the attention
it deserves," Volcker said.

That doesn't mean the government can fix everything in the markets, nor
should it, he said. Instead, reform of financial institutions and
procedural safeguards that identify problems before they blow up are keys
to the nation's economic well-being, he said.

"One thing is absolutely certain," he said. "It was government that, at the
end of the day, had to ride to the rescue of our broken financial markets.
That cannot be a permanent situation."

Volcker is the third recipient of the Truman Award, which was first
presented in 2005 to then-Fed Chairman Alan Greenspan. Former Secretary of
State George P. Schultz received the honor two years later.