Volcker Says `No Doubt' Economy Slid Into a Recession
The U.S. economy is in a recession because of a financial crisis caused by excessive debt, former Federal Reserve Chairman Paul Volcker said.
“I don't think there is any doubt we are in a recession, which seems to be spreading through the developed world,'' Volcker said today in a speech in Miami Beach, Florida. “I don't know how deep, but it will be rather long before we see robust growth.''
Volcker, known for quelling inflation during the presidencies of Jimmy Carter and Ronald Reagan, said a collapse in the housing market in 2007 triggered “cascading'' declines in asset prices that led to the bankruptcy of Lehman Brothers Holdings Inc. and the seizing up of credit markets.
“I've lived through a lot of crises, but I've never seen anything as complicated as this one,'' Volcker said as the keynote speaker to a conference of the Urban Land Institute, a Washington-based association of architects, planners and real estate financiers. “We should have seen it coming.''
Ben S. Bernanke, the current central bank chairman, has responded with the most aggressive expansion of the Fed's power in its 95-year history. Bernanke has cut the benchmark overnight lending rate to 1.5 percent from 5.25 percent, made loans available to investment firms for the first time since the 1930s and launched rescues of Bear Stearns Cos. and American International Group Inc one hour loan.
Volcker endorsed the Fed's efforts as necessary to restoring trust in the financial system.
`Mutual Trust'
“This is not a technical problem; it's one of confidence and trust,'' Volcker said. “You cannot run a financial system without a sense of mutual trust among the major organizations involved.''
The economic downturn won't be as deep as that of the 1930s, he said.
“While we are in a serious recession, I don't suggest it's comparable with the Great Depression,'' Volcker said. “Unemployment is 6 percent but that's nothing like what we had in the Depression, and the industrial U.S., except for the auto industry, has gone into this situation in a strong and profitable position.''
The former Fed official said more investment and infrastructure are needed to return the economy to growth, and that consumption must come “back in line with our ability to produce.''
“We produce very few civil engineers; we produce enormous amounts of financial engineers,'' Volcker said. “The result is lousy infrastructure and a lousy financial market. That's going to change because of the force of circumstances.''
Filed under: business by Forest