Volcker Blames Recession on Trade Imbalances; Wants Stiffer Regulation of Institutions

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Byline: David M. Dickson, THE WASHINGTON TIMES

Paul Volcker, former chairman of the Federal Reserve and an economic adviser to President Obama, told a congressional committee Wednesday that massive trade-related imbalances in the U.S. economy were the source of the financial crisis that has produced an ugly recession.

Mr. Volcker then urged Congress to enact long-term financial-market reforms by increasing regulation of large financial institutions that could undermine the entire economy if they failed.

Some banks are not only too big to fail, Mr. Volcker said. Some are too big to exist.

Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd, Connecticut Democrat, asked Mr. Volcker to assess the source of risk in the current crisis.

Go back to the imbalances in the economy, Mr. Volcker replied. The United States has been consuming more than it has been producing for many years.

The result was a collapse in personal and government savings and an explosion of the trade deficit. America's lack of savings was replaced by a flood of financial capital from abroad. Those inflows generated low long-term interest rates, which helped home prices to soar.

When housing prices stopped rising, the fragility of the financial system was exposed, Mr. Volcker said.

Mr. Volcker testified on behalf of the Group of 30, which includes financial experts from private and public sectors around the world.

Citing a recent G30 report, Mr. Volcker called for greater transparency and the registration of large hedge funds with a national regulator, which should have authority to establish standards for capital, liquidity and risk management. …