Former Federal Reserve Chairman Paul Volcker questioned the central bank’s decision to back a loan to an investment bank, saying the decision was at “the very edge” of its legal authority.
“The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central-banking principles and practices,” Volcker said in a speech to the Economic Club of New York.
Fed Chairman Ben Bernanke last month agreed to take on $29 billion of Bear Stearns Cos.’ assets, paving the way for JPMorgan Chase & Co. to buy its Wall Street rival. Bernanke, who worked with Treasury Secretary Henry Paulson to broker the bailout, last week defended the move as necessary to prevent “severe” damage to financial markets.
Volcker, the Fed chairman from 1979 to 1987, had implicit criticism for U.S. regulators and market participants who allowed “excesses of subprime mortgages” to spread into “the mother of all crises.” The Fed’s Bear Stearns loan was unusual, he said.
“What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central-bank mantra in time of crisis: Lend freely at high rates against good collateral; test it to the point of no return,” he said.
Volcker said the modern financial system has “failed the test” of the marketplace. When asked whether he predicts a “dollar crisis,” he said, “you don’t have to predict it; you’re in it.”
The dollar has dropped 15 percent against the euro and 14 percent versus the yen in the past year.
