The US economy will need to endure "some big adjustments" after a boom time in financial markets, said former Federal Reserve Chairman Paul Volcker on Friday. "There are some big adjustments that have to be made," Volcker said in a speech at Harvard University in Cambridge, Massachusetts, outside Boston.
"We have been clearly spending more in this country than we can afford. We can't afford to keep up indefinitely spending 6 to 7 percent more than we are producing," he added. "We have had a happy time in the financial markets, which have led to some considerable excesses which are going to have to be repaired," said Volcker, who served as Fed chairman from 1979-87, preceding Alan Greenspan. "We're going through that process right now."
Markets world-wide have been rocked in recent months by a credit crunch sparked by rising default rates among US mortgage borrowers with weak credit. Banks made billions of dollars in higher-risk subprime loans, which were then resold to other investors.
With investor appetite for that debt now drying up, top Wall Street banks including Citigroup Inc and Merrill Lynch & Co Inc, have taken billions of dollars in write-downs on the debt. Volcker said the subprime turmoil was in part due to a lack of understanding of what went into bundled debt packages.
"This market situation now, as severe as it is because of the lack of transparency, nobody knows what they're buying or what they're selling," Volcker said. "Those instruments are so complex ... they take a degree of expertise that is clearly beyond those who were buying them."
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