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Volcker: Billions More Will Be Needed

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February 05, 2009 – Comments (0)

Former Federal Reserve Chairman Paul Volcker warned a Senate committee on Wednesday that billions of dollars more will be needed to resolve the credit market crunch behind the deepening economic recession.

"It's going to cost more money to deal with this financial crisis ... It's going to be lots more billions of dollars," Volcker told the Senate Banking Committee at a hearing on restructuring the nation's financial oversight system.

With the Obama administration expected to unveil a financial rescue package next week, Volcker suggested that U.S. taxpayers may be asked again for help beyond the $700 billion bank bailout program already in place.

"I suspect there's going to be some public capital, maybe quite a lot of it," said Volcker, an economist who has remained an international financial expert since his Fed years.

He presented a report to the committee on regulatory reform calling for general reforms such as greater transparency and more oversight of hedge funds and private equity funds, as well as better capital and risk management standards.

Banking Committee Chairman Christopher Dodd, outlining plans for 2009, told the hearing he will consider designating an agency, possibly the Federal Reserve, to monitor systemic risk.

"Central banks should accept a continuing role in promoting and maintaining financial stability, not just in times of crisis, but in anticipating and dealing with points of vulnerability and risk," Volcker told the committee.

Dodd said he would also consider greater centralization of bank regulation, a possible consumer protection agency and ways to better align executive pay for long-term company health, not just short-term profits.

Dodd's statement echoed earlier remarks he has made. They also closely resembled a broad outline of regulatory reform efforts made on Tuesday by his counterpart in the House of Representatives, Massachusetts Democratic Rep. Barney Frank, who chairs the House's financial services committee.

Dodd called for "a new, modernized and, above all, transparent structure that recognizes consumer protection and the health of the financial system are inextricably linked."

The committee's senior Republican, Alabama Sen. Richard Shelby, called for an investigation of the causes of the financial crisis before forward-looking reforms are tackled.

A failure to understand the roots of the capital market crunch, and its impact on the economy, help to explain why the federal government's $700 billion bank bailout, known as the Troubled Asset Relief Program, "has drifted rudderless ... wasting taxpayer dollars," Shelby said.

 © 2009 Reuters. All rights reserved.

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