Volcker: Subprime is ‘The Mother of All Crises’

Former Federal Reserve Chairman Paul Volcker — a critic of the current Fed — has openly chastised the monetary authority’s latest decisions to bail out the housing market.

Volcker says the Fed’s latest move to bail out Bear Stearns by giving it a $29 billion loan teeters on "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, according to Bloomberg.

Volcker, who was the Fed chairman from 1979 to 1987, told attendees that the subprime mortgage debacle has become "the mother of all crises.”

"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 Fed has failed to send the market and its investors the right message with its bailout of Bear Stearns. In the future, other companies might expect to be bailed out if they fail, he said, what’s known as "moral hazard.” Volcker also said the country is already in a "dollar crisis.”

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"You don't have to predict it, you're in it," he said.

Volcker said the Fed could appear to be "biased” by helping out the housing market, The Wall Street Journal reported.

Volcker is not the only one who has spoken out against the Fed. Even the Fed is starting to see some dissent among its members.

At the March 18 meeting, Richard Fisher of the Dallas Fed and Charles Plosser of the Philadelphia branch voted against the decision to lower interest rates by three-quarters of a point.

Fisher and Plosser said cutting the interest rate would only increase inflation.

Plosser said that the Fed "could not afford to wait until there was clear evidence that inflation expectations were no longer anchored, as by then it would be too late to prevent a further increase in inflation pressures,” reported The New York Times.

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