Roman Baudzus writes — Paul Volcker, former head of the American central bank Federal Reserve, announced last Thursday at a conference of the Federal Reserve Bank of Chicago that the US financial system is largely insolvent and “broken”. Volcker indicated that not only the banks are to blame for this situation, but also the federal regulators. During the last few years, they could have tried a lot harder to stop the investment banks from turning the global markets into a casino. The investment banks were also responsible for attracting large parts of the former core business of the commercial banks, which consequently led to major problems, as everyone could now see. Thus, Volcker considered that the credit business generally had taken a negative path. The size of the losses from toxic assets so far hidden by banks would not be assessable anymore. Therefore it would not be hard to imagine that the present situation holds big risks for the future stability of the financial system as well as for the broader economy. He blamed the international central banks of overshooting the mark, when trying to acquire skills that were not part of their original fields of activity. Additionally, a lax monetary policy stirred up the existing problems instead of tackling them. Volcker added that he was not sufficiently content with the new financial markets bill, since the legislation, known as Dodd-Frank, and the included Volcker rule, was strongly diluted by individual lobbies. Nowadays it was not the financial regulators, who provided the banks and lenders with rules that generally had to be observed. In fact, a major part of the market participants resented the financial authorities, since they find the regulations disruptive and bad for business. He lambasted a lack of respect that led to a refusal to obey the federal rules and to fully execute them. Volcker described the American mortgage market as “completely broken”. It would take a long time to get the problems of the housing market under control and to reinstall an economic equilibrium. This situation would weigh on the economic development for a long time, since it causes a big problem for the American consumer and has already led to huge wealth destruction. Published by GoldMoney Copyright © 2010. All rights reserved. Written by Roman Baudzus – Contributing Writer