Volcker, a former chairman of the Federal Reserve, said he did not know how long the economic malaise would last but policy makers should use this opportunity to rebuild the financial system on a more stable foundation.
“Crises are old but this crisis is different,” said Volcker, whom President-elect Barack Obama has appointed to chair the President’s Economic Recovery Advisory Board.
“It’s different in its enormous complexity; it’s certainly different in the massive intervention of government. It’s more global in scope than any previous crises.”
Indeed, Volcker said the economy and markets were now feeling the hangover effects of one of the greatest bubbles in history.
The crisis is different but the cause is the same: artificially cheap credit and inflation of the money supply to generate economic activity not supported by the pool of real savings. When economic reality asserts itself, all that prosperity out there that the Keynesians insist will flow from inflating the money stock and monkeying with the supply-demand curve for loanable funds is revealed for what it is: a bubble supported by nothing but air. So unfortunately, the recession is the cure, not the problem per se.