Volcker: Obama Plan May Lead to More Bailouts

Former Fed chief faults strategy of 'too big to fail'
By Newser Editors and Wire Services
Posted Sep 24, 2009 5:27 PM CDT
Former Federal Reserve Bank Chairman, and current White House economic adviser, Paul Volcker testifies on Capitol Hill in Washington, Thursday, Sept. 24, 2009.   (Susan Walsh)

(Newser) – A top White House economic adviser says the Obama administration's proposed overhaul of financial rules preserves the policy of "too big to fail" and could lead to future bailouts. Former Fed chief Paul Volcker told Congress that by designating some companies as critical to the broader financial system, the plans create an expectation that those firms enjoy government backing in tough times. That implies those financial companies "will be sheltered" by a "federal safety net," he said.

Lawmakers should make clear that nonbank companies will not be saved with federal money, he said. Volcker told a House panel that he does not differ with the administration on most of its proposals and takes "as a given" that banks will be bailed out in times of crisis. But he opposed bailouts of insurance firms such as AIG, automakers' finance arms, and others.