The former Fed chief also said the current financial system may be adding to weak economic expansion.
Former Federal Reserve Chairman Paul Volcker said the U.S. financial system, dependent upon securitization rather than traditional bank loans, is broken, and may contribute to the weakest expansion since the 1930s.
"This bright new system, this practice in the United States, this practice in the United Kingdom and elsewhere, has broken down," Volcker said Friday at a banking conference in Calgary, Alberta. "Growth in the economy in this decade will be the slowest of any decade since the Great Depression, right in the middle of all this financial innovation."
Volcker projected "a lot" more losses from the collapse in the mortgage-backed debt market, after the more than $500 billion tallied so far, should the U.S., European and Japanese economies fail to pick up. He urged changes in financial regulations, echoing calls of officials and legislators.
"It is the most complicated financial crisis I have ever experienced, and I have experienced a few," Volcker said. Volcker ran the Fed from 1979 to 1987, and engineered an increase in interest rates to 20 percent to quell inflation that exceeded 10 percent.
U.S. growth has averaged 2.3 percent so far this decade, down from 3.4 percent in the 1990s.
Volcker's comments came after a government report Friday showed that the U.S. unemployment rate rose to a five-year high as the economy lost more jobs in August than forecast. The report underscored concerns that U.S. consumer spending will weaken and push the economy into recession.
Economists expect annualized rates of growth of 1 percent in the third quarter and 0.4 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey in early August.
Fed Chairman Ben Bernanke said Aug. 22 that financial turmoil has "not yet subsided," and is contributing to weaker growth and higher unemployment. Policy makers will "continue to review" the Fed's measures to ensure liquidity to determine "if they are having their intended effects," Bernanke said.
"Changes are going to have to be made" to the global financial system, Volcker said. Banks three decades ago accounted for about 60 percent of U.S. credit; that later declined to about 30 percent as securitization -- where financial firms package assets into bonds and other instruments and sell them to investors and other companies -- spread.
Volcker said he agreed with descriptions of the current financial system as "dysfunctional."
"That is a polite way of saying it failed," he said.