Five Dumbest Things on Wall Street: April 11

1. Volcker: Fearful Fed Heads

They don't make Federal Reserve chairmen like they used to, at least that's former Fed Chairman Paul Volcker's assessment of his successors..

Ben Bernanke has caved in to the demands of Wall Street at every turn in this credit crunch. And Alan Greenspan's linguistic contortions in explaining why he bears no responsibility for the credit bubble that began when he cranked down interest rates to record lows for years makes many observers long for days of yore, when he gave merely inscrutable answers to the most mundane questions.

Perhaps emboldened by his favorable comparisons, Volcker, a true hero of the Federal Reserve who slew stagflation in the 1970s by imposing unpopular measures, minced no words in a speech at the Economic Club of New York this week.

The 80-year-old Volcker labeled our current economic predicament the "mother of all crises." He laid blame for it directly at the feet of paper-pushers on Wall Street and the enormously complicated, mostly unregulated, little understood and highly engineered financial system they have concocted since he left the Fed with their trillions upon trillions of complex derivative securities. "Simply stated, the bright new financial system, for all its talented participants, for all its rich rewards, has failed the test of the marketplace,'' said Volcker.

Intended or not, Volcker's remarks looked like a direct rebuke to Greenspan, who once hailed derivatives as a triumph of financial innovation over risk. Of course, recent events show these "innovations" to be the "financial weapons of mass destruction" that Berkshire Hathaway'sBRK-A Warren Buffett once predicted they would become.

But Volcker also had words for the current shaky hand on the wheel at the U.S. central bank.

Volcker began his speech by harkening back to his early days as the New York Fed president when New York City was unable to finance itself, leading to widespread fears of a systemic financial crisis amid an already weakened economy. There were urgent calls for the Fed to help the city avoid a default by resorting to emergency lending authorities left over from the Great Depression like those used recently for investment banks by Bernanke. But unlike the current Fed chairman, Volcker resisted those calls to "instill discipline." The Big Apple soon recovered and has since flourished as a world financial center.

He said Bernanke's willingness to use government to rescue Bear StearnsBSC from bankruptcy and provide direct financing to its investment banking counterparts "will surely be interpreted as an implied promise of similar action in times of future turmoil." He also said the Fed's recent actions raised political concerns about "the proper use and allocation of government power" and "embedded economic interests and lobbying."

He noted that the New York financial crisis came after the country had been free from any clear sense of financial crisis for more than 40 years, while today's credit crisis is the culmination of at least five serious breakdowns of systemic significance over the past quarter century.

Dumb-o-meter score: 95. "It seems to me that is warning enough that something rather basic is amiss," said Volcker, who took pains to note that we're now in the midst of a currency crisis and that inflation is a threat again.