Volcker Says Bailouts Make Recession More Manageable

By Chen Shiyin

Oct. 14 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker said the U.S.'s $700 billion bailout of banks is necessary and will help mitigate the effect of an almost inevitable recession.

The bailout measures were ``distasteful'' and ``not consistent with a capitalistic system,'' Volcker said at a lecture in Singapore today. ``But however distasteful, they are necessary to restore stability to the financial system.''

Global equity markets rallied, with Japan's benchmark index jumping the most on record, as the Bush administration prepared to invest $125 billion in nine of its biggest banks. France, Germany, Spain, the Netherlands and Austria yesterday also pledged 1.3 trillion euros ($1.8 trillion) to guarantee bank loans and take stakes in lenders.

The bailout will help turn an ``inevitable recession into something more manageable and that will last not too long,'' said Volcker, chairman of the Fed from 1979 to 1987. The global financial system is in ``intensive care'' and will remain there for a considerable time before things return to normal, he said.

The MSCI Asia Pacific Index surged 9.3 percent today, the most since 1998, with Japan's Nikkei 225 Stock Average jumping 14 percent as trading resumed following yesterday's public holiday. The MSCI World Index has advanced 13 percent in two days, the most since records began in 1970.

The world's largest banks and securities firms have posted $636 billion of writedowns and credit losses since the beginning of last year, according to data tracked by Bloomberg.

`Face a Challenge'

``We will face a challenge in restoring a full, private environment for finance,'' Volcker said.

Industrial economies will grow 0.5 percent in 2009, down from 1.5 percent this year, the International Monetary Fund said on Oct. 8 in its World Economic Outlook. That will be the slowest pace since 1982, as the intensifying financial crisis adds to the likelihood of a recession.

The Washington-based IMF also scaled back its forecast for global growth in 2009 to 3 percent -- a level the fund itself has called the dividing line between a global recession and expansion -- from 3.9 percent this year.

Efforts by the U.S. and European governments to prevent a collapse of the global financial system will fail to halt an approaching recession, said Jesper Koll, director of hedge fund Tantallon Research Japan and former chief Japan economist at Merrill Lynch & Co.

``There is no magic bullet,'' Koll said. ``The world's going to have a recession.''

U.S. Recession

The U.S. economy expanded at an annual rate of 2.8 percent in the second quarter after consumer spending and trade added less to growth, the Commerce Department said on Sept. 26. The economy will probably shrink at a 0.2 percent annual pace in the third quarter, and contract 0.8 percent in the last three months of the year, according to the median estimate of 52 economists surveyed by Bloomberg between Oct. 3 and Oct. 8.

``There is a need for stimulus measures on the budgetary front'' to combat the recession, Volcker said. ``A higher deficit is needed.''

A recession would mean efforts by central banks to ease a liquidity shortage won't contribute to inflation, Volcker said. Authorities worldwide, including the Fed, last week cut interest rates in tandem for the first time since 2001.

``Inflation is not going to be a problem in the short run'' in the face of recession, Volcker said. ``But it's something we do have to guard against when we get out of the recession.''

The gain in the U.S. dollar against other currencies indicates that investors still consider the dollar to be a haven, Volcker said. The U.S. currency has climbed against its counterparts in nine of the Group of 10 nations this year.

The dollar ``hasn't lost it yet,'' Volcker said. Still, there's ``too much passivity on the part of governments in managing the currency markets.''

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net.