In the midst of what he termed the "mother of all crises," former Federal Reserve Chairman Paul Volcker maintained that the worsening economic climate sends a clarion call to repair and reform the U.S. financial system.

In a speech before The Economic Club of New York - his first in 30 years before that group - Volcker, who served as Fed chair from 1979-1987, cited a confluence of factors including the complexity of modern financial instruments such as derivatives and hedge funds, lax oversight and the country's rising addiction to spending and consuming, as the cause of today's roiled markets.

"It all became so comfortable, there was no pressure to change - not on Washington, on Wall Street or Main Street," said Volcker. "The sheer complexity, opaqueness and systemic risks embedded in the new markets have enormously complicated both official and private responses [to the crises.]"

The result, said Volcker, has been eradication of personal savings, rising imports and a mammoth trade deficit.

Volcker likened the current economic crises to the one endured by the city of New York in the late 1970s, explaining that the city had spent beyond its means for many years and, "aided and abetted by local banks, a profitable but rickety financial structure was built. It was dependent on the rollover of short-term financing and rested on the presumption that major cities don't go broke."

The former Fed chair also said the current crises has raised questions about the characteristics and usefulness of "mark to market" accounting, in particular, its extension in "uncertain and illiquid markets to what is euphemistically known as fair value accounting."

"I know very well that the seemingly simple approach of fair value accounting is a highly complex matter extending beyond the financial markets," he added. "The resolution of these questions is in the hands of standard setters and I am encouraged that the issues are under review."

He welcomed Treasury Secretary Henry Paulson's recent plan to overhaul the regulatory system and highlighted the proposed role of the Federal Reserve as the ultimate overseer under that plan.

"The Fed by reason of its mandate is advantageously placed to exercise strong and effective oversight of the financial system," he noted. "The transient pleasures of extreme leveraging have been exposed. The need for regulatory reform is broadly recognized."

Said Volcker, "Answers won't come easily, but they must come."

Later, when asked if he predicted that the U.S. would be in a “dollar crisis” in the upcoming years, Volcker bluntly said, “You don’t have to predict it. We’re in it.”

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