Kaufman Calls for Reform of Finance Rules

Henry Kaufman, one of the country’s top economists, on Thursday called for sweeping changes in U.S. regulation of financial institutions to cope with increasing turmoil in the financial system.

“I feel very strongly that our financial system is going astray: Many deposit institutions are weak, and businesses and households have assumed massive debt burdens,” Kaufman, managing director of the investment firm Salomon Bros., said in testimony before the Senate Banking Committee.

“This poses serious risks for our economy,” he added.

Kaufman added that an economic recession was possible by 1989. “I believe the (U.S.) expansion will continue this year and probably next year. The next time we get into a recession could be in 1989,” he said.

The possibility of a recession highlights the need to make major reforms in the U.S. financial regulatory system, including the creation of a new super agency with greater powers than the Federal Reserve, he said.

Risks to Financial System

“We will be running increasing risks in the financial system. It could hurt our capacity to recover from a recession,” Kaufman said.

“In light of these risks, the current system of financial regulation is inadequate to deal with changes in financial markets. Congress should abandon the current system and pass comprehensive legislation to install a better one,” he said. Kaufman noted that his views were his own and not necessarily those of his firm.

Senate Banking Committee Chairman William Proxmire (D-Wis.) has promised that the committee will consider financial regulatory reform later this year or early in 1988.

Kaufman urged the government to set up a new central agency to regulate financial institutions and markets as a means of coping with increasing risks in the system. He also said that the new regulations should continue the separation of banking and commerce, which became law in 1933.