Fed first to blame for financial crisis: Kaufman

By John Parry

NEW YORK (Reuters) - The Federal Reserve allowed the global credit crisis to happen and must be redrawn as a tough regulator to stop big financial institutions from taking excessive risks, prominent Wall Street economist Henry Kaufman said on Friday.

The world is "now in the midst of the worst financial crisis since the Second World War," Kaufman said in a speech titled "Who is Primarily Responsible for the Credit Crisis?" he gave to a conference in New York.

"I am convinced that the misbehavior of some would have been much rarer -- and far less damaging to our economy -- if the Federal Reserve and, to a lesser extent, other supervisory authorities, had measured up to their responsibilities," Kaufman said.

Kaufman became known for correctly forecasting higher inflation and interest rates when he was chief economist with Salomon Brothers in the 1970s and 1980s. During that time, he acquired the moniker "Doctor Doom" among financial market watchers and is well known as an expert on monetary policy and how financial markets work.

"At a minimum, the Fed's sensitivity to financial excesses must be improved," Kaufman said.

SAYS GREENSPAN FAILED TO WARN ABOUT RISKS

Kaufman directly criticized former Federal Reserve Chairman Alan Greenspan for not using his position to dissuade big banks and others from taking big risks.

"Alan Greenspan spoke about irrational exuberance only as a theoretical concept, not as a warning to the market to curb excessive behavior," Kaufman said. "It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective."