Federal Reserve Bank of New York president William Dudley Monday evening suggested that it might be appropriate for the Federal Reserve and the Securities and Exchange Commission to constrain the lifeblood of Wall Street to “monitor and limit the buildup in leverage at the major securities firms and the leverage extended from these firms to their clients and counterparties.”

Dudley told a Columbia University audience that many years of assuming the Fed cannot recognize and deflate bubbles in advance is a concept being reevaluated in the wake of the tremendous losses from the financial crisis.

“There was a tremendous increase in financial leverage in the U.S. financial system over the period from 2003 to 2007, particularly in the nonbank financial sector,” Dudley said.

“This sharp rise in leverage was observable. Presumably, this rise in leverage also raised the risks of a financial asset bubble and the impact of this bubble on housing certainly raised the stakes for the real economy if such a bubble were to burst.”

— Market News International

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