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<div><img alt="" src="http://hits.guardian.co.uk/b/ss/guardiangu-feeds/1/H.15.1/91554?ns=guardian&pageName=Business%3A+Volcker+blames+%27alchemists%27+and+bloated+bonuses&ch=Business&c3=The+Guardian&c4=Executive+salaries+%28Business%29%2CCredit+crunch+%28Business%29%2CUS+economy+%28Business%29%2CUS+housing+and+sub-prime+crisis+%28Business%29%2CObama+White+House+%28News%29%2CInflation+%28Business%29%2CBanking+sector+%28Business%29%2CUS+news%2CWorld+news%2CBusiness&c5=Investments%2CCredit+Crunch%2CNot+commercially+useful%2CBusiness+Markets%2CUS+Elections%2CUS+Economy&c6=Larry+Elliott&c7=2008_11_18&c8=1119494&c9=article&c10=GU&c11=Business&c12=Executive+salaries&c13=&c14=&h2=GU%2FBusiness%2FExecutive+salaries" width="1" height="1" /></div><p>Paul Volcker, the central banker responsible for crushing inflation in the United States in the 1980s, blamed excessive pay packages yesterday for leaving the world with a "broken financial system".</p><p>Speaking in London, the former chairman of the Federal Reserve, who some have tipped for a key role in Barack Obama's new administration, said there had been "tremendous rewards and payments of magnitude for presumed success and not much penalty for failure".</p><p>Volcker said the other main culprit for the current crisis was financial engineering, with securitised loans, credit default swaps and other derivative products trumpeted as a way of minimising and distributing risk. "In fact, the managers of organisations didn't know what they were doing and were not in control. They were trying to turn dross into gold. We had a lot of alchemists out there."</p><p>In the aftermath of Obama's victory a fortnight ago, it was rumoured in Washington that he might turn to the 81-year-old Volcker to be his treasury secretary. More recently, there has been speculation that he will head an inquiry into causes of the credit crunch and possible cures. He declined to comment on the speculation.</p><p>The man who ran the US central bank from 1979 to 1987 said he favoured breaking up banks into smaller units. "Banks are going to fail so keep them individually small so that the failure of one can't upset things."</p><p>The bigger banks were, Volcker added, the tougher the controls would have to be on their activities. Speaking at a symposium organised by Lombard Street Research, Volcker said the US was facing a prolonged downturn. "Nobody thinks we are going to be through this in a hurry. We can argue about how deep it's going to be but it is going to go on a while."</p><p>The first big challenge for the new president, Volcker added, would be the crisis in the US automobile sector, which was of profound importance for the wider economy and the financial markets. "Throwing money isn't going to do it [solve the problems of the carmakers]. Maybe the sector needs money, but in a constricted framework."</p><div style="float: left; margin-right: 10px; margin-bottom: 10px;"><ul><li><a href="http://www.guardian.co.uk/business/executivesalaries">Executive salaries</a></li><li><a href="http://www.guardian.co.uk/business/creditcrunch">Credit crunch</a></li><li><a href="http://www.guardian.co.uk/business/useconomy">US economy</a></li><li><a href="http://www.guardian.co.uk/business/subprimecrisis">US housing and sub-prime crisis</a></li><li><a href="http://www.guardian.co.uk/world/obama-white-house">Obama White House</a></li><li><a href="http://www.guardian.co.uk/business/inflation">Inflation</a></li><li><a href="http://www.guardian.co.uk/business/banking">UK banking sector</a></li><li><a href="http://www.guardian.co.uk/world/usa">United States</a></li></ul></div><a href="http://www.guardian.co.uk">guardian.co.uk</a> © Guardian News & Media Limited 2008 | Use of this content is subject to our <a href="http://users.guardian.co.uk/help/article/0,,933909,00.html">Terms & Conditions</a> | <a href="http://www.guardian.co.uk/webfeeds/1,,1309488,00.html">More Feeds</a>

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