Paul Volcker: The financial world is 'bigger than its britches'

Volcker: Opportunities 'not as great as they were'
Volcker: Opportunities 'not as great as they were'

The American Dream is in trouble. And Paul Volcker knows a big reason why.

The former chairman of the Federal Reserve says the financial world has gotten "bigger than its britches." Attempts to regulate the industry have failed, he says, and the pay of financial executives has gone way up.

"I wasn't born yesterday," Volcker told CNNMoney's Christine Romans. Since World War II, he said he has seen "20 different substantial efforts to reform the regulatory system. None of them have moved the needle."

While the financial industry has become bigger and more complex, Volcker thinks we have to ask: "How much has that actually contributed to the growth and productivity of the economy?"

Related: The American Dream is a myth, says Nobel-prize winner

Volcker served as the Fed chairman from 1979 until 1987, when he was succeeded by Alan Greenspan. He is credited for containing the increasing inflation in the late 1970s by hiking interest rates. However, the hike is often criticized for triggering the recession in the early 1980s.

For almost half a century, Volcker has been calling for a major overhaul of financial regulation.

The impending crisis: Government regulators focus mainly on banks. But Volcker says the financial world has changed over the years. There are many more players beyond banks.

"What about the crisis that's going to arise outside the banking system?" Volcker asks. "It is inadequately supervised and regulated, and it's time to do something."

Even within the banking system, he sees issues. The 2010 financial reform legislation -- known as Dodd-Frank -- contained a provision known as the "Volcker Rule" aimed at banning risky trading by banks that they did solely for their own profit as opposed to on behalf of clients.

Paul Volcker: Our bank regulation is 'rickety'
Paul Volcker: Our bank regulation is 'rickety'

Another problem is how large the financial sector has become.

Just take the pay of financial executives. Volcker notes that their pay as a percent of U.S. national income is much bigger than it used to be.

Related: U.S. and Israel have the worst inequality in the developed world.

Growing inequality: Volcker is worried about so much wealth going to America's elite, although he differentiates between the Silicon Valley elite and the Wall Street elite. He says Silicon Valley is responsible for "real innovation" that has changed lives.

Volcker laments that the opportunities for the middle class to advance are "not as great as they were."

He says some of that was inevitable as other parts of the world expand their economies and industries.

"It's very hard for the manufacturing industry to compete with china and rest of Asia and Mexico and so forth," he believes.

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