UPDATE 1-Fed's Warsh says more regulation might hurt US economy

WASHINGTON Tue Feb 2, 2010 5:33pm EST

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WASHINGTON Feb 2 (Reuters) - U.S. Federal Reserve Board Governor Kevin Warsh said on Tuesday that financial reform efforts that focus narrowly on expanding regulation could stifle the economy.

His comments, published in a Financial Times newspaper opinion piece, come as President Barack Obama pushes for tighter rules that would attempt to limit risky behavior by banks.

Warsh described attempts to strengthen the system as "worthwhile," but said time would be better spent reviewing the role of government-sponsored mortgage finance agencies Fannie Mae and Freddie Mac.

Banks, he said, should not be treated like heavily-regulated utilities.

"In a global economy, big is not bad," Warsh wrote."The U.S. economy runs grave risks if we slouch toward a quasi-public utility model."

The Obama administration's efforts, led by senior White house adviser Paul Volcker, would look to reinstitute the separation between the speculative trading of investment brokers and the desposit-taking and lending that is the bread-and-butter of commercial banks.

Volcker testified before the Senate Banking Committee on Tuesday, arguing that while his proposal would not have prevented the collapse of firms like Lehman Brothers and AIG, it could help avert future crises.

"I may not live long enough to see the next crisis but my soul will come back to haunt you," the 82-year-old Volcker quipped.

Warsh, however, spoke of a return to market discipline which he maintained could only take place if government became, less, not more, engaged in the banking system.

"The specter of government support threatens to confuse price signals and create a class of institutions that operate under different rules of the game," he said.

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