Ex-Fed chief calls on candidates to restore trust

MIAMI BEACH, Florida (Reuters) - Massive government intervention has so far failed to restore confidence in financial markets in part because people distrust government, former U.S. Federal Reserve chairman Paul Volcker said on Tuesday.

Volcker, an economic adviser to Democratic presidential candidate Barack Obama, said current market turmoil is a crisis of "trust and confidence" and called on Obama and Republican hopeful John McCain to put the restoration of trust in the U.S. government "front and center" in their campaigns.

Speaking to delegates at an Urban Land Institute convention in Miami Beach, Volcker said Washington had protected the basic structure of the financial system with its multibillion-dollar moves, which include safeguarding banks, commercial paper markets and money market accounts and taking over mortgage giants Fannie Mae and Freddie Mac.

"With the government standing in so strongly, confidence ought to return. But as you know, confidence has not returned," he said. "In a way it's eroded further with it spreading around the world."

The Bush administration's actions, which included pumping billions of dollars into banks and markets to improve liquidity and jumpstart credit, "should have been enough," said Volcker, who served as Fed chairman from 1979 to 1987 under U.S. presidents Jimmy Carter and Ronald Reagan.

But the "semi-nationalized" financial system revealed an underlying problem that has been growing for decades, Volcker said -- a "steady growth in distrust of the American government."

"That, I think, has got to change," he said. "There's got to be renewed respect and trust and confidence in what our leadership is doing."

Volcker, who as Fed chairman battled the double-digit inflation that flared in the 1970s, reiterated his contention that the U.S. economy is already in recession.

He said he has been urging Obama -- for whom he announced his support eight or nine months ago, long before the market collapse -- to recognize that restoring trust in the U.S. government is a key issue for the next president.

"I don't think they (the candidates) probably perceive it as a popular campaign issue. But I wish they did," Volcker said. "I wish they'd put this front and center in their campaign."

"I hope whoever is elected recognizes that as a principal challenge of his administration," he said.

Volcker called the recent changes in U.S. financial markets "almost unbelievable."

"Who would have thought, eight years after a conservative administration, moving to get government out of markets, ends up as they leave office with a government-dominated financial market?" he said.

(Editing by Michael Christie)