April 23 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker said the global economic slump is one of the worst in history.

“The U.S., along with the rest of the world, is in the midst of a great recession,” Volcker, head of President Barack Obama’s Economic Recovery Advisory Board, said today at a conference in Washington. Volcker served as head of the central bank from 1979 to 1987.

“Markets remain uncertain, unsteady and dysfunctional despite trillions of dollars of official support for banks and other financial institutions,” Volcker said.

Volcker said the new regulations needed to prevent another financial crisis would not amount to “a resurrection of Glass- Steagall,” the Great Depression era legislation that separated commercial and investment banking activities. Still, he said the 1999 Gramm-Leach-Bliley Act, which removed many banking barriers, might have to be rewritten.

Volcker said banks should be prohibited from sponsoring hedge funds or equity funds.

“The relatively recent participation in capital markets has contributed for some institutions to an unfortunate lack of focus on core banking functions,” he said.

He also advocated keeping banks small. “If we could have less concentration and large institutions are not quite so large, it would be a good idea,” he said.

International Cooperation

Some parts of the financial system, such as new accounting standards, “are going to require international cooperation to be effective,” he also said.

Volcker said there is now real progress toward a global regulatory regime, including actions on tax havens and regulatory havens. “I haven’t heard talk of this strength ever in my life,” said Volcker.

Volcker, 81, took issue with the idea that some banks should be labeled as too large to be allowed to fail. Government shouldn’t encourage “the view that some institutions should be assured of official support” because they are too important to the financial system, he said.

Policy makers shouldn’t publicly state which firms are considered key in maintaining financial stability, said Volcker. “A certain amount of ambiguity in that respect could help temper moral hazard.”

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net

Last Updated: April 23, 2009 15:25 EDT