Federal Reserve Governor Kevin Warsh said the U.S. financial sector has to be rebuilt, and banks have to adapt to new credit models for a recovery from the ongoing economic crisis to take place.

He said in the wake of the crisis, markets have been re-assessing "virtually every asset." On a positive note, he said, there are visible signs of improvements in credit markets.

Speaking to an audience at the University of New York, Warsh said he is unsure when the U.S. economy will recover, or how deep it's downturn will be. He said sales and production data are already indicating a downturn in the fourth quarter.

He said official response to the crisis may not be enough, and the Federal Reserve has to caution against responding to pleas for help too graciously.

Nevertheless, answering questions after his speech, Warsh said he wants the Federal Reserve to renew credit availability "in a solid way" and that the Fed probably will allow their balance sheet to grow.

Warsh said although the credit markets appear to be thawing, the movements are tentative. He said markets are currently facing harsh judgment for bad discipline.

By Megan Ainscow
©CEP News Ltd. 2008