ZAKARIA: When you look at this crisis, there are many regulatory problems. There are many issues that the bankers did wrong. There are many issues government regulators did wrong.

But many people argue that the one key issue, the biggest weapon the United States government has to slow down, to tamp down excesses, is to have raised the interest rate.

Do you believe, during this period, if interest rates had been higher, some of this would have been -- some of this froth would have subsided?

VOLCKER: Well, I have certain rule that ex-chairmen of the Federal Reserve don't comment on monetary policy of their successors. I'll tell you how good monetary policy was 30 years ago, but I don't want to comment on it now.

But I don't think there's any question that the Federal Reserve -- and the other regulators, it wasn't just the Federal Reserve -- were not on the top of this housing picture, or they weren't on top of the regulatory picture. And unfortunately, you know, when this was all going up, where was the SEC? And you ask, where was the Federal Reserve? Where was the comptroller of the currency?

There was a whole attitude, a kind of philosophic attitude that the market would take care of itself. And that became quite ingrained. The complexities, the so-called "financial engineering," a whole school of thought said you don't have to worry about a breakdown. These smart mathematicians are taking care of it. And all the risks have been dispersed to the point where they won't upset anything.

Well, when the screws became loose, we found out a lot of the risks were pretty concentrated.

ZAKARIA: All in AIG, for example... VOLCKER: And AIG was one case.

ZAKARIA: ... insuring almost all the risk.

VOLCKER: Part of the problem was that it got so complex, that a lot of the management, you know, couldn't understand it, and didn't understand it. But they were kind of reassured that somebody down in the bowels had it under control. But there was just a complexity which made it very opaque.

ZAKARIA: Is it true that you once said that the only financial innovation that you believe has added any real value in recent years is the ATM machine?

VOLCKER: I have said something like that to make the point, yes. And I guess I'll have to add the ATM machine was a mechanical innovation.

ZAKARIA: Not a financial...

VOLCKER: But I'll tell you, it is a very useful innovation. I don't think there's any doubt about that. Heavily used, efficient, saves you a lot of money.

ZAKARIA: Let me ask you a final question.

What is the crisis you're worried about now? Because one of the things people talk about is, does the United States still have the credibility to continue borrowing at the quantities we borrow? The people who -- you know, the rating agencies are now saying our AAA creditworthiness might be in doubt.

Is it something that we need to worry about? Larry Summers says...

VOLCKER: I hate to give you this answer...

ZAKARIA: ... can the world's greatest power be the world's greatest borrower?

VOLCKER: I hate to give you this answer, but the crisis I most worry about is the crisis in governance.

ZAKARIA: In government.

VOLCKER: In governance, yes. Have we got the capacity to develop programs, get them enacted and in a constructive way?

And that -- it's not just a political problem. That will underlie your question about the confidence in the United States, and confidence in American leadership.

ZAKARIA: And your basic concern is, can our democratic system make the hard choices that it needs to make...

VOLCKER: Yes. ZAKARIA: ... the reform -- to push these reforms forward?

VOLCKER: Yes.