US Federal Reserve chief Ben Bernanke says the world is suffering from the worst financial crisis since the 1930s.
Mr Bernanke argues that the roots of the current global economic downturn stem from global imbalances in trade and flows of capital in the late 1990s.
In a speech to the Council on Foreign Relations, he argues that the US and its trading partners did not do enough to redress these imbalances.
He also says future economic recovery depends on financial stability.
“ Until we stabilise the financial system, a sustainable economic recovery will remain out of reach ”
Ben Bernanke, Federal Reserve chairman
Mr Bernanke says the imbalances "reflect a chronic lack of saving relative to investment in the US and some other industrial countries, combined with an extraordinary increase in saving relative to investment in many emerging markets."
As a result, saving flowed into developed economies for more than a decade, despite low interest rates, he argues.
Risk management systems in the private sector and government regulation then failed to "ensure that the inrush of capital was prudently invested," he says.
CRUNCH TIME FOR AFRICA
World leaders will meet next month in London to discuss measures to tackle the downturn. See to the G20 summit.
The crisis is spreading to hit poor countries in Africa.
This week BBC World News and World Service Radio will be examining how Africa is coping with the crisis, with
Mr Bernanke calls for "forceful, coordinated" action to combat the financial crisis.
"Until we stabilise the financial system, a sustainable economic recovery will remain out of reach," he says.
Well-capitalised financial institutions are essential for any such recovery, he adds, before reiterating the Fed and the US Treasury's determination to "take any necessary and appropriate steps" to ensure that such organisations can function properly.
He outlines four areas that need to be addressed to ensure that a similar crisis does not develop in the future.
• The problem, often referred to as 'too big to fail', whereby an institution gets so big that its failure has serious consequences for the whole financial system.
• Financial rules and conventions - on trading, payments and clearing, for example - that underpin the financial system
• Regulation and accounting policies
• The creation of an authority to monitor and address systemic risk
The US government has already taken a number of measures to combat the economic downturn sparked by the financial crisis.
Last month, the new Obama administration signed into law an economic stimulus plan worth about $787bn (£548bn).
The package included tax cuts, additional spending on infrastructure and aid to US states, which are having their own budget difficulties.
The Fed has also cut US interest rates down to between zero and 0.25% to try and stimulate consumer spending.
Mr Bernanke will be meeting other G20 finance ministers and central governors in the UK this weekend to try and agree a collective response to the economic crisis, ahead of the London G20 summit in April.
He believes G20 leaders should agree on principles to guide nations rather than detailed proposals.
"The better goal for a meeting of leaders would be, as much as possible, to establish some principles that would guide reforms around the world," he says.
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Published: 2009/03/10 21:39:44 GMT