Former Federal Reserve Chairman Paul Volcker roundly criticized the central bank’s extraordinary response to the financial crisis that’s been gripping markets since late last summer in a speech Tuesday.

The former official, in an address before the Economic Club of New York, had no less scathing words for the financial markets, which he argued have become so complicated and unbalanced that they have lost the ability to function fairly and effectively. Volcker helmed the Fed from 1979 to 1987 and is widely credited for taking the painful steps needed at that time to quell surging inflation.

“The Federal Reserve judged it necessary to take actions that extended to the very edge of its lawful and implied power, transcending certain long embedded central banking principles and practices,” Volcker said, according to a copy of his speech. Actions taken by the Fed “will surely be interpreted as an implied promise of similar action in times of future turmoil.”

Beyond fueling future risk-taking appetite on Wall Street, Volcker argued the Fed has also compromised its relative stringent emergency lending standards.

“What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time honored central bank mantra in time of crisis - ‘lend freely at high rates against good collateral’ to the point of no return,” Volcker said.

The Fed’s actions were not Volcker’s only target. “The bright new financial system, for all its talented participants, for all its rich rewards, has failed the test of the market place,” Volcker said. Meanwhile, the nation as a whole “became addicted to spending and consuming beyond its capacity to produce.”

Volcker said reform efforts will be a “lengthy and arduous process,” and in that environment, he said the Fed would be well suited to get additional regulatory powers over the financial system. – Michael S. Derby