CERNOBBIO, ITALY - THE United States Federal Reserve bears most responsibility for the current financial market turmoil as it let asset bubbles be created, the Asia chairman of US bank Morgan Stanley said.

'In my opinion the Fed is the most responsible for this crisis we are in right now,' Mr Stephen Roach told reporters on Friday on the sidelines of a business conference.

'It had a policy to tolerate or condone asset bubbles and clean up the mess afterwards,' he added.

He said lawmakers should instead revise the Fed's mandate requiring it 'to do a more effective job in focusing on financial markets' stability and its impact on the real economy'.

'This is a huge flaw in the government's proposal as it has been presented on Monday,' he said.

US Treasury Secretary Henry Paulson revealed sweeping plans this week for streamlining regulations blamed for allowing the country's mortgage crisis to balloon into a full-blown economic threat.

The regulatory blueprint proposes eventually vesting new powers in the Federal Reserve as a 'market stability regulator'. The move would effectively formalise a role the central bank adopted recently by expanding the list of financial firms that can borrow directly.

Mr Roach said he was not 'smart enough' to know whether the worst of the current financial crisis was over but warned the consequences had yet to unfold.

He cited the risk of a protectionist reaction in the United States.

Mr Roach also said the dollar might reverse part of its recent fall. Downward pressures on the US currency in the last eight months were excessive, he said. -- REUTERS