The Federal Reserve is running the risk of replaying the disaster movie that led to the credit crisis by keeping monetary policy loose for too long, Stephen Roach, non-executive chairman at Morgan Stanley, told CNBC Tuesday.
Despite the central bank's efforts to juice the economy, a double-dip recession looms, he said.
"This is a replay of exactly what the Fed did, but with different stakes, following the bursting of the equity bubble in early in 2000. They stayed easy for an extended period, gave us monster bubbles in property and credit. Those caused the crisis, and now they're playing the movie back again," Roach said.
- Watch the full interview with Stephen Roach above.
Roach said the Fed's mandate should be expanded to include financial stability and the central bank should have a much more strategic outlook and be more transparent.
If it doesn't, it could risk sowing the seeds of another round of asset bubbles, he said.
"We have a reactive Fed, they're always being driven by the latest problem in the economy," he added. "They've gotten themselves into a big, big hole and they don't know how to get out of it."
Even though Roach thinks that U.S. monetary policy is too loose, he also said the economy is still spluttering and describes himself as being in the "double-dip camp."
"The case for a double dip is not a complex case; it starts with a weak recovery… You don't have the staying power to avoid a relapse," he said.
Because of the weakness in the economy, Roach said the Fed should not tighten, but rather be more open about its exit strategy and focus on the risk of asset bubbles.
"This is not the time for an aggressive Fed tightening, but it is the time for the Fed to stand back (and be more strategic)," he added.
The Fed is divided over its recent policy decision to buy Treasury notes with the proceeds from its mortgage securities maturing, according to a report in the Wall Street Journal.
Roach said the dissent is likely and justified, but also said that there is a desire within the rate-setting organization to stand behind Fed Chairman Ben Bernanke.