The Federal Reserve's efforts to stabilize credit markets during the recent financial crisis didn't create a "moral hazard" where Wall Street can count on being bailed out in the future, retiring Fed Vice Chairman Donald Kohn told CNBC.
"Anyone who bet on the housing market, thinking that lower interest rates are going to bail them out, also lost money," Kohn said in an extensive interview on his last day at the Fed.
"I don't think investors (should) think that the Federal Reserve, using its monetary policy to promote macro-economic stability, is going to necessarily mean that asset prices don't fluctuate or that declines in asset prices are quickly reversed," he added.
Kohn acknowledged that the central bank initially failed to understand the severity of the credit crunch.
"I saw some of the issues," he said. "But I certainly will admit that I didn't see the severity."
Still, Kohn, who served 40 years at the central bank, defended the Fed's actions in bringing the crisis under control.
"Given what we knew, the tools we had, I think we did as well as anyone could have done," he said. "I certainly think that if we hadn't acted as aggressively as we did, it would have been far worse."
Kohn denied that the Fed's low-interest rate policy caused the housing crisis in the first place.
"Low interest rates probably contributed a little around the edges to the run-up in housing prices," he said. "But I think most of the studies I've seen suggest that it was just a little around the edges."
As for dealing with future crises, Kohn said regulators—not the central bank—should be the first to step in.
“We ought to address bubbles while they’re happening, but I think we should do it with supervision regulation first," he said. "The interest rate is a very blunt tool. If I see a bubble in the housing market, and I raise interest rates to take care of the bubble in the housing market, I discourage capital spending. I discourage spending on automobiles. I discourage exports, because the dollar will go up.”
Kohn, who will become a senior fellow at the think tank Brookings Institution, said that the Fed's recent decision not to reduce its holdings of government debt didn't necessarily mean that more easing was on the way.
“Certainly there's nothing automatic leading from that to further quantitative easing," he said. "I think the fact that we did that was—suggestive of—a deterioration in the overall economic outlook.”
And while he welcomed dissent among individual Fed members, Kohn said the market should really focus on one voice.
"I would still continue to pay most attention to (Chairman) Ben Bernanke," he said.
Watch Liesman's interview with Kohn on the Kudlow Report at 7pm ET on Wednesday.