Former Federal Reserve Chairman Paul Volcker says that when it comes to regulation, less is better.

"In my judgment we don't need to regulate the capital markets so heavily," Volcker said in an interview with Business week.

"You have some extreme cases where individual institutions are so big and so vulnerable, yes, you might want some regulation of capital and leverage, but that would be the exception. But if they fail, let 'em fail."

"We will have some kind of a new resolution process. Some agency will go in there and say, "You're going to fail, but we're going to provide a more orderly exit."

Volcker says that the kind of reform he proposes is “somewhat in the spirit of Glass-Steagall in making a distinction between capital-market activities and trading activities and banking activities.”

However, he would allow commercial banks to do underwriting of corporate customers, which the Glass-Steagall bill, passed toward the end of the Great Depression, did not.

“The kind of reform I've been advocating is acceptance of the fact that the core of the system remains commercial banking,” Volcker says.

“So let's leave the capital markets to their own devices without any expectation of government protection and keep the existing safety net for the commercial banking system.”

The bill proposed by Senators Maria Cantwell and John McCain bill would bar commercial banks from merging with investment banks.

If passed, the Cantwell-McCain bill would result in the break up of major Wall Street firms that critics say are gumming the country's economic works by refusing to make smaller commercial loans.