WASHINGTON — A top Federal Reserve official Wednesday said excessive intervention by Washington in the financial sector could hurt the U.S. economy and defended the role private big banks play in a global economy.

In a prepared speech to the New York Association for Business Economics, Fed Governor Kevin Warsh warned against trying to "micro-manage" banks. "The U.S. economy runs grave risks if we slouch toward a quasi-public utility model."

His remarks come as President Barack Obama's administration is pushing for a $90 billion tax on big banks to make up for taxpayer money spent on rescuing the financial sector and tighter rules aimed at limiting risky behavior by lenders to prevent a new financial crisis.

"In a global economy with integrated financial markets, big is not bad," Warsh said, adding that fostering competition among banks so that smaller lenders can take market share is better than to "bully" large banks.

The U.S. Congress is proposing legislation to drastically overhaul financial-sector regulation, including measures to seize control of troubled big banks that pose a threat to the entire economy should they fail.

"We should not want clients of the state at the core of our financial system. We do not want some new social contract between government and large banks," the Fed official said.

Warsh said regulatory reform efforts in Washington were "a wholly worthwhile task," but urged greater focus on the mortgage finance system, saying government-sponsored agencies Fannie Mae and Freddie Mac were given license to take excessive risks.

The central banker said the main policy goal should be to find ways for large banks to go under without threatening the whole economy, although he indicated this was no easy task.

Failing that, the second-best option should be regulating what banks can do--and warned against trying to control how they do it. As examples of trying to control banks on how they operate, Warsh mentioned whether they're lending too little to small business and too much and too cheaply to big companies.

Under an Obama administration plan, the government would invest $30 billion from the Troubled Asset Relief Program in community banks to encourage them to lend to small businesses.

"Clear rules — more focused on the 'what' than the 'how' — could liberate firms from the corridors of Washington so they can get back to business," Warsh said.

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