The Champions League winner also suggests England's young players have shown they "are not good enough" to go on to win the World Cup, but is confident those problems can be fixed
Greg Dyke, chairman of the Football Association, highlighted a number of issues in English football this week, including the failure of homegrown youngsters to break into the first teams of England's biggest clubs.
|5/1||England are 5/1 with BetVictor not to qualify for the 2014 World Cup
"If you look at the latest team sheets of the biggest clubs, at Under-18 level you uncover something astonishing, something that new FA chairman Greg Dyke will welcome.
"Chelsea, FA Youth Cup finalists for the last two seasons, included some exotic names, such as Fankaty Dabo, Ola Aina, Mukhtar Ali and Jay Dasilva, in their team. They are all English."
Carragher highlighted that Chelsea had nine English youngsters in their line-up in a recent match against Everton, while the Toffees, Tottenham, Liverpool, Manchester United, Arsenal and Manchester City all boasted similar numbers.
The former defender, who retired at the end of last season, claimed that a rule that allows foreign youngsters to be classed as 'homegrown' after three seasons in a Premier League academy is a "big con" and should be scrapped.
"This is what Mr Dyke must fix," he added.
"Don't get me wrong, finding a way into the first team ahead of established foreign stars should encourage greater competition and increase standards.
"I played with Sami Hyypia, Xabi Alonso and Fernando Torres - and you can't tell me that playing with Mesut Ozil and Santi Cazorla will not improve Jack Wilshere as a footballer.
"But there are too many foreigners. It's too easy for clubs to buy cheaper abroad rather than risk a young player coming through."
England's Under-20 and Under-21 teams were knocked out of their respective summer tournaments at the group stage after failing to pick up a single victory between them earlier this year.
And Carragher suggests the youth teams have shown they are not good enough to meet Dyke's target and win the World Cup in 2022, but is confident that can be turned around.
"From the evidence of the summer we do not have a team in the making to win a major tournament in the time-frame suggested by the FA chairman, because they will be the players who go on to represent England at senior level," he continued.
"They are the best we've got at the moment and, on the evidence of what we have seen, they aren't good enough.
"However, scrap the homegrown rule and pack youth teams with English talent fighting for a place in the best league in the world and perhaps we will have a breeding ground for future success."