Fed Easing 'Miserable Failure' That Risks Depression: Bove
The Federal Reserve is risking a second Great Depression by putting pressure on banks to raise more capital, banking analyst Dick Bove writes in a scathing note that accuses the central bank of losing “all sense of reality.”
Among other charges, the Rochdale Securities analyst says the Fed’s quantitative easing program was a “miserable failure,” primarily because all it did was raise asset prices but injected little new money into the economy.
Bove points out that reserves at the Fed have jumped by more than $568 billion to more than $1.5 trillion—money that is simply sitting at the central bank and not doing anything. The money comes from the Fed’s purchases of $600 billion in Treasurys from banks, which simply deposited the funds to meet new capital requirements.
“These numbers indicate that the banking system never put the QE2 money to work in the economy,” he says. “They simply redeposited it back in the Federal Reserve itself. However, the new money did have one clear impact. It drove up asset values.”
The Bove screed is unusual on a couple fronts.
First, it comes several months after he praised the Fed’s Troubled Asset Relief Program, which bailed out troubled banks during the financial crisis, as perhaps the most successful government program ever.
Second, much of the venom is directed at an idea that Bove acknowledges is unlikely to go anywhere: Recent suggestions from Fed Governor Daniel Tarullo that banks could raise another 20 to 100 percent in capital beyond Basel III requirements.
But he said the notion that the idea is even being discussed shows how out of touch the Fed is with the state of banking and what actually needs to be done to prevent another crisis.
“I unfortunately believe these people may have lost their minds just as the US Congress did when it passed the Dodd/Frank Act,” he says. “However, the proposal may be taken seriously by investors. If so it spells dangers for bank stocks. This is because it is likely that some form of this inane proposal may actually be put into place.”
Bove breaks down the cause of the crisis and Washington’s reaction as such: Too much money in the economy helped create the crisis at a time when the Fed should have been clamping down on banks.
Now, he says, the banks need to be given room to lend money and conduct business to reinvigorate the economy but instead are being handcuffed by onerous capital restrictions.
Bank critics likely will howl at such a suggestion, but it’s at least in keeping with Bove’s contention that Washington has attacked the wrong set of problems when trying to straighten out the banking industry. He believes that banks should be encouraged to lend, albeit responsibly, not to hoard cash to comply with unnecessary regulations.
As a side issue, Bove in a separate note puts forth his own version of what a QE3 could look like: Take that $1.5 trillion in accumulated reserves and turn it loose through tax incentives and loosening capital regulations.
In that same note in which he encourages the unleashing of $1.5 trillion into the economy, Bove worries about how Fed policies might be causing inflation.
Is that having it both ways? Perhaps, but Bove believes the money will do more good in the economy than at the Fed.
“The American economy has functioned without assistance from its banking industry for the past 2 ½ years. It may need this assistance now,” he writes. “The money is there it simply needs to be made available.”
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