Morningstar ETF Conference

Economy weak because of 'stupid' policies: JPMorgan pro

David Kelly
JP Morgan

A top Wall Street market observer thinks the government is hurting the economic recovery by unfairly constraining banks and continuing bad policies.

David Kelly, chief global strategist at JPMorgan Funds, used housing as a prime example in a speech Thursday.

"The reason housing is still weak in the United States is because of the combined efforts of the federal government and Federal Reserve to help," Kelly said at the Morningstar ETF Conference in Chicago. "The federal government ... is on a witch hunt after the large banks because they decided to assign to the large banks all the blame for what happened in 2008."

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The result, Kelly said, was an unnecessarily weak lending environment.

Fed's new guidance regime
Fed's new guidance regime

"You really don't want to write a bad mortgage today," Kelly said of what he called the "war on risk" by the government. "Banks really don't want to do this because if they do the right thing, there's a chance they're going to get beaten up horribly, multiple-fold, a few years from now."

He said the government was exacerbating the slow housing market recovery by buying mortgages. He said mortgage rates were being kept so low that it doesn't make sense for banks to lend much money for so long at such low rates, such as a 30-year, 4.25 percent mortgage.

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"This is the part I can't really forgive because it's so stupid," Kelly quipped.

The JPMorgan executive, speaking to a room full of investment advisors, mutual fund managers and exchange-traded fund marketers, went on to slam government policy for slow economic growth in general.

Kelly said that gross domestic product expansion would likely be constrained to about 2 percent in the long term but could be higher if the government lowered the corporate tax rate or passed immigration and entitlement reform, for example.

He said a flat corporate tax rate of 10 percent would cause capital to flow back to the U.S., increase mergers and acquisitions, dividends, stock buybacks and, ultimately, spending.

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"That could cause a productivity and capital spending boom in this country," Kelly said. "That would really help."

"As a citizen this frustrates me ... but as an investor I know darn well that it makes no sense to base an investment strategy on what Washington will do. Because Washington won't," he added.

Despite his frustration, Kelly said he still recommended stocks over bonds despite their relatively high valuations. He hesitantly mentioned a few potential fixed income investments, including high-yield bonds and emerging markets local debt.

—By CNBC's Lawrence Delevingne