Tags: Bove | Fed | crippling | economy

Dick Bove: Fed Rate Tactics ‘Crippling’ Economy, Limiting Bank Earnings

Monday, 04 Feb 2013 11:27 AM

By Dan Weil

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Star bank analyst Dick Bove of Rafferty Capital Markets says the Federal Reserve’s easing campaign is doing little to boost the economy and is preventing bank earnings from soaring even higher than they already have recently.

“I couldn’t care less what the Fed does,” he tells CNBC. “The Fed has sat there — and I'm a big [Fed Chairman Ben] Bernanke supporter — and they've cut interest rates to a level which is crippling bank earnings to some degree and crippling the economy.”

The Fed has targeted the federal funds rate at zero to 0.25 percent.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Bove says that before the Fed embarked on its rate cuts in late 2007, 19.5 percent of Americans’ income came from passive investments. That compares with 12.8 percent now.

“That means they've just taken away a staggering amount of money from the elderly population in the United States and put a whole bunch of them on food stamps,” Bove notes. The Fed is making the tradeoff in hopes that it can spark bank lending.

“They didn't get the bank loans. They just took the money away,” he says. “The second thing they're doing with this ridiculous interest rate policy is diverting funds to areas of poor return.”

Lenders are interested mostly in loans of less than five years’ duration, unless it’s for junk bonds, because interest rates are so low. “In terms of putting money into long-term projects that are going to generate income, they don't do it.” But eventually rates go up, “and that's going to help banks and the economy.”

That’s quite an irony, because historically lower rates have been seen as a boon for banks and the economy, but that was when rates were being cut from much higher levels than what they’re at now.

Bove is bullish on bank stocks for the next few years, and he rattles off a slew of statistics to back up his view.

“In the last 14 quarters, bank earnings have gone up every quarter. In 2012, bank earnings were up 22 percent, to about $145 billion,” he says. “In the fourth quarter of 2012, the industry probably earned $39 billion,” and that’s a record.

“This has all happened in a period in which the banks have been forced to deleverage their balance sheets, increase their cash holdings, write off $800 billion worth of bad loans, deal with price fixing from the government, deal with regulations coming from every sector, deal with the housing industry busting,” Bove says.

So the idea that the banking industry is in the doldrums “just doesn't fit with any of the facts as it relates to this industry.”

As of mid-morning Monday, the KBW Bank stock Index has risen 26.4 percent over the past year.

Bove says stocks are headed higher for the entire industry. But among his recommendations are Goldman Sachs, Bank of America, US Bancorp and Comerica.

Another renowned bank analyst, Meredith Whitney, has turned bullish on the industry herself. "There's an incredible growth opportunity within the financials, particularly Bank of America, Citigroup, Discover Financial," she told CNBC in December.

"I think the underlying support is housing is close to bottom.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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