Christopher Whalen, co-founder of Institutional Risk Analytics, says the Federal Reserve should let interest rates rise but that takes courage — something the current board doesn’t have and should quit because they lack it.
“Ben Bernanke has no courage. The whole Federal Reserve Board ought to resign, in my view,” he told Newsmax.TV.
He also said government officials in both parties must have the courage to acknowledge the need to restructure the financial system.
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Financial institutions will have to be restructured, and investors will have to accept losses, says Whalen, author of the upcoming book “Inflated: How Money and Debt Built the American Dream.”
“We should start with Fannie Mae and Freddie Mac. They should both collapse inside the government,” he said.
“Banks will have to be restructured, specifically the top four – Bank of America, Wells Fargo, JPMorgan and Citigroup.”
Focus must shift from the financial sector to the real economy, Whalen says. “The crisis isn’t done yet.”
Some of the onus is on the White House, he says. “If we continue to see no leadership from the Obama administration on restructuring the government housing complex, I think we’re going to have a difficult time in all markets.”
The biggest part of the foreclosure crisis in residential and commercial real estate is still ahead of us, Whalen says. “We’re talking about trillions of dollars of losses, so clearly the government will be involved.”
With real estate now in the dumps, it’s a good time to consider investing, Whalen says. “When the updraft starts, then real estate will be a haven too.”
As for interest rates, the Fed will have to let them rise, or yields for everything will drop to zero, he says. “Low interest rates kill savers. They’re taking trillions away from savers,” Whalen said.
“Your more conservative investors like public pension funds are being punished. If you don’t let interest rates go up, we’re Japan.”
While the Fed is trying to support the banking system with its accommodative policy, “it’s killing the real economy in the balance,” Whalen says.
“That’s why rates have to go up. Everything I see now is feeding deflation, lower revenue, lower GDP, lower home prices. Those things will kill us if we don’t change them.”
The dollar will suffer too. It must fall to reflect the Fed’s easing, Whalen says. “If there is more quantitative easing, which is printing money, then the dollar will have to free fall.”
But Whalen doesn’t expect all of this to damage equities. “I think stocks will rally quite a lot because there’s no place else to go,” he said. “Interest rates are so low that the Fed is driving everyone into the equities market.”
The Fed’s unwillingness to raise rates boils down to a lack of courage, Whalen says. “We need somebody who has a spinal cord, because the last two chairmen have been pathetic,” he said.
“They need to go back and study Paul Volcker and his predecessors," he said.
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