Tags: bove | stimulus | bank | rules

Bove: To Fire Up Growth, Scrap Excessive Bank Rules

Wednesday, 20 June 2012 08:20 AM

While the Federal Reserve was debating whether or not it would stimulate the economy to encourage job creation, any decision to intervene won't work, says Dick Bove, a banking analyst at Rochdale Securities.

Scrapping regulations to encourage more lending will give the economy the jolt that it needs, Bove says.

"It seems clear that the United States economy’s growth is slowing and that the global economy is facing major challenges. This suggests a need for some action by the Federal Reserve and other central banks," Bove writes in a note to clients, CNBC reports.

"It also appears to be just as evident that lowering interest rates to zero and printing more money are not effective options."

Editor's Note: The Final Turning Predicted for America. See Proof.

The Fed’s stimulus tools include outright bond purchases from banks, known as quantitative easing, or extending a $400 billion program shuffling up its Treasury holdings, known as Operation Twist.

Under Operation Twist, the Fed sells short-dated Treasury instruments and buys longer-dated Treasurys in tandem with the aim of pushing down long-term interest rates.

Unlike quantitative easing, Operation Twist does not expand the Fed's balance sheet, yet neither tool is what the economy needs, Bove says.

Ending regulations like tougher capital requirements will.

"It is possible that the regulators are beginning to understand that by taking the banks out of the financial system, they are crippling the economy and pushing unemployment rates higher," says Bove, a longtime critic of increased bank regulation.

"If they do understand this they might reverse the absurd actions they have taken and assist the economy."

Critics say Fed stimulus measures threaten to push up inflation rates, especially quantitative easing.

Fed officials themselves have said that monetary policy is not a panacea for the economy, and some have said that Congress needs to make tax and spending reforms before the economy really heals.

That’s not going to happen soon enough, especially in an election year, Christina D. Romer, former chairwoman of President Obama’s Council of Economic Advisers, writes in a Project Syndicate column. It’s up to the Fed to steer the economy away from decline via more stimulus measures and do what it can to encourage job creation.

“The argument for additional monetary action is straightforward. By law, the Fed is supposed to aim for maximum employment and stable prices. But the unemployment rate is 8.2 percent — a good two percentage points above what even the most pessimistic members say is its sustainable level," Romer writes.

"I agree that we need more effective fiscal and housing policies. But neither is likely to happen, at least not before the presidential election," Romer adds.

"As a result, the Fed is the only plausible source of immediate help for the American economy. It was set up as an independent body precisely so that somebody can do what’s right when politicians can’t or won’t."

Editor's Note: The Final Turning Predicted for America. See Proof.

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