The Federal Reserve’s near-zero-interest-rate policy hasn’t worked, pulling away income from senior citizens without any benefit on the lending side, says Dick Bove, star bank analyst for Rafferty Capital Markets.

The amount of household income coming from passive sources, such as bond interest payments, has dropped to about 12.8 percent from 19.5 percent a decade ago, he tells Moneynews TV in an exclusive interview.

“The primary reason for that is because interest rates have literally been decimated, and in the process of decimating these interest rates, we’ve removed from that portion of the population who is retired a good portion of the money that they expected to live on.”

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The Fed’s target rate for federal funds is zero to 0.25 percent.

Its aim with the low rates, of course, is to spark lending and thereby lift economic growth.

“What happened instead is that lending also declined as this passive income declined,” Bove says. “What you’re really doing is misallocating funds in the economy.”

Banks are willing to lend for short periods – 90 days or less – but generally not for five or 10 years, unless it’s for junk bonds, Bove says.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

“We have not put funds into the creation of projects that will generate income over a long period of time. So, at that end of it, I don’t think this low interest rate policy has worked.”

When it comes to bank stocks, Bove is quite optimistic about them now. Indeed, he foresees a 14-year bull run for the sector. Banks have overcome a world of woe, he says.

“Capital requirements have gone up, liquidity requirements have gone up, the industry has written off close to $800 billion worth of bad loans, there’s been increases in operating costs due to regulations,” Bove says.

“And yet this industry is sitting here earning the most money it’s ever earned in its history.”
In 2012, the industry probably earned $145 billion net after tax, he says. “That’s very close to the highest amount it’s ever earned.”

Bank profits have risen in each of the last 14 quarters, Bove says.

So how have the banks made all this money? “It’s because, basically, the banking industry borrows money at a lower rate than the United States government,” he says.

“There’s $10 trillion in deposits in the banking industry, and neither you nor I are getting a reasonable return on a penny of it. The banks have the ability to re-lend that money at what still is very reasonable spreads in the current environment.”

And Bove expects the windfall to continue.

“If the industry can earn that much money when all of these negatives are in place, how much is it going to earn as you pull these negatives away?” he asks.

“My thought is they’re going to earn a great deal.”

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.