Excessive regulation of financial institutions is squeezing out middle-class consumers who soon will find themselves locked out of the banking system, analyst Meredith Whitney said Wednesday.
That trend already is beginning to manifest itself in terms of who is driving most consumer spending, Whitney, the president and founder of Meredith Whitney Advisory Group, said in a CNBC interview.
The latest data show retail sales rose 0.4 percent during the post-holiday season, while Macy's (NYSE:M - News) indicated strong sales growth in the past quarter.
But Whitney said such figures can be misleading in that the spending is being driven mostly by shoppers at opposite ends of the spectrum. The ones in the middle, she said, are finding it harder to be active consumers.
"It's somewhat of a false indicator looking at consumer spending and saying all consumers are doing so much better," she said. "You haven't had substantive wage growth and you see the contraction in available credit for mainstream America take a toll."
Decreasing access to credit is one of the main obstacles middle-income America will face, she said. That's been brought on by tighter lending practices enacted after the financial crisis, which was triggered in large part by easy credit standards.
Now the pendulum has swung the other way, and it's become highly difficult for consumers to get access to credit that helps drive economic expansion.
"The unintended consequence is it's really squeezing the middle end," Whitney said. "You're going to see more and more people living outside the system. When it happens, it becomes so much more difficult to operate...The pendulum swings to too much regulation and it squeezes out the system."
Those people getting "unbanked," as Whitney termed it, will turn more towards payday lenders and others at the periphery of the financial system to get access to money.
Whitney's comments echo those from another prominent banking analyst, Rochdale Securities' Dick Bove, who last year warned that regulations such as Dodd-Frank would drive up the cost of doing business for banks and push millions outside the system.
The problem is not as acute for lower-end consumers, Whitney said, who "really didn't benefit from the housing boom and weren't compromised from the housing bust. They're spending what they've always spent."
Those consumers are continuing to shop at lower-end outlets that have been booming.
Dollar Tree (NASDAQ: DLTR - News), for instance, has seen its shares rise 70 percent over the past year and trades at more than seven times book value. Dollar General's (NYSE: DG - News) stock is up 45 percent in the past 12 months and trades at more than three times book value, according to Thomson Reuters data.
Whitney rose to Wall Street prominence for making a call on Citigroup (NYSE:C - News) that presaged the collapse of the subprime mortgage market, which in turn capsized some of Wall Street's biggest names, including Bear Stearns and Lehman Brothers.
Her call last year during a "60 Minutes" profile that there would be 50 to 100 major municipal bond defaults that would cause more than $100 billion in damage proved to be not as prescient. The muni bond market has seen some high-profile defaults, but by and large has performed very well since her call.
Still, Whitney said municipal finances remain a major concern and are weighing on the minds of many consumers.
"For the last three and a half years I've spent so much time focusing on this issue because I really think it shapes the future of the American economy," Whitney said. "This issue is so much bigger than the municipal bond market."
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