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Fed Is Firing Blanks With QE: Whalen

Pras Subramanian

Hollywood is bringing back the man of steel, and one thing we can count on (other than a new body-sculpted suit), is that kryptonite will still be the only thing that zaps him of his power. While the comic geeks have Superman, investors have Helicopter Ben and the Federal Reserve that's pumping $85 billion a month into the economy. But could it be the Fed has its own version of kryptonite that’s sapping its strength? Christopher Whalen of Carrington Investment Services seems to think so.

The benefits of the Fed’s quantitative easing (QE) program are being offset by regulation promulgated from Washington, Whalen says, and therefore nullifying its stimulative ability. “When you look at all the constraints on banks in terms of lending, it's just not being effective in terms of growing jobs, and the key thing is that even with say housing up 10% last year, there’s no credit growth,” Whalen notes. “In terms of a classical economic recovery, we’re not having that.”

The Fed’s plan of reflating assets like home prices in order to stimulate the economy (and thus job growth) is admirable, but according to Whalen regulations like Basel III and Dodd-Frank are stifling lending. This is because reform legislation discourages banks from making all but the least risky mortgage loans.

In fact, Whalen notes that estimates for new loan originations in the U.S. mortgage market are in a precipitous decline; falling from $1.7 trillion in 2012 to $1.4 trillion in 2013, and perhaps below $1 trillion next year. Major home mortgage originators like JPMorgan Chase ( JPM) and Wells Fargo ( WFC) will likely take a hit from this decreased volume.

To make matters worse, the Fed’s extended ultra low rate policy is hurting savers, as “QE is actually driving deflation now because we’ve gotten past the point where cheap funds are net-net helpful… because we’re constraining consumption,” Whalen says. “There was a time when QE in terms of the net effects early on was a benefit… but now we're at the point where QE is really starting to hurt savers particularly, and I think that’s a drag on the economy.”

Since regulation is here to stay, Whalen advocates that the Fed hike rates up a bit in the short term in order to get assets repriced from such low rates, which would help banks, investors and retirees who depend on interest income. It will take time to get housing, and thus the economy, back to normal, though.

“We’ve put so much friction in the system, to expect a classical recovery is almost unreasonable," Whalen concludes.