Screen Shot 2015-01-28 at 4.42.13 PMThe Fed’s balance sheet now foots to nearly $4.5 trillion, a great leap from early July 2008, when its total assets were less than $900 billion.  Interest rates have been held just above zero since then as well, all in an attempt to jumpstart the economy.

But while monetary policy has been beyond promiscuous, bank regulation has been, and continues to be, in Jim Grant’s word, “asphyxiating.”  Dick Bove, who analyzes banks for Rafferty Capital Markets and seems terminally bullish on the industry, says banks have been essentially nationalized in the U.S.

Bove says the government now tells banks how much they can have in assets and if they go over that amount, capital penalties are imposed.  The makeup of the assets is dictated by regulators and government gumshoes determine what are liquid assets and what are not.  Next, he told Charlie Grant, the government tells banks, “This is where we’re going to allow you to have low-risk weightings and therefore we want to lend there, and this is where you can’t lend.”

On the liabilities side the regulators frown on short term borrowing because the banks would be creating a systemic risk in the repo market. “Then they put a few hundred people in the big banks and they make the big banks pay for these people,” Bove tells Grant,”even though these people work for the government.”

Screen Shot 2015-01-28 at 4.43.46 PMGrants spoke with lawyer David Baris who is the president of the American Association of Bank Directors. “Undoubtedly, fear of personal liability has had a big impact on the kinds of loans that are approved, given the risk that directors are willing to take in approving loans. Our advice has been for bank directors not to approve loans at all.”

Steve Hanke pointed out a year ago,  that while what he calls state money had grown four times, “bank money has shrunk by 12.1 percent — resulting in an anemic increase of only 4.5 percent in the total money supply (M4).”

Hanke said the public is rightfully confused. “On the one hand, when it comes to state money, the Fed has been ultra-loose. But, on the other hand, when it comes to the largest component of the money supply, bank money, a tight monetary stance has been embraced.”  When banks don’t lend less money is created.

Also, no lending means velocity and the money multiplier have sunk.  What else has sunk is the number of banks. Bove told CNBC’s Andrew Ross Sorkin that a few big banks do well and otherwise one bank per day has been lost since 1987.  It is only the banks with economies of scale that can bundle products and price services cheap enough for the American public.

Screen Shot 2015-01-28 at 4.57.02 PMYellen and company can make the Fed as big as they want, but if regulators stay unfriendly and bankers and bank directors stay scared, don’t look for roaring inflation anytime soon.