St. Louis Federal Reserve Bank President James Bullard said on Tuesday that public anger over the U.S. financial crisis and subsequent bailouts could cause big problems if this escalated into a political challenge to the independence of the U.S. central bank. "If that leads to some sort of erosion, or even the appearance of an erosion, of the independence of the Fed, I think that could be very counterproductive in this environment," he said after giving a talk about monetary policy to a Global Interdependence Center event. The atmosphere between the Fed and the U.S. Congress has become very tense in the wake of last year's crisis. Lawmakers are angry over the taxpayer-backed rescues of investment bank Bear Stearns and insurer American International Group, which led to a public outcry that could hurt them in the polls. – Reuters
Dominant Social Theme: An irreplaceable institution like this needs to be treasured not tortured.
Free-Market Analysis: As we moaned in the other article in today's issue, it is a lonely business to write the Bell. But we are tough enough. We go our own way. We are loners! We are, indeed, the bad boys your mother warned you about. We wear sunglasses indoors and we don't wear helmets. We have our tattoos and cultivate facial hair. We rarely run with the pack. Heck, we'll even sport an earring every once in a while. Months ago we went out on a limb and said the American Federal Reserve was irretrievably damaged in terms of its reputation and credibility and, being independent cusses, we see no need to revise this perception.
Let defenders point out the brilliant job Ben Bernanke has done. Let the president call for more powers for the Fed. There are millions of pages on the Internet now explaining just what a central bank is and why the concept is fatally flawed. And there are videos, pitiful videos, on Youtube.com showing in detail just how Fed leaders behave when they are pressed to justify their actions. It is not a pretty picture.
The facts are hardly in question. Panicked, Bernanke et. al. huddled with Treasury and issued maybe US$2 trillion to various financial entities without telling hardly a soul. Then it issued maybe another US$8 trillion without mentioning it. Then it sent a solicitor general to the Hill who told Congress that she lacked the ability to track the money. Then chairman Ben Bernanke went to the Hill to tell Congress that he had followed the law and was not going to say a word more about it – and that anyway he had forgotten just exactly what he'd said to begin with. All this took place against a backdrop of jawboning and bullying that eventually dismantled Wall Street and forced Merrill Lynch, willy nilly, into the ungrateful arms of Bank of America.
What exactly is it that James Bullard wants to salvage? An entity with a failed monopoly on creating money? One that drives the American system (if not the West's) into virtual bankruptcy every century or so – and into penury in between? One that endlessly centralizes financial and industrial entities during every crisis? One that demands further regulatory power every time Western economies erupt into crisis caused by its own actions? Is this what Bullard seeks to shield? Is this the reason he jealously guards its independence?
Obviously Bullard is worried. In fact, we've been waiting for the yelps. We wrote the Fed had begun to topple – but had not yet hit the ground and thus few were yet aware of how gravely it was damaged. Maybe some of the top men knew. But the extent of the damage is only just now occurring to them in our opinion.
This is going to be a fascinating battle, one of the most interesting and important of the young 21st century. The American Fed – and central banking in general – will need to fight all over again for legitimacy. Yet the first time around so much was accomplished by subterfuge. Those who planned the Fed early in the 20th century, for instance, met in secrecy on a rich man's island. On the trains going there they all wore masks. The bill authorizing the Federal Reserve was passed late at night with much of Congress absent. Even the name was carefully picked to imply financial insurance – not a central bank.
Conclusion: The trouble – the one, worst, inextricable fact (and facts are stubborn things) is that central banking doesn't work. The arguments for it are insupportable. Its track record is lamentable. Its failures are writ large across the face of the Internet and tens of millions have already made up their minds and understand the futility of the current system. There is no argument that can be made in support that has not already been made – yet they are inevitably specious. There is, indeed, nowhere to hide. Scott Fitzgerald wrote that there are no second acts in America. If there is a second one, the Fed in particular may not look too much like what went before.
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