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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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A senior Bank of England official today compared the banking system over the last 20 years to the South Sea bubble of the early 18th century and said bankers had merely "resorted to the roulette wheel" to keep up with each other. The Bank's executive director for financial stability, Andy Haldane, said in a speech in Chicago that having been stable over much of the 20th century, returns in the banking system relative to the wider stock-market shot up after 1986 until 2006. "Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison," he said. He said bankers and policymakers became seduced by the excess returns available: "Banks appeared to have discovered a money machine, albeit one whose workings were sometimes impossible to understand. "One of the South Sea stocks was memorably 'a company for carrying out an undertaking of great advantage, but nobody to know what it is'. Banking became the 21st-century equivalent." He said banking returns over the period were magnified by leverage as banks borrowed excessively, he said. - Guardian

Dominant Social Theme: Even bank officials must speak truth to power.

Free-Market Analysis: We have been lonely! (It is often a lonely task to help write the Daily Bell.) Seemingly all alone, we have pointed out over and over that the banking system worldwide is a BUBBLE. Plenty of people, including ourselves, have written that central banking created all sorts of bubbles including money bubbles, stock bubbles, financial bubbles, mortgage bubbles etc. But none of them, to the best of our knowledge, pointed out the banking industry itself is locked in a bubble.

European and American banks with their hundreds of thousands of employees and coast-to-coast banking networks are as overextended as, say, Starbucks was before the economic crisis, in our opinion. In vain, we waited for confirmation from others. We soldiered ahead. We restated the premise. Banks worldwide are in a bubble and remain so. ... And finally, one voice rings out of the ether to confirm our point of view. And whose is it? Why the Bank of England's! We are truly tickled. (Like you dear reader, we don't believe something truly exists unless a central banker says it.) But still we have differences with the Bank of England in that its adherents apparently believe the bubble has subsided. We beg to differ. It has not because it cannot.

The reason why banking is a bubble industry and remains in a bubble is because the industry is supported in large part by its central banking mechanism which is itself propped up by its governmental associations. Of course, there is a further point to make here, which is that government itself is a bubble business. Government continually expands without surcease and never lets even one of its subsidiaries go out of business. Government is the biggest bubble of all, but banking remains, perhaps, the second biggest. Or perhaps they are really just one big, inter-linked bubble. It is the central bank, with its curious private/public status, that makes it so.

Part of the definition of socialism as well as fascism (almost any ism) has to do with the conflation of private and public entities. It is the use of the color of law to insulate a private institution from the vicissitudes of the marketplace that creates, ultimately, a command-and-control economy. As Ludwig von Mises famously pointed out, over time, it is not possible to have just a little bit of socialism. Socialism develops more socialism. What begins with a little socialism ends up with a lot. He might just as well have been speaking of fascism or of government involvement in general, in the private sector.

Because central banks are so familiar to us, we do not necessarily perceive that the interaction between government and central banking is essentially a socialist concept. Government commissions private bankers to create money privately and protects the monopoly franchise with its power and authority. This is the essence of a private-public partnership, operating at the heart of capitalism. It is the big reason why Western democracies continually devolve away from free-markets and why despite the best of intentions those who are proponents of free markets have difficulty translating their arguments into reality.

Because socialism lies at the heart of Western democratic capitalism, the banking system itself is never truly cleansed. It lurches from one crisis to the next - especially the big money center banks that are not allowed to collapse. The system never truly corrects. In fact, if the system had been allowed to correct in the past year, probably about 90 percent of it would have been wiped away - so far as we can tell. The system was truly frozen and banking shares were going for pennies. In both America and Europe the banking industry was basically finished. Nobody believed in it and no one was lending to it. Heck, the banks wouldn't even lend to each other and many won't to this day. The choices that had been made, the investments consummated, the funding committed, all of it was for naught. The market told us the banking industry had failed and needed to be cleansed. Instead the leaders of the industry, the captains of finance and those who ran the American and European central banks, doubled down. They printed more money and salvaged what they could.

And now comes Andy Haldane to admit what you already know, dear reader, that the banking industry is the biggest bubble of all. Of course, he claims it is all over now. The bubble has successfully been lanced, he says. He draws this conclusion based on equity valuations of big money center banks. We find this hard to believe. The stock market is no less a ward of government now than the banking industry itself. The market, these days, inevitably rises or falls based on the quantity of money stuff that central bankers decide to print. Since central banks have printed trillions over the past year - and stuffed money center banks to the gills with electronic money - securities marts have begun to rise. Sooner or later the amount of money will float to big commercial banks as well. They are too-big-to-fail and this is bound to be extraordinarily advantageous for their businesses and their lines of funding from institutional investors, etc.

Conclusion: Government and central banking leaders did not "salvage" or "save" the Western banking system from a meltdown. On the contrary, they perpetuated an endless bubble that will continually re-flate. Because of this, the events of the past two years are bound to re-occur, no matter what regulatory "solutions" are put in place. Knowing that the banking structure of the Western world remains in peril, savvy investors ought not to be lulled by central banking nostrums or government assurances that the worst is past. Remember please that gold, especially, hovers at an all time high and likely will go much higher - as the banking industry bubble reflates, the banking troubles continue and the faith of the general public in all major Western fiat currencies continues to erode. Yes, there was a banking bubble. No, it has not gone away.

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