I can’t believe that I actually agree with Jim Cramer on something. I’m breathing through a brown paper bag as I type this but there’s no way around it. He makes too much sense this time.
If you want to know what I’m talking about, check out this clip where he loses it talking to Erin about the inaction of the Fed. In the top video it looks like he’s going to have an aneurysm! It’s difficult to concentrate on what he’s saying and not on how he’s saying it. Then there’s the follow up (second video on the bottom) where he explains himself - this time with less emotion.
What he refers to is the “discount window” which according to the New York Fed :
…functions as a safety valve in relieving pressures in reserve markets; extensions of credit can help alleviate liquidity strains in a depository institution and in the banking system as a whole. It also helps ensure the basic stability of the payment system by supplying liquidity during times of systemic stress.
If that doesn’t describe what we’re going through, then I don’t know what will.
I don’t think Cramer is saying that the Fed should write a blank check to the market so that it can take on any and all manner of risk. What he is saying, and what I agree with, is that in times of stress to the system, the Fed should step in and act to reassure the market. Although as an economist Greenspan was a brilliant political operative, he understood this key point and was always there personally to ensure that all the key players knew it.
Right now the market is screaming at the Fed to reduce rates. The bond market is on the precipice of a real liquidity crunch which could reverberate throughout other markets and the whole economy. And it seems like the Fed is asleep at the beach.
I don’t think this is the end of the world. Nor would it be if the Fed continues to be hands off. But I’m sure that it would stabilize the fixed income market for them to have some sign that the Fed’s got their back.
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