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Hell Freezes Over, Pigs Fly & I Agree With Cramer





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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11 Responses to “Hell Freezes Over, Pigs Fly & I Agree With Cramer”  

  1. 1 Johan

    I'm not sure that the best thing to do is for the FED to go in unscheduled and lower the rates. A few weeks to next week shouldn't mean much to the economy. But if they go in now, then that would be like saying, "Everything we have said about that the market and economy is going fine was totally wrong and we are pushing the panic botton!". Now THAT could cause panic if anything.

    I'm not saying that it will be like that, but it could be like that. No one knows the outcome. Just don't take for granted that a FED move right now would be nothing else than positive.

  2. 2 Babak

    Johan, I agree. They should have lowered rates a while back IMHO. Right now they should be working behind the scenes.

  3. 3 ken

    The market has been on fire since June 06 without any corrections except a small one in March 07, but at this point it hasn't even been down 10% (a typical correction in a bull market), yet everybody thought we were near the end of the world.

    Right now, percentage wise, the corrections in the S&P500 and NASDAQ are approximately the same, or just a bit larger than their respective ones in March, but the correction in the DOW is smaller than its own correction in March. People keep saying we need healthy corrections in a bull market, but whenever one comes, everybody seems to think it's a crash! In any cases, all of these pullbacks are still less than 8%, so what's all the fuss about?

    The fact is we haven't seen any meaningful correction for a long time, so now suddenly a 7-8% pullback seems like the sky is falling! People have been complacent for so long, now they need to take a step back and look at the big picture for a better perspective.

    I think a big part of the reasons many institutions/hedge funds blew up lately was due to the fact that they were confident that the "Greenspan put" would come to their rescue whenever things go bad just like old times, no matter how reckless they are. Every time there was a potential problem in the past the Fed always came to the rescue, so Wall Street has Pavlov's dog syndrome: "Ok, we blew up due to excessive risk-taking (or rather, gambling), but so what, only the investors would suffer. And the Fed will save the day anyway."

    Why should the Fed come their rescue every time? Why shouldn't they be responsible for the problems they created, or for their reckless gambling? Remember, only rich people are allowed to invest in hedge funds, and they say it's to protect poor people from high risk investments. When the hedge funds do well, the rich benefit, and when some blew up in the past, they were saved by the Fed. The rich people won no matter what. Poor people remain poor.

    Why didn't the Fed help bail out mom and pop investors when the bubble bursted, or when Enron and WorldCom collapsed? The poor got creamed, but Wall Street firms still enjoyed huge profits and bonuses every year. Where did that money come from? It's obvious who sold Internet/Enron/WorldCom stocks at outrageous prices to the naive public, and still encouraged them to average all the way down to 0 with their bogus "upgrades".

    We're lucky people like Cramer don't work at the Fed. Otherwise every time the market seems to be in trouble he would cut rate, and fuel another bubble. The excessive speculation and reckless money management at these hedge funds (if they do have one) result from their expectations that the Fed would save them no matter how irresponsible they are.

    The Fed should stay put and focus on the big picture economy. The market is large enough to sort itself out. We need a good cleansing of excessive speculation and undisciplined trading/investing from hedge funds and the likes. Retail investors have to take responsibility for their own losses, so why not the big boys, especially since they are much richer and can absorb the losses better?

    The market just gave back less than 10% of its big gain since last year. If the media, Wall Street and Cramer would just stop whining about the need for rate cuts, then people might just have time to realize that this "market crash" is not even a typical correction in a bull market. Sure, it may eventually get worse and worse until we're in a full-fledged bear market, but there's no remote evidence of that yet.

    The dollar is teetering on its multi-year support, so what if the Fed cuts rate? People like Cramer who wish for a cut to stop this "8% market crash" might just get it, but they might at the same time witness a different kind of crash, and this one won't be pretty. As they say, be careful what you wish for, it might come true.

  4. 4 Boiler Shop Criminal

    The FED has been a disaster for the last 20 years. They should have increased margin requirements to moderate the tech bubble. They shouldn't have left rates below the inflation rate to create the current credit (and housing) bubble.

    They need to just leave things alone. Let some Wall Streeters and big banks fail.

    Cramer is just another crim. Four months ago he was pounding the table for regional banks, saying that Downey is the most underpriced. Now that their subprime/negam nonsense has caught up with them and others, he's crying.

    Come-on.

    Let markets work!!

    Crim

  5. 5 hoot1987

    Is it that bad? I dont think so, these Bankers are getting at least 52 months bonuses last year due to booming of the structured Mortgage securities that they pushed to their customers.

    Now they are losing their job because of this fiasco, so what? They still can go to the beach for 2 years and come back to look for a new job, while their clients lost their life savings for these pigs.

    Fed should not do anything, let the bank fold and history teach them a lesson.

  6. 6 GDM

    Have you ever heard of the concept of moral hazard? Have you read the article in today's WSJ (http://online.wsj.com/article/SB118643226865289581.html)?

    If the Fed steps in to bail out investors/banks/funds who took on more leverage than was appropriate and, worse yet, created a liquidity/duration mis-match between their assets (MBS, CDOs, CLOs) and liabilities (investor assets, margin, repo agreements) then the message is that you can go ahead and take on too much risk and if you get in trouble you'll get bailed out.

    Market participants must know that they will be the ones to own both the upside and the downside risk of the investment decisions they make. If funds blow up so be it. If Bear Stearns goes bust, so be it. Hell, if Countrywide ends up in Chapter 11, that's their problem and their shareholder's problem.

    The discount window is for true systemic crises that surpass rationality, such as providing liquidity following the 23% drop in equity markets on 10/19/87 or offering liquidity after 9/11/01. The events of the past few weeks have been completely predictable. In fact, many funds have predicted them -- Paulson Credit Opportunities ( 40% in June and 129% YTD (no June info yet)) and BlueCorr ( 17% in July and 34% YTD) for example were created to profit from just these sorts of events.

  7. 7 GDM

    Wise words from Europe's central bankers:

    “Interest rates aren’t a policy instrument to protect unwise lenders from the consequences of their unwise decisions,” Bank of England Governor Mervyn King said today at a press conference unveiling the bank’s latest Inflation Report.

    In fact, while noting the bank would continue to monitor markets closely, Mr. King said the turmoil heralded “a more realistic appreciation of risk, which we should welcome.” He also contends there’s no evidence, yet, that the U.S. subprime turmoil has spread across the pond to Europe: “I don’t think there is much evidence of a major change in loan performance in other markets.”

    European markets have gyrated recently along with global exchanges, but so far the impact of the U.S. subprime crisis on Europe does seem limited. Germany’s taken the hardest hit, with a Frankfurt-based asset management firm closing one of its funds on Monday and a government-backed group last week providing $4.8 billion to bail out another German bank whose subprime investments went bad.

    Mr. King’s comments today echo similarly sanguine ones made last week by his continental European colleagues. At a press conference following the European Central Bank’s decision to keep its key interest rate at 4%, ECB President Jean-Claude Trichet said: “I would qualify this episode as a process of re-appreciation of risks which can be interpreted as a phenomenon of normalization of risk pricing in a number of markets.” Mr. Trichet had warned for months that investors were under-pricing risk.

    Mr. Trichet, declining to comment on whether the ECB would consider coming to the market’s rescue in the event of a banking crisis, referred reporters to comments made by the head of Germany’s central bank, Axel Weber. Mr Weber’s take: “Fears of a banking crisis in Germany lack foundation.”

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