The Volokh Conspiracy

Prof Lindgren,

Could you please explain what you mean by "the Fed is not providing credit to the market"?

Credit is there. The fact that Cramer's friends at the investment banks got carried away and made commitments for leveraged buyouts at historically low spreads over risk free investments (Treasuries) and now find that buyers are no longer willing to take them out at the interest rates they committed themselves to should not drive Fed policy.

Cramer's position in all this is akin to the theory that the way to prevent hangovers is never to sober up.

Cramer's position in all this is akin to the theory that the way to prevent hangovers is never to sober up.

And the problem with that position is ...?

Good comments, all.

BTW, I try to stay over 90% in equities at all times, which is where I am now.

In my very small IRA account where I do active trading, I'm up 7% this week, and I'm buying into the close today, but that doesn't mean that I'm not worried about a 1987 style crash next week.

Jim Lindgren

Someone as excitable as described should have nothing to do with any market.

I've been waiting for a big drop -- bigger than this -- for buying opportunities.

Inflation (an increase in the money supply) is the reason we're in this mess, its most certainly, not the solution.

A credit crunch is suggested (by Cramer) as a result of a lack of liquidity, and that therefore the Fed should answer by cutting interest rates in order to boost liquidity. This is a false reading.

The cause of narrow spreads for high yield over Treasuries, and other excessive speculation in real estate and related securities, including the extension of credit to vast numbers of sub-prime borrowers, is a result of too much liquidity, for too long following the tech bubble peak in 2000, and subsequent market implosion.

By keeping the Fed Funds rate at 1%, from mid-'03 to mid-'04, long after the market bottom in '02, and long after the economy started growing robustly, with low inflation, the real cost of borrowing (by financial intermediaries) was zero. With a zero marginal cost of funds, lending institutions created new ways to find new customers--no down payments, no closing costs, teaser rates to reset at a later date, interest only mortgages, a pulse and a paycheck, et. al.

[metaphor alert] Now having stopped spiking the punch bowl, by raising rates to 5.25%, Cramer wants the Fed to provide a little "hair of the dog" (in the form of lower rates), in order to soften the hangover from the credit extension frenzy.

If good judgment doesn't stop foolish lending practices, then high rates will. Cutting rates simply removes discipline from the market that a regulator is supposed to supply--especially when there appear to be no other adults present at the party.

Cramer does have a mental disorder. Does anyone know what it is? (I remember him talking about it on the tube, but I was at the barber, and couldn't hear well.) I know that there was some connection made by the producers of the show between this disability and his penchant for flying off the handle at odd times.

After learning this, I lightened up on him. But I don't see why he is paid to do what he does. (I have arachnophobia. I doubt I'd be able to keep a job as an exterminator. But perhaps Orkin has higher standards than CNBC.)

Just because the Fed didn't engineer this credit crunch

Not so fast Bucko! The root cause of this credit crunch is the collapse of the ridiculous housing market of the last six years. And while the Fed (i.e., Greenspan) didn't directly engineer that debacle--specifically designed to create fictitious wealth by suckering people into buying houses they could not afford with the assurances that prices would climb at ahistoric rates forever--it certainly aided and abetted the pyramid scheme. Now that the pyramid is collapsing, the Fed bears some of the blame for letting the scheme propagate.

Jim Cramer's tirade was aimed at helping his buddies at the brokerages and banks on Wall Street. His anger was amusing and pathetic. He doesn't have a clue what armageddon really is. He's going to be embarassed when Bernanke doesn't lower interest rates this week. I use to be a faithful viewer of Mad Money. I will stay away from it from now on. This guy is the epitomy of a "flip flopper" on stocks. He's a trader, not an investor. If you listen to his stock chatter and buy his reco's you will only be sorry.

Fred,

Cramer was screaming, not because he expects the Fed lower rates on Tuesday, but because he doesn't expect them to do so.

Jim Lindgren