Jim Cramer on Ben Bernanke – Fair in August 2007 and Unfair in August 2008

One year ago, Jim Cramer went on a self-described “rant” against Ben Bernanke, the Federal Reserve Chairman, on CNBC. Just in case, you have not heard this “rant”, click on the YouTube clip below:




I agreed with Cramer’s sentiments that day. He said what many of us wanted to say and he said it with far greater effect than any one else.

One year later, on August 1, 2008, Jim Cramer revisited this rant on his daily show on CNBC “Mad Money”.  In this segment, he blamed Ben Bernanke for making the housing crisis worse, for the drop in stock prices of Fannie Mae, Freddie Mac, Merrill Lynch etc., and for the loss of jobs in America. A couple of his quotes are:


  • “…All Bernanke had to do to avert this mess was to cut short rates drastically, cut them fast, cut them low enough so that people with adjustable rate mortgages could have had chance to refinance…”

  • “…The Fed did not start cutting until August 17, but they used a series of wee-little cuts that were not enough to stop the crisis…”

        NOTE:  (Added on Monday, August 4, 2008)  – You can watch this segment at http://www.cnbc.com/id/15840232?video=811847196&play=1


I think Jim Cramer is being grossly unfair to Ben Bernanke. Let me share my reasoning with you.

The size of the problem was such that America needed the President, the Congress, the Treasury Department and the Federal Reserve to act in unison and quickly. The country needed a new Resolution Trust (the entity established in 1990 to take in bad loans during the Savings and Loans crisis) type entity where banks could deposit their bad housing-related securities. The sad reality is that, in 2007, neither the Administration nor the Congress paid any serious attention to the problem, let alone take any action. So, the entire burden fell on the Federal Reserve and its Chairman, Ben Bernanke.

The size of the problem was such that America needed the President, the Congress, the Treasury Department and the Federal Reserve to act in unison and quickly. The country needed a new Resolution Trust (the entity established in 1990 to take in bad loans during the Savings and Loans crisis) type entity where banks could deposit their bad housing-related securities. The sad reality is that, in 2007, neither the Administration nor the Congress paid any serious attention to the problem, let alone take any action. So, the entire burden fell on the Federal Reserve and its Chairman, Ben Bernanke.

In addition, Ben Bernanke has had very little room to maneuver. This is because
Bernanke has had to face a great force that has driven global financial markets for the past few years, a force greater than the Fed and all the Central Banks in the world put together.

This force is the enormous, gigantic pool of capital that has been given to short-term, performance-oriented investors or commonly called the force of momentum money (Mo-Force in short). This Mo-Force has had one and only one mantra, Global Liquidity and Global Growth (GLG2 for short). Their favorite vehicles have been Oil, Gold, Emerging Market Equities & Currencies and Short US Dollar positions.

This Mo-Force moves from market to market and from asset class to asset class with blinding speed and leaves frightening destruction in its wake. Just look at the last week of June 2008. In that one week, the Two-Year Treasury yield went up by 61 basis points (0.61%), an event not seen since 1982. As a result, some hedge funds lost a monstrous amount of money that week. All this damage without any real change in the economy and just because of a change in Mo-Force’s perception.

Look what this Mo-Force did every time Bernanke lowered interest rates or added liquidity to the US Financial System. The Mo-Force exploded the price of Oil upwards, shot up the price of Gold, crashed the value of the US Dollar and poured money in to Emerging Markets. See the charts below and judge for yourselves.

In other words, Mo-Force punished Bernanke and America every time Bernanke tried to help the American homeowner. This was because Mo-Force was obsessed about Inflation.

The damage shown below was when Bernanke, in Cramer’s words, “used a series of wee-little cuts”. Had Bernanke “cut drastically in a couple of weeks or months” as Cramer says he should have, what havoc would Mo-Force have created? Who knows, the price of Oil would have gone to $175 or even $200 by now.

Mo-Force essentially told Bernanke stop lowering rates or else. If you do not believe me, just listen to CNBC’s own Rick Santelli.

This enormously popular veteran ex-trader (and now CNBC’s Bond reporter) has been on an anti-rate-cut and anti-Fed tirade that makes Cramer’s “rant” seem mild by comparison. Cramer is mad because Bernanke did not cut rates drastically and Rick is livid because Bernanke cut rates too much and too quickly. Here is an idea for CNBC. Fly Rick Santelli to New York for a


Live, In-Studio, no-holds-barred, Cramer-Santelli  Fed-Rate-Cut Smackdown.



     (The chart of USO – Oil ETF – red annotations indicate rate cuts or bail outs)


                                                 (The chart of GLD – Gold ETF)


  
               (Chart of UUP – US Dollar ETF)                                                 (Chart of EEM – Emerging Markets ETF)


The last spike in Oil has probably done real damage to the American Consumer and the American Economy. It has also damaged growth in Emerging Markets. Europe has begun slowing visibly. That is why, finally Mo-Force started getting out of GLG2 trades in July 2008. Of course, by its very nature, Mo-Force never gets out slowly. Their exit led to devastation of Oil and other commodities last month. 

I believe that 
Mo-Force no longer chants the GLG2 mantra. Look at the action of the Treasury Market last week. The 2-Year Treasury yield went down 20 basis points and the 10-Year yield by 16 basis points. This action in Treasuries might be a signal that Mo-Force might be climbing on the DEFLATION bandwagon. If and when Mo-Force starts chanting the deflation mantra, then Bernanke will have the force behind him to cut interest rates again.

Then, if Bernanke does not cut interest rates further, I will make an impassioned and strident plea to Jim Cramer to do his “rant” again, this time more explicitly and more loudly.

We need the help of both Mo-Force and Bernanke to quickly take the 10-Year Treasury yield below 3% (yes, 3%) and keep it there for some time. I believe that the Housing Bill will stabilize the bleeding at banks. The combination of sub-3% 10-Year Treasury Yield and a stabilization of Bank balance sheets will bring down mortgage rates. A 30-year fixed rate mortgage near or below 5% will lead to a long term revival of US housing.


I think Larry Kudlow, host of CNBC’s “Kudlow & Company” might disagree with me but his frequent guest, Gary Shilling, would concur with me. Unfortunately, Gary Shilling is so mild-mannered that a Kudlow-Shilling smackdown would be a mismatch in volume and stridency. Since the guru consensus still expects higher interest rates, I am unable to think of a suitably strident Treasury Bull to match up with Larry Kudlow.

So CNBC would have to be content with the Cramer-Santelli smackdown.


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