Thursday, January 31, 2008

Behind the Curve

The Fed cut interest rates by another 50 basis points on Tuesday (ok, so this post isn't timely, get over it) which means they slashed 125 points in only 8 days. Since Fed rate cuts take 6-9 months to work their way through the general economy, imagine how much of this crisis might have been avoided if they cut rates aggressively in August. Of course, no one was suggesting that in August - all the pundits reassured us that the subprime problems were well-contained, mere fractions of a percentage point of GDP.

No one but Cramer, of course.

Cramer's got his share of detractors. He makes a ton of bold calls, and certainly not all of them are correct. He'll give buy/sell recommendations on 30 stocks in a single show, and he gets many of them wrong. So if you dislike him, there's a huge volume of mistakes you can use to "prove" yourself right. Naturally, I've yet to find one of these detractors who can demonstrate a record comparable to the major indices, let alone Cramer himself, but that's entirely to be expected.

But I am once again amazed by his bold and completely correct call on this financial crisis. You've seen the video before, I'm sure, from August where he is pounding the table for Fed rate cuts, claiming that Bernanke is "asleep", "clueless", an "academic" who "knows nothing." I'm linking it here again anyway, because it's amazing to see how prescient he was about the extent of the subprime mess.

The Dow has dropped 1000 points since this video was made. Bear Stearns, whose chart is also listed, dropped over 30% and then recovered about half of those losses recently.

What's more amazing, perhaps, is not that Cramer was so right...but that the Fed was so wrong. How could all of these PhDs in economics have stood by idly, mumbling about inflation risks, while the ship was sinking around them? How could they have still been clueless on December 11th, when they cut by a mere quarter-point? Has so much changed in those 50 days that we suddenly need 125 basis points worth of emergency rate cuts? Of course not - the only thing that's changed is that they've only now noticed the water rising up to their necks. These emergency cuts validate that Cramer was right, and that he was right six months before the Fed.

Pathetic. What are we paying these guys for? We'd be better off dumping them all and letting the market set rates. Now that they're cutting, too late of course, it means in 6-9 months we'll be forming the base for the next bubble/crash cycle.


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