It’s hard to believe, but remember this rant from Jim Cramer?
It’s been just over two years since Cramer told the Fed it would need to lower interest rates and save his Wall Street buddies. Here’s what the New York Times said in August 2007:
Jim Cramer, known for his histrionics on the CNBC financial news channel, angrily called for Mr. Bernanke to lower interest rates, something the Fed has resisted doing.
A week ago, Mr. Cramer charged that the Fed was “asleep” and that the chairman “has no idea how bad it is out there” in the markets. A video clip of his remarks has been viewed more than one million times on YouTube.
Lower interest rates would help operators of hedge funds and other money managers because the housing market presumably would strengthen as mortgage rates fell. A revived mortgage market would give the hedge fund operators and other holders of the risky securities a chance to sell them, which they are having trouble doing now in the current nervous market.
But others see a bigger danger for the economy in acting on the pleas of Mr. Cramer and others on Wall Street. Cutting interest rates to help the hedge funds would tend to encourage a resurgence of the very risky mortgage lending that has caused the current turmoil, rekindling the crisis.
Well Bernanke lowered interest rates and has been seen by many as a "hero" for his many "rescue" programs. But are we really out of the woods now?
With housing prices down 30+% on average over the last few years, is Uncle Sam blowing fresh air into the housing balloon and actually creating another housing bubble? I believe that’s exactly what is happening.
If you are scratching your head and think I am off base with my assertion, please navigate this path along our economic landscape with me.
What drove the housing bubble? Cheap rates and undisciplined lending from the private sector. What added to the bubble? The internal ‘hedge fund’ portfolios of Freddie Mac and Fannie Mae.
What is perpetuating the housing bubble if not creating another mini-bubble of sorts? Cheap rates and undisciplined lending directly from Uncle Sam or supported by Uncle Sam. What is adding to this bubble? Those same internal portfolios at Freddie and Fannie.
Here was one analyst’s assessment from the NY Times 2007 piece:
For all the turmoil in the markets this past week, the number of people involved appears to be relatively small. They are mostly engaged in hedge funds, banks and mortgage lending and they are usually wealthy. Hedge funds, for example, require investors to have a net worth of at least $5 million.
“It is a limited crisis as of now,” said Albert M. Wojnilower, a Wall Street economist. “And if I had to bet my life, I would bet that it would remain that way. But I would not want to bet my life.”
Here’s hoping Mr Wojinilower isn’t a betting man. Housing Bubble Part II is on the horizon.
At the time of this rant Cramer assumed that the debt instruments were fine as long as rates stayed low. The market recognized the toxicity of these securities and didn’t buy them at any price. The hedge funds blew up or closed.
It wasn’t the just the low interest rates that inflated the housing market, we have had effective low rates many times in history with no bubbles. The root cause was a failure to regulate rating agencies. No AAA rating, no CDOs, no CDOs, no NINJA loans. No NINJA loans equals fewer buyers. It was the extension of housing loans to dead beats and/or anyone with a pulse. Traditional underwriting would have kept this in check had Wall Street not offerd to buy anything the lenders could sell.
Cramer is always right because he is contantly on the buy side and only very recently came up with his “sell block” segment. In theory, nearly every stock will be worth more in the future so he’s never wrong. He just waits until the price goes up and then says “See if only you bought it at $5, now you have a big profit.”
I think his street.com charitable trust portfolio actually has performed much worse than if you just would have held everything.