reality-based educator

So screamed Jim Cramer yesterday on CNBC, speaking about conditions in the fixed income markets. With a worldwide credit crunch hurting both consumers and corporations, Cramer is calling for Fed chair Ben Bernanke to lower the Fed Funds rate when the Federal Reserve Board meets next Tuesday and bail out both the big investment banks and overleveraged homeowners alike. Cramer's rant came after a Bear Sterns conference call yesterday afternoon in which

Bear Stearns said it is weathering the worst storm in financial markets in more than 20 years after a major rating company warned mortgage credit problems could hurt the investment bank's profits.

Bear Stearns' chief financial officer said the shockwaves hitting lending markets, triggered by rising mortgage losses, were as bad as crises such as the Internet bubble bursting in 2001 or the 1998 collapse of hedge fund Long-Term Capital Management.

"These times are pretty significant in the fixed-income market," CFO Sam Molinaro said on a conference call with analysts. "It's as been as bad as I've seen it in 22 years. The fixed-income market environment we've seen in the last eight weeks has been pretty extreme."

Here's the Cramer video - watch it, it's as close to a meltdown as you'll see on "serious" TV.




Calculated Risk thinks Cramer is wrong - lowering interest rates now might help bail out a few homeowners who would be able to refinance their readjusting ARMs at lower rates, but the real credit crunch is coming from tightening lending standards for both corporate credit and mortgages after several years of no underwriting standards whatsoever.

Big Picture also thinks Cramer is off base and says it is not the Fed's job to bail out investment banks that have made bad bets on loans.

I also wonder if if we really want the Fed to lower interest rates now to bail out people/institutions who took bad loans and/or backed them. According to Melissa Cohn, chief executive of Manhattan Mortgage, a New York mortgage broker, tightening standards has brought about this:

"Banks want to see higher credit scores and more money in the bank and larger downpayments."

I dunno, call me traditional, call me conservative, call me whatever, but I see no problem with banks tightening standards so that people have to actually qualify for loans. The years when there were no underwriting standards whatsoever and anybody with a pulse could get a loan they couldn't really afford brought us the Housing Bubble, the current subprime mess, and the spreading foreclosure contagion. While I feel sorry for the people naive enough or ignorant enough to have taken out ARMs to buy houses they could not afford who now face foreclosure and financial ruin, I don't think bail outs by the financial sector, the Federal Reserve, or the federal government will help the country to learn the lesson that needs to be learned from all of this -

THE AMERICAN ECONOMY SHOULD NOT BE PROPPED UP ON BAD FUCKING DEBT!!!!

At one time, the United States of America was the largest lender nation in the world. We are now the largest debtor nation in the world. Individual credit card debt is 100% of GDP. Total credit market debt is 350% of GDP. The personal savings rate for Americans is a net negative. We have run the economy in the last few years by borrowing money from overseas so that we can buy and sell overinflated real estate from and to each other and tap home equity from our overinflated homes so that we can buy consumer goods we don't really need and can't really afford. At the corporate level, companies keep buying each other up at frantic rates, taking on enormous amounts of debt in order to get these same deals done that just a few years ago would have been laughed away as "crazy." And we call this economy built on paper and bad debt "strong" and say it is "getting stronger"

Enough with the bullshit. Lowering interest rates here in the U.S. while the rest of the world is raising interest rates, while oil nears $80 a barrel, while food prices have skyrocketed, and while the Fed is printing money faster than the speed of light is foolish and will only reinforce bad behavior and delay the inevitable crash.

Market conservatives love to say that markets work out irregularities and problems best. Right now the market is working out the irregularities and problems in the fixed income market.

Let the market do its job. After all, this "armageddon" as Cramer termed it yesterday didn't just happen - it was created by Uncle Alan Greenspan after the Tech Bubble burst. That is Greenspan's legacy. Let Bernanke's legacy be to add sanity and discipline back into the American economy.

I doubt Bernanke has the courage or the desire to do so, but we'll see soon enough.