The Fed really knew nothing in 2007

How did the central bank get the housing crisis so wrong? Maybe because it doesn't speak to folks in the trenches.

By Jim Cramer Jan 22, 2013 10:12AM

thestreet logoIn August 2007, when I went on CNBC's "Street Signs" and screamed, "They know nothing," my now famous rant (watch on YouTube) about how the Federal Reserve was way behind the curve on the coming housing crisis, I had one goal in mind: to get the Fed to cut interest rates and to cut them fast.

 

I didn't know at the time, but I sure succeeded in getting the Fed's attention, as we know from the release of the 2007 transcripts last week. Except it wasn't the kind of attention I sought. I became a laugh line at the subsequent meeting as someone who was strident and wrong about the shape of the markets to come.


I certainly didn't intend to go ballistic when I started. If you watch the whole "Stop Trading" episode, I was actually fairly subdued, explaining why the market didn't act so well. I only got going with how Ben Bernanke knew nothing and how Fed voting member William Poole was a disgrace because he had been the leader of the let-the-market-handle-it contingent, because my friend Erin Burnett inadvertently pushed the wrong button by asking what they should do and why they weren't doing it.

 

We all know now that if the Fed had cut rates dramatically at the time, as I suggested, we might not have had so many financial institutions go under or as many as $7 trillion in mortgages that went bad or needed to be modified.

 

Federal Reserve Building Hisham Ibrahim CorbisBut I don't write this to show how right I was or how wrong they were, although the cruel irony of their laughing at my performance is pretty galling given subsequent events.

 

I write because I am confused to this day about how my contacts could have been so much better than theirs. How could the Fed, with all of its resources and nationwide staffers and fabulous data, not get it better than this one commentator? Doesn't it say that something is very wrong about this institution if that can happen? How could I, with my small band of colleagues, long-time contacts and long-standing relationships, get it so much more right than they did?

I have some theories. First, it is possible that people are reluctant to tell important Federal Reserve people the truth for fear that it could haunt them in the form of regulatory action. Second, there is a natural tendency among key people in the financial industry to not raise any red flags for fear that they can shake confidence, which even in the best of times can be a real issue. Finally, I think they speak to the wrong people. It's the people in the trenches who know the most and the people I talk to are very much the higher-level people who man those trenches. Maybe the big shots, like Jeremy Irons in "Margin Call," -- still the best movie ever about Wall Street -- simply didn't know the score.

 

After I went out on the limb as I did, even as I wanted it to be a one-and-done affair -- you don't rant every day or you are just a cartoon character -- I was amazed that my comments were met with such derision rather than an attempt to deal with them head on. The Fed certainly never reached out to me, even the lowest levels. You would think they would be more curious, if only to find more belly laughs to live up their meetings. In fact, before these minutes, it was only after Treasury Secretary Tim Geithner, at CNBC's Delivering Alpha conference, acknowledged that I got it right and the Fed got it wrong, that I learned anyone official had even heard what I had to say.

 

But the bottom line is pretty clear. All I really did was manage to bring a little levity to a clueless set of people who should have known a lot better than some blogging TV personality. Just like nobody high level in the corrupt portion of the mortgage industry was ever pursued by the authorities, no one in that room ever had to pay any price for getting it so wrong.

 

Alas, after the release of these transcripts, my legacy and my recompense will have to be simple: he who laughs last, laughs best.

 

Cramer's face

 

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust.

 

 

 

More from TheStreet.com

64Comments
Jan 22, 2013 7:31PM
avatar
I kinda thought some of the Banks have been paying back "bailout monies", so as to go on and persue "business as usual "...They are not big on having the Gov. going over their books closely.
avatar

Kramers comment= Just like nobody high level in the corrupt portion of the mortgage industry was ever pursued by the authorities, no one in that room ever had to pay any price for getting it so wrong.

 

My comment=Little wonder, they control the US Government.

Jan 22, 2013 5:36PM
avatar

The results of the first (very limited and compromised) audit in the Federal Reserves nearly 100 year history were posted on Senator Sanders webpage in may.What was revealed in the audit was startling: $16,000,000,000,000.00 (TRILLION) had been secretly given out to US banks and corporations and foreign banks. 

The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest. Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailoutThe Federal Reserve bailed out foreign banks while Americans were struggling to find jobs. And congress does or says nothing?

Jan 22, 2013 5:04PM
avatar
So now instead of making it easier to regulate by seperating the merchant banks and investment banks, they just write more legislation that they cannot enforce.
Jan 22, 2013 5:01PM
avatar
 They knew the government would bail out the banks, they are all in bed together at the expense of the tax payer.
--- true.  How come no one is upset with the people that made all the money doing these real estate transactions, rolling closing costs into the mortgage,  builders that created a lot of sales based on creative mortgage programs and no docs, inspectors, agents, appraisers, etc.. It was the banks that created the products, not the legislation. They all are guilty. There were more millionaires made between 2000 and 20007 then ever before., There were many second homes, flippers, and investments to buy rentals. All over priced. It was not just poor people that were participating.
Jan 22, 2013 4:54PM
avatar
We are weaker because we refuse to be energy independent. --- We export more oil than we have ever exported. PennyMac the old country wide guys are doing fine.
Jan 22, 2013 3:57PM
avatar
The Fed knew what was going on. They were just playing possum. They knew and didn't care, it's what they have been doing since 1913. Making money, legal theft and bank earnings to the elite and the corporations is all they ever care about. They knew the government would bail out the banks, they are all in bed together at the expense of the tax payer.
Jan 22, 2013 2:28PM
avatar
Watch "Inside Job".  If you haven't seen this documentary, you should.  I got a copy from the library.  You need to understand how intertwined and inbred this corrupt system is, and how it influences and even controls the government.  I am no radical... you just need to see it if you haven't.  Take my word for it, just find a copy and watch it.  Why nothing was done will become much more clear, as well as why they took the actions that they did once the crisis was upon us.  You will also understand why none of these jerks are in jail, and you will see through personal testimony just what sickening jerks (weasels) that they really are.  Don't forget:  watch "Inside Job".  I have no connection with the program.
Jan 22, 2013 1:59PM
avatar
Most of the people in power in washington dc  have no damn clue what is going on in the real world. They are just concerned with themselves and could care less about the rest of us. Just look at the last 5 years if you don't believe it.
Jan 22, 2013 1:09PM
avatar
The Federal reserve needs to be audited by the CBO... And their out of control QE1-2-3 at 40 billion a month needs to stop.... Oh ya Ben needs to be fired. ....Congress needs to fix the National debt by increasing revenue and cuts to defense and tweak soc sec . And put a means test to collect medicare and soc sec . Cut all corporate welfare and tax loopholes for companies ! That will balance the budget AMERICA .. Any idiot who says different are true idiots ! You cannot just cut your way out... BTW America the Bush tax cuts were to create jobs? After two unpaid for wars and a decade plus ? I am still looking for all them jobs... LMFAO... Tax cuts and the rich and wall street do NOT CREATE jobs !! Consumers DO... in a 2/3rds consumer economy that the USA HAS ... Get that through your heads America... After a decade plus understand now...BTW its way before Obama people so to all the republicans and MITT WITTs out there , ITS BOTH idiots.. Anything less is a lie....
Jan 22, 2013 1:04PM
avatar
For those struggling to find a meaning or cause to the loss of prominence of our country I will offer the word usurp.  Our personal liberty to determine what and how we conduct ourselves as individuals has been usurped by a political process hell bent on acquiring what it wants at the expense of our individual rights.  With a complicit media and an illiterate populace we are now being "governed".  Individual rights or self determination is very rapidly becoming replaced by socialism and conformity. Yes folks the state now dictates to the individual what he or she can acquire or "keep", where and how your children are educated,  and when and how you will die.  So by voting either red or blue it all means the same. You Lose your personal dignity, which in my opinion was the greatest asset that we Americans had over the rest of the world and why we could accomplish so much good throughout the world.  And if you took the time to watch yesterday  personal rights were never even remotely mentioned.  We this We that fails the individual and usurping that individuals ability to determine his own destiny means he is a non entity in the eyes of the state. The inability to make individual choices fits in very well with free trade and outsourcing.  The new Corporate mentality is you will buy what we want you to buy and we will allow you to talk to us when we allow you to talk to us.  If you think not try and raise a customer service issue with this new mentality. The state and corporatism are now one and the same.  Competition is now governed and controlled by the Internationals and their ability to suppress any new product development it wishes.
Jan 22, 2013 1:02PM
avatar

I understand Steve...I wasn't really picking on you...And I fully unerstand why you might have left the Philly area...I've only passed through there...Should do it again someday to see some History, but probably never will ??

I agree with you and probably most displays at trade shows are not U.S. manufactured...?? Sad.

 

One show or shows I always liked were beverage and spirits trade shows, friends in the biz..

You can probably understand, I was never driving.

And always wish I had a chance to go to Electronics thing in Vegas.

A lot of space taken up now at some of these Venues now, are Gun and/or Antique/Collectibiles types.

Along with the Auto stuff.. 

Jan 22, 2013 12:54PM
avatar
Or you could just assume, as I do, that they did see it coming but did nothing. 
Jan 22, 2013 12:51PM
avatar
I hope they put some kind of destruct mechanism in the F-16's they just gave to Egypt just in case.
Jan 22, 2013 12:47PM
avatar
The FED needs a house cleaning and Bernanke needs to be gone. We have too many people who are academics running things in Washington who have NEVER lived in the real world. Also the FED is owned by the large banking families so the agenda of the FED is not directed toward the real people in this country.
Jan 22, 2013 12:47PM
avatar
V_L and Brutus..Good points and perceptions.....Well taken.
Jan 22, 2013 12:41PM
avatar

"In August 2007, when I went on CNBC's "Street Signs" and screamed, "They know nothing," my now famous rant (watch on ) about how the Federal Reserve was way behind the curve on the coming housing crisis, I had one goal in mind: to get the Fed to cut interest rates and to cut them fast."

 

You have to imagine who was above the glass ceiling then, and how influential they were. In 2007, the best move to counter the Dubya vehicle from running us into the ditch was-- to RAISE the bank rate and close the borrowing window, at least temporarily. Wiping out too big banks was the target. There would be prosperity today, no import platforms left and a whole lot of smaller enterprises guiding us to stability. It didn't happen then for the same reason it isn't happening now-- alumni and social network influence. Never in a million years did I think we would be stupid enough to let banks and bum-borrowers off the hook. A 5-5-5 program (5 years term and amortization at 5% APR) on a segment of owed debt, repeated until fully settled, would have kept all things afloat while Kool Aid addicts suredly learned their lesson about keeping up with the Joneses, buying lipsticked pigs and thinking that a college degree in business gave anyone 1% ability IN business. To make matters worse... we had concurrent doofus Congress, first as Pelosi tried to rig it so girls took over America (84% male unemployment in 2008) and then the Party of NO (I pledge allegience to the GOP). We cannot fix banks, the Federal Reserve or Wall Street without closing them, reconciling and opening with firm regulatory and supervisory control that isn't there because they have an Ivy League, Big Ten or Wealthmonger degree or connection. If you don't have tread marks from being where the rubber meets the road and got run over a few times before learning survival wisdom... we don't want you anywhere near money. Look up Henry VIII of England, Jim. Bad banks, dismal economy, wildly rampant socio-psychopathic corruption. He fixed the borrowing rate at 12% regardless of who you were or what you wanted credit to do. It fixed English banking, economics and enterprise spurring a 264-year dynamic society. No one ever said it was easy, but most GREAT solutions are simple. We ought to try it.

 

 

Jan 22, 2013 12:37PM
avatar

"They know nothing," my now famous rant

 

You're a legend in your own mind BoBo.

Jan 22, 2013 12:32PM
avatar

Steve....I go to few trade shows anymore....Time thing, lack of Interest.

Not to be a Smart azz, but New York and the other Coast have very little on us in the Midwest...

Really, many of us didn't just fall off the Pumpkin Wagon or Turnip Truck...?

When we (wife) owned a small commercial company we attended a few trade shows, the bigger ones in McCormack place in Chicago...

The Corporation I worked for put on exhibits in several cities...Usually pops. of over a 250,000.

I was involved with some of that, over 5-6 years. Maybe longer?

Have been to Large Auto sales and shows, like the one in Scottsdale, Auburn,Ind,. Detroit, & KC,Mo.

Many,many others...Friends and Family in the business. I was involved some.

On a local level I was involved in putting on or starting different Festivals, because of being a member of different organizations.

The last 10 years until I retired, I was a member of Committees and Councils for my Corporation..

Our part of the International Company was a 5 State region of the Midwest...

 

New York and Jersey is just a more populace area, with Headquarters of many Corps and a Financial Center, along with everything that goes along with it....My friends there were sometimes envious of the way we lived our lives...And some wanted to leave that "rat race."

California and the Coast needs no explaining to you...But I've only been to SF, that was enough.

Seattle and Portland are a little calmer...

I've been very fortunate, to be able to do what I have done... 

Jan 22, 2013 12:28PM
avatar

"I have a dream and it does not include Republicans".

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

129
129 rated 1
281
281 rated 2
444
444 rated 3
732
732 rated 4
629
629 rated 5
623
623 rated 6
610
610 rated 7
440
440 rated 8
303
303 rated 9
126
126 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
BBBYBED BATH & BEYOND INC10
TWXTIME WARNER Inc10
COPCONOCOPHILLIPS9
HDHOME DEPOT Inc9
VZVERIZON COMMUNICATIONS9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.