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.

 

 

 

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64Comments
Jan 22, 2013 12:14PM
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The good old USA is getting weaker by the day.  We're weaker because of our huge debt.  We are weaker because of our ever-growing entitlement mentality.  We are weaker because we are quickly losing the knowledge and ability to make so many of the products we rely on everyday.  We are weaker because we need the rest of the world more than they need us.  We are weaker because we refuse to be energy independent.  And we are weaker because we are now apologetic instead of proud.
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This was in 2007. Does anyone think the people in power have their head on their shoulders now? The people in Washington don't care if something fails or not, it's ALWAYS not their fault.

So it's up to me to change Washington?

No it's not. All I can do is vote for my guys. Others like Bernanke and Geithner. No citizen has a say in.

All tax paying Americans are screwed. It's just the degree of screwing you will receive that makes it different for each of us.

Jan 22, 2013 10:40AM
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just like the rants about USA losing all their manufacturing base ~ no one cares until someone says it's now up to you to turn out the lights.
Jan 22, 2013 12:47PM
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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 11:23AM
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And these are the guys, the smartest guys in the room, the central planners, that we are now relying on to effectively monitor all the complexities of the economy and make adjustments quickly and deftly to avoid a wealth destroying spike inflation.
Jan 22, 2013 11:14AM
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it is really sad that the fed responded so slowly compounding the disaster overseen by bernanke's predecessor. we ended up with bigger banks and an even greater possibility of even more problems. the smaller banks now have little say and less impact. small business cannot grow as effectively as it should with the banking system as it now exists.
Jan 22, 2013 12:54PM
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Or you could just assume, as I do, that they did see it coming but did nothing. 
Jan 22, 2013 11:29AM
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Jobs have been disappearing for the better share of 25 years,,Probably depends where you live..?

 

In the Midwest there were parts suppliers for the Auto Industry, a lot of Plastic injection molding and other small parts supplliers..Some may have consolidated? Others just closed their doors for the last 10-15 years.

Appliance makers, TV, VCR,DVD and other type homemaker type stuff has walked away, at a fervid pace....Some to Mexico, then to the Pacific Rim...Washers,dryers,Frigs & Freezers (small) along with Micro Waves and other stuff in the kicthen...Just plain gone, and probably never coming back..??

 

Jan 22, 2013 12:51PM
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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 1:59PM
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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.
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Gee people the housing crisis was at worst a $50 billion crisis not enough to stop the economies around the world.

 

The Federal Reserves are hiding the fact that they had not seen the fact that Clinton era T-bills and Bush Era T-bills were all coming due about $8 trillion of them in the same two month span. And they did not realize that over $4 trillion of them were not going to roll over.

 

That is what the crisis was all about trying to come up with the money to pay off the T-bills that were not rolling over.

 

Today the crisis is not solved and is even worse $12 trillion dollars come due every two months now and if a large percentage of those who hold them do not roll them over there will be a crisis that will not be stoppable this time.

 

Forget the housing crisis it was just a cover story to the real and present danager of Federal T-bills. Soon S.S. will have to cash out it's $4 trillion of T-bills to pay current retired people.

 

Yep the real crisis is about ready to hit the fan folks and what we saw in 2008 was nothing.

 

Why do you think the rest of the world has begun trading in yuan???

Jan 22, 2013 1:09PM
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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....
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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 12:05PM
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Funny, I am reading a book right now, which is about advertising from the 1900's to the 1980's (roughly) and am struck by the fact that we now manufacture next to NOTHING!  All of those mills (most of which are empty) now house rental space, storage, etc.  Once upon a time (when they were built), we were a great country which fabricated our own products, grew our own food, took pride in our country...  not so anymore...  all those jobs, gone...  We are now a country of service industry jobs, buying our goods from China and others... Shameful!  All so the rich can increase their profits...  Wonderful

 

Jan 22, 2013 2:28PM
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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 3:57PM
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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 5:01PM
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 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 5:04PM
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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 12:37PM
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"They know nothing," my now famous rant

 

You're a legend in your own mind BoBo.

Jan 22, 2013 12:41PM
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"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.

 

 

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