Bailouts and 'Bailouts'
Just as we took stock on Friday's show of what's happened in the year since Cramer's eerily prescient "They know nothing!" rant and celebrated – without any pleasure – how right he was to be raising the alarm about the serious danger of all that mortgage-backed paper, I want to take a moment to "celebrate" (pillory) those folks on the other side of the debate who, contra Cramer, felt it was a bad idea for the Fed to cut rates a year ago.
The people who, like Slate's Daniel Gross, who wrote a column about a month after the rant heard round the world, deriding those clamoring for lower interest rates (including the host of a certain television show) by likening them to people whining that a responsible adult had taken away the punchbowl.
Remember, a year ago many people saw the idea of the Fed lowering the discount rate or the federal funds rate as a "bailout" for irresponsible banks, hedge funds and homeowners. Just last week, President Bush finally signed a housing/mortgage-relief bill that will cost billions of dollars. Congress is also allowing many of the major banks to sell their bad collateralized debt obligations to the government for 80 cents on the dollar, which, while lower than these CDOs may be worth on paper, is significantly higher than the banks could get from any other buyer. On Friday's show Jim said he thought the government would ultimately end up spending half a trillion dollars to clean up the mortgage mess. Now that's a bailout!
All of this, of course, might have been avoided if the Fed had simply done it's own "bailout," cutting rates faster and deeper, to allow people to refinance and let banks make more money off deposits, which in turn would have made it easier for them to take the pain from two-years worth of bad mortgages.
What the people who mocked Jim for his rant didn't seem to understand was that, either way, some form of what they'd consider a bailout would have to happen. Things were just too dire for the financial system to scoot through without some form of intervention. Remember that Fannie Mae and Freddie Mac had fallen to the single digits before the Treasury got its act together. And those two institutions truly are too big to fail. The Federal Reserve could've done it fast and easy a year ago (or better yet, even earlier so Jim wouldn't have ended up scaring Erin Burnett half-to-death), or at least that's what we believe, but instead we took the slow and hard road. Think about that the next time someone calls it a bailout when the Federal Reserve lowers rates. Maybe, after all, the rates just ought to be lower.
Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Richand Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.
Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.
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