Housing or Inflation?

The Federal Reserve’s preoccupation with inflation in the face of a housing depression and massive problems in the banks has Cramer feeling like it’s 2007 all over again.

We all remember what happened. As everything connected to housing and mortgages and the financial-services industry dropped precipitously last year, resulting in almost $500 billion in losses, Fed Chairman Ben Bernanke and gang towed the “our biggest concern is inflation” line. That is, until things got so bad they had no choice but to act.

Well, now it seems Uncle Ben is back to thinking everything’s rosy in the economy – “The risk that the economy has entered a substantial downturn appears to have diminished over the last month or so,” he said yesterday – proving yet again he knows nothing.

The inflation we’re struggling with is energy based, Cramer said. It has nothing to do with wage costs or housing. So just getting rid of the ethanol mandate alone would do more to fight inflation right now than raising interest rates ever could. And higher rates have the potential to do a tremendous amount of damage.

An interest-rate hike would hurt the banks – Lehman Brothers , Washington Mutual, UBS, even JPMorgan Chase – homeowners and American businesses. The Fed would be sparking recession to prevent inflation, all under the assumption that our housing woes have passed.

“They want to be tough on oil-based inflation, which won’t work,” Cramer said of the Federal Reserve, “and bet the housing depression is over. That’s a bad bet. These problems have to be tackled sequentially, or they won’t be tackled at all.”

The U.S. economy – and housing, in particular – is not stable enough yet for the Federal Reserve to be turning its attention elsewhere. Theoretically, Bernanke could try to battle inflation. But it would come at too high a cost.

“Speaking as someone who doesn’t want to see the economy devastated with millions of people losing their homes and million more losing their jobs,” Cramer said, “I’d prefer if they’d cure housing first.”

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