Game Plan: Why We Absolutely Need a Rate Cut

It’s all about the rate cut next week.

The Federal Reserve Tuesday afternoon will announce that they either know something or nothing when they decide to either cut interest rates or not. For the sake of the markets, let’s hope they know something.

Cramer said he wanted a full 1% cut, 50 basis points at the minimum, so banks will get the leeway they need to get back on their feet. Low interest rates mean that banks can pay their depositors less while earning more on the loans that they’re issued. This is what’s called net interest margin, and the bigger the gap the more money banks make. And Cramer thinks that right now banks need as much capital as they can get.

But of course, this is Ben Bernanke’s Federal Reserve and not Alan Greenspans. And we all remember the “inflation is a concern” statements we’ve gotten from Uncle Ben, even when the market was collapsing around him. If that happens again, Cramer said, then bear raiders are going to crush the already-ailing Lehman Brothers, Washington Mutual and AIG. It’s not like the SEC is concerned about the uptick rule or naked short-selling, so raiders can hammer down stocks with impunity.

Another reason the banks are struggling so much: When Treasury Secretary Henry Paulson wiped out Fannie Mae and Freddie Mac’s common stock earlier this week, he also killed the preferred stocks. Banks use these preferreds to raise money. But now there’s no buyer confidence in them as names like Lehman and others struggling to keep the doors open. So there’s no way for these banks to generate the cash they need.

So without a much-needed rate cut, Cramer said, the major financial institutions will be hurt even more and the bear raids will commence.

There is hope, though. If Lehman, AIG and WaMu go under, at least then the market can move on. And the other banks still standing might be too big to fail or capable of getting government loans. But the amount of puts being bought on Citigroup by short sellers has Cramer thinking that more bear raids are ahead.

Here’s your Game Plan:

If the Fed cuts, Cramer’s Fortress Four banks – JPMorgan Chase, Bank of America, Wells Fargo and US Bancorp – are buys.

If the damage from Hurricane Ike isn’t as bad as expected, Cramer said there’s a good chance the oil drops below $90 a barrel next week. That means UPS, Disney , Kimberly-Clark and other names levered to gas prices could do well. If Ford and General Motors get a government bailout, then they should, too.

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