Why the Rate Cut Matters

You may have heard experts, analysts and other Wall Street pros saying that Wednesday’s half-point rate cut was irrelevant. Well, they would be dead wrong, Cramer said during today’s Mad Money.

For starters, he thinks the only reason the market didn’t sell off after yesterday’s 889-point surge was because of the rate cut. Nevermind the fact that Ben Bernanke and company finally – finally! – have let go of their fears of inflation. Hey, Cramer’s only been waiting a for more than a year now.

But more than that, a U.S. rate cut makes it easier for Europe and China to cut rates. China recently took its rate down to 6.66%, but that’s still too high. The European Central Bank and the Bank of England could cut their rates in half, Cramer said. Such a move would help all those American companies, such as Caterpillar, whose international business is suffering right along with those overseas markets. An adrenaline boost for those countries would revive the end markets that businesses like CAT so desperately need.

Here at home, rate cuts will lower household and business debts linked to the prime rate, which is linked to the fed funds rate. A lower prime rate means people and businesses will be able to borrow money, and as a result, stay afloat.

Cramer said he applauded the idea floated on CNCB today that the government might guarantee 3 million mortgages, which is nearly half of the 7 million that were taken out by people who put too little money down. A move like that, and one to aid people with home-equity loans, could be enough to stabilize housing by mid-2009.

Another important thing the rate cut does is force cash from the sidelines back into the market. That fed funds rate also dictates how much people earn on savings account, and with that number lower now, investors will look elsewhere for a return. In fact, Cramer thinks today’s rate cut could boost his thesis on dividend-paying stocks like Verizon , BB&T, Merck, Watsco, Eaton and others. Thanks to the rate cut, those yields now pay out more than hiding in cash.

Also, the lower rate means banks have to offer less on their savings accounts and pay less to other banks from which they borrow. But at the same time, that rate cut increases the margin on the loans the make. So not only are banks now in better position to loan, there’s more incentive. And the businesses that take out these loans, to meet payroll and for other reasons, again, have a chance to survive.

We need banks to make loans again, and we need central banks overseas to cut interest rates. “Without it,” Cramer said during this afternoon’s Stop Trading! segment, the rally we saw Tuesday is “just going to go right back down.”

In the very least, we want stocks to stay up long enough for investors to raise some cash and prepare for the next sell-off.

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