Despite a stock picking accuracy that is no better than flipping a coin, Jim Cramer’s Mad Money show on CNBC has many fans. Last Friday Cramer made headlines with his screaming rant that the Fed needs to immediately cut interest rates.
My first post on this blog was about Jim Cramer. Because his demagoguery and ideas threaten the economic well-being of most Americans, it is time to revisit them.
Cramer poses as a friend of little investors. He promises over and over that he just wants to make them money. Cramer is hardly their friend; instead he is a shill for Wall Street’s vested interests.
Cramer is an advocate of cheap money and low interest rates. Cheap money results in economic distortions, inflation, and ultimately recession or depression. For example, after the stock bubble burst in 2000, Alan Greenspan’s Fed helped to create the housing bubble by cutting interest rates multiple times. In response to soaring housing prices, families took out record numbers of exotic mortgages. Many will not be able to pay back those mortgages and they will lose their homes.
For a few years, the cheap money that Cramer advocates forced interest rates for savings to essentially zero. Markets respond to incentives. Americans responded to the incentives provided by the Fed by going on a spending spree and reducing their personal savings rate to negative territory for the first time since the depression of the 30s. As late as the 1980s, the savings rate was over 10%. It is only savings that can provide the capital investment that is needed for a growing economy.
If cheap money does not benefit little investors, what does? First and foremost, little investors benefit by a sustainable and growing economy. They benefit by interest rates that rewards savings. They benefit by low taxes. They benefit by a sound currency and low inflation rate. They benefit by housing prices that they can afford.
What doesn’t benefit little investors? Little investors do not benefit by a housing bubble that pushes prices beyond what they can afford. They do not benefit by a crumbling dollar that will eventually result in higher prices. They do not benefit by economic distortions that result in excessive salaries paid to hedge fund managers and other Wall Street insiders. They do not benefit by excessive Fed credit expansion that inevitably results in recessions or even depressions.
Why does a Fed credit expansion result in recessions or even depressions? When the Fed through its policies drives down interest rates below rates which would occur on the free market, people make purchases and investments that they would not otherwise make. Housing is the most visible distorted market; but the distortions of cheap credit reverberate throughout the capital markets in often unseen ways.
To many, like Cramer, cheap credit seems like “something for nothing.” It isn’t; the price is just paid later. It goes without saying that if Cramer’s mistaken ideas didn’t reflect the views of many, he would not be on the air. Sadly, when the cost of cheap credit comes due, many will incorrectly blame free-markets rather than the unsound policies that they advocated.
The Jim Cramers of the world want a fixed casino. When results of their poor choices come home to roost, they want to be bailed out; first by cheap money and then, if necessary, by outright cash infusions from the Fed.
Free-markets don’t operate well when the game is rigged. Businesses need to be able to succeed or fail based not their ability to serve the consumer and not upon their ability to have the taxpayer bail them out. Wall Street should be no exception. Don’t let Jim Cramer convince you that his interest is your interest. It isn’t.
My conclusion to my blog post that I wrote in March still stands:
Pundits who speaks in 30 second sound bites, like Cramer, usually understand very little. Their believers want a quick fix. “Why doesn’t someone do something about it” is their motto.
It is principle of life that a reactive fix that comes from a lack of understanding will almost always make the problem worse.