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 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 5-Aug-07
CNBC's Jim Cramer becomes hysterical, blaming Ben Bernanke

Web Log - August, 2007

CNBC's Jim Cramer becomes hysterical, blaming Ben Bernanke

In an interview that followed Friday's market meltdown, Cramer started screaming hysterically, at one point appearing to cry. This interview is gaining quite a bit of attention around the internet.

CNBC's Jim Cramer screams at the lovely anchor Erin Burnett as she tries to interview him. <font face=Arial size=-2>(Source: CNBC)</font>
CNBC's Jim Cramer screams at the lovely anchor Erin Burnett as she tries to interview him. (Source: CNBC)

Most people think he's going crazy, but I actually sympathize with him. I've written about how this whole thing is affecting me, and how much I'm dreading what's coming, while everyone else is oblivious to it. So even though it's possible that Cramer was acting, my feeling was that he was being honest.

Cramer says that he's spoken to the heads of numerous organizations and gotten a picture of total desperation throughout the country, as millions of people are going to lose their homes. The purpose of his tirade is to beg Fed Chairman Ben Bernanke to lower interest rates, to solve the problem. Of course this is completely wrong, since it won't have any effect whatsoever on the problem, but I'll discuss this after you've had a chance to view the video:

Here's a transcript of the last few minutes of the interview:

"Lovely Erin Burnett: It's not Ben Bernanke and the rate that matters.

Angry Jim Cramer: It's the rate. It's entirely the rate. We're going to spend billions in Iraq to build homes. We have thousands of people losing their homes right now. 14 million people took a mortgage in the last three years. 7 million of them took teaser rates or took piggy-back rates. They will lose their homes. This is crazy.

[[At this point, he's screaming at the top of his lungs.]]

I'm sorry to be so upset about it, but you have to see what they're saying to me, off the record, before I come in here, every night and every day. And what I hear from these blowhard managers who act like ... Call someone, for heaven's sake. Go call someone.

I worked at fixed income. This is not the time to be complacent.

Sometimes I wish I didn't know anybody, so I could just sit here and say, 'You know what? Just go buy some Washington Mutual. Take that yield.' Unfortunately, I know too many people, and I'm too darn old

Erin: You are 62.

Cramer: I've been around for too long. I mean, look, I gotta tell you ... He has got to listen ...

[[At this point, he's practically in tears.]]

He's gotta call someone. Bernanke's gotta call someone. No, they're not calling anybody. And Bill Poole? Bill Poole? There was a President named Hoover, and no one thinks much of him now, the Great Engineer.

I'll leave here, and I'll get another ten calls from the trading desk, saying Cramer, would you please speak up?"

There's a reference to Bill Poole for this reason: Poole is President of the Federal Reserve Bank of St. Louis, and is a colleague of Ben Bernanke.

In recent speeches, Poole has said two things that distress Cramer: First, he said that inflation is "moderating just a bit," and indicated that there's no need to lower interest rates just yet; and second, he said that he doesn't expect losses from defaults on subprime mortgages to spread beyond the real estate industry. "The damage, I think, is going to remain primarily in the real estate sector. We do not have a bank involvement and therefore bank lending for the normal sort of economic projects is alive and well."

This, of course, has already been shown to be disastrously wrong, which is why Cramer is contemptuous of him.

Cramer is making the same point that I have: That a major economic crisis is growing, and almost everyone is oblivious to it, including the Fed governors. However, we differ on what can be done about it.

From Cramer's point of the view, the solution is simple: The Fed can lower interest rates 1%. That will reduce mortgage interest rates, and will cause the housing bubble to start growing again.

From the point of view of Generational Dynamics, nothing could be further from the truth. The economic crisis is coming about because investors and everyone else are turning highly risk-averse, after two decades of increasing willingness to take huge risks.

The coming financial panic and crash is caused by huge generational changes that are taking place. The original 1990s stock market bubble was caused by a new young generation with no fear of any financial crisis. Now that they've seen what can happen, especially in the case of Bear Stearns, then they're close to panicking, and that's what will trigger the crash. Nothing can be done to stop this, certainly not a small change in the interest rate.

Earlier this week, Jim Cramer had another controversial interview, in which he said that If your home is worth significantly less than the amount of your mortgage loan, then you have nothing to lose by just walking away and defaulting on your mortgage.

A web site reader has asked me the following question:

"You mentioned that in essence there is no effective consequence to a person simply walking away from their home, i.e., defaulting on their mortgage (which was taken on the premise that the market would keep going up, etc.). Is that in fact legal consequences?"

Now, I'm not a lawyer, and I'm not giving any legal advice. I'm simply telling you what I believe to be the case, and if any actual lawyer reads this and believes that I'm wrong, he should write to me and let me know.

What I believe to be the case is this: A mortgage loan is a secured loan that permits the bank (or lender) to foreclose and take back the home used as security for the loan. The bank can then sell or auction off the home for whatever it can get, and since the former homeowner has no control over that sale, he's not responsible if the bank gets less money than expected. Therefore (and as specified by consumer protection laws), the former homeowner is not required to repay the amount that the bank lost. Now there may be exceptions to this; perhaps you might have to pay a fee; or perhaps the bank can sue you if it can prove that you defrauded them, or that you purposely damaged the house. But as a general rule, you can "walk away" and not suffer major legal consequences, as far as I know.

That doesn't mean there are no consequences. One is that you'll lose your home. Another is that the foreclosure will be on your credit record for many years, and you may have difficulty obtaining credit or another home mortgage.

If you, Dear Reader, are facing this situation, then you should consider other options before "walking away." Since it's extremely expensive for the bank if you walk away, they may be willing to accept terms highly favorable to you. This is increasingly true as mortgage foreclosures have been surging, and banks are increasingly stuck with owning large inventories of foreclosed homes.

So, for example, they may be willing to substantially reduce the monthly payments by renegotiating the terms of the loan, perhaps even cutting them in half for a few years. They may consider that option preferable to having you walk away.

Another possibility is to allow you to sell the home as a "short sale." Normally, if you sell your home, then you have to repay the mortgage loan in full. But if the value of your home has fallen, then you will owe the bank a lot of money. If you think you can sell your home, you might get the bank to agree to a "short sale," which means that you'll sell it for whatever you can get for it, and the bank won't require you to make up the difference in the mortgage loan.

The advantage to you of negotiating a short sale instead of walking away is that you can demand that the short sale not go on your credit record. This might make a big difference to you in the future.

If you'd like to consider these options, then there are two things you can do. First, google the words "mortgage foreclosure," and start reading. There's plenty of information online.

Second, consult a lawyer before you do anything drastic. You should ask the lawyer for a free initial consultation, so that you can decide what to do. If you're going to go into a tough negotiation for reduced payments or a short sale, you'd be wise to have an expert doing the negotiating for you. (5-Aug-07) Permanent Link
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