It seem Paul Krugman is upset with Rick Santelli (and rightly so), founder of the Tea Party for continuing to rant about the wrong things. But it occurred to me that there is another rant from 2007 that no one ever paid attention to: the less-than-famous Jim Cramer meltdown (below) calling on the Fed to open the discount window and pump in the money.
Santelli is famous for spending the last 5 years ranting about how the dollar is going to be debased with the Fed pumping in money, and bailing out “loser” homeowners who were losing their houses. Of course, as Paul Krugman eloquently points out, Santelli was wrong. Yes, lots of money got pumped from the Fed – into the bank vaults of “too big to fail,” and those “loser” homeowners never saw it. So naturally, we traded a liquidity trap for a debased dollar, right? – Re-inflating a deflated economy would not have actually debased the dollar.
Rich CBOE commodity trader as Tea Party founder aside, Jim Cramer had something to say in 2007 as the Dow was tanking, and Bear Stearns was collapsing. Mind you, I’m no big fan of Cramer; I think he is ethically challenged. However, he was right, because the Fed, 18 months later would do something resembling what he demanded; open the discount window, drop interest rates, and let the money flow.
The Fed, supposedly being the lender of last resort, would of course drop interest rates, but they would not loan out money just for just a measly 1%. They would instead buy toxic assets off the banks in return for mountains of cash. It was better than a loan at the discount window; it was practically free money. And instead of banks paying an interest rate to the Fed on discounted loans to save themselves, the Fed would pay the banks interest on their excess reserves! It dis-incentivized the bank to ever release that money (up to $4 Trillion now) into the economy.
It’s been a great Tea Party for the banks! But saving wall street bankers aside from Cramer’s meltdown, he makes a greater point: 14 million people were about to lose their home. Perhaps opening the discount window at the Fed would’ve been better since it would’ve put 1% of $4 Trillion in interest squarely on the banks. It would’ve incentivized moral hazard; which is something that both the Fed and the Treasury have completely removed.
Here’s Jim Cramer’s epic meltdown: