In August 2007, Jim Cramer got on TV and yelled “THEY KNOW NOTHING.”
It was an earthshaking rant, arguing that Wall Street was in horrible shape, and that the Fed was asleep at the wheel.
We’ve long maintained that it was a great moment. Of course, we already knew that he was totally right about how bad the situation was about to get.
And now we know that he was right about how clueless the Fed was about how bad things were getting.
John Carney at CNBC has a great post keying off the 2007 Fed transcripts, which shows that as of August 2007, there was concern inside the Federal Reserve about the economy and the financial system, but nobody was predicting doom.
And one Fed chief even elicited laughter when talking about Cramer.
Carney found this quote from Atlanta Fed President Dennis Lockhart:
In the past few days, I have had substantive conversations with some well-positioned credit market observers, including managers of large investment portfolios, suggesting that the skittishness of financial markets is not likely to abate until later this fall. They have suggested that the choppiness in financial markets will be the rule in the near term and, very important, that the threshold for what constitutes a shock is now much lower than usual. I believe that the correct policy posture is to let the markets work through the changes in risk appetite and pricing that are under way, but the market observations of one of my more strident conversational counterparts — and that is not Jim Cramer [laughter] — are worth sharing. This party sees problems in the subprime structured debt market spreading to the CLO leveraged-loan market and, in a knock-on effect, to repo and commercial paper markets as well as to investment-grade corporate credit. This party points to nonprice rationing, commercial paper rollover risk, and general CDO contagion caused by the damaged credibility of rating agencies and contraction of collateral values. This party argues that treating the widening of credit spreads as normalization ignores substantial subsurface potential dislocations as evidenced by the collapse of American Home Mortgage Corporation. All that said, another counterpart noted a large pool of money now on the sidelines that is ready to provide financing for reasonable deals if prices fall low enough. Importantly, a large portion of this money comes from reliable long-term sources of investment, pension funds and insurance companies. Notwithstanding some descriptive rhetoric, this is not the credit crunch of the late 1980s, when the traditional financial intermediaries were strained for capital. The traditional investors are still out there with substantial liquidity, and they are just temporarily on the sidelines for understandable reasons and, barring further shocks, should return to the markets in force later this fall. The dislocations in the financial markets call for a posture of vigilant monitoring of developments but nothing more for now.
So Cramer was right. The financial crisis was going to be horrible, and they knew nothing.
Here’s the key transcript (via Carney) of what Cramer said:
I have talked to the heads of almost every one of these firms in the last 72 hours and he has NO IDEA what it’s like out there. NONE! And Bill Poole, he has NO IDEA what it’s like out there. My people have been in this game for 25 years and they’re LOSING THEIR JOBS and these firms are gonna GO OUT OF BUSINESS and it’s nuts. They’re NUTS! They know NOTHING! This is a different kinda market. And the Fed is ASLEEP. Bill Poole is a shame, he’s SHAMEFUL! He oughta GO, and READ the Accredited Home document, at least I READ the darn thing.
Here’s the famous video.