Jim Cramer challenges ‘laissez faire’ government

Jim Cramer visited my school a couple of days ago and delivered this passionate speech (45 Minutes, click on the link to listen to the mp3):

Jim Cramer challenges ‘laissez faire’ government

Although I always had a feeling I’d like the guy in person, I never quite realized how much we had in common.

Here’s the synopsis from Bucknell University:
LEWISBURG,
Pa. — An impassioned and sometimes fiery Jim Cramer, the investing guru and host of CNBC’s “Mad Money,” said Tuesday night that government deregulation was nothing short of a “covert attempt” to eliminate the federal government’s responsibilities to its citizens.

“Do not be fooled by the sirens of laissez faire,” he told a packed audience at Bucknell University’s Weis Center for the Performing Arts in the continuing national speakers series, “The Bucknell Forum: The Citizen & Politics in America.”

“Ever since the (President) Reagan era, our nation has been regressing and repealing years and years worth of safety net and equal economic justice in the name of discrediting and dismantling the federal government’s missions to help solve our nation’s collective domestic woes,” he said. “We call it deregulation … a covert attempt to eliminate the federal government’s domestic responsibilities.”

Before embarking on his talk, titled “The Capitalist Citizen and Democracy,” Cramer warned his audience to not be misled by the persona that hosts his popular CNBC program “Mad Money.”

“This is not a ‘Mad Money’ show, nor is this the man you see at 6 and 11 on TV. This is who I really am. And I’m honored to be given a chance to say who I really am and to give you a talk that is heartfelt and is not about entertainment education or making friends and making money,” said Cramer.

Deregulation
He said that deregulation is the equivalent of saying that “private industry will do it better, that volunteers will do it better, that business if left unfettered will produce so many rich people that they will do it better than the government can.”

Even the best of the nation’s private enterprises, Cramer said, citing companies like Wells Fargo, Pepsi, United Technologies, Google, and Costco, can’t meet those demands.

“You, the next generation of corporate and government leaders, should know and understand the limits of what even the best of capitalism and the marketplace can do to promote the general welfare. As future citizen capitalists you must not embrace the unrequited love of the government of the
United States for private enterprise,” he said. “Be wise enough to see that government regulation is a necessary evil.”

‘Hands-off democracy’
He blamed both Republicans and Democrats for a “hands-off democracy” and “rough-and-tough capitalism,” but was especially critical of government institutions like the Federal Reserve under then-Chairman Alan Greenspan for failing to “curb the Internet boom before it became the dotcom bomb recession of 2001.”

He said Greenspan could have curtailed that boom by using the rules that Congress gave the Fed to curb excessive margin lending that exacerbated the Internet stock boom.

“Then the effects of the dotcom hangover were so severe that he had to lower rates substantially to reflate to get the economy going again. The result? The reckless over-built housing bust that could rival the Great Depression in taking down economies worldwide,” he said, adding that as many as 7 million homebuyers could be left destitute.

‘Nonsensical rebate’
Cramer took issue with the proposed $150 billion economic-stimulus plan, calling it a “nonsensical rebate, the functional equivalent of a fancy iPod and an expensive pair of Nikes, and layer on still more debt that we can’t pay for. … What a waste, what a travesty.”

The bemused best-selling author noted the “utter inconsistency” of laissez faire.

“We want laissez faire when it comes to business — except when it comes to the insistence of a politically popular but economically and environmentally hazardous renewable fuel, ethanol,” he said.

A fuel that doesn’t work
As a result, he said we have unequivocal government support for a fuel that doesn’t work and that raises the price of food for everyone including those who can least afford it, which, in turn, forces the Federal Reserve to keep the money supply tight to rein in resulting inflation.
“So we are laissez faire when it suits us … and we are anti-laissez faire when we can help farm states crucify us on a cross of ethanol,” he said.

He railed against a tax structure that supports “tax rates for billionaires at a lower percentage level than those who make $30,000 a year. This is utterly shameless.”

Enlightened capitalists
In the end, he said, laissez faire policies are but a “fraud meant to get around the true role of a government in promoting the general welfare and enriching a select few” and called on enlightened caring capitalists to reassess the abilities of an unregulated marketplace and for the country to readdress the role of regulators “who would leave us at the hands predator capitalists.”

It is necessary, Cramer said, to get the limitations of capitalism back on the agenda for the next generation in order to fulfill the mission statement made by the Founding Fathers “to promote the general welfare for all.”

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One Reason Last Week’s Market Rally was a Bear Rally

After the Market plummeted to begin the year, it staged a magical 4.9% week to finish January. Don’t believe the magic. In the following analysis I take a look at why last week should be described as the market’s emotional attempt at a bear market rally. To get a closer look at the financial sector, I took a lead from Mish at the Global Economic Blog but took it further. Here’s the scoop:

 

At the heart of all this and most evident at the time is sub prime. However, no one can really understand how bad it is until they see the crisis in charts. To quickly recap the damage it has wrought just take a look at the following year long stock charts: Moody’s, Countrywide, Citigroup and almost every other commercial bank… and the list goes on. This has been happening for some time now so people are predicting a bottoming out around now, hence the rally last week.

 

Mish pointed out this interesting chart a few weeks ago:



 

As can be seen on the chart something is not right. Moving back in time lets look at history:

 

The sharp decline of borrowed money from Depository Institutions, aka “the US banks”, is the result of massive sub prime write downs. A quick look can show you that this todays levels are unprecedented. No crisis has tested the reserve requirements of banks to such a massive extent.

 

The next closest circle, for comparison purposes, is the recession of 1991, aka the Savings and Loans crisis. The only time in history that financials have been sold off this much was during the Savings and Loans crisis of 1991, aka financial stocks are currently valued at the cheapest level in a long time. Notice how the reserves never went negative but in fact went up during this period. On simply a reserve basis, we can see that the financial stocks are overvalued, if they are selling at 1991 levels, assuming the magnitude of the subprime crisis is much bigger.

 

 

Then we have the recessions of the 1970s. In those times we saw an even bigger run up in housing prices and a bigger decline than what we have today. Here we see that although banks became net borrowers, it never and as rapidly amassed to such huge levels of borrowing from the Fed.

 

 

Finding this interesting, I decided to take a further look at the total non-borrowed reserves of depositary institutions.

http://research.stlouisfed.org/fred2/series/BOGNONBR?rid=19



 

Surprisingly, the huge drop off of reserves happened back in December, not January. Meaning the huge drop in reserves seen here does not take into account the massive borrowing from the Fed in January. Notice how no crisis has ever depleted reserves like this since before the 1960s.

 

From their latest, non graphed records we can go to:

 

http://www.federalreserve.gov/releases/h3/Current/
Here we find that the preliminary results for Jan 30th is -$8,751 billion. To make it more clear: The American financial system as a whole has non of the reserve requirements necessary, aka they have all been lost due to subprime losses and banks are now borrowing to meet demand withdrawals. To make it clearer: The money you withdraw from your bank next time is actually borrowed from the Federal Reserve. Also, the Fed is charging banks interest on that money. If this was graphed on the above chart the value would be negative for the first time since before the 1960s. Again, the blue line would actually cross the x-axis.

 

This shows that banks need to sell more than $40 billion in assets to meet the reserve requirement without borrowing. Taking into account that they managed to raise $84 billion in cash from sovereign funds and that $72 billion of losses will be triggered in the downgrading of a bond insurer alone and the picture does not look good for the financial industry.

 

However, it is important to note that generally the market prices in recessions well before they actually happen and stock markets generally go up during recessions. For the reason explained above and many others that will soon be discussed here, I have a feeling we are far from over this sub prime mess.

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