Let the Process Run Its Painful Course

Nobody roots for failures. But we all know we need them. Is there any doubt that the nation has too many auto companies? Wouldn't everyone be better off with Chrysler closing and the gunslinging private-equity folks at Cerberus eating the loss? Wouldn't it be better if we had fewer homebuilders like the zombie Beazer (BZH) that just reported? We need inventories to decline for housing, but this industry wants bailouts so it can pump out more homes. We need just the opposite. Merge and close.

But the most glaring bailout I have seen is the emergency Pennsylvania funding for Boscov's, a poorly run retailer that overexpanded and deserves to be let go so outfits like Macy's (M) can stay alive and prosper. We have way too many retailers and way too many stores. To bail out the ne'er-do-wells is ridiculous.

We seem to have lost our sense of what's going to help end the sour part of the business cycle: mergers and deaths of enterprises not worth preserving that have overstepped their leverage bounds and made silly expansions to points where they shouldn't go. We need to make sure that there is less capacity out there, and the way to do that is to let bad businesses like Chrysler or Beazer go. Sheila Bair, rapidly becoming the shining star of this tawdry era, is making the right move terminating credit to marginal homebuilders when she ceases the banks that provided financing to them, as anyone who looks at the now failed Downey Savings can tell.

I know this works. When the permits drop and the prices drop, you get sales, admittedly from many foreclosures because there is no new inventory.

There are tons of stories about how people can't get mortgages. Some of that is job-related. Some of that is Fannie Mae (FNM) troubles and rates still too high vs. Treasuries, an embarrassment that can be cured by buying agency paper. But most of it is a belief by the banks that as soon as they make loans on homes, the homes decline in value. That's the issue that has to be addressed, and the best way to do it is to not reward homebuilders, but to make them merge or die. I like the tax credit idea for buying homes, but frankly I would limit it to anything but new homes.

So, we want this painful cycle to end? Let the cycle run its course. Without that, we're in this stew for much longer than we should be.

At the time of publication, Cramer had no positions in the stocks mentioned.

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Know what you own: Cramer mentions homebuilders. Other companies in the industry include Toll Brothers (TOL), KB Home (KBH), Centex (CTX) and Meritage (MTH).

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