Cramer's 'Mad Money' Recap: Surviving a Free Fall

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Jim Cramer told "Mad Money" viewers Friday that he wanted to talk about "the deep-six of '06," referring to the recent market rout.

"It was a classic dive with everything in free fall. ... This wasn't just a soft patch or some weakness," he said.

So why did a market that looked so good a week ago suddenly kick us in the teeth? Because Wall Street collectively realized that the Federal Reserve could raise short-term interest rates to 6.5% in an effort to cool speculation in hot markets and keep inflation in check, said Cramer.

Back in 2000, with the Nasdaq -- "the heart of speculation" -- roaring, Cramer said, the Fed crossed the line. On May 16, 2000, the central bank began to raise short-term rates.

Cramer said that this was "the biggest and most stupid mistake imaginable," and that the effect was like launching nukes on stocks. It sent everyone for the doors. The carnage was unprecedented, he said, and people lost fortunes as we headed into a genuine bear market.

People on the Street are worried that this doomsday scenario is going to happen all over again. Maybe the speculation that the Fed is worried about is in commodities, not in the Nasdaq, but Cramer said that it doesn't matter. The central bank uses "the same blunt instrument of short rates to crush speculators wherever they may be," he said.

So, that explains why everyone is in panic mode as signs of a 2000 redux pop up everywhere. The car market is crippled by high gasoline prices, the housing market has peaked and, as rates move higher, consumers are getting nailed by the bad loans and bad mortgages. Moreover, he said, you can see that consumers are weakening in the fact that both Target(TGT Quote) and Home Depot(HD Quote) recently reported weaker sales.

It wasn't an earnings problem and it wasn't bad companies that caused the deep-six of '06, he said. We had too much supply in equities, and it got too expensive to borrow money to take them down.

Now that we're "playing chicken with the Fed," Cramer said, he believes the Fed will take rates up. And he said that the only way to avoid getting nailed is to have a balanced diversified portfolio. That way, if one sector is crushed, your other stocks can offset the poor performers.