Because we all collectively do so, the Fed is worried it has a bubble on its hands. The single most important worldwide, real-life case study here is the destruction of the Japanese economy at the hands of its stock market in the 1990s. That market, like the Nasdaq, went too high and the nation margined to the hilt to play.

(This is a really, really important point. The speculative bubble lasted for so long in Japan that eventually you were a fool if you didn't margin up and buy. Those of us who traded in that era can remember clearly that brokers from Japanese firms would come to you and say, "Well, you want to get long the rails tonight, because we're taking them up and you can sell them tomorrow." Or, "If you buy 50,000 shares of a fishery stock, we'll take you out up 10% tomorrow. After a while, when this happened, you'd feel like a total dolt if you didn't do it in size. I remember at 38,000 on the Nikkei I didn't even want to know what I was buying. I just wanted to be given the profit the moment I bought it, instead of having to wait overnight. I don't invest in irony, but at the top in Japan they would basically give you a check for the profits even if it didn't work because they wanted to keep you in the game!)

In the end the loser was consumer confidence. Those people bank at the

First National Bank of Seely

.

(Too obtuse? These people keep their money under their mattresses because they're so fearful of financial institutions. They're afraid of spending. They have lost fortunes speculating in the stock market.)

We can't have that happen here. But beginning with the Nasdaq runoff of 2500 that's exactly what we had, and the Fed knows it. It knows it because the margin debt soared just like it did in Japan.

(These margin debt numbers in this country are completely out of control. It's quite obvious to me that people feel as they did in Japan in 1986, 1987 and 1988, namely that you're an idiot if you don't buy as much stock as you can because at the end of the day it will be higher. There is no other explanation for such high debt numbers. Many of you, judging by the poll we had yesterday and by your letters, think that margining is a conservative philosophy. Some of you even used that term several times in describing it to me. Wrong!)

As long as that debt hadn't taken off the Fed was OK with the market. Remember, the Fed is anti-excess. It rewards prudence and punishes profligacy. If there is ever a place where too much money is being borrowed to finance speculation, whether in gold, or land or oil, the Fed's jackboot won't be far behind. That's why right now the Fed wants this new market down.

(They don't say that point-blank because they don't want to attack something directly then look foolish when the market doesn't behave.)

It's also why, if it doesn't go down, the Fed will use its tools to destroy -- wouldn't you know it -- the old market, because the old market is based on credit. If you take short-term credit up too high, it stifles the economy and everybody from the airlines to the papers gets crushed.

(For the life of me this has to be the dumbest thing Alan Greenspan has done as chairman, to wreck the profitable economy to support the unprofitable and profligate economy. He would rather ratchet up short-rates that affect everybody, rather than bump the margin rules to dramatically higher levels -- even though it is completely in his powers to do so. Why use nighttime saturation bombing when you can take out the culprits with daytime precision instrument bombing? Senator Charles Schumer feels similarly but has not been given his due by the Chairman of the Fed. What a shame! It doesn't have to be that way. You want speculation in stocks to dry up? Don't force people to sell stocks by raising short rates to the point that all stocks are unattractive. Just take away the rocket fuel. Or tell the institutions to ratchet up the amount of collateral you need to buy stocks on margin.)

That's why every time the new market cracks we at

Cramer Berkowitz

shift to the old market: Because the old market will rally big if the Fed doesn't have to brake the economy hard, and the Fed won't break it hard if the new market behaves.

(Don't believe me? Wednesday of this week was a classic example -- a lot of the Nasdaq names got hurt, led by Intel, (INTC) - Get Report while drug stocks roared. We thought it best to get out of one set of high-risk high reward names and into a group that does well when the economy is softer, which it will be if the spending boom cools because of the dot-com decline. We continue to like the food and drug stocks and dislike the whole new economy world, which is why we have cut back on all sorts of tech, fearing the lock-up expirations and coming onslaught of selling by venture capitalists and execs afraid the boom is over.)

On that terrible Friday we thought that the silver lining of the collapse would be that the Fed would cease to be a factor. But yesterday's rally made a mockery of that theory. It destroyed it. The rally re-liquefied the speculators and gave hope to those who want to see the new economy continue its astronomical growth.

(We were possessed by Tuesday's market. It led me to reintroduce Buzz because I was searching for honest explanations for why the market went up and couldn't find any. I liked Buzz's Marshall Plan for mutual fund ne'er-do-wells much more because this stuff does go on.)

Why do we even care about the new economy? Because all of those little four letter jobbies with the billion-dollar market caps fates will be determined by the continual creation of new companies and their ability to finance new hardware and software. You take away the capital creation machine and you take away the earnings (and potential earnings) of the new economy.

(How many start-up companies take delivery of equipment and promise payment upon the completion of the IPO? I would say they're in the thousands. Don't forget that before the dam broke there were tons of companies hoping to sneak past the hordes of sellers and go public. Without a public market to tap, many of these companies will never make it into stocks. When these stocks were at a high, we needed all of the companies to make it. That's just not going to happen now.)

So Friday's selloff seemed to be the answer to the Fed's prayers. Yesterday's rally was a crushing blow, though.

(The rally fizzled and the Nasdaq erased all of Tuesday's gain by Thursday.)

If yesterday's rally continues, the new market will get re-energized and the Fed will tighten even more aggressively because the Fed must head off a Japan bubble. It has to. Or

Greenspan will go down in with same terrible reputation that the Japanese central bankers of the 80s now have. He will go down as the man who financed the crash. He can't do that.

(We are not being conspiratorial. In fact, we are confident that Greenspan will take rates up as far as he thinks necessary to quell the boom. That's very foolish, of course, because he is hurting the S's, not the N's. You want the N's to come down? Here I go again: Change the margin rules. Protect people from themselves. That will hurt the levered part of the economy -- the stocks that represent concepts and can help take inflation up high -- more than anything else.)

Oddly, because it is all connected, the only clue to what will happen is the stock market itself! If the new economy goes up, then we are in trouble. If the new economy chills for a bit, then consumer spending declines, confidence gets throttled back, the Fed wins and we can have both good new and old markets. But if there is no short-term chill, the Fed will engineer a long one.

(We now dread any strong macro number that comes because the Fed could move quickly to raise rates again. If we don't slow down these numbers, the Fed will slow down the numbers. Believe me, you take short-term rates up past 7% and we will have a very sluggish economy on our hands.)

No wonder it is so darned hard right now. It's supposed to be!

(And it is hard. We leave the office exhausted, drained every single day. And it's only April! What a year we've already had!)

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Cisco and Intel. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.