This column was originally published on RealMoney on Dec. 12 at 10:18 a.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Let's be the

Fed

for a moment,

even after the coordinated liquidity and an attempt to throw some money at the problem.

What does the Fed see?

First, it sees robust profits for many U.S. companies that have their tentacles in overseas markets. The Fed doesn't distinguish cross-border business, I believe; it lumps all businesses together. The governors may look at an

Emerson

(EMR) - Get Report

or a

Honeywell

(HON) - Get Report

or a

United Technologies

or

3M

(MMM) - Get Report

this morning with great earnings and decide that these successes trump

Toll Brothers

(TOL) - Get Report

,

Lennar

(LEN) - Get Report

or

Black & Decker

.

Mind you, I don't think the Fed governors are that "granular," but anyone looking at these big internationals has to be impressed. Same goes for companies like

Hewlett-Packard

(HPQ) - Get Report

and

Cisco

(CSCO) - Get Report

and

Intel

(INTC) - Get Report

. They are not levered to the U.S., but their profits accrue to U.S. companies. For many of these companies, there are no slowdowns. Big companies like

GE

(GE) - Get Report

and

Exxon

(XOM) - Get Report

are the same; the former says that the U.S. slowing could hurt profits but its international business is booming so not to worry. You sure don't see a slowdown at

Verizon

(VZ) - Get Report

or

AT&T

(T) - Get Report

.

Employment? It's really very strong, to the point that I am sure the Fed governors are worried about the economy overheating. We have a shrinking work force and the decline in financial services jobs somehow hasn't impacted the employment growth in the country. Employment is a key gauge linked to a recession -- it could be a tell for it, even as I find it lagging. It could be another reason that those on the Fed are reluctant to cut bigger and are satisfied, or even dismayed with any cut.

Construction loans, for some reason, are just off the charts. To the Fed, that means that commercial could override residential and make the problems in residential not as important to the crucial overall construction lending business in this country.

Inflation hasn't come down much to speak of because the inflation indices don't include dropping home prices. That's wrong, of course, but I am sure the Fed satisfies itself by saying the numbers didn't get moved up by the increase in housing, so it is apples to apples. The Fed seems unimpressed that the affordability of homes has become easier and the cost of building them, because of price deflation for lots of the goods that go into a home, has come down. The Fed also, I believe, wants discipline in who can buy a home -- someone who can repay a mortgage --and it has accomplished that and doesn't want to sacrifice it again with easy money.

Gold, a great indicator of inflation, hasn't come down. Nor has oil. They are both really bad harbingers of what's really going on in the world, so the Fed doesn't want to send them higher.

All of these lend themselves to a gradualist approach, even as the domestic economy is showing lots of weakness in housing and retail and autos, three key industries that the Fed seems to believe are not going to be able to push us into recession.

I am willing to concede that every one of these points is true. I am simply saying

they are irrelevant.

There is a tremendous misperception about the Fed on the part of so many people.

First, there are the political people. They look at the points above and say, "You see what the Bush administration was able to accomplish, particularly with tax cuts?" This is the "fundamentals are sound" contingent, and their politics and optimism seep into all of their judgments. Or lack of judgments. They have an agenda and they see the Fed as endorsing it.

Second, there are the people who simply don't understand the way the fixed-income markets work. These are the people who don't get "credit" risk. They see the decline in interest rates as a sign that they are whipping inflation now. They do not see it as radical deflation and fear. They are not worried when they see rates come down as hard as they did. They are gleeful. If they understood credit risk, they would realize that the bonds are signaling that many credit-market participants believe there could be a financial catastrophe ahead.

Third, there are tons of Fed proponents, including the Fed governors themselves, who say "Show me the big bankruptcies! Show me the problems!

Citigroup

(C) - Get Report

needs financing? Voila, it is right there. Same with

MBIA

(MBI) - Get Report

. Same with

Freddie Mac

. Same with

UBS

(UBS) - Get Report

.

"If things were so bad, would there be financing?

Merrill

(MER)

and

Bear

(BSC)

screwed up royally on mortgage loans, but aren't they functioning and their stocks well, albeit down, which is just desserts? You can't expect them to rally.

"Only Freddie Mac,

Fannie Mae

and

Washington Mutual

(WM) - Get Report

have had to do anything drastic, and they should, given their profligacy."

Fourth, there are the folks who see the Fed as a

moral

animal, not eager to reward deadbeats or ne'er-do-wells. They want the market to decide, and this Fed is deliciously hands-off.

So, what

should

be the perception? The Fed cuts rates in times of crisis -- Mexico, or 9/11, or Long Term Capital -- if these crises have the

potential

to get out of hand.

I don't think anyone wants to believe that the housing situation

could

get out of hand. The idea that the Fed can tinker with how it injects funds, somehow cauterizing the problem, is just wishful thinking. You want the banks to be able to absorb the losses, so they need to make money off the yield curve, which they can do

if the Fed lets fund rates fall to what the yield curve now indicates would be a natural level.

But the Fed doesn't seem to care one whit about that.

I think the Fed is being complacent and betting that nothing out of control really occurs. That would be true

if

the consequences to the

system

were easily absorbed. But the $500 billion in bad loans out there is on the books at big banks and the Fed is saying that these banks have to work it out and can't count on easy money to do so.

Until that happens, until major homebuilders, banks and insurance companies go under, all of the declines are theoretical.

In fact, all of the worries about mortgages are theoretical. To the Fed, there has not been enough stress to matter. Until the stress directly threatens the U.S. economy, it will only give us cuts of quarters of a point.

Those who are calling for bigger cuts look like either Cassandras or people who own stock and want to make more money. They are not looked at as people who know how tenuous the credit markets are and how insolvent so many important institutions are because they could not place loans on the books that are going to destroy capital or take the capital levels down to where they might not survive.

So, you can see the Fed's case. You can see that the casualties of less speedy cuts don't overwhelm the goodness of not rewarding recklessness.

In other words, you can see how the Fed would think it is prudent, instead of, to me, reckless, because prudent people don't ignore insurance and just presume everything works out well in the end if you only deliberate and take your time.

Maybe the Fed is right and no one big fails or big failures are just the price of an economy.

I wish I felt that way. I believe the crisis is real, and that there are just a lot of institutions hanging on for dear life. The longer the Fed draws things out, the more likely it becomes that these institutions fail. Take a look at the

Wachovia

(WB) - Get Report

news this morning about credit losses that jives with this morning's sell rating from Merrill. The earnings here are dropping off a cliff.

The news out of

Bank of America

(BAC) - Get Report

-- a really ugly preannouncement -- tells you how out of sync the Fed is with the

banking

world. If Bank of America, which is a well-run outfit, is blowing up, what's happening at lenders without that bank's higher standards?!? What's happening? Credit risk at Wachovia and Bank of America is off the charts.

How about the bad guys? I'd bet Washington Mutual has had a huge jump in credit problems in the last two weeks. These are not hedge funds that I am worried about. These are bedrock lenders. They need rate relief to get net interest margin to take charges against. This Fed plan injects cash to "ease elevated finding pressure." Of course that does nothing to solve the key problem, which is the need for banks to be able to offset gigantic losses without falling afoul of capital requirements, something that will still happen. The market's spoken on the plan and all the major banks are down or headed down. But the oils are up! Meaning, meaninglessness.

I just can't believe it's a good thing or a prudent thing to have these earnings collapses and this lack of money. I can't believe it's a good thing to have

PMI

(PMI)

and

Ambac

(ABK)

and

MGIC

(MTG) - Get Report

desperately searching for money. I can only imagine how bad

Countrywide

(CFC)

or

GM

(GM) - Get Report

credit might be.

But the Fed does not seem to care about these deflationary trends and believes that inflation is still a front-burner issue.

The Fed, we learn this morning, certainly wants to try to do something with some sort of plan about institutions needing money. It has opened up swap lines to banks for $40 billion.

Big deal, just more confusion.

I think all it will do is increase volatility and make things even more confusing.

What the Fed is really doing is making itself irrelevant and allowing a 1990 scenario to happen, where almost all of the savings and loans and many banks were hobbled or closed.

It's slow motion now. It will be fast motion soon. And then we can see if the Fed governors are as complacent as they seemed Tuesday. Oh, and for the record, I think they don't respect either the stock or bond markets as judges of their activity and believe that they report to some sort of higher academic power that those of us who've been in the business for a quarter of a century or more know smacks of the theoretical business classes we took that have had no relevance to our work lives.

Random musings:

It's excellent that both

Wells Fargo

(WFC) - Get Report

chairman Dick Kovacevich and Freddie Mac's Richard Syron apologized for misjudgments. Amen! ... Book signing tonight! Last year at this location we had a great time, tons of people showed up and we stayed late to accommodate everyone. Hope it's the same scene again. See you at 7 p.m. in Bridgewater, N.J.'s Borders. If you miss this one, there's just one more: Saturday, Jan. 12, at 1 p.m. in Westbury, Long Island's Costco. Mark your calendar.

General Electric owns CNBC, for which Cramer is a featured commentator. At the time of publication, Cramer was long Hewlett-Packard, Citigroup.

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for

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