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Jim Cramer: Here's Why I Ranted at the Fed 10 Years Ago

All people really remember about the rant back then was that I kept shouting that the Fed was nuts, asleep and knew nothing.

Yep, 10 years ago Thursday, when I came out on the set for my regular Stop Trading segment, I was incensed and, by TV terms, I "lost it," screaming that the Fed seemed clueless to what was really happening in the country, that people would soon lose their jobs by the thousands, and their homes by the millions.

Look, if it hasn't dawned on you now, I am a passionate guy, and my passion got the better of me that day, because I had so many friends "in the business" and they were desperate to try to stop the Armageddon that was happening.

They needed help from the Fed in the form of immediate rate relief and loans in order to stay afloat, because the mortgage default data they were seeing was so different from what the Fed was saying. The data was terrible. The Fed? Sanguine, worried about inflation, not the Great Depression-like deflation that was about to hit home.

It was very hard to reconcile.

But, looking back 10 years after I screamed vicious things about respected Fed officials like then chairman Ben Bernanke and Bill Poole -- a very nice man who happened to be the head of the St. Louis Fed -- it's coming clear to me. These men and women didn't have any real-world contacts with people in the trenches on Wall Street as I did. They were like World War I armchair generals 100 years ago, who sat back in French chateaus, "Paths of Glory"-like, sending hundreds of soldiers to their deaths, clueless to what was happening in no man's land just a few miles away.

They didn't know the battlefield.

I, on the other hand, simply by dint of friendship with those who had worked their way up the ranks, knew plenty of hard-boiled, ice-water veined execs -- the "my people" in the rant. And my people were scared of what was happening in the mortgage market, an emotion I wasn't used to hearing from them. They were scared for their jobs, their homes. Yep, the contagion had reached the highest levels, yet the Fed was clueless. "My people" were right.

The Fed was wrong.

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I remember the night before the rant talking to a friend who managed a bond firm. He mentioned to me that something had started happening at his firm that had never happened since the Great Depression: people were beginning to walk away from their homes in record numbers. They had put very little money down, or none at all, just a promise to pay, and they were just abandoning them. He was the third exec that week who, in confidence, had told me the same thing.

The afternoon of the rant I was on a conference call with a major bank, and they had seen the identical pattern. And then, right before I walked on set, a top dog at a major subprime house called to plead with me: say something on air about how bad things really are; get them to cut rates and cut rates quickly, open the discount window to firms in trouble like his. I said I'd try, but I doubt they would take me seriously.

And that's what got me ranting. Of course, it turned out the Fed wasn't listening at all. They were laughing at me, as the transcripts of the Fed meeting held a couple of days later eventually showed. They were worried about inflation -- they should have been worried about deflation that comes from defaults. They couldn't see or feel the palpable desperation out there as I could.

Looking back, I still can't believe how they could be so wrong; it seemed so obvious. But it wasn't obvious if you were in the chateau, the ivory Fed tower, so to speak, knowing none of the people I knew.

The good news, the Fed seems to have a better grip on things these days. Many times since then there have been people urging the Fed to be tough and tighten hard, but Bernanke and then Janet Yellen had learned their lesson. We'd be back in a recession if they had.

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 The bad news? I am still seeing loans being made that they should intervene on, this time by reckless lenders in the subprime auto industry, offering nothing down against vehicles that are rapidly becoming obsolete because of technology and are losing value just like houses back in 2007. It's not as bad yet, but it will be.

I've calmed since then. Ranting didn't get the job done. I failed. But a decade later, I can look myself in the mirror knowing that, unlike so many others, at least I tried.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.
 
Originally published Aug. 3 at 6:02 a.m. EST.

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