More On Cramer, Santelli & Financial Markets Turmoil & Excesses

Yesterday's post involving Jim Cramer's attempts to bully and intimidate other CNBC on-air participants- notably Rick Santelli and Brian Wesbury- attracted what I believe to be a record number of readers. The number of visitors who simply Googled something like,

"rick santelli jim cramer cnbc"

was astonishing. And that my blog post ranked among the first results for that Google search. I'm still getting hits this morning, as I write this piece.

Even Jack Welch, this morning's CNBC SquawkBox guest host, took time to specifically and explicitly give Santelli an on-air 'well done' for shutting Cramer up.

Carlos whats-his-name seconded, safely, declaring that the incident was "good television."

But back to the main topic- the financial markets.

Somewhere yesterday afternoon or this morning on CNBC, a few very calm, sane, well-reasoned guests offered the following recap of the current situation, and the path to it. I've summarized their joint specific wording, but the thrust of my synopsis is faithful to their points and, for what it's worth, also reflect my own thinking:

"We have a free market economy and free financial markets. There's regulation, to be sure, but, mostly, participants are free to take risks and make money as they choose.

The past few years saw excesses involving, but probably not limited to:

-people buying houses that they could not, in the long run, actually afford
-financial institutions creating opaque structured financial instruments whose ultimate value and trading patterns were actually unknown and, thus, very risky
-some homebuilders (over) built in markets known to be overheating

Beginning last summer, this all came to a boil. As a result, private investors, large and institutional, and small and retail, lost money due to these financial excesses.

The smaller investors lost on housing and rising mortgage payments. The larger, institutional investors lost on opaque credit instruments which, in the event, turned out not to actually have continuous markets in which to trade them.

With this background, many institutional financial market participants and related pundits, such as Jim Cramer and Steve Liesman, both of CNBC, regularly began to excoriate Fed Chairman Ben Bernanke.

Two commentators noted that this is grossly unfair. How, they asked, can one man and the rest of the Fed be expected to correct, at a stroke, with just interest rate cuts, what an entire financial market and one economic sector took years to screw up?

Alan Reynolds, in his superb editorial in yesterday's Wall Street Journal, noted, similarly, that President Bush and Congress can't just wave a fiscal stimulus wand and prevent a recession, either. If it was that easy, we'd never suffer recessions.

No, we have recessions as the natural counter-cycle to financial market and/or economic excesses.

But we aren't in a recession yet. And we don't seem to actually be headed for one. It's just a financial market panic reaction to a slowing, but still growing, economy.

One commentator opined that what we have is

'A bunch of Wall Street investors whining because they aren't making money this week. Grow up!' "

This Fed-bashing, which even as I write this, is being continued by CNBC's on-airhead Mark Haines, misses the point. The Fed can't magically undo in weeks or months what a host of investors and economic players took years to do.

If you want that type of centralized financial and economic control, maybe you should climb in Professor Peabody's WayBack machine and return to the Soviet Union of 1965.

In our economy, you have to take the bad with the good. Someone else's excess can affect you. It's just part of the world of free economic and financial markets.

In fact, another reason that magical elixirs evade us is that there are so few genuine recessions and financial meltdowns.

In a falling market, everybody is working in unfamiliar territory. My partner noted that, while my long-oriented equity, and derived options strategy, work superbly 90% of the time, we really are in uncharted waters when my market allocation signal indicates the need to take short or put positions. There are just so few, recent, relevant market samples on which to do research and base strategies that bear market equity-related strategies are inherently riskier. There's less data and, thus, far more volatility in any particular approach to profiting, or limiting losses, during such inflection points and subsequent bear markets, followed, usually pretty soon, by the inevitable second inflection point on the way back up.

Guess what? It's the same for the Fed and most market participants.

If you carefully consider the origin of the Fed, and its most unique role, it has to be fighting inflation through the provision of stable monetary policy. It's not actually supposed to cure recessions.

Financial panics? Yes. Financial liquidity shortages? Yes.

In the final, summary analysis, here's what I think is going on now.

The past few years saw an excessive buildup of investment in housing-related sectors. Too many houses were built, too many people bought homes they couldn't really pay for, and too many financial services firms churned out structured, mortgage-based securities to fund them.

Aside from that, the other sectors of the US economy were firing on all cylinders, energy price increases due to legitimate global demand increases notwithstanding.

Eventually, beginning last summer, the financial house of cards built upon suspect mortgages began to collapse.

Private investors lost a lot of money. Perhaps something like 15% of the $1.5Trillion subprime mortgages outstanding could default. That's about $200Billion.

However, associated with these are many over the counter interest rate and credit swaps that now carry much counterparty risk.

When these risks and losses began to become apparent, large US commercial and investment banks wrote off nearly $100B in losses, prompting a corresponding loss in equity values in the sector, and then some.

Now, the credit market losses have hit the equity markets, resulting in trillions of dollars of US equity market losses in January, 2008, already.

Eventually, these levels of losses will affect consumer financial behavior in a more slowly-growing, but not recessionary, US economy.

In the meantime, a lot of less-skilled, mediocre institutional investors, analysts, pundits, traders, etc., are panicking. Thus, what would have been a softening economy with a loss of some credit instrument investments due to the mortgage sector mess, seems to have amplified into a near-term financial panic that assess the US economy as already in recession.

As my longtime friend and sometimes business partner, B, emailed me a few months ago,

'We're not in a recession yet. But if enough people keep saying we are, we will be soon.'

So true.

Even so, because the basic economic signals remain non-recessionary, most investors are likely to be surprised that, later in the year, the economy will appear to be healthier. And the equity market downdraft will seem to have been overdone.

It's likely that the particulars of how long the equity markets turmoil and bear market will last, as well as how long the economy will remain soft, have to do with the degree to which the recent events become central determinants of longer term consumer behavior. And right now, nobody knows how that will develop.