The Market’s Echo Chamber

Jim Cramer—the hyperactive, loud and opinionated host of CNBC's "Mad Money"—is no fan of Federal Reserve chairman Ben Bernanke. If you'd tuned into "Mad Money" any time in recent months, you might have caught one of Cramer's outbursts against the ex-Princeton University economics professor. "Defend us from Uncle Ben Bernanke's relentless march to recession," went one rant. "You know what Bernanke is? He's the General Sherman of monetary policy. He's waging total war against the American economy. Is that Atlanta I smell burning?"

All this is entertaining, but it's also much more. Call it the rise of financial populism. Cramer is its biggest star and, in some ways, it has fundamentally altered the climate in which the Federal Reserve makes economic policy. Throughout its history, the Fed has rarely been popular (the peaceful period in the 1990s under Alan Greenspan was an exception). People often blame the Fed for recessions or high interest rates. But traditionally, politicians, business leaders and unions have been the most vocal critics.

No more. In recent months, the noisiest and nastiest criticism of the Fed has come from Wall Street. Hordes of money managers, analysts, commentators and economists have joined Cramer in ridiculing Bernanke and other Fed officials. They're "clueless" and "behind the curve." The blunt message: cut interest rates more and faster; revive the economy; boost stock prices; save our investments. But these custodians of capital no longer speak only for small numbers of the superwealthy. From 1980 to 2005, the share of U.S. households owning stocks or mutual funds went from less than 19 percent to 50 percent; the number of brokerage accounts rose from 10 million to 109 million.

Just as the late-19th-century populists, mostly farmers, wanted the government to provide cheap money and curb the railroads' power, today's financial populists think government should somehow guarantee that the economy always expands and stock prices always rise. Whenever either seems threatened, there's a clamor for action. Last week, Bernanke's Fed seemed to capitulate. On Tuesday, it cut its overnight Fed funds rate from 4.25 percent to 3.5 percent (as recently as mid-September, it had been 5.25 percent). The Fed's main decision-making body meets again this week; another rate cut is expected, though not guaranteed.

Of course, the Fed doesn't think it was surrendering to critics. Instead, it was trying to avert a financial stampede. Remember the crash of 1987, when stock prices dropped 22.6 percent in a day? Well, with U.S. markets closed last Monday for Martin Luther King's birthday, stocks around the world plunged. Before the Fed took action, global stock markets were already down 12 percent for the year, says Howard Silverblatt of Standard & Poor's; the paper loss totaled $6 trillion. Heading into last Tuesday, signs pointed to a huge sell-off of U.S. stocks. The Fed rate cut aimed to prevent a panic that would feed on itself. Lower rates would improve confidence by cushioning any slowdown.

Fair enough. The trouble is that this may be a distinction without a difference, because market sentiment—what sends prices up or down—is heavily shaped by the financial populists operating through the business cable channels, Internet-distributed commentaries and print press. There is a vast echo chamber in which if something is repeated often enough, it becomes its own reality. When there's mostly cheering, stock or bond prices rise; with boos, prices fall. Either way, the Fed must deal with what "the markets" are saying. The present panicky climate results, at least partly, from all the invective heaped on the Fed.