Jim Cramer's guide to investing: Looking back at how the Fed handles economic downturns

• CNBC’s Jim Cramer reviewed several significant market downturns he’s witnessed throughout his career and looked at the Federal Reserve’s action during those moments.
• “Whenever the market goes into a tailspin, whether it’s a Fed-mandated decline or if it’s caused by the White House, or by the real weakness in the economy, you should try to understand why it’s happening,” he said.

CNBC’s Jim Cramer reviewed several significant market downturns he’s witnessed throughout his career and looked at the Federal Reserve’s action during those moments.

“Whenever the market goes into a tailspin, whether it’s a Fed-mandated decline or if it’s caused by the White House, or by the real weakness in the economy, you should try to understand why it’s happening,” he said. “Because that has a huge impact on what happens next, and it’s often the key to saving, or losing, a ton of money.”

During his more than 40 years on Wall Street, Cramer said he’s recommended “selling everything” four times. Once in 1987 just before historic “Black Monday” and “Terrible Tuesday” declines, then in 1998 when hedge fund Long-Term Capital Management was in crisis. He also advised investors pull out of the market in 2000 before the dotcom bubble burst, and then in 2008 as the collapse of the U.S. housing market triggered a devastating crash.

Of these moments, Cramer said he only regrets his judgement in 1998. At the time, Cramer’s own hedge fund was underperforming and investors were pulling money out, he said, adding that he sensed “a total collapse.” Cramer said he believed the Fed seemed “oblivious to the situation” even as the spillover from Long-Term Capital Management’s predicament threatened other banks. 

But shortly after Cramer recommended pulling out the market, the Fed stepped in. The central bank issued an emergency rate cut and helped bail out Long-Term Capital Management, staving off disaster. His call at the time was “perhaps the worst professional mistake of my life,” Cramer conceded. He said he learned an important lesson — even if the Fed seems to be “asleep at the wheel,” it can still change course at any moment, especially when the market is doing poorly.

However, the Fed acted too late in 2008, Cramer said. While he said the downturn stemmed from the economy itself, the Fed made it worse with rate hikes. The agency believed the economy was strong, he continued, and it “couldn’t see the rot underneath.” Cramer said some major firms had already collapsed by the time the Fed started to cut and offered up “the mother of all government bailouts.”

“When I told people to get into cash in October of 2008, when the Dow was around 10,200, I got a lot of hate — the conventional wisdom was that I was being insanely irresponsible,” he said. “Of course, if you listened to me, you sidestepped a hideous decline. The financial crisis was caused by genuine systemic risk, even if the very real problems were made worse by a clueless Federal Reserve.”

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