I generally avoid reading predictions of the government’s move every time the market hits a rough patch, as is happening now. Guessing the mind of Fed chief Ben Bernanke - if he will cut the interest rate again to soothe investor sentiment - has become as much a suspense as predicting the stock market.

Donald Luskin writes that with S&P 500 index only <6% below its all-time high (a 10% drop counts as a mere market “correction”), the market is still bullish, and this is not the time yet for government intervention. He also reminds us of Bernanke’s 2002 speech, where he said that the interest rate is a tool for regulating economic growth in the long term, not for giving short-term relief to the market every time it slips.

Many do not share Luskin’s optimism on market conditions today, and they do not need to look up charts. The current credit crunch and housing crisis have stressed the investing environment, and it feels particularly hard coming right after the boom over the preceding year.

But this is not a recession yet, and until the overall economy is threatened, the Fed has no reason to step in. I agree with the conservative sentiment that the investors must own up responsibility for their action, and it is not the government’s (and hence the taxpayer’s) job to bail them out. But it is the government’s job to ensure the investors are not duped by reckless actions of private enterprises, as the subprime mortgage mess today shows.

See related posts:

1. What determines the "real" interest rate?