Some pre-market optimism this morning on hopes of a Fed rate cut, made me stop to think whether such cuts help the market. When Alan Greenspan chaired the Fed, investors became convinced he would always bail them out of a jam. This assumption was dubbed the Greenspan put -- meaning that his interest rate policies would create a floor below which the market would not decline.

But his successor Ben Bernanke is creating the opposite expectation -- through his interest rate policies, investors are witnessing a short-term market pop followed by a medium-term market tumble. After a rocky August, Bernanke's first 50 basis point rate cut propelled the Dow up 979 points. But subsequent 25 basis point rate cuts were followed by enormous Dow drops. For example, last October, the Dow fell 571 points, the Fed cut rates 25 basis points but the Dow kept falling -- 541 points.

Here is a time line that tracks recent dropping equity markets, followed by interest rate cuts:

• September 50 basis point cut. In the first week of September 2007, the Dow drops 244 points after a tumultuous August driven in part by subprime concerns -> September 18, 2007, the Fed cuts the Fed Funds rate by 50 basis points from 5.25% to 4.75% -> Hint of rate cut in second week of September causes the Dow to rise 979 points to 14,093 by October 12th.
• October 25 basis point cut. Between October 12 and October 19, 2007, the Dow drops 571 points to 13,522 due in part to concerns about bank asset write-downs -> October 31, 2007 the Fed cuts the Fed Funds rate by 25 basis points to 4.50% -> But the market is disappointed with the lower than expected cut and the Dow falls an additional 541 points to 12,981 by November 23rd.
• December 25 basis point cut. Between November 23 and December 7, 2007, the Dow rises 645 points to 13,625 due in part to concerns about a rocky 2008 -> December 12, 2007, the Fed cuts the Fed Funds rate by 25 basis points to 4.25% -> But the market is disappointed with lower than expected cut and the Dow falls an additional 718 points to 12,800 by January 4, 2008.

Bernanke's interest rate policies are thus having the opposite affect of Greenspans' -- creating a Bernanke call. Instead of putting a floor underneath the market to bail out investor's mistakes, Bernanke's interest rate cuts create a ceiling above which the market can't rise. And as he lowers interest rates, the effect is to push the market down instead of boosting it. For example, since September's first interest rate cut, the Dow has lost 7% of its value or 939 points.

Bernanke's problem is that his interest rate cuts are not treating the problem, which is that financial institutions are delaying the accurate accounting for bad assets. Here's what I think the Fed should do:

• Contact the Chairman of each U.S. financial institution with significant Level 3 assets -- those hard-to-value bank assets with little market action;
• Require the Chair to convene an independent committee to mark the Level 3 assets to market;
• Demand a report from the Chair within 30 days that makes a conservative estimate of the amount to be written down;
• Send the report to the Fed along with a plan to restore capital following the write-down; and
• If an institution cannot raise sufficient capital, decide whether to merge it with a stronger institution, close it, or help it raise capital.

I don't see any reason why Bernanke can't take these steps. In the interests of the global financial system and his own reputation, it seems to me a much better way to complete his term in office. Otherwise, the market is likely to continue to decline because participants will realize that the Fed is not willing to take the steps needed to address the real problem with the financial system -- a lack of credibility in the accounting for its financial condition.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.