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.

The New York Times reports that the market rally last week was due to investor's confidence that the Bush administration is stepping in to bail out the economy. I don't buy this explanation and think that the market moves because of what big investors are doing -- information that does not get into the media. Moreover, based on its track record, I would conclude that the Bush Put -- as I'd call the Times' notion -- is likely to be just as effective as the Mission Accomplished banner he used as a prop in May 2003.

To explain this, here's some recent history. In May 2003 George Bush landed a jet on an aircraft carrier and strutted like a peacock in front of a banner blaring "Mission Accomplished." That was over four years ago and that banner still looks like it's premature. By contrast, during the reign of Fed Chair Alan Greenspan, the market formed the concept of the Greenspan Put -- the execution of Fed policies that limited investor's downside risk -- because he successfully bailed out investors for their excesses.

This week my guess is that the market rallied in response to two moves: Fed Chair Bernanke's comments on flexibility -- hinting at further rate cuts on December 11th -- and Treasury Secretary Paulson's announcement of negotiations with banks to keep some mortgage rates from resetting upwards on some of the 1.5 million nonprime mortgages valued at $331 billion that will reset by the end of 2008. Since Bush seems to be coordinating the responses to the latest economic turmoil, I am elevating the market rescue efforts to the Oval Office -- hence the Bush Put.

Higher interest rates are making an increasing proportion of potential LBO deals look unprofitable. That's what The Wall Street Journal [subscription] reported last Friday.

Up until last week, the stock market seemed to be rising because low interest rates made private equity deals attractive. And with so much money available to remove the supply of equity from public investors, stocks rose because of the Private Equity Put -- the perception that private equity investors' liquidity and willingness to take stock out of public shareholders' hands created a floor underneath which stock prices would not fall.

With Alan Greenspan now making headlines on behalf of his business rather than the Fed, the Private Equity Put had replaced the Greenspan Put -- the perception that the Fed's ability to manage interest rates and the economy created a floor underneath which stock prices would not fall.