“Interest rates aren’t a policy instrument to protect unwise lenders from the consequences of their unwise decisions,” Bank of England Governor Mervyn King said today at a press conference unveiling the bank’s latest Inflation Report.

In fact, while noting the bank would continue to monitor markets closely, Mr. King said the turmoil heralded “a more realistic appreciation of risk, which we should welcome.” He also contends there’s no evidence, yet, that the U.S. subprime turmoil has spread across the pond to Europe: “I don’t think there is much evidence of a major change in loan performance in other markets.”

European markets have gyrated recently along with global exchanges, but so far the impact of the U.S. subprime crisis on Europe does seem limited. Germany’s taken the hardest hit, with a Frankfurt-based asset management firm closing one of its funds on Monday and a government-backed group last week providing $4.8 billion to bail out another German bank whose subprime investments went bad.

Mr. King’s comments today echo similarly sanguine ones made last week by his continental European colleagues. At a press conference following the European Central Bank’s decision to keep its key interest rate at 4%, ECB President Jean-Claude Trichet said: “I would qualify this episode as a process of re-appreciation of risks which can be interpreted as a phenomenon of normalization of risk pricing in a number of markets.” Mr. Trichet had warned for months that investors were under-pricing risk.

Mr. Trichet, declining to comment on whether the ECB would consider coming to the market’s rescue in the event of a banking crisis, referred reporters to comments made by the head of Germany’s central bank, Axel Weber. Mr Weber’s take: “Fears of a banking crisis in Germany lack foundation.”

If the Fed steps in to bail out investors/banks/funds who took on more leverage than was appropriate and, worse yet, created a liquidity/duration mis-match between their assets (MBS, CDOs, CLOs) and liabilities (investor assets, margin, repo agreements) then the message is that you can go ahead and take on too much risk and if you get in trouble you’ll get bailed out.

Market participants must know that they will be the ones to own both the upside and the downside risk of the investment decisions they make. If funds blow up so be it. If Bear Stearns goes bust, so be it. Hell, if Countrywide ends up in Chapter 11, that’s their problem and their shareholder’s problem.

The discount window is for true systemic crises that surpass rationality, such as providing liquidity following the 23% drop in equity markets on 10/19/87 or offering liquidity after 9/11/01. The events of the past few weeks have been completely predictable. In fact, many funds have predicted them — Paulson Credit Opportunities ( 40% in June and 129% YTD (no June info yet)) and BlueCorr ( 17% in July and 34% YTD) for example were created to profit from just these sorts of events.

Now they are losing their job because of this fiasco, so what? They still can go to the beach for 2 years and come back to look for a new job, while their clients lost their life savings for these pigs.

Fed should not do anything, let the bank fold and history teach them a lesson.

They need to just leave things alone. Let some Wall Streeters and big banks fail.

Cramer is just another crim. Four months ago he was pounding the table for regional banks, saying that Downey is the most underpriced. Now that their subprime/negam nonsense has caught up with them and others, he’s crying.

Come-on.

Let markets work!!

Crim

Right now, percentage wise, the corrections in the S&P500 and NASDAQ are approximately the same, or just a bit larger than their respective ones in March, but the correction in the DOW is smaller than its own correction in March. People keep saying we need healthy corrections in a bull market, but whenever one comes, everybody seems to think it’s a crash! In any cases, all of these pullbacks are still less than 8%, so what’s all the fuss about?

The fact is we haven’t seen any meaningful correction for a long time, so now suddenly a 7-8% pullback seems like the sky is falling! People have been complacent for so long, now they need to take a step back and look at the big picture for a better perspective.

I think a big part of the reasons many institutions/hedge funds blew up lately was due to the fact that they were confident that the “Greenspan put” would come to their rescue whenever things go bad just like old times, no matter how reckless they are. Every time there was a potential problem in the past the Fed always came to the rescue, so Wall Street has Pavlov’s dog syndrome: “Ok, we blew up due to excessive risk-taking (or rather, gambling), but so what, only the investors would suffer. And the Fed will save the day anyway.”

Why should the Fed come their rescue every time? Why shouldn’t they be responsible for the problems they created, or for their reckless gambling? Remember, only rich people are allowed to invest in hedge funds, and they say it’s to protect poor people from high risk investments. When the hedge funds do well, the rich benefit, and when some blew up in the past, they were saved by the Fed. The rich people won no matter what. Poor people remain poor.

Why didn’t the Fed help bail out mom and pop investors when the bubble bursted, or when Enron and WorldCom collapsed? The poor got creamed, but Wall Street firms still enjoyed huge profits and bonuses every year. Where did that money come from? It’s obvious who sold Internet/Enron/WorldCom stocks at outrageous prices to the naive public, and still encouraged them to average all the way down to 0 with their bogus “upgrades”.

We’re lucky people like Cramer don’t work at the Fed. Otherwise every time the market seems to be in trouble he would cut rate, and fuel another bubble. The excessive speculation and reckless money management at these hedge funds (if they do have one) result from their expectations that the Fed would save them no matter how irresponsible they are.

The Fed should stay put and focus on the big picture economy. The market is large enough to sort itself out. We need a good cleansing of excessive speculation and undisciplined trading/investing from hedge funds and the likes. Retail investors have to take responsibility for their own losses, so why not the big boys, especially since they are much richer and can absorb the losses better?

The market just gave back less than 10% of its big gain since last year. If the media, Wall Street and Cramer would just stop whining about the need for rate cuts, then people might just have time to realize that this “market crash” is not even a typical correction in a bull market. Sure, it may eventually get worse and worse until we’re in a full-fledged bear market, but there’s no remote evidence of that yet.

The dollar is teetering on its multi-year support, so what if the Fed cuts rate? People like Cramer who wish for a cut to stop this “8% market crash” might just get it, but they might at the same time witness a different kind of crash, and this one won’t be pretty. As they say, be careful what you wish for, it might come true.