Pay special attention to the last paragraph. http://www.nytimes.com/2007/03/01/opinion/01thur1.html?hp After the Sell-Off Published: March 1, 2007 In a way, the stock marketâs rebound yesterday was as troubling as Tuesdayâs rout. Ben Bernanke, the chairman of the Federal Reserve, managed to calm the market, saying that one could reasonably hope for a stronger economy by midyear if housing stabilized soon, and if manufacturing strengthened. But those are big ifs. The torrent of bad news on housing is only worsening, with a report yesterday that new home sales for January had their steepest slide in 13 years. And as David Leonhardt pointed out in yesterdayâs Times, manufacturing has already slipped into a recession, with activity contracting in two of the last three months. How is it then that investors took Mr. Bernankeâs words as a âbuyâ signal? The short answer is that investors have a proclivity to hear what they want to hear. On Tuesday, warning bells were simply too loud to ignore, including the steep sell-off in stocks in Shanghai, downbeat reports on the United States economy and an attempt in Afghanistan on the life of Vice President Dick Cheney. Yesterday, investors needed only the slightest prod to revert to âhear no evilâ form. The more complete answer is also more troubling. In recent years, as housing and stock markets surged, even highly speculative investors have been encouraged to an unusual degree by their bankers and regulators, who are supposed to restrain investorsâ more maniacal bents, but instead have done little to quell or question excessive risk-taking. Just last week, Treasury Secretary Henry Paulson Jr. and top financial regulators said the government need not â and should not â provide greater oversight for the $1.4 trillion hedge fund industry, or, by extension, the trillions of dollars more in complex derivative transactions spawned by the industry. That stance is mostly free-market ideology run amok. But it is also based on the unproven assumption that unregulated investing, which dispersed risk and reduced volatility as markets surged, will continue to do so when markets tank. The upshot is a one-sided bet for investors. They have explicit assurances from regulators and policy makers that almost anything goes when the markets are hot, and implicit assurances â based on past experience â that the Fed would lower interest rates to contain a financial crisis should one erupt. Unfortunately, there is no guarantee that easing up on rates would have the same powerful effect in a future crisis as it had in the past. The next crisis appears to be building around weakness in the United States, not in Russia or Asia or South America. That means money could flow out of the country if markets were rattled. That would weaken the dollar and require speedy and complex remedial action by the worldâs central banks â not just a rate cut by the Fed. Tuesdayâs stock market decline could turn out to have been a garden-variety correction. But major market participants would be wise to rethink their assumptions.