Greenspan Put


Also found in: Wikipedia.

Greenspan Put

A term coined in the late 1990s describing Federal Reserve chairman Alan Greenspan's loose monetary policy. Throughout this period, Greenspan and the Fed kept interest rates rather low to encourage growth in the stock markets. Investors assumed from this policy that stocks would continue to rise and, thus, they could enter long positions and sell them at a higher price on or before a certain date, creating a put option in practice, if not in contract. While this was likely not the intent of the Federal Reserve at this time, investors used this investment strategy anyway. See also: Irrational exuberance.
References in periodicals archive ?
Notwithstanding howls of protest from market participants and rumoured unconstitutional threats from an unhinged US president, the Fed should be congratulated for its steadfast commitment to policy "normalisation." It is finally confronting the beast that former Fed Chairman Alan Greenspan unleashed over 30 years ago: the "Greenspan put" that provided asymmetric support to financial markets by easing policy aggressively during periods of market distress while condoning froth during upswings.
So there was a "deep conceptual issue" involved in New Keynesian analysis: its failure to explain how banks might come to "underprice risk worldwide," as Alan Greenspan put it.
This perception of a Greenspan Put aided the ensuing stock market recovery after Black Monday, which turned out to be the greatest bull market in American history.
Faced with a jump in the appetite to borrow, the Fed had [wrongly] decided 'to meet the legitimate demands of business,' as Greenspan put it.
The Fed's post-financial crisis mission creep, since 2008, has fueled an unhealthy codependence between it and the market, akin to the infamous pre-crisis "Greenspan put," whereby the Greenspan Fed was expected to--and did--step in to support financial markets whenever there arose a threat to rising asset markets.
This "Greenspan put," they observe, "created moral hazard on a grand scale, and Greenspan deserves blame for it" (p.
The underwriting of downside protection, which has been called the "Greenspan Put," owing to former Federal Reserve Chair Alan Greenspan's willingness to cut interest rates and provide assistance to the financial sector, was accompanied by the fierce campaign to unshackle market participants via deregulation.
This phenomenon became so entrenched in investors' minds, that it got a name of its own: the Greenspan Put. This mistake is being repeated today, with the bailout not only of the financial sector, but now the US auto sector, and undoubtedly other sectors worldwide will follow.
In doing so, it has replaced the Greenspan Put with a Bernanke Put.
As Federal Reserve Chairman Alan Greenspan put it in congressional testimony in early 2004, "The problem that exists is because they have a subsidy, granted not by the Congress but by the expectation that government will bail them out in the event of a crisis."
"Federal Reserve chairman Alan Greenspan put his foot on the brake, and interest-sensitive industries responded immediately," says Wahed.