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The "Greenspan Put" refers to the monetary policy that Alan Greenspan, the former Chairman of the United Statesmarker Federal Reserve Board, and the Fed members fostered from the late 1980s to the middle of 2000.

"Put" refers to a put option in which the buyer acquires the right to sell at a pre-agreed price if prices drop. During this period, when a crisis arose, the Fed came to the rescue by significantly lowering the Fed Funds rate, often resulting in a negative real yield. In essence, the Fed pumped liquidity back into the market to avert further deterioration.

The Fed did so after the 1987 stock market crash, the Gulf War, the Mexican crisis, the Asian crisis, the LTCM debacle, Y2K, the burst of the internet bubble, and the 9/11 terror attack.

The Fed's pattern of providing ample liquidity resulted in the investor perception of put protection on asset prices. Investors increasingly believed that when things go bad, the Fed would step in and inject liquidity until the problem got better. Invariably, the Fed did so each time, and the perception became firmly embedded in asset pricing in the form of higher valuation, narrower credit spreads, and excess risk taking., as new Federal Reserve Board chairman, Ben Bernanke continues the practice of reduced interest rates to fight market falls. The decision by the Fed to lower short-term interest rates by 50 basis points (one-half of one percent) on Oct. 08, 2008, and thereafter a range from 0.00-0.25% rate in December 2008 suggests attempts to create a Bernanke put similar to the Greenspan put. New steps in quantitative easing further illustrate the Fed's attempt to repeal the private business cycle.

However, the depths of the global credit crisis, with related falls in housing and stock prices, suggests that no monetary policy "put" strategy has been able to prevent asset deflation this time around.

See also


  1. Greenpan "put" may be encouraging complacency - Financial Times
  2. The 'Bernanke Put'—with a Currency Kicker
  3. When Markets Are Too Big to Fail - New York Times
  4. Buttonwood | Paint it black |

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