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Greenspan_put

Greenspan put

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

Bernanke Put

In 2007 and early 2008, the financial press had begun discussing the Bernanke Put, as new Federal Reserve Board chairman, Ben Bernanke continues the practice of reduced interest rates to fight market falls. However, in the wake of a Lehman bankruptcy filing and shopping of investment banks, the latest stage in the global credit crisis opens the window if the Greenspan put will continue through the Bernanke put to essentially protect asset deflation.

The decision by the Fed to lower short-term interest rates by 50 basis points (0.5 of one percent) on Oct. 08, 2008 could be interpreted as an instance of Bernanke following in Greenspan's footsteps, in this regard.

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