Alan Greenspan was the governor of the US Federal Reserve (Fed) from 1987 to 2006. The expression « Greenspan put » conceptualizes the Fed’s attitude immediately after the 1987 stock market crash. The Fed maintained a very accommodative policy in the period following the crash, allowing asset prices to remain artificially high during that time.
In finance, a « put » option refers to a put option that can be exercised if the price of the asset covered by the contract falls below a specified threshold. Here, the Greenspan put conceptually refers to the situation resulting from this monetary policy, namely that investors now anticipated that they would have the opportunity, through the intervention of the central bank in the event of a fall in asset prices (crash), to resell their assets at a relatively high price compared to a situation where the central bank would not have intervened. It is therefore a put in practice: asset prices fall, but the central bank’s monetary policy allows them to rise again, enabling investors to resell at a relatively high price (as soon as the price threshold is passed, the insurance provided by the accommodative monetary policy allows them to sell at that price).
This « Greespan put » is often criticized as a practice that creates significant moral hazard: investors, knowing that in the event of collective error their losses will be limited by the intervention of the central bank, will adopt a more negligent attitude to risk in their ex ante investment decisions.
Due to the similar response adopted by the Fed from 2007 to the present, the term « Bernanke put » is sometimes used to refer to the same phenomenon.
Julien P.
