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The Greenspan Put was a monetary policy response to financial crises that Alan Greenspan, former Chairman of the Federal Reserve Board exercised beginning in late 1987. Successful in addressing various crises, it became controversial as it led to periods of extreme speculation led by Wall Street investment banks overusing the Put's "repurchase agreements" (or indirect quantitative easing), and creating successive asset price bubbles. Eventually, the banks so overused Greenspan's tools that their compromised solvency in the global financial crisis, required Fed Chairman Ben Bernanke to introduce direct quantitative easing (the Bernanke Put).

In Q4 2019, Fed Chairman Jerome Powell recreated the Greenspan Put by providing "repurchase agreements" to Wall Street investments banks as a way to boost falling asset prices; in 2020, to combat the financial effects of the COVID-19 pandemic, Powell re-introduced the Bernanke Put with direct quantitative easing to boost asset prices. In November 2020, Bloomberg noted that the Powell Put was stronger than both the Greenspan Put or the Bernanke Put, while Time noted that the scale of Powell's monetary intervention in 2020, and the tolerance of multiple asset bubbles as a side-effect of such intervention, "is changing the Fed forever".

While the individual tools many vary between each genre of "Put", collectively, they are often referred to as the Fed Put. By 2020, continual high use of the Fed Put had led to what was termed the Everything Bubble, being simultaneous bubbles in most major asset classes, due to sustained very loose monetary policy.

Overview

Tools

The term "Greenspan Put" is a play on the term put option, which is a financial instrument that creates a contractual obligation giving its holder the right to sell an asset at a particular price to a counterparty, thus providing a measure in insurance to the holder against falls in the price of the asset.

While Greenspan did not offer such a contractual obligation, his Federal Reserve taught markets that when a crisis arose and the stock market fell significantly, the Fed would engage in a series of monetary tools, via Wall Street investment banks, that would cause the stock market falls to reverse. The main tools used were:

• Fed purchase of Treasury bonds in large volumes at high prices (i.e. lowering the yield), to give Wall Street banks profits on their Treasury books, and free up capital on their balance sheets; and
• Lowering the Fed Funds rate, even to the point of making the real yield negative, which would enable the Wall Street investment banks to borrow capital cheaply from the Fed; and
• Fed providing Wall Street investment banks with new loans (called short-term "repurchase agreements", but which could be rolled over indefinitely), to buy the distressed assets.

Repurchase agreements (also called, "repos") are a form of indirect quantitative easing, whereby the Fed prints the new money, but unlike direct quantitative easing, the Fed does not buy the assets for its own balance sheet, but instead lends the new money to investment banks who themselves purchase the assets. Repos allow the investment bank to make both capital gains on the assets purchased (to the extent the banks can sell the assets to the private markets at higher prices), but also the economic carry, being the annual dividend or coupon from the asset, less the interest cost of the repo. When the balance sheets of investment banks became very stressed during the global financial crisis, the Fed had to by-pass the banks and employ direct quantitative easing.

Use

The Fed first engaged in this activity after the 1987 stock market crash, which prompted traders to coin the term Greenspan Put. The Fed also acted to avert further market declines associated with the savings and loan crisis, the Gulf War, and the Mexican crisis. However, the collapse of Long Term Capital Management in 1998, which coincided with the 1997 Asian Financial Crisis, led to such a dramatic expansion of the Greenspan Put that it created Dot-com bubble. After the collapse of the internet bubble, Greenspan amended the tools of the Greenspan Put to focus on buying mortgage backed securities, as a method of stimulating house price inflation, until that market collapsed in the Global Financial Crisis, and Greenspan retired from the Fed.

Issues

• Moral hazard. The expectation of a Fed bailout in any market decline created moral hazard in markets, and was considered a driver of the high levels of speculation that resulted in the 1998–2000 internet bubble. At the start of the 2008 global financial crisis, Wall Street banks remained relaxed about the adverse price movements in markets in the expectation that the Greenspan Put would protect them.

• Wall Street profits. The Greenspan Put created substantial profits for Wall Street investment banks who borrowed large amounts of capital cheaply from the Fed to buy distressed assets during crises. Wall Street learned to use "repurchase agreements" to push non-distressed asset prices even higher, as the positive price action (coupled with more positive analyst notes) that resulted from their "repurchase agreement"-funded buying, stimulated investor interest, who bought the assets off Wall Street at higher prices. Wall Street came to call Greenspan, The Maestro.

• Wealth inequality. Various economists attribute the Greenspan Put (and the subsequent Bernanke and Powell Puts, see below), to the historic widening of wealth inequality in the United States, to levels not seen since the late 1920s; this is disputed by the Fed.

• Escalating economic crises. Steven Pearlstein of the Washington Post described it as: "In essence, the Fed has adopted a strategy that works like a one-way ratchet, providing a floor for stock and bond prices but never a ceiling. The result in part has been a series of financial crises, each requiring a bigger bailout than the last. But when the storm finally passes and it's time to begin sopping up all that emergency credit, the Fed inevitably caves in to pressure from Wall Street, the White House, business leaders and unions and conjures up some rationalization for keeping the party going".

• Political interference in markets. The ability of the Greenspan Put to make stock markets rise led to concerns of political interference in markets and asset pricing. By 2020, economist Mohamed A. El-Erian noted that: "Donald Trump believed, and repeatedly stated publicly that the stock market validated his policies as president. The more the market rose, the greater the affirmation of his "Make America Great Again" agenda. The president's approach was music to investors' ears. They saw it as supporting, both directly and indirectly, the notion that policymakers needed asset prices to head ever higher. It reinforced the longstanding belief of a "Fed put" — shorthand for the view that the Fed will always step in to rescue the markets — to such an extent that investor conditioning changed markedly".

Bernanke Put

In 2007 and early 2008, the financial press had begun discussing the Bernanke Put, as new Federal Reserve Board chairman, Ben Bernanke continued the practice of reducing interest rates to fight market falls. The decision by the Fed to lower short-term interest rates to 50 basis points (0.5%) on October 8, 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 moderate the business cycle. Recent (post March 2011) declines in measures of velocity and related declines in monetary growth measures suggest there is a limit to market manipulation.

Powell Put

In Q4 2019, Fed Chair Jerome Powell recreated the Greenspan Put by providing large-scale "repurchase agreements" to Wall Street investment banks as a way to boost falling asset prices. By the end of 2019, US stock valuations reached valuations not seen since 1999, and so extreme were the valuations of many large US asset classes, that Powell's Put was accused of creating an Everything Bubble. In 2020, to combat the financial effects of the COVID-19 pandemic, Powell would re-introduce the Bernanke Put with direct quantitative easing to boost prices, further underlying the Powell Put.

In June 2020, The Washington Post reported that "The Fed is addicted to propping up the markets, even without a need", and further elaborating with:

Testifying before the Senate Banking Committee, Fed Chair Jerome H. Powell was pressed by Sen. Patrick J. Toomey (R-Pa.), who asked why the Fed was continuing to intervene in credit markets that are working just fine. "If market functioning continues to improve, then we're happy to slow or even stop the purchases", Powell replied, never mentioning the possibility of selling off the bonds already bought. What Powell knows better than anyone is that the moment the Fed makes any such announcement, it will trigger a sharp sell-off by investors who have become addicted to monetary stimulus. And at this point, with so much other economic uncertainty, the Fed seems to feel it needs the support of markets as much as the markets need the Fed.

— Steven Pearlstein, Washington Post (June 2020)

In August 2020, Bloomberg called Powell's policy response to the COVID-19 pandemic, "exuberantly asymmetric" (echoing Alan Greenspan's "irrational exuberance" quote from 1996), and profiled research showing that the Fed's balance sheet was now strongly correlated to being used to rescue falling share prices, or boosting flagging share prices, but that it was rarely used to control extreme stock price valuations (as the US market was then experiencing in August 2020). In November 2020, Bloomberg noted the "Powell Put", was now more extreme than the Greenspan Put or Bernanke Put. Time noted that the scale of Powell's monetary intervention in 2020, and the tolerance of multiple asset bubbles as a side-effect of such intervention, "is changing the Fed forever".

See also

• Austrian Business Cycle Theory
• Credit cycle
• Criticism of the Federal Reserve
• Liquidity trap
• Privatizing profits and socializing losses
• Speculative bubble
• Too big to fail
• Zero interest-rate policy (ZIRP)

References

1. ^ Duy, Tim (13 February 2018). "Powell's Fed Isn't About to End the 'Greenspan Put'". Bloomberg News. Retrieved 22 November 2020.
2. ^ Stiglitz, Joseph E. (2010). Freefall: America, Free Markets, and the Sinking of the World Economy. New York and London: W. W. Norton & Company. p. 135. ISBN 9780393075960.
3. ^ Miller, Marcus; Weller, Paul; Zhang, Lei (2002). "Moral Hazard and the US Stock Market: Analysing the 'Greenspan Put'". The Economic Journal. 112 (478). Oxford University Press: 171–186.
4. ^ Petrou, Karen (6 November 2019). "Repo ructions highlight failure of post-crisis policymaking". Financial Times. Retrieved 13 November 2020. The old 'Greenspan put' is now a Powell promise: fear not, the Fed is there for you
5. ^ Brancaccio, Emiliano; Fontana, Giuseppe (2011). "From Maestro to Villian: A Critical Assessment of the 'Greenspan Put" as the main cause of the global crisis". History of Economic Ideas. 19 (2). Accademia Editoriale: 131–146.
6. ^ Leonard, Christopher (22 June 2020). "How Jay Powell's Coronavirus Response Is Changing the Fed Forever". Time. Retrieved 12 November 2020.
7. ^ Authers, John (4 August 2020). "The Fed's Stocks Policy Is Exuberantly Asymmetric". Bloomberg News. Retrieved 18 November 2020.
8. Hulbert, Mark (16 November 2020). "Yes, the 'Fed Put' Really Does Exist. That Could Be Bad News for Bulls". Barron's. Retrieved 25 November 2020.
9. ^ Howell, Mark (16 January 2020). "The Federal Reserve is the cause of the bubble in everything". Financial Times. Retrieved 9 November 2020.
10. ^ Lachman, Desmond (19 May 2020). "The Federal Reserve's everything bubble". The Hill (newspaper). Retrieved 9 November 2020.
11. Gold, Howard (17 August 2020). "Opinion: The Federal Reserve's policies have drastically increased inequality". MarketWatch. Retrieved 22 November 2020.
12. Nageswaran, V. Anantha (28 January 2019). "Powell reinforces the Yellen-Bernanke-Greenspan put". Mint. Retrieved 22 November 2020.
13. Klien, Matthew (13 May 2015). "Fed says US wealth inequality hasn't increased quite as much as you think". Financial Times. Retrieved 22 November 2020.
14. ^ Steven Pearlstein (17 June 2020). "The Fed is addicted to propping up the markets, even without a need". Washington Post. Retrieved 23 November 2020.
15. Mohamed A. El-Erian (23 November 2020). "Joe Biden needs to break the market's codependency with White House". Financial Times. Retrieved 24 November 2020.
16. Stevenson, Tom (2007-09-19). "History won't treat 'Bernanke put' kindly". The Daily Telegraph. London. Retrieved 2010-05-04.
17. The 'Bernanke Put'—with a Currency Kicker
18. "When Markets Are Too Big to Fail". The New York Times. 2007-09-22. Retrieved 2010-05-04.
19. "Paint it black". The Economist. 2007-10-18.
20. "Q&A: The Fed's Rate Cut". New York Times. 2008-10-08. Retrieved 2008-10-08. {{cite news}}: Unknown parameter |authors= ignored (help)
21. "Central Banks Coordinate Global Cut in Interest Rates". New York Times. 2008-10-08. Retrieved 2008-10-08. {{cite news}}: Unknown parameter |authors= ignored (help)
22. Siegel, Rachel (13 September 2020). "The recession is testing the limits and shortfalls of the Federal Reserve's toolkit". The Washington Post. Retrieved 9 November 2020.
23. Randall, David (11 September 2020). "Fed defends 'pedal to the metal' policy and is not fearful of asset bubbles ahead". Reuters. Retrieved 11 November 2020.

Further reading

• Cieslak, Anna; Vissing-Jorgensen, Annette (March 2020). "The Economics of the Fed Put". National Bureau of Economic Research. Working Paper No. w26894 {{cite journal}}: Cite journal requires |journal= (help)
• Brancaccio, Emiliano; Fontana, Giuseppe (2011). "From Maestro to Villian: A Critical Assessment of the 'Greenspan Put" as the main cause of the global crisis". History of Economic Ideas. 19 (2). Accademia Editoriale: 131–146.
• Miller, Marcus; Weller, Paul; Zhang, Lei (2002). "Moral Hazard and the US Stock Market: Analysing the 'Greenspan Put'". The Economic Journal. 112 (478). Oxford University Press: 171–186.

External links

• Greenspan Put, Investopedia.

• Monetary policy
• Options (finance)
• Monetary policy of the United States