Greenspan Put
Candlefocus EditorGreenspan believed that any major market declines would have ripple effects on the economy and he therefore preferred to step in with "no cost" options, such as lowering interest rates to help create a cushion in the event of a crash. In this way, he sought to provide a kind of insurance policy for the markets.
In the event of a downturn, Greenspan believed that the Fed’s policies should act as a backstop and ensure that market losses would not be too extreme. This policy thus came to be known as the “Greenspan Put”.
The Greenspan Put was credited with several important successes. First, the Fed's aggressive actions in 1998 to prevent a correction of the stock market during the Russian financial crisis were widely seen as having prevented much larger losses. This had a significant positive impact on the U.S. economy, which had been on the brink of a recession at the time.
Second, in 2000, the Greenspan Put helped mitigate losses during the tech stock bubble burst. In fact, Greenspan testified in front of Congress that without his intervention, the losses would have exceeded anything experienced during the Great Depression of the 1930s.
The third episode of the Greenspan Put occurred in 2003, when the Fed temporarily lowered the Federal Funds rates, which acts as a benchmark for the cost of money, in order to support the markets and prevent further losses.
In conclusion, the Greenspan Put was a key element of Fed policy during the chairmanship of Alan Greenspan. It involved the Fed introducing pro-growth policies to act as a backstop during market downturns and help to mitigate losses. This policy of the Greenspan Put has been credited with preventing some of the worst market losses in U.S. history and for that, Greenspan deserves a lot of credit. It is important to note, however, that there is a risk associated with this type of policy in that large market losses could still occur, even with the Fed’s intervention.