The Greenspan put is an ironic use of the financial term put, a contractual obligation giving its holder the right to sell an asset at a particular price to a counterparty. The put option can be exercised if asset prices decline below the put price, protecting the holder from further losses. In the Greenspan put the holder is implicitly all market players and the counterparty is the Federal Reserve with an "obligation" to buy at an above-market price. The obligation was not, in this case, contractual but an implicit or expected willingness of the Fed to buy assets at prices well above the going market rate in case of a crisis. During Greenspan's chairmanship, when a crisis arose and the stock market fell more than about 20%, the Fed would buy bonds essentially without limit at high prices, lowering the Fed Funds rate — sometimes to the point of making the real yield negative — and bailing out the holders of bad assets. The Fed added monetary liquidity and encouraged risk-taking in the financial markets to avert further deterioration. The Fed first engaged in this aggressive expansion of liquidity and purchase of otherwise sinking assets after the 1987 stock market crash, which prompted traders to coin the term Greenspan Put. The Greenspan Put — the expectation of a Fed bailout of private parties in case of market decline — created substantial moral hazard: knowing that they could sell sinking assets to the Fed traders would take on risks with high upside possibilities while ignoring the downside risk because it was likely to be absorbed by the Fed. The Fed also injected funds to avert further market declines associated with the savings and loan crisis and Gulf War, the Mexican crisis, the Asian financial crisis, the LTCM crisis, Y2K, the burst of the internet bubble, the 9/11 attacks, and repeatedly from the early stages of the Global Financial Crisis to the present. The Fed's pattern of providing ample liquidity resulted in the investor perception of put protection on asset prices. Investors increasingly believed that in a crisis or downturn, 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. Joseph Stiglitz criticized the put as privatizing profits and socializing losses and implicates it in inflating a speculative bubble in the lead-up to the 2008 financial crisis.
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 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 declines in measures of velocity and related declines in monetary growth measures suggest there is a limit to market manipulation.
