Greenspan put
(finance) the widely-held belief by most traders or speculators that federal reserve chairman alan greenspan (s.1987 to 2006) would use monetary policy to ensure that -sset prices would not fall below a certain level.
a “put” here refers to the put option, a financial derivative that allows the owner the guaranteed right to sell a fixed amount of the underlying -sset for a fixed strike price. a person who has a put for the -ssets she owns therefore is immune from the risk of those -ssets falling below a particular floor.
in the case of the greenspan put, it was widely observed that greenspan intervened in order to protect gains in -sset values; this tended to guarantee that purchases of financial -ssets during greenspan’s tenure were very unlikely to be mistakes. this, of course, created conditions of moral hazard in the -sset markets. particularly in financial stocks and in housing prices.
the outcome of that (october 1994) rate cut turned out to be far worse, as the committee’s actions came to be viewed as the greenspan put, meaning speculators could take enormous amounts of risk trusting that greenspan would do anything to stop the market from a serious decline.
william a. fleckenstein & frederick sheehan, -greenspan’s bubbles- (2008), p.61
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