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Greenspan put
The Greenspan put was a monetary policy response to financial crises that Alan Greenspan, former chair of the Federal Reserve, exercised beginning with the crash of 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. The banks so overused Greenspan's tools that their compromised solvency in the 2008 financial crisis required Fed chair Ben Bernanke to use direct quantitative easing (the Bernanke put). The term Yellen put was used to refer to Fed chair Janet Yellen's policy of perpetual monetary looseness (i.e. low interest rates and continual quantitative easing).
In Q4 2019, Fed chair Jerome Powell recreated the Greenspan put by providing repurchase agreements to Wall Street investment 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 the Powell put was stronger than both the Greenspan put or the Bernanke put, while Time noted 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 specific individual tools have varied between each generation of "put", collectively they are often referred to as the Fed put (cf. Central bank put). In late 2014, concern grew about the emergence of a so-called everything bubble due to overuse of the Fed put and perceived simultaneous pricing bubbles in most major US asset classes. By late 2020, under Powell's chairmanship, the perceived everything bubble had reached an extreme level due to unprecedented monetary looseness by the Fed, which simultaneously sent most major US asset classes (i.e. equities, bonds, housing, and commodities) to prior peaks of historical extreme valuation (and beyond in several cases), and created a highly speculative market. By early 2022, in the face of rising inflation, Powell was forced to "prick the everything bubble", and his reversal of the Fed put was termed the Fed call (i.e. a call option being the opposite of a put option).
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, regardless of the prevailing market price of the asset, thus providing a measure of insurance to the holder of the put against falls in the price of the asset.
While Greenspan did not offer such a contractual obligation, under his chairmanship, the Federal Reserve taught markets that when a crisis arose and stock markets fell, the Fed would engage in a series of monetary tools, mostly via Wall Street investment banks, that would cause the stock market falls to reverse. The actions were also referred to as "backstopping" markets.
The main tools used by the "Greenspan put" were:
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 banks 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 2008 financial crisis, due to excessive use of repos, the Fed had to bypass the banks and employ direct quantitative easing; the "Bernanke put" and the "Yellen put" used mostly direct quantitative easing, whereas the "Powell put" used both direct and indirect forms.
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Greenspan put
The Greenspan put was a monetary policy response to financial crises that Alan Greenspan, former chair of the Federal Reserve, exercised beginning with the crash of 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. The banks so overused Greenspan's tools that their compromised solvency in the 2008 financial crisis required Fed chair Ben Bernanke to use direct quantitative easing (the Bernanke put). The term Yellen put was used to refer to Fed chair Janet Yellen's policy of perpetual monetary looseness (i.e. low interest rates and continual quantitative easing).
In Q4 2019, Fed chair Jerome Powell recreated the Greenspan put by providing repurchase agreements to Wall Street investment 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 the Powell put was stronger than both the Greenspan put or the Bernanke put, while Time noted 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 specific individual tools have varied between each generation of "put", collectively they are often referred to as the Fed put (cf. Central bank put). In late 2014, concern grew about the emergence of a so-called everything bubble due to overuse of the Fed put and perceived simultaneous pricing bubbles in most major US asset classes. By late 2020, under Powell's chairmanship, the perceived everything bubble had reached an extreme level due to unprecedented monetary looseness by the Fed, which simultaneously sent most major US asset classes (i.e. equities, bonds, housing, and commodities) to prior peaks of historical extreme valuation (and beyond in several cases), and created a highly speculative market. By early 2022, in the face of rising inflation, Powell was forced to "prick the everything bubble", and his reversal of the Fed put was termed the Fed call (i.e. a call option being the opposite of a put option).
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, regardless of the prevailing market price of the asset, thus providing a measure of insurance to the holder of the put against falls in the price of the asset.
While Greenspan did not offer such a contractual obligation, under his chairmanship, the Federal Reserve taught markets that when a crisis arose and stock markets fell, the Fed would engage in a series of monetary tools, mostly via Wall Street investment banks, that would cause the stock market falls to reverse. The actions were also referred to as "backstopping" markets.
The main tools used by the "Greenspan put" were:
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 banks 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 2008 financial crisis, due to excessive use of repos, the Fed had to bypass the banks and employ direct quantitative easing; the "Bernanke put" and the "Yellen put" used mostly direct quantitative easing, whereas the "Powell put" used both direct and indirect forms.