Delving into stock market phrases: The Greenspan put

Julie Brownlee, Fsp Invest, 03 Nov. 2015

Tags: greenspan put, what is the greenspan put, bernanke put, stock market crashes, stock market phrases, stock market

There are a whole host of different stock market sayings and phrases with their own unique roots.

One such stock market phrase is the Greenspan put.

So what does the Greenspan put actually mean and refer to?

Let’s take a closer look…

What is the Greenspan put?

The Greenspan put came about after the stock market crash of 1987. Whenever the stock market fell significantly, the then chairman of the US Federal Reserve, Alan Greenspan would step in and reduce interest rates.

To explain the phrase more, a put is a financial instrument which lets you sell an asset at a given price, and this helps to insure yourself against stock market falls.

Puts are options which give the holder the right to sell an asset when the price of an asset falls below the put price. This prevents the holder from making further losses.

What was wrong with the Greenspan put?

There were critics to this. This is because the behaviour creates a moral hazard as there is an incentive for investors to behave badly.

To put it another way, the existence of the put could make investors and institutions take on higher levels of risk than they normally would.

This, in turn, makes the stock market more prone to booms and crashes, and this undermines the Federal Reserve’s attempts to stabilise it.

Greenspan’s predecessor Ben Bernanke, also went on to do the same thing when he took over at the helm of the Federal Reserve. In 2007 and 2008 he reduced interest rates following the financial crisis.

So there you have it. What the Greenspan put is.

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