Greenspan put

Naming 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. Tools The main tools used by the "Greenspan put" were: Side effects In contrast to the benefits of asset price inflation, a number of adverse side effects have been identified from the Greenspan put (and the other Fed puts), including: and was considered a driver of the high levels of speculation that created the dot-com bubble. The term "don't fight the Fed" was associated with the Greenspan put, implying do not sell or short assets when the Fed is actively pushing asset prices higher. Economist John H. Makin called it "free insurance for aggressive risk-taking." • Wall Street profits. The Greenspan put created substantial profits for Wall Street investment banks who borrowed large amounts of capital cheaply from the Fed to buy distressed assets during crises. Wall Street learned to use "repurchase agreements" to push non-distressed asset prices even higher, as the positive price action (coupled with more positive analyst notes) that resulted from their repurchase agreement funded buying and stimulated investor interest, who bought the assets off Wall Street at higher prices. Wall Street came to call Greenspan "The Maestro". • Wealth inequality. Various economists attribute the Greenspan put (and the subsequent Bernanke and Powell puts), to the historic widening of wealth inequality in the United States, which bottomed in the 1980s and then rose continually to reach levels not seen since the late 1920s, by late 2020; this is disputed by the Fed. • Housing bubbles. With each successive reduction in interest rates as part of the Greenspan put, US house prices responded by moving higher, due to cheaper mortgages. Eventually, stimulating a wealth effect through higher house prices became an important component of the Greenspan put until it led to the 2008 financial crisis. The unprecedented use by Powell of the Fed put during 2020–2021 to combat the financial effects of the coronavirus pandemic led to exceptional amounts of inflation, forcing Powell to turn the Fed put into a Fed call (i.e. using the same tools to reverse the effects of the Fed put). In his 2022 book The Price of Time: The Real Story of Interest, historian Edward Chancellor showed that overuse of central banking tools such as the Fed put had led to an "everything bubble" with an inflation "hangover". • Escalating economic crises. Steven Pearlstein of The Washington Post described it as: "In essence, the Fed has adopted a strategy that works like a one-way ratchet, providing a floor for stock and bond prices but never a ceiling. The result in part has been a series of financial crises, each requiring a bigger bailout than the last. But when the storm finally passes and it's time to begin sopping up all that emergency credit, the Fed inevitably caves in to pressure from Wall Street, the White House, business leaders and unions and conjures up some rationalization for keeping the party going." ==Variations==

Bernanke put During the 2008 financial crisis, the term "Bernanke put" was invoked to refer to the series of major monetary actions of the then Chair of the Federal Reserve, Ben Bernanke. Bernanke's actions were similar to the "Greenspan put" (e.g. reduce interest rates, offer repos to banks), with the explicit addition of direct quantitative easing (that included both Treasury bonds and mortgage-backed securities) and at a scale that was unprecedented in the history of the Fed. Bernanke attempted to scale back the level of monetary stimulus in June 2010 by bringing QE1 to a close, however, global markets collapsed again and Bernanke was forced to introduce a second program in November 2010 called QE2. He was also forced to execute a subsequent third longer-term program in September 2012 called QE3. however, the tightening caused global markets to collapse again and Powell was forced to abandon his plan. Yellen put The term "Yellen put" refers to the Fed Chair Janet Yellen, but appears less frequently because Yellen only faced one material market correction during her tenure, in Q1 2016, where she directly invoked the monetary tools. The term was also invoked to refer to instances where Yellen sought to maintain high asset prices and market confidence by communicating a desire to maintain a continual loose monetary policy (i.e. very low interest rates and continued quantitative easing). Yellen's continual implied put (or perpetual monetary looseness), saw the term Everything Bubble emerge. During 2015, Bloomberg wrote of Fed monetary policy, "The danger isn't that we're in a unicorn bubble. The danger isn't even that we're in a tech bubble. The danger is that we're in an Everything Bubble – that valuations across the board are simply too high." The New York Times wrote that a global "everything boom" had led to a global "everything bubble," which was driven by: "the world's major central banks have been on a six-year campaign of holding down interest rates and creating more money from thin air to try to stimulate stronger growth in the wake of the financial crisis." As Yellen's term as fed chair came to an end in February 2018, financial writers noticed that several asset classes were simultaneously approaching levels of valuations not seen outside of financial bubbles. Powell put When Jerome Powell was appointed fed chair in 2018, his initial decision to unwind the Yellen put by raising interest rates and commencing quantitative tightening led to concerns that there might not be a "Powell put." Powell had to abandon this unwind when markets collapsed in Q4 2018 and his reversal was seen as a first sign of the Powell Put. As markets waned in mid-2019, Powell recreated the Greenspan Put by providing large-scale "repurchase agreements" to Wall Street investment banks as a way to boost falling asset prices this was seen as confirmation that a "Powell Put" would be invoked to artificially sustain high asset prices. By the end of 2019, US stock valuations reached valuations not seen since 1999 and so extreme were the valuations of many large US asset classes that Powell's Put was accused of re-creating the Everything Bubble. In 2020, to combat the financial effects of the COVID-19 pandemic and the bursting of the Everything Bubble Powell added the tools of the Bernanke put with significant amounts of direct quantitative easing to boost falling prices, further underlying the Powell put. So significant was the Powell put that in June 2020, The Washington Post reported that "The Fed is addicted to propping up the markets, even without a need" and further elaborating with: In November 2020, Bloomberg noted the "Powell put" was now more extreme than the Greenspan put or Bernanke put. Everything Bubble in 2020–21 host Jim Cramer said the market created by the Fed in late 2020 was "the most speculative" he had ever seen. By December 2020, Powell's monetary policy, measured by the Goldman Sachs US Financial Conditions Index (GSFCI), was the loosest in the history of the GSFCI and had created simultaneous asset bubbles across most of the major asset classes in the United States: For example, in equities, in housing and in bonds. Niche assets such as cryptocurrencies saw dramatic increases in price during 2020 and Powell won the 2020 Forbes Person of the Year in Crypto. In December 2020, Fed Chair Jerome Powell invoked the "Fed model" to justify high market valuations, saying: "If you look at P/Es they're historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you'd look at." The creator of the Fed model, Dr. Yardeni, said the Fed's financial actions during the pandemic could form the greatest financial bubble in history. In December 2020, Bloomberg noted "Animal spirits are famously running wild across Wall Street, but crunch the numbers and this bull market is even crazier than it seems." CNBC host Jim Cramer said market created by the Fed in late 2020 was "the most speculative" he had ever seen. On 7 January 2021, former IMF deputy director Desmond Lachman wrote that the Fed's loose monetary policy had created an "everything market bubble" in markets that matched that of 1929. In contrast, the Bank of China started withdrawing liquidity in the first quarter of 2021. Fed call in 2022 By early 2022, rising inflation forced Powell, and latterly other central banks, to significantly tighten financial conditions including raising interest rates and quantitative tightening (the opposite of quantitative easing), which led to a synchronized fall across most asset prices (i.e. the opposite effect of the Everything Bubble). The Economist noted that the "Fed put" had now become a "Fed call" (i.e. a call option being the opposite to a put option). By June 2022, the Wall Street Journal wrote that the Fed had "pricked the Everything Bubble" by "turning the Fed put into a Fed call". By June 2022, the US equity market registered a 20 percent fall from its 2021 high, a situation that historically had led to the "Fed put" being invoked to reverse the correction, however, the Fed instead chose to tighten markets even further by raising rates and increasing quantitative tightening. MoneyWeek declared "The Greenspan put is dead". In July 2022, the former governor of the Reserve Bank of New Zealand, Graeme Wheeler, co-wrote a paper attributing the post-COVID surge in inflation to the overuse of central banking tools and the Fed put toolset in particular. A few days after the publication of Wheeler's paper, an independent investigation was launched into the role of the Reserve Bank of Australia in the post-COVID inflation surge experienced in Australia. Financial historian Edward Chancellor said "central banks' unsustainable policies have created an "everything bubble", leaving the global economy with an inflation "hangover". The Fed cut rates by 50 points, which Powell referred to as a "recalibration" in emphasis on labor market strength compared to lowering inflation. The drop is the first of a series of expected cuts that could mirror Greenspan's cuts in 1995 and 1996, which brought the central rate to Greenspan's preferred "neutral rate". ==See also==