Greenspan Put

Fed Reserve Chairman Mr. Alan Greenspan, who was chairman for almost two decades, did some tinkering with the federal funds rate (the interest rate at which banks must lend money to each other).

The Greenspan Put was a trading strategy that investors used for put options as a result of Chairman Greenspan’s actions. Because Greenspan used the federal funds rate as a lever often (depending on what the economy was doing), it became pretty predictable when and in what direction Greenspan was going to pull that federal funds rate lever.

Investors seized the day, using the fact that they knew Greenspan was going to lower or raise the fed funds rate, making put options (contracts to sell assets at a specified price before a specified date) profitable at the opportune times, and arguably encouraging a lot of risk. Greenspan was no fool and knew what he was doing, incentivizing the increasing risk-taking in markets by keeping rates super low.

Greenspan’s replacement, Ben Bernanke, did similar tinkering as Greenspan, which some say helped lead to the risk-taking that caused the Great Recession in 2007-2008.

Maybe time to cool it on the levers? Maybe not.