The term “Greenspan put” was coined after the stock market crash of 1987 and the later bailout of LongTerm Capital Management (LTCM) in 1998. The Federal Reserve (Fed), under chair Alan Greenspan, lowered interest rates when the financial system was in trouble, and life continued. The paltry 0.25 percent hike in the Federal Funds Rate on Dec. 13 to 1.5 percent does not change this dynamic.
The idea of the Greenspan put was that lower interest rates would cure the market’s woes. Unfortunately, the Fed has since fallen into a pattern in which longer periods of low or even zero interest rates are used to address yesterday’s errors. But this action also leads us into tomorrow’s financial excess.