Who Is Alan Greenspan?
Alan Greenspan is the former Chairman of the Board of Governors of the Federal Reserve System (the Fed), which is the central bank for the United States, from 1987 until 2006. In that role, he also served as the chairman of the Federal Open Market Committee (FOMC), which is the Fed’s principal monetary policymaking committee that makes decisions on interest rates and managing the U.S. money supply. https://35e1bf1d499e31b08b66ac7f2d7a37fa.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html
- Alan Greenspan is an American economist and former chairman of the federal reserve bank.
- Greenspan’s policy was defined by keeping inflation low at all costs, giving him the label of an ‘inflation hawk.’
- The expansionary monetary policy of ‘easy money’ attributed to Greenspan’s tenure has been blamed in part for stoking the 2000 dot-com bubble and the 2008 financial crisis.
Alan Greenspan and the Fed
Alan Greenspan was born in New York City on March 6, 1926. He earned a Ph.D. in economics from New York University later in his life, in 1977. https://35e1bf1d499e31b08b66ac7f2d7a37fa.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html
Greenspan became the 13th Chairman of the Federal Reserve replacing Paul Volcker. President Ronald Reagan was the first to appoint Greenspan to the office, but three other presidents, George H.W. Bush, Bill Clinton, and George W. Bush, named him to four additional terms. His tenure as Chairman lasted for more than 18 years before he retired in 2006 to be replaced by Ben Bernanke. Alan Greenspan now works as a private adviser and consultant.
Alan Greenspan was known as being adept at gaining consensus among Fed board members on policy issues and for serving during one of the most severe economic crises of the late 20th century, the aftermath of the stock market crash of 1987. After that crash, he advocated for sharply slashing interest rates to prevent the economy from sinking into a deep depression.
Considered an inflation hawk, Greenspan received criticism for focusing more on controlling prices than on achieving full employment. Greenspan’s “hawkish” stance generally meant a preference for sacrificing economic growth in exchange for preventing inflation. Finance and investment professionals who preferred more economic growth would often find themselves at odds with Greenspan’s keen focus on inflation.
Greenspan was flexible, however, willing to risk inflation under conditions that could create a severe depression. In 2000, he advocated for reducing interest rates after the dot-com bubble burst. He did so again in 2001 after the 9-11 World Trade Center attack. Greenspan led the FOMC to immediately reduce the Fed funds rate from 3.5% to 3%, and in the following months, he worked towards lowering that rate to as low as 1-percent. However, the economy and stock markets remained sluggish.
Alan Greenspan’s Controversial Legacy
Although he presided over one of the most prosperous periods in American history, Greenspan is remembered by some as making some significant errors. One was in the 1990s when the Federal Reserve took action to slow economic growth in response to fears of inflation. This action resulted in an unforeseen economic downturn. Although Greenspan eventually reversed those actions, in a 1998 speech he conceded that the new economy might not be as susceptible to inflation as he had first thought.
And although in the early 2000s, Greenspan presided over cutting interest rates to levels not seen in many decades, some criticized those rate cuts as contributing to a housing bubble in the U.S., which resulted in the subprime mortgage financial crisis that began in 2007.
In fact, in a 2004 speech, Greenspan suggested more homeowners should consider taking out adjustable-rate mortgages (ARMs) where the interest rate adjusts itself to prevailing market interest rates. Under Greenspan’s tenure, interest rates raised. This increase reset many of those mortgages to much higher payments, creating even more distress for many homeowners and exacerbating the impact of that crisis.
The ‘Greenspan Put’
The ‘Greenspan put’ was a trading strategy popular during the 1990s and 2000s as a result of certain policies implemented by Federal Reserve Chairman Alan Greenspan during that time. Throughout his reign he attempted to help support the U.S. economy by actively using the federal funds rate as a lever for change which many believed encouraged excessive risk taking that led to profitability in put options.
The ‘Greenspan put’ was a term coined in the 1990s. It referred to a reliance on a stock market put option strategy that if utilized could help investors mitigate losses and potentially profit from deflating market bubbles. The Greenspan put suggested that informed investors could expect the Fed to take predictable actions that made put option derivative strategies profitable in times surrounding a crisis.
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