The Greenspan Put undermines solvency by encouraging banks to embrace more risk.

Along with the end of panic for covid-19, it is time to end the Greenspan Put. Back in the day when Alan Greenspan was in charge of the Federal Reserve, he promised investors that the Federal Reserve would support the stock market if there was a loss of financial liquidity in the age of enhanced risk. That promise is the Greenspan Put. Before that happened, the age of enhanced financial risk was helped when the Federal Reserve ended the policy package of the Banking Act of 1933 which separated commercial and investment bank monies. Most people have called that separation Glass Steagall. Cross border capital flows became normal after the London Stock Exchange deregulated and opened its financial markets to foreign investors in the London Big Bang. Hot money began to look for bargains as it circled the world snapping up cheap assets. As hot money entered and left nations, it created imbalances that also provided investment adavantages to people who held large amounts of secure capital. These changes were processes that led to global bank deregulation.
We can see that since the Greenspan Put was applied to the banking sector, it provides a subsidy whenever banks run into problems. Uncle Sam steps in like an enabler that helps an alcoholic to continue abusing whiskey. It’s time to stop enabling banking hubris. When derivatives created imbalances in the stock market during the subprime mortgage crisis, collaboration between the Treasury and Federal Reserve subsidized the losses of large banks. Some, like Timothy Geithner, claimed that this saved the economy but even more than ten years afterwards, many people experienced life in an economy that had a lot less opportunity for them. And banks have continued dominating the economy in an unhealthy way.
Banks have also profited from the covid-19 panic. They were having trouble with collecting loan debts in the repo market and the Federal Reserve was already providing them with more liquidity. Now ever more liquidity has been made available for failing ventures large and small but the economy continues behaving like a fragile invalid with debts that can’t be paid. The whole world is sick from bad banking. The world needs better banking policies. That would include an end to the Greenspan Put, an end to derivatives, an end to ZIRP and an end to cross border capital flows. Solvency is better than risk.

Buy a copy of Political Catsup with Economy Fries at Amazon.com.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.