Market Bailouts and the “Fed Put”

Abstract

March/April 2008, 90(2), pp.65-73.more expansionary policy in 1930-32, sufficient to avoid the Great Depression, would the stock market have declined so much?Question 2: Assuming that a more expansionary monetary policy would have supported the stock market to some degree in 1930-32, would it be accurate to say that the Fed had "bailed out" equity investors and created moral hazard by doing so?I note that a more expansionary monetary policy in 1930-32 would, presumably, have supported not only the stock market but also the bond and mortgage markets and the banking system-by reducing the number of defaults created by business and household bankruptcies in subsequent years.Now apply these questions to the current situation.Did the Fed "bail out" the markets with its policy adjustments starting in August of this year?Have we observed an example of what some observers have come to call the "Fed put," typically named after the chairman in office, such as the "Greenspan put" or the "Bernanke put"? 1 Why has no one, at least not recently to my knowl- 1 A put option contract provides that the buyer of the contract can sell an item, such as 100 shares of common stock of a particular company, for a certain price-the strike price-for a certain period.The contract protects the buyer from declines in the stock price beyond the strike price.The "Fed put" terminology implies that Fed policy adjustments, by analogy with a put option, will prevent stock price declines beyond some point.

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