Saturday, August 13, 2011

The End of The Greenspan Put

link here to article

This article (via Mark Thoma), suggests that the erratic behavior of stock prices may be related to confusion in Wall Street about the possibility that the Greenspan put is no longer operative. The Greenspan put gave investors the belief that the Fed would do what it could to moderate the business cycle. This eliminated some of the risk in owning equities. The worry today is that Fed is out of ammunition to moderate the current business cycle and that the risk premium for stock ownership will have to be increased. In other words, political uncertainty is putting pressure on stock prices. Many investors are worried that the government can not moderate the business cycle.

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