Alan Greenspan

Alan Greenspan is the U.S. distinguished figure in economics, and a former chairman of the Federal Reserve Board, who set monetary policy from 1987 to 2006.

In fact, Greenspan is most familiar for leading the way of the Great Moderation, i.e. a period of quiet steady inflation, along with sustainable economic development.

Youth and outset of career

Alan Greenspan was born on March 6, 1926, in New York, in a family of Jewish immigrants. His father, Herbert, was a businessman, and later acquired a status of stockbroker and economic consultant. At the age of 3, his parents divorced. However, this didn’t prevent his father from having a great impact on the formation of Greenspan’s personality.  A major influence was the book "Recovery Ahead!", in which his father advocated for the New Deal, i.e. the economic policy of President Franklin Delano Roosevelt.

Actually, Alan Greenspan became an honors student, being able to transfer from the seventh grade straight into the ninth. After graduating from George Washington High School in 1943, he entered the prestigious private Juilliard School, but then dismissed, and played in a jazz group, where famous saxophonist Stan Getz performed. Shortly thereafter, Greenspan began to manage the financial affairs of his ensemble.

After receiving bachelor and master's degrees in the economic realm, the future head of the Federal Reserve met the writer Ayn Rand, the founder of Objectivism, or a philosophical movement that stood for libertarianism and unregulated capitalism. This acquaintance had a lasting influence on his views.

In 1954, together with William Townsend, Alan Greenspan founded Townsend & Greenspan, an economic consulting firm that brought them a large fortune.

Professional activities

In 1968, Alan Greenspan met his former jazz bandmate, Leonard Garment, who was an associate of the prospective U.S. President Richard Nixon. Future head of the state was advised to hire Greenspan as a legislation director for his campaign headquarters. After Nixon's election, Alan Greenspan participated in a transitional administration, but then resigned from the White House, acting as an informal adviser.

After Republican Ronald Reagan was elected as the President of the United States, Alan Greenspan became an economic consultant to the Congressional Budget Committee.

In due course, he was appointed to the position of a Chairman of the Federal Reserve Service, a quasi-state structure that performs the functions of the U.S. central bank. Two months after his assignment, there was a collapse in quotations on the stock exchange, which later became known as "Black Monday". Thanks to the Fed prompt actions, this crisis had been quickly overcome.

The press praised Alan Greenspan, claiming that during his leadership in the Fed, there was little inflation and continuous economic growth in the U.S. Experts note that thanks to the low interest rate, American firms could develop their investment activities and put up the capital in information technologies.

Pursued policies

As a matter of fact, Alan Greenspan has been called the most powerful statesman in the world, following the U.S. President. The media pointed out that only William McChesney Martin held the Fed post longer than this outstanding economist. Describing his political beliefs, Greenspan called his views as a "Libertarian Republican".

Inflationary pressures. Alan Greenspan pursued a tight monetary policy and tried to keep inflation under control, while remaining a supporter of a liberal economy and minimizing its state intervention. In 1987, as a result of the measures taken by the Fed, and particularly by the economist, it was possible to effectively overcome the crisis, caused by a 22.6% drop in the Dow Jones Industrial Average.

Unemployment in the U.S. had reached its lowest level (4%) in more than 20 years, while inflation - its limit in a decade (1.5%). Under Alan Greenspan's leadership, the Fed experienced one of the longest periods of economic growth.

Consumer loans. In 2002-2004, interest rates were extremely low. This situation was mainly due to the strong inflow of savings from Asian emerging market economies and other regions of the world.

However, Alan Greenspan’s opponents believed that the increase in interest rates was erroneous and led to a recession in the economy in the early 2000s. Moreover, many economists predicted that his policies could lead to the formation of speculative bubbles. Since the start of the U.S. mortgage crisis in 2007, and the start of the “Occupy Wall Street” protests in 2011, Alan Greenspan has been cited as one of the main parties at fault.

Greenspan Put. First of all, the put option allows the owner to sell a commodity at a predetermined price. In the falling market, it also allows investors to make a profit by getting others to buy above the commercial value.

Thus, Greenspan's put option was to control short-term interest rates. All market players, including central bankers, believed that lower interest rates could increase the demand for financial facilities, which, in turn, stimulated consumer spending and investment in manufacturing. 

In other words, the “Greenspan Put” was a nickname given to the policies pursued by Alan Greenspan during his tenure as a Chairman of the Federal Reserve System. The Fed, at another point, has been extremely active in stopping the stock market from a decline, acting as a form of insurance against losses, functioning like a regular put option.