Alan Greenspan had been running the Federal Reserve for barely two months when the floor gave out. On Oct. 19, 1987, the day that became known as “Black Monday,” the Dow Jones Industrial Average plunged nearly 23% in a single session, still the worst one-day percentage drop (1) in its history. Panic rippled across global markets, but the new Fed chair’s response would define the next two decades and beyond.
Greenspan, who died Monday (2) at his Washington home at age 100, moved fast after the stocks crashed. Before markets opened the next morning, the Fed issued a single sentence pledging to keep the financial system liquid, then flooded it with cash and pushed its benchmark interest rate down from about 7.3% to 6.5% (3) over the following months. The spiral stopped. Within a couple of years, the crash looked on a long-term chart like little more than a blip.
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The “Greenspan put”
Greenspan’s swift rescue of the markets earned him early credibility and set the standard for how he handled turmoil for the rest of his tenure. When Wall Street wobbled in 1998, and again after the dot-com bubble burst, investors came to expect the same move: the Fed riding in to cushion the fall.
Traders gave the pattern a name, the “Greenspan put,” (1) borrowing from the options contract that limits an investor’s losses. The assumption that the central bank will backstop markets in a crisis still shapes how Wall Street takes risks today.
Critics would later argue that the very same instinct, rushing to soften every downturn with cheap money, encouraged the reckless betting that helped inflate the 2008 housing bubble (4). But in October 1987, praise for the rookie chairman was nearly unanimous.
Greenspan’s legacy
Across five terms under four presidents, the second-longest tenure in Fed history, Greenspan presided over the longest economic expansion the country had ever seen, from 1991 to 2001, and earned the nickname “the Maestro.” President George W. Bush awarded him the Presidential Medal of Freedom (5) in 2005, and Queen Elizabeth II granted him an honorary knighthood in 2002 for his contribution to global economic stability.
After stepping down in 2006, Greenspan kept writing and consulting, publishing the best-selling memoir The Age of Turbulence.
Greenspan is survived (6) by his wife of 29 years, his only immediate family.
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Article Sources
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Federal Reserve Bank of Richmond (1); NBC News (2); TD Economics (3); PBS (4); CNN (5); Good Morning America (6)
This article originally appeared on Moneywise.com under the title: Alan Greenspan was two months into his Fed job when stocks crashed on Black Monday — what he did next defined his legacy
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