From William C. Dudley, president of the New York Federal Reserve, at a speech at Bernard M. Baruch College:
Let me be clear, there is no Fed equity market put. The expectation of such a put is dangerous because if investors believe it exists they will view the equity market as less risky.
The “equity market put” refers to the Fed’s practice of giving speculators and investors a “put” option on the equity market. In other words the Fed protects them from losses, like a put option would. This whopper far exceeds: “If you like your health care plan, you can keep it,” as an out and out lie. Since Alan Greenspan opened the liquidity sluice gates after the 1987 stock market crash, the Fed has repeatedly propped up the equity market. That was the response to the savings and loan crisis in the early 1990s, the 1997 Asian currency crisis, the 1998 Russian debt crisis, the 2000 tech wreck, the 9/11 attack, and the 2008-2009 financial crisis. The Fed even pumped liquidity beforehand for a crisis that never happened. Remember Y2K? Does Mr. Dudley think the Fed’s almost fourfold expansion of its balance sheet and microscopic interest rates since the last financial crisis have had nothing to do with the stock market’s ascent from its 2009 low? Does he think that St. Louis Fed President James Bullard’s hint that the Fed should consider delaying the end of quantitative easing on October 16 had nothing to do with reversing a S & P downdraft over the previous few weeks and its subsequent straight up rally? (see Fed Cries Uncle, SLL, 10/16/14) Has he not noticed that equity markets rally anytime any central bank official, anywhere on the planet, hints of additional monetary easing? Mr. Dudley is either monstrously mendacious or dangerously deranged or both (the betting favorite here at SLL) if he can publicly deny the Fed’s equity market put. He is, however, correct that the put is dangerous because it encourages speculators, and what’s left of investors, to view the equity market as less risky.
