On Jun 26, 2007, at 2:22 PM, Jayson Funke wrote:
I have been trying to understand the “Greenspan put”, which is the
phrase
often used to refer to the Fed’s willingness to backstop equity
declines in
financial markets. Why would lower interest rates encourage money
to flow
into financial markets? Who are the investors that borrow said
money for
such purposes and from whom do they borrow?
It's not just interest rates - AG made it clear that the Fed would
provide whatever liquidity the system needed (see his terse but
powerful statement after the 1987 crash) and organize bailouts as
necessary (see LTCM, Russia, etc.).
That aside, the stock market loves lower interest rates (though not
if, as in the 1930s, they come from depression). It makes it cheaper
to speculate with borrowed money; the lower the interest rate you
plug into a valuation model, the higher the warranted stock price;
and the less attractive fixed-income investments appear as an
alternative. Hedge funds and individual investors borrow; they borrow
from whoever will lend - banks, their brokers, whatever.
