KKR & Co. L.P. (KKR), Reynolds American, Inc. (RAI): The Libertarian Who Ruined the Free Market

On this day in economic and business history …

The Federal Reserve of the 1980s was known primarily for its role in combating the inflation that had riddled the previous decade. Under the leadership of Chairman Paul Volcker, the Fed pushed inflation rates down from a peak of 15% in early 1980 to a far more moderate rate of approximately 4% by the latter half of the decade. His most important work finished, Volcker unexpectedly resigned on June 2, 1987. That same day, President Reagan announced the selection of a successor whose name would later become synonymous with booming stock markets and asset bubbles: Alan Greenspan.

Volcker’s resignation shocked the international financial community, according to the Los Angeles Times. The former Fed chairman’s aggressive inflation-fighting policies, which became highly unpopular when the U.S. economy fell into a damaging recession in the early ’80s, had become widely respected by 1987 as markets soared to new records with nearly every passing day. Greenspan was deferential toward his predecessor, saying that “filling Paul Volcker’s shoes will be a major challenge,” but promised to serve in the Volcker mold when confirmed to the post. However, the selection of Greenspan, a staunch Republican whose close ties to Ayn Rand’s Objectivism were already well known, drew sharp rebukes from politicians across the aisle. One Democratic representative said that “Greenspan is such an ideologue that he will more than likely cave in to ideological pressures.”

Greenspan sailed to an easy confirmation two months later, beginning his second stint as a public servant since his four-year tenure as the chairman of President Ford’s Council of Economic Advisors. He was quickly beset by a major market problem, as two months after his confirmation, the Dow Jones Industrial Average suffered the worst one-day percentage drop in its century-plus history. Immediately after the crash, the Greenspan Fed issued a press release promising to “serve as a source of liquidity to support the economic and financial system.” Thus the Greenspan Put was born. This term refers to Greenspan’s consistent willingness to backstop the financial system and the stock market — a “put,” for those investors unaware, is an option that grants the buyer the right to sell a certain asset to the seller of the put when values drop below a certain price.