IT all started when stock markets around the world tumbled in October 1987. After seeing the Dow Jones index fall by more than 500 points in a single day, the then-chairman of the Federal Reserve cut interest rates to shore up the stock market. It did the trick.

Confidence returned, Wall Street rallied and so was born the idea of the ‘Greenspan put’ — when times got tough the Fed could always be relied upon to ride to the rescue.

The Greenspan put was deployed in a more serious crisis in 1998, when the hedge fund Long Term Capital Management went belly-up, a move that ensured that the wild dot com boom of the late 1990s continued for a further two years. When the Internet bubble collapsed under the weight of absurd valuations and falling profitability, Wall Street expected Greenspan to deliver, and once again he did not disappoint.

Interest rates were slashed to one per cent and left there for a year, creating the conditions for a housing boom the like of which the United States had never seen. Eventually, the Fed did start to tighten policy, but too little too late.

Greenspan has long retired, but the Fed’s policy has not changed. The biggest bubble in history led to the biggest bust in history and the biggest policy response in history. Zero interest rates, electronic money creation, manipulation of the money markets: you name it, the Fed under Greenspan’s successor, Ben Bernanke, has tried it.

The strategy appears to be working, after a fashion. Activity in the world’s biggest economy is picking up and unemployment has started to come down. Compared with Europe — which is not saying much, admittedly — the US is doing OK.

In the financial markets, there is growing confidence that America’s recovery is for real, and a lively debate about whether the Fed needs to start to thinking about withdrawing some of the stimulus it has provided. Bond yields — the interest rate paid on government bonds — have been rising in the past few weeks, an indication that financial markets believe stronger growth will force the Fed into taking pre-emptive action against inflation.

There are three schools of thought about the US economy. In the first there are the doves, who believe that policy should be kept ultra-loose for years to come. They are led by Bernanke, who, as a student of the Great Depression and Japan’s ‘lost decade’ in the 1990s, is alive to the risk that tightening too quickly and too aggressively can tip countries back into recession.

That was what happened in the US in 1937 and on many occasions in Japan during the 1990s and early 2000s. As things stand, Bernanke would be happy to see the Fed’s key policy rate remain at virtually zero for some time.

The Fed chairman is modestly encouraged by recent developments in the US economy, which has seen jobs created, a floor put under the housing market and a pickup in factory output. But he remains unconvinced about the strength and the durability of this recovery, not least because something similar happened at the end of 2010 and the start of 2011. — The Guardian, London