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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (43774)	3/21/2000 5:56:00 PM
From: Les H	Respond to of 99985

PIMCO'S MCCULLEY: FED SHOULD USE MARGIN REQUIREMENTS IN MONETARY POLICY By Claudia Hirsch WASHINGTON (MktNews) - A high-profile investment portfolio manager Tuesday told a House Banking panel that the Fed must use all available weapons in its arsenal of monetary policy, including raising margin requirements in the equities market. Paul McCulley, portfolio manager and short-term desk chief at PIMCO, a West Coast investment company with $180 billion in assets, told the House Banking Subcommittee on Domestic and International Monetary Policy he opposes Federal Reserve Chairman Alan Greenspan's stance that margin requirements should stay where they are. Margin requirements have been at 50% since 1974. Between the 1930s and the early 1970s, the Fed tweaked the requirement some three dozen times in its efforts at managing monetary policy. Greenspan has argued that stock prices are not necessarily closely linked with the so-called wealth effect, which is generally defined as the impact of capital gains on consumer spending. The Fed chief has also said that raising margin requirements would be discriminatory against smaller investors. McCulley said Greenspan was "simply wrong" regarding the link between stock prices and the wealth effect, noting that as new-economy stocks have risen relative to total stock market capitalization, margin debt has also accelerated as a percent of total stock market capitalization. An "interest-rate-hike only policy" has a "nefarious effect" on average Americans' activities, not just on major Wall Street players, McCulley said. He also said that if raising the requirement is discriminatory, then the existence of margin requirements is itself discriminatory. Senator Charles Schumer, D-NY, a member of the Banking Committee, also appeared before the House panel to speak in favor of re-examining margin requirements. The market is not a "democracy," he said. And indeed those smaller investors who are most vulnerable to margin debt will benefit the most from the protections of increased margin requirements, he said. As to its correlation to stock prices, Schumer said that "a full-scale investigation into the effects of margin on the markets hasn't been conducted by the Fed since" 1974, when the financial system was not as dominated by the capital markets as it is today. But Schumer stopped short of advocating any type of legislative remedy for the malady of margin debt. "That creates a very dangerous precedent," even if it may be warranted by current circumstances, Schumer said. The testimony Tuesday appeared to be predicated on the assumption that the Fed's interest rate tightening cycle is now aimed at puncturing runaway stock valuations. The Fed has been careful, as ever, not to pinpoint any one motivation behind interest rate moves. The Fed's Federal Open Market Committee on Tuesday again raised its key rates by 25 basis points.