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To: SOROS who wrote (129277)	10/15/2001 7:20:50 AM
From: Giordano Bruno	Respond to of 436258

Meyer Urges Federal Reserve to Add Corporate Bonds, Stocks to Portfolio By GREG IP Staff Reporter of THE WALL STREET JOURNAL WASHINGON--The Federal Reserve should consider adding corporate bonds and stocks to its portfolio of securities when the supply of Treasury bonds dwindles, Fed Governor Laurence Meyer said. The Fed controls the money supply and interest rates primarily by buying and selling Treasury securities, both permanently and temporarily. Should budget surpluses result in a much smaller supply of Treasury securities, Mr. Meyer said in a speech in Philadelphia, the Fed's permanent portfolio of securities should consist of "a slice of the same assets held by the private sector. We might think of this portfolio as one large index fund, with all private debt, equity, and other financial claims represented in proportion to their outstanding stocks." Mr. Meyer acknowledged holding stocks would give the government "ownership rights over private businesses," but suggested holding only corporate bonds would distort capital markets by favoring debt over equity financing. He said a mutual fund might be asked to manage the portfolio "under some strict guidelines, related to appropriate indexing and asset quality." This would also distance the Fed from a management role in the companies whose stock it owns, he said. For the Fed's temporary operations, Mr. Meyer suggested accepting a broader range of collateral than at present. In addition to Treasurys, the Fed now accepts as collateral bonds and mortgage-backed securities issued by mortgage lenders Fannie Mae and Freddie Mac. But Mr. Meyer said holding their debt and not other private assets would "reinforce the market perception of the special status of federal agency debt," which would "increase the subsidy that already exists in this market, potentially further distorting the allocation of credit and resources." The FOMC has asked Fed staff to explore what additional assets the Fed might use as the supply of Treasurys dwindles, although the urgency has decreased given that a sharp shrinkage in the surplus this fiscal year, and possible return to deficits, has delayed the point at which the federal debt is retired. Among the options Fed officials have disclosed are holding securities issued by lender Ginnie Mae, which are fully backed by the Treasury, foreign government debt, and municipal securities. They have not previously explicitly suggested corporate bonds or stocks. Mr. Meyer said he was speaking for himself, rather than for the Federal Reserve Board or the FOMC.