Greenspan says Fed considering action

“Federal Reserve Chairman Alan Greenspan says a challenge the Fed faces is administering the new banking law in such a way as to ensure that ‘unsound behavior’ by financial institutions remains isolated from other institutions and the economy.

“But when pressed by New York Democratic Sen. Charles Schumer, the Fed chairman acknowledged that officials ‘have also been discussing what alternatives that there are.’ Mr. Greenspan added, ‘I don’t want to suggest that we’re about to do anything at this stage, but I would confirm that we obviously are doing a good deal of thinking about this whole process.’

“Mr. Greenspan didn’t elaborate on what possible actions were under consideration, and other Fed officials refused to discuss what the options were or how seriously action was being considered.

“Independent experts said the Fed doesn’t have many alternatives within its direct power to curb margin lending since it doesn’t regulate securities firms or stock exchanges. But Mr. Greenspan implied that the Fed was working on the issue with the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, which can prod the exchanges to clamp down.

“Late last year, the New York Stock Exchange and National Association of Securities Dealers jointly approved tighter margin requirements on “day traders,” investors who buy and then sell the same stock quickly, but left unchanged the limits for other traders.

“Mr. Greenspan made the remarks during a hearing held to consider his nomination to a fourth four-year term guiding the nation’s monetary policy. The banking committee will vote on the nomination Tuesday morning, with a vote by the full Senate expected later that day. The 73-year-old Mr. Greenspan enjoys broad bipartisan support — he didn’t field a single critical comment at the largely laudatory session — and is expected to be confirmed by an overwhelming majority.

“Financial markets were closely watching Mr. Greenspan’s appearance, which was televised live on many cable-TV networks, for any clues about how aggressively the Fed will raise interest rates in the coming months. However, he shed little new light on that topic. The Fed is widely expected to raise rates by a quarter of a percentage point when policy makers meet Tuesday and Wednesday, and the Fed chairman said nothing to counter that impression. But his opening remarks were silent about the state of the economy, and few of the questions from the senators broached the topic.

“The politicians were largely interested in drawing Mr. Greenspan into the intensifying political war over how to divvy up mounting surpluses. The Fed chairman reiterated his long-held view that his first priority would be to allow as much of the surplus as possible “to flow through into a reduction of debt to the public.” But he refused to be maneuvered by Democrats into saying that Republican plans for a big tax cut would force the Fed to raise rates.

“The most significant new statements Mr. Greenspan made were his comments about margin debt. He didn’t raise the topic, but was drawn into a discussion of it by Mr. Schumer, who has close ties to Wall Street. Mr. Schumer noted a recent jump in margin debt and said he had “talked to a lot of people in the markets, and they’re very troubled by this.”

“Indeed, stock-related borrowing has risen sharply in recent years, and more and more economists are worried that such debt has been fueling a speculative bubble. Through much of last year, Fed officials dismissed those worries, noting that the level of debt had risen largely in line with the value of the stock market.