NEW YORK (AP) -- How many small investors might have been saved the costly consequences of their naivete had the Federal Reserve made it more difficult for them to invest?
This is not a new question, but it has assumed a new meaning after the multibillion-dollar shearing investors took during the cruelest April in many years.
It still has no answer, or at least no response that might put the question to rest. The Fed had the power to limit what it viewed as overly ebullient stock purchases, but it declined to use it.
That power, expressed in so-called Regulation T, allows the Fed to raise or lower margin requirements, or the size of the down payment investors must produce before buying shares in a company.
The Fed has left the margin requirement at 50 percent since January 1974, despite its acknowledgment that the rise in borrowing to buy stocks over the past six months was worrisome.
After rising in tandem with stock prices through much of the 1990s, such borrowing spurted late last year and during 2000, just as the market itself spurted.
As 1999 ended, investors owed New York Stock Exchange firms $229 billion, almost $50 billion more than in June, and the total was rising. The Financial Markets Center, a think tank, measured the tab as the highest in 63 years as a percentage of gross domestic product.
The idea behind raising Regulation T is that higher down payments, or margin requirements, would tend to discourage speculation, and it had been used often for that purpose until 1974.
While the idea might appear to be entirely rational, Fed chairman Alan Greenspan testified before Congress that a rising level of stock prices is unrelated to liberal margin requirements.
He went further, cautioning that to raise requirements might put small and poor investors at a disadvantage to large investors, who have various other sources of funds to help meet down payments.
Meanwhile, the Fed raised interest rates in an attempt to slow the economy, which it feared was being pushed by demands beyond its ability to produce, a well-known precursor of inflation.
The stock market all put ignored the higher rates. Investors continued to pour money into the market, and many of them then doubled the size of their investment by borrowing from their broker. In effect, they used stock as collateral to borrow half the price.
As almost any investor could recognize, the danger in such a procedure was that a downturn in the market value of their stocks -- the collateral -- would require them to put up more money. Either that, or face the possibility the broker might sell their stocks.
It was a danger easily ignored as the market continued to soar. Optimists at heart, many investors rationalized that they would be able to sell out well before prices ever fell to margin-call levels.
They and others now know that a modern market of huge institutional traders and instant electronics can turn a gain into a loss within minutes, leaving individual traders no time to sell.
The question of why margins weren't raised isn't just for the Federal Reserve. Brokers, too, could have imposed their own margin levels; some did so, but many did not. And the situation is also one to be pondered by Congress.
Finally, and unavoidably, the consequences of borrowing to buy stocks is one that must be considered by every investor.
They can wonder and complain, perhaps justifiably, why they weren't better protected -- from themselves -- no less. But in a free and open market they are where the buck stops.
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