He once quipped that it is the Fed's unhappy job to take away the punch bowl just when the party is getting really good. But prior to 1974, the Fed frequently used less intrusive procedures. O ne way is the Fed's power, under Regulation T, to reduce the ability of stock investors to leverage their bets with borrowed money. The Fed adjusted margins 10 times during Martin's long tenure in the 1960s and 1950s. A nother regulatory tool at the Fed's disposal is its power to increase the reserve requirements on bank lending to brokerages and other investment firms.
Bank examiners can also tighten up on lax standards for lending to other financial institutions.
And Congress can tighten up on tax-deductible home equity loans, which are increasingly used to finance stock purchases. To the extent that record high stock prices are the product of too much leverage, the Fed has obvious reasons for concern. The present danger to U.S. prosperity is not growth in the real economy. It is too much borrowing, speculation and volatility in the paper economy. The Virtues of Tight Labor Markets W here regulatory options exist, there are several other reasons why the Fed should avoid choking off real economic activity with higher interest rates.