NCPA - National Center for Policy Analysis

No Need To Raise Margin Requirements

April 10, 2000

Congress gave the Federal Reserve the power in 1934 to control margin requirements -- the proportion of funds that can be borrowed to finance stock purchases. From then until 1974, the margin requirement was changed 22 times -- the amount increasing to cool off markets that appeared too speculative, and decreasing to jump-start sluggish markets.

For the past 26 years, it has been left at 50 percent -- meaning that investors may borrow no more than half the purchase price of equities directly from their broker.

Now some warn that the markets are overheated and too volatile, and they suggest margin requirements be raised to reduce volatility -- the tendency of stock prices to fluctuate. But some economists disagree.

  • Considerable research shows margin requirements have no impact on volatility.
  • Some economists believe that the wealth effect -- the tendency of people to consume more as their stock portfolios increase in value -- promotes inflation.
  • But a 1996 study by the Federal Reserve Bank of St. Louis concluded that the pace of increase in stock prices "is not itself inflationary, nor are stock prices particularly useful in helping to gauge inflation trends."

Today, new financial instruments -- such as options, futures and even borrowing against home equity -- allow investors to purchase stocks without recourse to margin loans. San Francisco Fed economist Simon Kwan points out that margin debt is still quite low as a share of market capitalization. In February, it was just 1.5 percent of the combined market value of the New York Stock Exchange and the NASDAQ.

A final reason arguing against a margin increase by the Fed is that brokers and exchanges can and are raising margin requirements on their own.

Source: Bruce Bartlett (National Center for Policy Analysis), "Margin Calls: Should the Fed Step IN? No, Meddling Makes Things Worse," Wall Street Journal, April 10, 2000.


Browse more articles on Economic Issues