Fed Chairman Resists Market Regulator Role

Federal Reserve Board Chairman Alan Greenspan, in his first extended public discussion of the Oct. 19 stock market collapse, said Tuesday that the Fed’s governors “seriously question” proposals for expanding its authority to oversee the stocks, options and futures markets.

But Greenspan, testifying before the Senate Banking Committee, reluctantly expressed support for a proposal that market-interrupting “circuit breakers” be developed to slow trading when it gets too volatile. That proposal was among the recommendations of a commission appointed by President Reagan to examine the market collapse.

Circuit breakers “may be the least bad of all the solutions. At some point you’re going to see excess orders in the market. Unless something absorbs them, the whole system could break down. So it’s less worse to have circuit breakers than to submit to the random forces of excess demand,” Greenspan said.

The Fed chairman said that he generally agrees with the finding of the commission headed by former New Jersey Sen. Nicholas F. Brady that the crash was caused by distortions in the markets themselves rather than by fundamental problems in the nation’s economy.

Federal Safety Net

In resisting suggestions that the Fed be given dominant authority for supervising securities markets, Greenspan warned that such a step might create “a presumption by many that the federal safety net applicable to depository institutions (i.e., commercial banks) was being extended to these markets.”

“If the government over-guarantees in securities markets . . . then you would begin to get too much demand for credit, which, in turn, would drive interest rates up” and perhaps re-create some of the factors that drove the stock market to unsustainable heights last year, Greenspan said.

In earlier testimony Tuesday, Brady, who was chairman of the Task Force on Market Mechanisms, said that Congress should give the markets and federal regulatory agencies--primarily the Securities and Exchange Commission and the Commodity Futures Trading Commission--six months to come up with a coordinated plan for dealing with present problems.

If they fail to develop plans for a coordinated regulatory system, Congress should impose one with legislation, he said.

‘Gun Is Still Loaded’

“Get them on the firing line to come up with an answer and, if they don’t, do it for them,” Brady advised. “We must act to prevent a recurrence of the events of October. We are looking down the barrel, and the gun is still loaded.”

In today’s relatively subdued markets, Brady said, he sees no likelihood of that trigger being pulled but that serious dangers remain for the future.

In its report early last month, Brady’s commission urged reforms in four areas and proposed that the Fed take charge of all of them. It recommended:

--Coordinating and strengthening the trading mechanisms so that they can handle massive flows of trading in the increasingly interrelated markets for stocks, options and futures.

--Coordinating the margin requirements that regulate the amount of money investors must put up to make purchases in the three markets.

--Establishing circuit breaker mechanisms to prevent runaway trading in any market.

--Setting up a central information system to monitor activities in all three markets every day.

Reluctance Hedged

Greenspan, whose general reluctance to thrust the Fed into a vastly expanded regulatory role had been widely expected, carefully hedged his reluctance in Tuesday’s testimony.

“I’m not saying we’d refuse the authority if you legislated it,” Greenspan told committee Chairman William Proxmire (D-Wis.). “But, we are also aware there are disadvantages in concentrating such power in one agency.”

He suggested instead that the Fed could work with the SEC and the Commodity Futures Trading Commission and perhaps the Treasury in a program of joint oversight with more diffuse powers.

Greenspan said that the Fed governors flatly oppose central market data collection, except when investors and trading institutions offer it voluntarily, on the ground that the potential invasion of privacy would chill market activity and drive foreign investors to offshore markets.

But, in reply to a query from Proxmire, Greenspan said that the Federal Reserve Board “would withdraw our concern” if it were established that the information would be held in confidence by the regulating agencies and would be privileged from public disclosure. In particular, he said, the Fed would insist that the data not be subject to disclosure through the Freedom of Information Act.