As the

Nasdaq Composite

sets new records almost daily, there's a feeling among some strategists that something about this is all wrong.

Even the

Federal Reserve

seems convinced that stock market strength is behind an excess of consumer demand that could erupt into a lava flow of inflation. The tech stocks that lie at the heart of the market's big gains have so far been fairly immune to higher interest rates -- the Fed's usual tool for slowing things down.

So maybe it's time to use another tool: A growing number of strategists believe that instead of hiking interest rates, the Fed should increase margin requirements. This, they say, would curb speculation and perhaps cut consumer demand without harming the real economy.

It's on the Margin, and in the Middle

Margin, very simply, is when a customer borrows from a broker to buy a certain stock. A buyer can borrow up to 50% of a stock's price to buy a certain number of shares. (That is, if you're buying $2,000 worth of shares, you put up at least $1,000 and borrow the rest.) That 50% requirement has been firm since 1974, and the Fed has said it has no intentions to change it, believing it penalizes individual investors who don't have access to as many borrowing vehicles as institutions.

Among

New York Stock Exchange

-member brokerages, debit balances on margin reached a record of $243 billion for the month ended January. That's exceedingly high. So much so that Stephen Roach, chief economist at

Morgan Stanley Dean Witter

, urged the Fed in a comment last week to increase requirements to stave off some excess speculation, and achieve the Fed's goal of bringing stock market gains in line with gains in income.

"It may be high time for the Fed to rethink its stance on stock-market-specific policies," Roach wrote. "The shock effect of an about-face would send an unequivocally clear signal to the equity market: The central bank would be saying 'no' to speculative excesses."

According to Federal Reserve data, a greater percentage of individuals owns stocks than ever before, with nearly half of U.S. residents holding stock either individually or through a fund or retirement account. Foreigners purchased $256 billion in U.S. shares in December 1999, a record, according to

Treasury International Capital

data. (The previous record? The $240 billion in shares purchased in November 1999.) Meanwhile, foreign purchases of U.S. Treasury notes and bonds fell to $244.9 billion, the lowest since June 1996.

Speculation Is All Around

Higher margin levels in themselves don't explain why stocks have run so high, argues Jim Bianco, president of

Bianco Research LLC

.

"I don't think people are margining those stocks to the degree we think they are," Bianco says. "No broker is going to give you a loan to buy your B2B stock of the week on margin. Stocks are going up because people are liquidating every investment in this country and putting it into stocks."

And this, some think, is the real problem, one that the Fed can't address: Investors are putting it all down on equities, and hoping seven doesn't come up.

Paul Kasriel, chief economist at

Northern Trust

, says the flows are evidence enough of a speculative element, never mind how much is on margin. "Somebody is clearly levering, and that's a bet," he says. "And you're trying to get the most bang from your buck."

Why, then, focus on margin as the source? Like Roach says, it's something the Fed could, if it wanted, specifically target, rather than trying to cut off demand through raising interest rates, a "blunt instrument" that the Nasdaq has ignored. As he surmises in his comment, the strategic targeting of margin is a potentially effective one.

But others think it's just some investors' way of protecting themselves, if only psychologically.

"The unconscious thinking is that there's some kind of unhealthy, wild speculation -- 'See, margin levels are going through the roof! It's just like 1929!'" says Bianco. "But everybody is liquidating everything, other than Nasdaq funds. There's this mania to want to own this stuff."

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