Greenspan blasts 'infectious greed'

By T.K. MALOY, UPI Deputy Business Editor

WASHINGTON, July 16 (UPI) -- Federal Reserve Chairman Alan Greenspan told a congressional panel Tuesday that the nation's recovery from its first recession in a decade continues -- albeit slowly.

Greenspan also delivered a warning that the growing revelations of corporate accounting malfeasance and irresponsibility -- what he termed an "infectious greed" -- were a threat to the economic recovery, if left unpunished and unregulated.


"Why did corporate governance checks and balances that served us reasonably well in the past break down? At root was the rapid enlargement of stock market capitalizations in the latter part of the 1990s that arguably engendered an outsized increase in opportunities for avarice," the Fed chief said.

"An infectious greed seemed to grip much of our business community," said Greenspan of corporate efforts to manipulate company balance sheets in order to artificially boost stock prices.

On the general economic front, the Fed chairman said that the nation's central bank anticipates an economic growth rate of between 3.5 percent to 3.75 percent for the year.

Also, the Fed chairman noted that the pace of any recovery was sufficiently slow to contain inflationary pressure. This indicates that the Fed is unlikely to raise key lending rates soon, meaning that mortgage rates will remain low.


"Over the 4 1/2 months since I last testified before this committee on monetary policy, the economy has continue to expand, largely along the broad contours we had anticipated at that time," said Greenspan to the Senate Banking Committee members, adding, "although the uncertainties of earlier this year are as of yet not fully resolved."

Sen. Paul Sarbanes, D-Md., who chairs the committee, said in his opening remarks that this was a "time of significant uncertainty for the U.S. economy."

Delivering the Federal Reserve's twice-yearly report on monetary policy to Congress, Greenspan noted such favorable economic factors as a reduction in corporate inventories, low inflation, continued productivity growth and steady household spending.

He also, however, cited the multiple economic blows that the economy has recently been forced to withstand, including major declines in the equity markets, a sharp retrenchment in investment spending, and the devastating terror attacks of Sept. 11.

Greenspan noted how in previous "business cycles (these economic blows) almost surely would have induced a severe contraction."

"But while the economy has held remarkably well, not surprisingly, the depressing effects of recent events linger," the Fed chairman added.

Greenspan sounded a cautionary note over Wall Street worries the U.S. dollar has started a steady decline.


"Exchange-rate movements depend on shifting perceptions of the relative returns from investing in different countries and on the myriad influences on relative tendencies to import and export," the Fed chairman said. "The net effect of these factors over any future time period is extraordinarily difficult to assess in advance."

Greenspan also noted that while the economy continued its slow upturn, the influence of the burgeoning corporate accounting scandals and the subsequent marked drop in the financial markets have had a negative effect.

"Spending will continue to adjust for some time to the declines that have occurred in equity prices," Greenspan said. "In recent weeks, those prices have fallen further on net, in part under the influence of growing concerns about corporate governance and business transparency problems that evidently accumulated during the earlier rapid run-up in these markets."

The comments come in the wake of large-scale corporate accounting scandal revelations, including WorldCom Inc.'s misstatement of more than $3.8 billion in earnings.

"Manifestations of lax corporate governance, in my judgment, are largely a symptom of a failed (chief executive officer)," the Fed chairman noted.

"I recognize that I am saying that the state of corporate governance to a very large extent reflects the character of the CEO, and that this is a very difficult issue to address," Greenspan added. "Although we may not be able to change the character of corporate officers, we can change behavior through incentives and penalties. That, in my judgment, could dramatically improve the state of corporate governance."


Late Monday, also prompted by the mounting reports of corporate accounting scandals, the Senate unanimously approved sweeping legislation to reform oversight of the accounting industry. The measure creates an independent regulatory board to oversee accounting firms and bars accountants from also performing various consulting services for their accounting clients in order to reduce potential conflicts of interest.

Members of both parties said they hoped the bill would send a positive signal to investors and boost confidence in corporate America, which has seen its reputation tarnished in the wake of blowups at Enron Corp., Global Crossing and WorldCom Inc. It passed Monday in a 97 to 0 vote.

The measure's architect, the Banking Committee's Sarbanes, called it a "major step contributing to the restoration of investor confidence.

"I think this marks the end of weak self-regulation with respect to public company auditors," Sarbanes said.

Questions over corporate financial reporting have led to steady drops in the market. The blue-chip Dow Jones industrial average losing nearly 700 points last week, and having a wild swing Monday, when it dropped nearly 450 points and then bounced back to lose only 45 points.

Market analysts said Tuesday that stocks rebounded from their early lows after Greenspan said the U.S. economy has held up against a steady pounding of economic hits, including corporate accounting blow-ups.


In late trading Tuesday, the Dow was down around 50 points and the tech-heavy Nasdaq composite index was up around 7 points.

(With reporting by UPI congressional correspondent Mark Benjamin and UPI financial markets correspondent Frank Schnaue.)

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