Federal Reserve Chairman Alan Greenspan told Congress Tuesday the economy is headed towards full recovery from the recession despite its lingering effects and an “infectious greed” that he said must be checked
within the corporate community.
“The fundamentals are in place for a return to sustained healthy growth,” Greenspan told the Senate Banking Committee,citing “remarkably strong” productivity growth and low inflation even in the presence of “considerable uncertainties” that “in previous business cycles almost
surely would have induced a severe contraction.”
His report came in the wake of a 97-0 Senate vote Monday on a bill to toughen punishment for accounting fraud that has left investors weary and the market volatile. Wall Sreet trading Tuesday saw the Dow Jones industrials plummeting 166 points after a morning fall of almost 230
But Greenspan expressed confidence in the resilience of the U.S. economy,forecasting a growth in real GDP of 3-1/2 to 3-3/4 percent in 2002 and a decrease in the unemployment rate to between 5-1/4 and 5-1/2 percent by the end of next year. These numbers were more optimistic than those in the Fed’s February report,where GDP growth was pegged at 2-1/2 to 3 percent,and also predictive of vastly less unemployment than the 7.8 percent which marked the last recession of 1990-91.
But Greenspan said as “managers seem to remain skeptical of the evidence of an emerging upturn,” CEOs must work to regain and maintain investor trust.
“Manifestations of lax corporate governance,in my judgment,are largely a symptom of a failed CEO,” Greenspan said. “In the end,a CEO must be afforded full authority to implement corporate strategies,but also must
bear the responsibility to accurately report the resulting condition of the corporation to shareholders and potential investors.”
He attributed recent scandals at corporations such WorldCom Inc.,ImClone Systems Inc. and Enron Corp. to a “rapidenlargement of stock market capitalizations in the latter part of the 1990s that arguably engendered an outsized increase in opportunities for avarice.”
But he said incentives for such practices is down. “With profitable opportunities for malfeasance markedly diminished,far fewer questionable practices are likely to be initiated in the immediate future,” he said. But he also predicted that more accounting scandals would
surface within the next few weeks as CEOs restate earnings,and that “even if the worst is over,history cautions us that memories fade.”
He said this underlined a need for stronger checks and balances. “Although we may not be able to change the character of corporate officers,” he said,”we can change behavior through incentives and penalties.”
When questioned on the bill passed Monday targeting corporate fraud,Greenspan called its elements “very specific” and “to the point.” But he noted that flexibility is often more important in checks and balances than rigid laws that are inadaptable to future market conditions.
He said the private sector remains more efficient than Congress in its ability to right itself,and he told the Senate he was encouraged by Coca-Cola Company’s recent announcement that it would expense stock options.
The Senate’s bill was much more prohibitive than the House version passed in April before recent scandals made the atmosphere much more tense,and will be tested next in a House-Senate conference.
The combination of corporate malfeasance with capital spending adjustment and the aftershocks of Sept. 11 demand “the accommodative stance of policy adopted last year” remain temporarily,Greenspan said. This would hold short-term interest rates at 40-year lows in the hope of further motivating business investment and consumer
Consumer prices were predicted to rise between 1.5 percent to 1.75 percent this year,keeping inflation at moderate levels.