Greenspan blames 'infectious greed' for setbacks

While blaming an "infectious greed" in the business community for market setbacks, Federal Reserve Chairman Alan Greenspan told…

While blaming an "infectious greed" in the business community for market setbacks, Federal Reserve Chairman Alan Greenspan told Congress yesterday that the US economy is on the road to full recovery.

Conor O'Clery

The Fed Chairman, delivering his bi-annual report to the Senate banking Committee, warned however that "previously undiscovered misdeeds will no doubt continue to surface in the weeks ahead as chastened CEOs restate earnings."

"Financial markets have been notably skittish of late and business managers remain decidedly cautious," Greenspan said.

CEOs must be held accountable to accurately report on the financial condition of their companies and should be penalised for not doing so.

"The effects of the recent difficulties will linger for a bit longer but as they wear off, and absent significant further adverse shocks, the US economy is poised to resume a pattern of sustainable growth," Mr Greenspan said.

As he spoke, stocks on Wall Street, which had fallen steeply in morning trading, began to recover with traders taking note of Mr Greenspan's upbeat tone on the future of the economy.

The Fed chairman forecast the economy would grow between 3.50 per cent and 3.75 per cent when measured from the fourth quarter of 2001. In February he said that growth would be in the 2.5 per cent to 3 per cent range. Productivity was rising at a remarkable pace, he said

The "depressing effects of recent events linger," he said. "Spending will continue to adjust for some time to the declines that have occurred in equity prices. Considerable uncertainties - about the progress of the adjustment of capital spending and the rebound in profitability, about the potential for additional revelations of corporate malfeasance, and about possible risks from global political events and terrorism - still confront us."

There was little pent-up demand to be satisfied in the economy, "consequently, a surge in household spending early in this recovery is unlikely."

Mr Greenspan indicated that there would be no rate increase "pending evidence that the forces inhibiting economic growth are dissipating enough to allow the strong fundamentals to show through more fully."

"Business spending has remained weak," he said. Companies whose profits were lowered during the slowdown are reluctant to make big commitments in hiring and in investment until they were sure the recovery is here to stay.

Mr Greenspan repeated his support for forcing companies to treat lucrative stock options for top executives as a business expense.

"Perhaps the recent breakdown of protective barriers resulted from a once-in-a-generation frenzy of speculation that is now over," he said.

"Our historical guardians of financial information were overwhelmed. Too many corporate executives sought ways to "harvest" some of those stock market gains. As a result, the highly desirable spread of shareholding and options among business managers perversely created incentives to artificially inflate reported earnings in order to keep stock prices high and rising," he added.