Alan Greenspan laces his speech with good economic news, but also puts a bull's-eye on dishonest executives.
©Los Angeles Times
July 17, 2002
WASHINGTON -- Federal Reserve chairman Alan Greenspan warned Congress on Tuesday that corporate scandals threaten to injure the United States' slowly mending economy and should be treated with stiff new penalties for executives who cheat.
Within hours, a Republican-controlled House dropped its previous reluctance and rushed to join the Democrat-controlled Senate in substantially increasing jail time for securities fraud and corporate misconduct.
Greenspan dispensed with his usual caution in predicting that new revelations of corporate corruption "will no doubt surface in the weeks ahead" and in recommending a harsh response.
"Even a small increase in the likelihood of large, possibly criminal, penalties for egregious behavior of CEOs can have profoundly important effects," he told the Senate Banking Committee.
Washington had hoped in advance of his testimony the central banker would calm skittish markets, and he was even interrupted by lawmakers updating the market's gyrations during his remarks. But while the market initially rose, Greenspan proved no more successful than President Bush in convincing investors it is again safe to buy stocks.
"There was a little Greenspan effect today," said, Steve Massocca, president and head of trading at Pacific Growth Equities, referring to the markets' gains in response to the chairman's remarks on past occasions. Greenspan's comments Tuesday may have helped soothe badly frayed nerves but were not strong enough to encourage buying, he said.
The dollar slid further Tuesday. In late New York trading, the euro was quoted at $1.0092, up from $1.0055 late Monday, while the dollar was quoted at 116.04 yen, down from 116.31 yen the day before.
Greenspan laced his testimony with tidbits of good economic news, but they were overwhelmed by his caveats and warnings. He skipped right over a portion of his prepared remarks that said the Fed is boosting its forecast of economic growth for the year from 2.5-3 percent to as much as 3.75 percent.
"The U.S economy is poised to resume a pattern of sustainable growth," the central bank chairman said. But only, he added ominously, after current problems "linger for a bit longer ... and absent significant further adverse shocks."
In perhaps the most striking moment of his appearance, the nation's foremost exponent of free-market capitalism sounded like one of its most radical critics.
He railed against the '90s stock boom for engendering "an outsized increase in opportunities for avarice." He charged that ballooning executive pay and stock options "perversely created incentives to artificially inflate reported earnings in order to keep stock prices high and rising."
He warned that once stock markets recover and the economy goes back to growing, Americans are apt to forget the lessons of the 1990s.
"An infectious greed seemed to grip much of our business community. Our historical guardians of financial information were overwhelmed," he said of the decade.
"It is not that humans (became) any more greedy than in generations past," he said. "It is that the avenues to express greed had grown so enormously."
Greenspan called for Congress "to create ... a legal structure which very significantly penalizes malfeasance." His suggestion was taken up with vengeance by some committee members.
"Personally, I think that one way we could restore some confidence in the market would be for the public to see some of the executives who have committed fraud to walk around in handcuffs and orange jumpsuits," said Sen. Jim Bunning, R-Ky.
But having issued his call for stiffer penalties, Greenspan veered away from most other proposals for changing how corporate America is run.
"Remember, the system is frayed, but it is not broken," he told lawmakers.
Banking committee chairman Sen. Paul S. Sarbanes, D-Md., bristled at Greenspan's go-slow approach on everything but penalties, saying it amounts to a recipe for inaction.
The chief sponsor of the Senate's corporate reform package said he had talked with the authors of a series of past proposals for changing accounting rules and corporate structure. "The constant refrain we heard from them was that they had made very important recommendations that had not been adopted" because the immediate crisis passed, Sarbanes warned.
Reflecting Washington's mounting concern about the fragile condition of U.S. financial markets, senators interrupted Greenspan's testimony at several points to report on how various stock indexes were responding to the central banker's remarks.
When the Dow Jones average pared its morning losses from 200 points to 130, Sarbanes suggested that Greenspan speak indefinitely. "That's right," cried Sen. Christopher Dodd, D-Conn. "A filibuster by the chairman of the Fed!"
"I thought you were going to dismiss me for the rest of the day," retorted Greenspan to gales of laughter.
In the end, however, the Fed chairman's ability to nudge markets upward proved as minimal as that of the president, who in speeches last week and again Monday tried to highlight the economy's strengths.
While the markets remain volatile, Greenspan stressed reasons for optimism about the economy.
For one thing, most businesses appear to have worked off their excess stocks of unsold goods that built up during last year's recession and manufacturing industries, among the hardest hit by the slump, are expanding production again.
At the same time, consumers, spurred in part by rising incomes and low interest rates, continue to spend even though falling stock prices and job worries have caused consumer confidence to fall recently. Home sales, fueled by low mortgage rates, continue at near record levels.
"Despite these encouraging developments regarding the longer-term prospects for the economy, financial markets have been notably skittish of late, and business managers remain decidedly cautious," in part because of concerns about future profits.
-- Information from the Washington Post was used in this report.