- The Washington Times - Wednesday, July 17, 2002

Federal Reserve Chairman Alan Greenspan yesterday predicted the economy would shake off lingering effects of corporate scandal and resume a solid expansion.
He criticized the authors of that corporate scandal as "greedy," and said they have held back economic growth.
Even as he spoke, the market gyrated through another losing session, with the Dow Jones Industrial Average dropping 166 points to 8,473.
The central bank chief expressed optimism that the economy, having weathered greater storms in the past year, such as the recession and the terrorist attacks, is in fundamentally good shape.
Mr. Greenspan said the seeds of the corporate scandals, which have wiped out trillions of dollars of stock value, were sown during the heady days of the late 1990s, when the prospect of quick riches on Wall Street enticed executives and amateurs alike.
"An infectious greed seemed to grip much of our business community," he told the Senate Banking, Housing and Urban Affairs Committee. "Too many corporate executives sought ways to harvest some of these stock market gains."
The advent of generous stock-options grants, which became the chief form of compensation for many executives in the 1990s, gave corporate chieftains the motive to pump up their company's earnings and stock prices each quarter sometimes by devious means and cash in on the gains, he said.
"It's not that humans have become any more greedy. It is that the avenues to express greed had grown so enormously," he said, voicing hope that it was "a once-in-a-generation frenzy of speculation that is now over."
Mr. Greenspan endorsed the tough penalties for corporate fraud proposed by President Bush and making their way through Congress as the most important antidote to outbreaks of rampant greed.
Even as he spoke, the House strengthened its accounting-reform bill by overwhelmingly approving fraud penalties that go beyond even the stringent measures passed unanimously by the Senate on Monday night.
Mr. Greenspan, however, did not recommend any congressional intervention over the proliferation of stock options, contending that those excesses are being corrected in the marketplace and are likely to be addressed soon by federal regulators.
He praised Coca-Cola Co. and a handful of other corporations that announced recently that they would start deducting stock options as an expense on their balance sheets as they do other forms of compensation.
He noted that Coke's announcement led to an increase in its stock price, even as the Dow Jones Industrial Average plunged as much as 440 points Monday, suggesting that investors are rewarding companies that adopt good accounting practices, even if it's at the expense of somewhat lower earnings.
Businesses, especially technology companies, have fought any move to force them to deduct stock options as expense because that would sharply lower their reported earnings and hurt their stock prices.
Mr. Greenspan said chief executive officers, because they not only directly control what goes on in a corporation, but also can establish either a culture of honesty or greed, must shoulder the greatest blame for the wave of scandals.
"Manifestations of lax corporate governance, in my judgment, are largely a symptom of a failed CEO," he said. "CEOs who insist that their auditors render objective accounts get them. And CEOs who discourage corner-cutting by subordinates are rarely exposed to it."
Still, he rued the extensive network of checks and balances in the financial system that failed to catch the lapses in the executive suites.
"Lawyers, internal and external auditors, corporate boards, Wall Street security analysts, rating agencies and large institutional holders of stock all failed for one reason or another to detect and blow the whistle on those who breached the level of trust."
Mr. Greenspan, nevertheless, urged Congress to tread lightly in its efforts to regulate these institutions, which he said have served investors well over the years and remain the best in the world, despite the scandals.
"The system is frayed, but it is not broken," he said.
On the economy, Mr. Greenspan appeared largely to dismiss worries that the stock market's woes will infect consumers and businesses and threaten the economy. The fall of major stock indexes to five-year lows recently took a big bite out of consumer confidence.
Mr. Greenspan acknowledged the effect of the scandals on confidence levels and said the market's travails also are probably inducing businesses to further postpone spending and hiring, thus slowing economic recovery.
But he maintained that the recovery is proceeding much as the Fed had envisioned earlier this year, with steady spending by consumers increasingly being supplemented by a slow return of business production, profitability and spending.
The Fed chairman reveled in the recent revival of manufacturing, the sector hit hardest during the recession, noting the Fed's report yesterday showing a strong 0.8 percent increase in industrial production last month.
And while the loss of stock wealth will continue to drag on consumers for some time, he said, they continue to benefit from low interest rates and a buoyant housing market, and are still responding to bargain offers, such as zero-percent financing by automakers.

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