Greenspan Fails to Soothe Sagging Markets

Despite Alan Greenspan's assurances the U.S. economy is holding up in the face of corporate scandals, his acknowledgment of a slow recovery continued to cast a shadow over markets today.

"While the economy has held up remarkably well, not surprisingly the depressing effects of recent events linger," Greenspan said this morning in his twice-yearly report on monetary policy before the Senate Banking Committee.

But Greenspan's speech appeared to do little to soothe rattled investors' nerves. Markets once again had a volatile session, with the Dow Jones Industrial Average closing down over 150 points despite gaining some ground in the afternoon after posting triple-digit declines early in the session. The Nasdaq also closed slightly lower.

Selling pressure in blue-chip stocks continued despite some of the biggest names in business reporting better-than-expected earnings, including General Motors, Johnson & Johnson and Merrill Lynch.

Analysts had hoped that more good news about earnings could outweigh the mounting corporate accounting scandals and set the stage for a rally. But so far, that hasn't happened.

Greenspan addressed the effect of corporate malfeasance directly, saying "an infectious greed seemed to grip much of our business community," overcoming good judgment among some CEOs, leading to a loss of investor confidence in the markets.

"Although we may not be able to change the character of corporate officers, we can change behavior through incentives and penalties," said Greenspan.

But he told the Senate panel the country may be near the end of corporate scandals, as he expressed faith in the overall transparency of U.S. corporations: "Perhaps the recent breakdown of protective barriers resulted from a once-in-a-generation frenzy of speculation that is now over."

Despite Uncertainties, Fundamentals in Place

Greenspan said the nation still confronts considerable uncertainties, among them, the progress of capital spending, the return of profits, the potential for more corporate malfeasance and risks from global political risks and terrorism.

Nevertheless, he said the fundamentals are in place for a return to sustained healthy growth. He cited low inflation, improving inventory imbalances and strong productivity growth.

Greenspan also indicated that the Fed would stand pat for now on interest rates, with low inflation allowing the central bank to keep short-term interest rates at their 40-year low of 1.75 percent so far this year.

"With inflation currently contained and with few signs that upward pressures are likely to develop any time soon, we have chosen to maintain that stance," he said.

Is This the Bottom?

Greenspan's remarks came on the cusp of a wild ride for the Dow on Monday, when the blue-chip index fell 440 points before swinging back in a late-day recovery to close just 45 points down. The drops also rocked world markets, with major Asian and European stock markets seeing turbulent sessions.

Whether or not the drops will continue remains to be seen. One school of thought is that stocks have a lot more room to drop before a bottom is reached, but more bullish forecasters say they sense that a bottom may already be close at hand, especially if corporate profits begin recovering.

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