Greenspan Insists Us Economy is Strong

Alan Greenspan, chairman of America's central bank, moved last night to soothe nerves in the world's jittery stock markets when he insisted that the strength of the US economy would allow it to withstand the effects of the "infectious greed" that gripped Wall Street in the 1990s.

On another day of wildly gyrating share prices, the testimony of the world's most powerful central banker to Congress trimmed a 200-point fall in early share trading in New York and pushed the London stock market higher for the first time in seven working days.

The FTSE 100 index, which dropped by 229 points on Monday, rose by 27.4 points to 4021.9.

An initial rise of 70 points in London was followed by a fall of 130 points to the market's lowest level for six years before a late rally on the back of Mr Greenspan's appearance before the Senate's banking committee.

The Fed chairman, who cut interest rates 11 times in the US last year to a 40-year low of 1.75%, said the fundamentals were in place for a return to sustained healthy growth in the world's largest economy, but did not play down the impact of the corporate scandals on the US.

"While the economy has held up remarkably well, not surprisingly the depressing effects of recent events linger," he said. "All the evidence that we have been able to accumulate in recent weeks suggests that the economy is improving. It's pretty much in line with our expectations."

Economists on Wall Street said that Mr Greenspan's testimony showed that the Fed was still anxious about the economy and might be forced to cut interest rates still further if the sharp falls in share prices continue over the coming weeks.

The Dow Jones industrial average was 70 points lower by early afternoon in New York, with some upbeat news from leading US companies such as General Motors and Merrill Lynch also helping to restore confidence.

Signs that overseas investors are losing faith in American stocks were again evident yesterday as the dollar came under renewed pressure on the foreign exchanges, dropping below $1.01 against the euro.

In contrast to the rhetoric of President Bush, urging business leaders to adopt higher ethical standards, Mr Greenspan offered a more prosaic assessment of the ills of corporate America.

"I don't see how one can effectively legislate for morality or character," he said. "But what you can do is try and create an environment and a legal structure which very significantly penalises malfeasance."

He warned that risks remained, including the possibility of fresh revelations of corporate scandals and the threat of further terrorism.

But he added that "the fundamentals are in place for a return to sustained healthy growth" in the world's largest economy. "We will get past this corporate governance issue," he said. "It is most unfortunate and I think very regrettable and has negative effects unquestionably, but beneath it all is still a very sound functioning system, as best I can see it".

Mr Greenspan supported calls for tougher penalties for white-collar crime and said the measures pushed through the senate on Monday were a step in the right direction. The senate unanimously passed a broad overhaul of legislation, including a new regulatory board for the accounting industry and prison terms of up to 10 years.

In an uncharacteristically blunt delivery Mr Greenspan said that "too many corporate executives sought ways to harvest" stock market gains.

The size of compensation packages, he added, "overcame the good judgement of too many corporate managers. It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously".

The protracted slump in stock markets had curbed the opportunity for further frauds but Mr Greenspan warned that action should still be taken. "Even if the worst is over, history cautions us that memories fade. It is incumbent upon us to apply the lessons of this recent period to inhibit any recurrence in the future."