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Greenspan Speaks to Senate Committee

Aired July 16, 2002 - 10:23   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
LEON HARRIS, CNN ANCHOR: And, again, we're keeping our eyes on the Senate Banking Committee and the Fed Chairman Alan Greenspan about to begin his remarks any moment now. We're going to continue with our analysis of what to expect him to say, and what we expect to see happen in the wider markets. Our analysis is coming from our Lou Dobbs standing by in New York, and Bill Schneider with us in Washington as well.

Lou, I want to go back to you with just one quick point. You did want to talk about whether or not you expect or you can even predict when there is going to be the bottom here, but can you at least say whether or not you expect to see a so-called double-dip happen here at all?

LOU DOBBS, HOST, "MONEYLINE": I would say in terms of the double-dip, I don't expect to see that at all because, as I said, there is every evidence that an economic recovery continues a pace. It's not quite as robust as many economists would like, but nonetheless, it is underway. It continues. It's sustainable and that's all very positive news.

But what we're watching here in terms of this market is volatility and a fundamental weakness that can only be turned by real earnings results. As I said earlier, five consecutive quarters of negative earnings and earnings recession certainly.

One can argue about whether we've had an economics recession, but the fact is we have had a corporate earnings recession. This is the quarter in which we expect to see that end, but the strength of that level of corporate earnings this quarter will determine the level of stock prices in my judgment.

If it comes back significantly, and by significantly I mean something above ten percent, then we will see, I think, just a commensurate gain in stock prices. Should it fail that, we're going to stay at these levels, I would guess, for some time.

HARRIS: Very interesting, and you would not be betting on any reductions in interest rates coming down the road?

DOBBS: I certainly wouldn't because first, there's very little likelihood with Fed rates under two percent, at a 40-year low, that it would be particularly helpful. In terms of interest rates and inflation, something called the real inflation rate that is the real interest rates, that is inflation rate being higher than interest rates right now, it just probably, it certainly wouldn't be helpful or productive, as it might be another time. So, I wouldn't expect that at all, Leon.

HARRIS: All right, let's bring in some other analysis from one of your colleagues, Lou, this morning. We're joined by Terry Savage from the Chicago Sun Times. You see Terry there, and often a guest here on CNN. Good to see you again, Terry.

TERRY SAVAGE, "CHICAGO SUN TIMES": Good morning, Leon.

HARRIS: All right, let's get your thoughts this morning, while we're waiting for the Fed chairman to begin his remarks.

SAVAGE: You know, as I was sitting here listening, we've talked an awful lot about the economics of this, of corporate earnings. We've talked about the economy is doing well, relatively well. What's out there now that's un-quantifiable is investor emotion.

Yesterday, I received so many e-mails and calls and people calling up, would you comment on whether investors should sell now. Sell into a decline of that magnitude? That's never wise, but the one thing we can't quantify is how emotional investors will get.

Keep in mind, all that 400 points down, someone was buying every share that emotional and panicked investors were selling. Only in hindsight will we know if that was the bottom. Bear markets don't tend to make rock bottoms. They're more like quicksand. They hang in there and they bounce up and down for a while. I think unless the Fed chairman is willing to depart from his tradition and say something really comforting, it won't have much impact today.

HARRIS: And would you expect that to happen?

SAVAGE: I don't think we're at the state of panic yet, that would require the Fed chairman to depart from his usual mode of hiding carefully those intentions he has. I think he learned his lesson with irrational exuberance, and maybe, as Bill said, we'll reach the stage of irrational anxiety, where he feels he has to comment, but I don't think we've reached that point yet.

HARRIS: Lou.

DOBBS: Investor confidence, consumer confidence here, we have not seen the kind of negativity that we're experiencing within the markets on Wall Street in a very long time. Give us your reading of the level of consumer confidence and investor confidence right now, if you would.

SAVAGE: Lou, are you asking me? You know I was on the trading floor. I was the first woman trader on the Options Exchange, so in 1973, '74, and I saw a lot of panic and fear then. It was external forces mainly we thought oil prices, for example.

But today, we have a different level of dissolution because so many more people are so fully invested and required to make decisions in their 401(k) plans. So, I think there's widespread dissolution out there, but not quite panic yet, although yesterday was pretty close.

DOBBS: As you say, close by also an amazing and impressive rebound. Bill Schneider, with the reference to sentiment in consumer confidence and investor confidence, those consumers, those investors are also voters and hence the relationship between this Fed chairman, this hearing of the Senate Banking Committee, and these markets. I'd like to get your judgment after Fed chairman Greenspan talks, about what will be the influence in February. Let's listen in to Alan Greenspan before the Senate Banking Committee.

(JOINED IN PROGRESS)

ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE BOARD: ... that in previous business cycles almost surely would have induced a severe contraction.

The mildness and brevity of the downturn, as I indicated earlier this year, are a testament to the notable improvement in the resilience and flexibility of the U.S. economy. But while the economy has held up remarkably well, not surprisingly, the depressing effects of recent events linger. Spending will continue to adjust for some time to the declines that have occurred in equity prices. In recent weeks, those prices have fallen further on net; in part, under the influence of growing concerns about corporate governance and business transparency problems that evidently accumulated during the earlier rapid run-up in these markets.

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. Nevertheless, the fundamentals are in place for a return to sustained healthy growth. Imbalances in inventories and capital goods appear largely to have been worked off; inflation is quite low and is expected to remain so; and productivity growth has been remarkably strong, implying considerable underlying support to household and business spending, as well as potential relief from cost and price pressures.

In considering policy actions this year, the Federal Open Market Committee has recognized that the accommodative stance of policy adopted last year in response to the substantial forces restraining the economy likely will not prove compatible over time with maximum sustainable growth and price stability. But 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 pending evidence that the forces inhibiting economic growth are dissipating enough to allow the strong fundamentals to show through more fully.

As has often been the case in the past, the behavior of inventories provided substantial impetus for the initial strengthening of the economy. However, as inventories start to grow more in line with sales in coming quarters, the contribution of inventory investment to real GDP growth should lessen. As a result, the strength of final demand will play its usual central role in determining the vigor of the expansion. While final demand has been increasing, the pace of forward momentum remains uncertain.

Household spending held up quite well during the downturn and through recent months, and thus served as an important stabilizing force for the overall economy. Spending was boosted by ongoing increases in incomes, which, in turn, were spurred by strong advances in productivity as well as by legislated tax reductions and, in recent months, by extended unemployment insurance benefits. Monetary policy also played a role by cutting short-term interest rates, which helped lower household borrowing costs. Particularly important in buoying spending were the very low levels of mortgage interest rates, which encouraged households to purchase homes, refinance debt and lower debt service burdens, and extract equity from homes to finance expenditures.

Fixed mortgage rates remain at historically low levels and thus should continue to fuel reasonably strong housing demand and, through equity extraction, to support consumer spending as well. But those sources of strength probably will be tempered by other influences. Because consumer and residential expenditures did not decline during the overall downturn, there is little pent-up demand to be satisfied. Moreover, the declines in household wealth that have occurred over the past couple of years should continue to restrain spending in the period ahead.

Still, despite concerns about economic prospects, equity valuations, terrorism and geopolitical conflicts, consumers do not appear to have retrenched in retail markets. Indeed, consumers responded strongly to the new interest rate incentives of motor vehicle manufacturers this month. Early reports indicate a significant improvement in sales over June. By contrast, business spending has been depressed. The recent economic downturn was driven, in large measure, by the sharp fall-off in the demand for capital goods that occurred when firms suddenly realized that stocks of such goods were excessive.

Overall, the level of real business fixed investment plunged about 11 percent between its quarterly peak in the final months of 2000 and the first quarter of this year. With the adjustment of the capital stock to desired levels now evidently well advanced, business fixed investment may be set to improve. A recovery in this category of spending is likely to be gradual by historical standards and uneven across sectors. Still, firms should respond increasingly to the expected improvement in the outlook for sales and profits, low debt financing costs, the heightened incentives resulting from the partial expensing tax provisions legislated earlier this year, and especially the productivity enhancements offered by continuing advances in technology.

Indeed, despite the recent depressed level of investment expenditures, the productivity of the U.S. economy has continued to rise at a remarkably strong pace. The magnitude of the recent gains would not have been possible without ongoing benefits from the rapid pace of technological advance and from the heavy investment over the latter half of the 1990s in capital equipment incorporating such advances. 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, these attitudes reflect the lingering effects of the shocks that our economy endured in 2000 and 2001.

Also contributing to the dispirited attitudes among many corporate executives is the intensely competitive business environment facing their firms. Increased competition, while producing manifold benefits for consumers and for the economy as a whole, clearly makes individual firms' operations more difficult.

Those businesses where heightened competition has engendered a loss of pricing power have sought ways to raise profit margins by employing technology to lower costs and improve efficiency. In the United States, as a consequence of the interaction of monetary policy, globalization and cost-reducing productivity advances, price inflation has fallen in recent years to its lowest level in four decades, as has the recent growth rate of nominal GDP and consolidated corporate revenues.

In part because nominal corporate revenues, although no longer declining, are growing only tepidly, managers seem to remain skeptical of the evidence of an emerging upturn. Profit margins do appear to be coming off their lows registered late last year, but, unsurprisingly, the recovery in economic activity from a shallow decline appears less vigorous than in the past.

The lowest sustained rates of inflation in 40 years imply that nominal growth in sales and profits looks particularly anemic. Reflecting concerns about the strength of the recovery, managers continue to limit capital spending to only the most pressing needs.

Given the key role of perceptions of subdued profitability in the current period, it is ironic that the practice of not expensing stock- option grants, which contributed to the surge in earnings reported to shareholders from 1997 to 2000, has imparted a deceptive weakness to the growth of earnings reported to shareholders in recent quarters.

According to estimates by Federal Reserve staff, the value of stock option grants for the S&P 500 corporations fell about 15 percent from 2000 to 2001, and grant values have likely declined still further this year. Moreover, options grants are presumably being replaced over time by cash or other forms of compensation, which are expensed, contributing further to less robust growth in earnings reported to shareholders from its trough last year.

In contrast, the measure of profits calculated by the Department of Commerce for the National Income and Product Accounts is designed to gauge the economic profitability of current operations. It excludes a number of one-time charges that appear in shareholder reports, and, importantly, records options as an expense, albeit at the time of exercise.

NIPA profits have increased sharply since the third quarter of last year, partly reflecting the dramatic jump in productivity and decline in unit labor costs.

The difficulties of judging earnings trends have been intensified by revelations of misleading accounting practices at some prominent businesses. The resulting investor skepticism about earnings reports has not only depressed the valuation of equity shares, but it also has been reportedly a factor in the rising risk spreads on corporate debt issued by the lower rung of investment-grade and below-investment grade firms, further elevating the cost of capital for these borrowers.

The recent impressive advances in productivity suggest that to date any impairment of efficiency of U.S. corporations overall has been small. Nonetheless, the danger that breakdowns in governance could at some point significantly erode business efficiency remains worrisome. Well-functioning markets require accurate information to allocate capital and other resources, and market participants must have confidence that our predominately voluntary system of exchange is transparent and fair.

Although business...

HARRIS: And while the Fed chairman continues with his remarks this morning from the Senate Banking Committee, let's bring in our Lou Dobbs, who has been listening in as well -- Lou, what do you make of what you have heard so far?

DOBBS: Well, the Fed chairman is making a far stronger statement, at least in my opinion, about the importance of corporate integrity and corporate governance and transparency of financial reporting by corporate America in these markets than frankly I expected he would.

He has laid squarely at the feet of corporate governance and integrity many of the issues affecting the cost of capital, which is important to business, and saying, point blank, that much of the weakness in the equities market is a result of investor lack of confidence in corporate America, and he made reference, Leon, as you may have noted there, importantly, to stock option expenses. Again, the Fed chairman is an advocate of corporate America expensing those stock options and requiring shareholder approval for expensing those stock options. The slide that we had put up during the Fed chairman's comments showing some of the egregiously, if not just outrageous, levels of CEO compensation by some companies. This is one of the issues Mr. Greenspan feels strongly about. A number of people in Congress, of course, as well, and the president has begun to address these concerns as well.

HARRIS: Yes, I did note that, Lou, and I was wondering whether or not he would be mentioned that, the issue of the compensation of the CEOs before he got to things like the stock options, and as we see, he did the stock options first here.

DOBBS: And importantly, Leon, the Fed chairman saying that the recovery continues at pace. He has talked about the principal threats as he enumerated three risk areas, obviously terrorism, geopolitical conflict, and therein he was referring specifically to the Israeli- Palestinian conflict, the Indian-Pakistani conflict, and, of course, to equity shares as the three principal risks the stock market. The three principal risks to this recovery, and obviously expressing profound concern about corporate integrity, and the importance of corporate accountability to return us to, if you will, a healthier and growing equities market, stock market.

HARRIS: Terry Savage, standing by in Chicago. She has been listening along with us as well. Terry Savage, a analyst who writes for the "Chicago Sun-Times" -- your thoughts this morning? I understand you were agreeing -- you were nodding your head in agreement with Lou.

TERRY SAVAGE, "CHICAGO SUN-TIMES": Well, yes, actually, I think one of the key points the Fed chairman made is how strong he believes the underlying economy is, that we have, as he said, "the fundamentals are in place for a return to sustained growth."

He pointed out that inflation is low, and productivity continues, and the one thing he sort of worries about is that consumers seeing stock prices go down, feeling this loss of wealth, will retrench, and he -- on the other hand, he said, Look, they responded very quickly to car lower interest rate incentives in July, so consumers have been strong. I think what he was saying to business was, you know, the profits that all of us are looking for, these earnings reports, may be colored a little bit by some changes in the way the economy has grown. In fact, corporations don't have pricing power. We don't have inflation. So you don't see a surge in revenues or in sales, profits are still up -- or not down as badly as before, but you won't see immense gains in profits, and he said, by the way, that if corporations had expensed stock options, as he would have liked them to do last year, it would have actually increased profits because the market was done so much this past year. The cost of stock options would not have been as great as in previous years. So he is encouraging corporations to expense stock options, realizing that will also hit at profits. And I think he is telling all of us, Don't look at these earnings numbers, don't stand there waiting for these earnings reports. The economy is fine, and if consumers keep spending, and business regains some confidence, the underlying economy of productivity mean we should have a good year ahead.

Very much a cheerleading speech, and a little bit out of the usual mode. He really did balance himself toward the optimistic side for the economy, and for the markets, too.

HARRIS: And for those who are watching the screen right now, and looking at the numbers there, you see the Dow Jones Industrial number there, that top line that's highlighted in the big green board there, you see the numbers are actually moving now in a positive direction.

Let's go back to Lou Dobbs standing by -- Lou, you've been watching that as well, no doubt.

DOBBS: Absolutely. The Dow Jones Industrials has improved by just about almost a hundred points here, over the course of the past 15, 20 minutes. But, interestingly, the Nasdaq has eroded. So it is probably too early to make much of this market. We are sort of taking a snapshot in time here. But as you say, a positive direction.

To follow up on what Terry was saying, Fed Chairman Greenspan, indeed, is saying, don't worry too much about this economy. I think it's important for us to say, though, Terry -- I'm sure you -- I assume you will agree, he is not saying, Don't worry about this market, and don't simply step into this market because either the Fed chairman or anyone else in Washington is suggesting that all is well.

SAVAGE: That's one thing, Lou, I think, that it is really interesting to note the Fed chairman once tried to warn people about being in the market. And today, so far at least, he has not warned, or encouraged people to get back in. He has spoken mainly about the economy and not about the markets as a level of buying opportunity.

HARRIS: Well, let me ask you -- if I can ask both of you about one other thing, though. He made another point that I happened to catch here, and when he talked about consumers and the role they have played so far, and how they have resisted so far basically panicking, but he also mentioned the fact that because they haven't really restrained their spending that dramatically up until now, that consumer spending may be tempered, and that there is now exists little pent-up demand. Does that matter at all?

SAVAGE: Well, it does matter.

DOBBS: Go ahead.

SAVAGE: It does matter because, in fact, you don't see that burst that everybody is looking for called "economic recovery." Consumers have carried this economy on their backs. The other thing I was surprised the Fed chairman didn't point out is that consumers are relatively highly in debt these days. I mean, they have taken out a lot of money, equity from their houses. He applauded them for doing that, and keeping the economy going, but there are not a lot of great, deep reserves in consumers' credit card, ability to borrow, or in their home equity loans, so that will not allow consumers to step back in and step it up, and may, in fact, be dangerous for some consumers if the weakness spreads. If stock market loss of confidence leads to economic loss of confidence and job layoffs, then we have consumers in a very precarious position.

DOBBS: Yes. Those consumers, Leon, Terry, Bill, have been in a -- frankly, a pretty precarious position here for just about two years. As Terry suggests, supporting this economy, and the Fed chairman is speaking a bit to corporate America as well here, talking about business investment, suggesting that these improvements in productivity -- now, this is a little arcane, if you will, but the fact is that with these remarkable gains in productivity, corporate America has now set the stage to improve profit margins. And that means, with improving profit margins as a result of productivity, there won't be much in the way of price increases, but with those improving margins, the fact is, we could start to see a significant improvement in employment, and that would be the safety valve for consumers throughout the economy.

I would like, if I may, Leon and Terry, turn to Bill Schneider, because what we're watching here is almost a minute by minute test on investor confidence and consumer confidence over the past year, and get Bill Schneider's views about how important investor reaction will be, consumer reaction will be, when it comes to November.

WILLIAM SCHNEIDER, CNN SENIOR POLITICAL ANALYST: Yes. Well, of course, consumer reaction has a great deal to do with both the economy and the way people vote in November. Two thirds of this economy, as you know, is consumer driven. And what Washington is worried about, essentially, is this: Will the conditions on the stock market, the drop in stock prices, the effect on people's retirement savings, will that have an impact on the economy? The economy is what matters in November much more than the stock market. Back in the '90s, we used to talk about something called the "wealth effect." Namely, because home prices were rising and retirement savings value was rising with the stock market, people felt wealthier and that led them to spend a lot of money, and that sustained the economic boom. What Washington is worried about is, will the decline in people's net worth, because they see their retirement savings diminishing, will that make people feel poorer, and lead them to be less willing to spend money on the vacation, or the new car, and as a result have a depressing effect on the economy, which would throw everything into a tailspin and could have a very powerful impact on the vote in November.

DOBBS: The economics and the politics, the two always related here, my guess is that we are going to see both the White House and the Democrats in the Senate step up the partisan rhetoric as we move forward. Frankly, with just a few months now remaining before November, we are not going to see that tiller deep in the economic waters changing directions here, so the dye is cast, pretty much, one would think, in terms of what will be in this economy -- Leon.

HARRIS: All right. Well, let's get back to the chairman's comments. We believe he is getting near the end of his remarks this morning.

GREENSPAN: ... look forward to questions.

UNIDENTIFIED MALE: Well, thank you very much, Chairman Greenspan. I say to my colleagues, it is my intention to do six- minute rounds. Given the number of members who are here, and that will probably take us about an hour and a half to do all the members that are present, and...

HARRIS: And as a matter of fact, the chairman was there at the end of his remarks, and they are going to take a break there, and so will we right here. Terry Savage in Chicago, Lou Dobbs in New York, and Bill Schneider in Washington, thank you very much. You all stand by, we will get back to you in just a bit, right after we take a break. Stay with us.

(COMMERCIAL BREAK)

HARRIS: Welcome back to our coverage this morning of remarks by Fed chairman Alan Greenspan before the Senate Banking Committee. We've been talking with analyst Terry Savidge in Chicago, our very own Lou Dobbs in New York, and our Bill Schneider standing by in Washington. And as we've been listening to the remarks this morning and this analysis from this panel, we've also been watching the Dow. You see it down now about 133 points. The Nasdaq actually up 4 4 points. The Nasdaq has bee moving in a much more narrower range.

But moments ago, somewhere in the middle of the remarks made by chairman Greenspan this morning, the Dow down by about as much as 248 or so, as I noted, as I watched the board. As you see, it's recovered somewhat there.

Bill Schneider, let me ask you about that, is there any concern there at the White House, as we heard before we went to break, we heard chairman Greenspan say the economy is good, and then we've been watching as he's been giving assessment this morning, we've been watching the markets somewhat recover and stabilize here. Is there any concern, do you think, at the White House, that when he says it, it means more than when President Bush says it, because we've got the exact same words from President Bush, but a different reaction.

SCHNEIDER: Well, I think his influence on stock market is likely to be more profound than that even if the president of the United States. He is the Federal Reserve chairman. He has a lot of say directly over interest rates. He's not an elected official, although he's chosen by elected officials. He's taken very, very seriously.

I think what the White House is concerned about chairman Greenspan helped respond to today. The White House concerned about isolating what's going on, on Wall Street from the rest of the economy, trying to restore confidence among American consumers and voters that the economy is sound. Well, chairman Greenspan just ended his remarks by saying the U.S. economy is poised to resume a pattern of sustainable growth. He talked about 3 1/2 to 3 3/4 percent over the whole of this year, and a slightly higher growth rate for next year. That's very encouraging news. The problem has always been with 60 percent of Americans invested in the stock market, a record number, that what happens in the stock market does spill over to the rest of the economy, the white house is trying to create a kind of firewall between those two.

HARRIS: Lou, if I could ask you about one thought that occurred to me as you were talk about what you expected to hear from the chairman in regards to corporate malfeasance here. Would you read at all from what you may have seen and heard from the chairman's remarks that he would be pushing for even tougher standards against the corporate malfeasance -- those who committed corporate malfeasance than the White House would be.

DOBBS: Well, I don't want to put words in the Fed chairman's mouth on that issue. I do think, however, it is fair to infer from what the Fed chairman has said, that anything that restores investor confidences and shores up the integrity of these markets and puts corporate America into a far more transparent position with the investing public, is something that obviously he would favor, because he outlined very articulately the economic impact of those failures of corporate governance. And so I'm fairly certain on that he would in favor of almost any measure that was helpful. With that being said, this chairman, this Fed chairman is not particularly enamored by excessive regulation or new laws either. My guess on that -- in that respect is that he would prefer business leadership taking responsibility. Unfortunately, with the exceptions of "The Washington Post" company and Coca-Cola, Boeing and Winn-Dixie. Those are the only four companies that have stood up to say that they are going to and are expend some stock options.

HARRIS: Yes, and I heard you earlier this morning commending those companies for actually making that move, particularly Coca-Cola.

DOBBS: And doing it, again, Leon.

HARRIS: And let's listen back into the committee as the question and answer sessions begins there with the Fed chairman.

(JOINED IN PROGRESS)

UNIDENTIFIED MALE: For the first time in more than two years. What are we to make of that. What are its the implications for the state of our own economy?

GREENSPAN: Well, first of all as I stipulated in my prepared remarks, all issues with the respect to the exchange rate are left to...

UNIDENTIFIED MALE: It's over that, and I wanted to draw you out a little bit on it.

GREENSPAN: The particular issue of what the actual exchange rate number is wholly arbitrary. So that the fact that it is above or less than 1.0 has no economic significance whatsoever. Beyond that, Mr. Chairman, that's as much as I will say on the exchange rate. I suggest you address further questions to the secretary of the treasury.

SEN. PHIL GRAMM (R), TEXAS: Mr. Chairman. Let me thank you for an outstanding statement. I want to ask you three questions that have to do with corporate governance and accounting. We have passed a bill in the Senate. It's obvious by the vote that senators believe that the bill contains -- that the bill addresses the right issues. Obviously, as we try to put together a compromise with the House bill, the question becomes, how do we address these issues? And I want to ask you about your views in terms of basic principles of what works and doesn't work in three related areas.

First of all, the question of whether or not we should give the board the power to set standards. For example, there are many strong feelings that members have and the public has about what auditors should do in providing other services. Obviously, everything we do in this bill that we have adopted applies to 16,254 different publicly- traded companies, some of them great big. Some of them not too big.

As a matter of principle, would you rather have standards set by the board, or set in law? GREENSPAN: Senator, it depends on whether the types of issues we are concerned about are immutable. In other words, for example, certain issues, with respect to rights and penalties, for example, are not going to change from one year or maybe one generation to the next, and it's far better that they be hard-wired into a statute. If you conclude that the particular elements within a regulatory structure are likely to be changing, or need to be changed through time, then I think the appropriate procedure is to empower, say the Securities & Exchange Commission to do certain things under a statute specifically delineated by the Congress.

Then, finally, there are areas that it's far better that the government is not involved at all. And as I indicated in my prepared remarks, the issue of the -- I think very helpful activities of the New York Stock exchange in this regard is an example.

I myself don't know enough about a number of the areas of the accounting profession as such. I know a lot about accounting, but not about the business of accounting. So I, in general, find that the elements within the bill that you just passed strike me as really to the point about what has to be addressed, but I have no real judgment, because I don't have the competence in the area of knowing which of the various element, which of the various different areas would be most effectively addressed by -- with a hard-wired or the issue of empowering the SEC.

GRAMM: Let me ask you a second question. You're familiar with a securities litigation reform that we did. We had all these strike lawsuits, we had one law firm that did 80 percent of the work. Senator Dodd was a leader in that effort. Do you see any evidence that we should be backtracking from that reform?

GREENSPAN: I don't, senator.

GRAMM: So you would think that, for example, changing the statute of limitations set in that reform would not be something based on what you've seen that would be...

GREENSPAN: Let me put it this way, I've seen nothing in the structure of corporate governance, as it is evolved in the last year or two, or the last several years, which suggests that significant changes in that area are needed.

But again, let me emphasize these are areas in which I don't perceive to have significant competence, and I don't wish to suggest that I do. I'm just merely giving you my impression that as I evaluate the relationship between corporate governance and the economy, this is not an issue that has surfaced with...

GRAMM: Let me go on to a third question, raise the issue of stock options. I want to conclude by asking you to explain your view on stock options so everybody knows exactly what it is. But no matter what the view is, do you believe that Congress ought to vote on the issue of setting an accounting standard with regard to how stock options are treated? In other words, should we have a -- should Congress be making accounting rules by law? For example, proposal that clearly at some point will probably be voted on is should stock options be expensed?

Now one can have a few for or against. The question I'm posing, and then I'm going to conclude by asking you your view on the issue. Should Congress be voting on that, or should that be set by FASBY law or some similar system?

GREENSPAN: Well, I, frankly, don't think that one needs to do anything as best I can judge what's happening. My own impression is that FASBY will rule in a manner which I think -- from listening to what the various discussions are -- in the manner of which would appropriately expense stock options, which I think is very important issue.

I don't think -- that if you take a look at what is happens, for example, two companies yesterday moving to stock option expensing. I suspect we are going to see many more. I think we will find that the advantages of expensing stock options which were so evident in the earnings reports to shareholders from 1997-2000 are now reversing and working adversely, so that those corporations which switched to expensing are probably going to find that an underlying trend of earnings growth is going to be more apparent as they switch. So my own judgment is nothing needs to be done at all. I think it's going to happen, and I think quite correctly so.

GRAMM: Thank you Mr. Chairman.

HARRIS: On that point, let's bring back in a panelist here this morning. Lou Dobbs, beginning with you, we were wondering if we would get some more fleshing out of chairman Greenspan's opinion about what should happen now here in terms of setting up standards for corporate governance. What do you make of what you just heard there?

DOBBS: The fed chairman, as I intimated before we heard him speak there, Leon, suggesting that the market is working here, that stock options will be expensed by corporate America, in part, because it is in their self-interest to do so now. And FASBY, it's clear that FASBY is moving, considering in that direction. FASBY being the private professional industries standard board of the accounting industry, which sets the rules for corporate America and its bookkeeping.

Interestingly enough, Leon, today the international standards board, accounting standards board, is meeting in London, and on their agenda is the issue of expensing stock options. So it is an idea whose time has certainly come. It's advocates would suggest well past time. It's important, perhaps in the -- it's arcane and somewhat complex for some, but the fact it is important in the sense it adds further disclosure on the part of corporate America to investors who are watching and listening at home as the Fed and the Senate Banking Committee discuss this rather arcane subject. It will give investors more information that is empowering, that is helpful, and it is another very important step to restoring investor confidence.

HARRIS: They may be under way even as we speak. We're watching the Dow numbers. If you can see them from where you're watching monitor, Lou, you can see that Dow now recovered quite dramatically. It's now down to double digits now. And moments ago, it was down 200. It's now down only 23 points. The Nasdaq, actually, rally even stronger there.

DOBBS: Leon, I remember earlier you said you were so impressed by that 400-point turn of the market yesterday. We're looking at a 200-point turn here in just a little bit over half hour. Another impressive turn if you're an optimist. Another example of more volatility and instability i the market if you're a pessimist. Whatever you are, as you watch this, you have to be impressed by the fact that this market is at least reversing some very deep and difficult losses, and at least, if not posting positive numbers, at the close, reversing some significant losses.

HARRIS: Of course the big question is whether or not that reversal will hold, and if we will see this trend continue. Of course we can't read the tee leaves on that. I think we have piece of tape cued up, the comments that Alan Greenspan made just moments ago that may have sparked this rally.

Let's listen in.

(BEGIN VIDEO CLIP)

GREENSPAN: The effects of the recent difficulties will were linger for a bit longer. But as they wear off, and absent significant further adverse shocks, the U.S. economy is poised to resume a pattern of sustainable growth. Our prospect for extending the performance over time can be enhanced through implementation of sound monetary financial, fiscal and trade policies.

(END VIDEO CLIP)

HARRIS: Those were comments the chairman made during prepared remarks, and about that time is when we were seeing the Dow down about 248 points or so. And as we can see now, it is knocked down to only 22.

DOBBS: Leon, I don't know how much of this I would put on the Fed chairman. This market is -- investors operate -- they make their operational decisions, their transnational decisions for a host of reasons.

I would suggest there's another important line in what the Fed chairman said that might be particularly encouraging to investor, and that is, he said "business investment is set to improve," -- should be set to improve, business investment critical here, because we've been mentioning the debt-ladened and burdened consumer, which accounts -- who accounts for two-thirds of the economy, really needs the help of the business community and corporate America, and with business investment set to improve, that is a considerable incentive for one, an investor particularly, to believe that things will improve over the next six to nine months.

And just that alone, given these negative times that we're enduring, that feels like a real positive. HARRIS: Certainly. Certainly. Let's go now and get a final word this morning from Bill Schneider, our political analyst standing by in Washington. You heard Senator Phil Gramm moments ago ask about it, just basically asking the chairman to give him some guidance on how much he thinks, the chairman thinks, that Congress should get involved here legislatively. What do you make of what you heard there?

DOBBS: What he said was that these solutions tend to be market- driven, and he believes the market will drive more and more firms to expense stock options, because there seeing that that gives a better picture of earnings growth.

You know, just about everything that changes in the economy, on Wall Street, is not driven by government in this country; it's driven by the market. And a lot of people argue, you know, the president threatened jail terms. What difference will that make? These people don't expect to get caught, or put on trial or go to jail.

Congress is threatening regulation, but what really makes the difference here is the threat of failure. The fact that these companies WorldCom, Enron, these people through their deceptive accounting practices, ruined the companies, they brought them down. That's the lesson that the market learned. You can't do things like that. The reforms that Greenspan and others are talking about are really driven by the market, and I think chairman Greenspan reinforced that point today when he talked about stock options.

HARRIS: All right. And as often happens in my home, let's give the lady the final word. Let's go to Terry Savidge who's been standing by in Chicago, watching and listening as well.

Terry, your thoughts.

SAVIDGE: Well, thanks, Leon. I think we really have about said it all. The fact that the market is not only the final word in determining the profit and loss, and will be the final regulator in this country, but the fact also is that Greenspan, we all read in college economic textbooks, the chairman has a couple of arrows in his quiver. Interest rates being one, another being job owning.

Well, today be had classic example of the Federal Reserve chairman job owning, telling consumers the economy remains strong, telling business that they ought to be poised to start investing again, and telling people, in effect, that the markets should not be a source of worry that they'll get taken care of, and we should not let a lack of confidence in the financial markets spiral into the economy which would be a downward spiral. We will see if, in fact, he has touched enough investor's hearts and enough confidence in consumers and business to turn the market around from these levels, or at least to keep it from going much, much lower, this cycle.

HARRIS: It will be tough to not be able to watch this ticker as it moves throughout the day to see how it all unfolds. It would be nice just to check back in a couple of hours and see how things look. That's what we will do, because we are going to move on and go to other news as well.

As you see there, the Dow is down 53 now, the Nasdaq up 16. S&P down now 2.98, and that number -- those numbers, rather, much better than what we saw barely even half an hour ago.

Thanks to our panelist this morning. Lou Dobbs in New York, Bill Schneider in Washington, and Terry Savidge in Chicago, thank you very much for the insight and for the lessons this morning. The uninitiated, like me, certainly appreciate you all putting forward for us in plain English.

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