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Greenspan: Economy Will Expand This Year; Corporate Greed Must Be Punished - 2002-07-16

Federal Reserve Board Chairman Alan Greenspan Tuesday told a Senate committee the U.S. economy will expand by at least 3.5 percent this year. But Mr. Greenspan also said that corporate greed, if unpunished, could inhibit economic growth.

Mr. Greenspan said the fundamentals are in place for a return to sustained and healthy growth. But, he told the Senate Banking Committee, an erosion of trust in corporations could keep the economy from reaching its full potential.

"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," Mr. Greenspan said.

U.S. equity markets that have been falling steadily for weeks rebounded from another sharp decline as Mr. Greenspan delivered his mildly encouraging economic assessment. The central bank governor endorsed strong measures by the government and the private sector to police and punish corporate fraud that has been weighing on financial markets.

Mr. Greenspan said corporate scandals undermine the very foundation of market economy - trust. "Our market system depends critically on trust. Trust in the word of our colleagues, trust in the word of the people with whom we do business," he said.

Mr. Greenspan gave no hint that interest rates would be rising soon. Short-term rates are currently at their lowest levels in 40 years.