And really, we should be thankful for the economy we have. The recovery won't be spectacular; "a firming in economic activity" is Greenspan's way of telling lawmakers and investors that it's not yet visible to the naked eye. In the next six months or so, any comeback in corporate production and capital investment will depend on consumer demand, and for there's still a lot out there to restrain shoppers high debt, shrunken portfolios and particularly that "soft labor market." That, in Greenspan-ese, could "put something of a damper" on this upswing.
But considering what we've been through lately, says Greenspan, "even a subdued recovery beginning soon would constitute a truly remarkable performance." Wired for speed and with the next round of IT spending already getting underway the American economy today is more responsive, lighter on its feet, better able to adapt to shocks, imbalances and other economic bugaboos than ever before.
Heck, even Enronitis has its bright side: The energy markets have barely rippled, the macroeconomic consequences are negligible. Wall Street, Greenspan insisted, was already well into its own brand of reform, selling companies whose balance sheets they couldn't comprehend and paying "price-earnings premiums" for those "without spin."
Certainly we shouldn't let the debacle in Houston turn us into economic reactionaries, confusing the financially cutting-edge with the morally contemptible and attacking financial sophistications like derivatives along with the companies that misuse them. Enron and Long-Term Capital were done in by "an old fashioned excess of debt," "opaque accounting" and "lax counter-party scrutiny" not by derivatives. "Despite the concerns that these complex instruments have induced," Greenspan noted dryly, these tricky little guys are responding to a need; they're distributors of risk and hedges against disaster. And on balance, "they have contributed to the development of a far more flexible and efficient financial system both domestically and internationally than we had just twenty or thirty years ago."
Rumors are swirling these days that what Greenspan dubbed "the past couple of stressful years" will mark the twilight of the 15-years-and-counting tenure of the most famous Fed chairman in history. Some of his testimony, recently, has been laced with life lessons, and Wednesday was no different. He dished investment tips, defended deregulation and quoted economic numbers from the 1950s. And he even gave his big-picture theory on how or, rather, why companies like Enron and Global Crossing and IBM got themselves into books-cooking in the first place. Two words, Ben: earnings addiction.
Greenspan traced it all to a change in the so-called "Thasby" accounting rule a few years back, that allowed stock options to be counted as compensation thus unduly inflating earnings outlooks already pumped up by productivity growth. The resulting pop in earnings basically ended the era of dividend payouts, and got Wall Street hooked on stock-price growth and the short-term earnings growth that fueled it. Pretty soon there were companies like Enron, whose only real business plan seems to have been the production of stellar-looking quarterly earnings reports.
But again, not to worry Wall Street is atoning for its sins. "The market's reaction to the revelations about Enron provides encouragement that the force of market discipline can be counted on over time to foster much greater transparency and increased clarity and completeness in the accounting treatment of derivatives" and of balance sheets in general. Greenspan had some ideas for accounting reforms, and urged that a "diagnosis" of Enron's fall be the first step to preventing its recurrence. But for grand old captain of the U.S.S. Economy, the markets have already begun correcting their course just another version of that inescapable old-fashioned business cycle.
And maybe that unpleasantness will soon be behind us too.