Greenspan Warns Of Complacency
Stock prices were mixed Thursday following the previous day's sharp sell-off, as Federal Reserve Chairman Alan Greenspan warned banks that they must not become overconfident in deciding how to manage risks, especially where it concerns their participation in new types of financial activities.
At the closing bell the Dow Jones Industrial Average was down 67.01 or 0.64 percent at 10413.12.
The tech-heavy Nasdaq Composite Index rose 13.45 points to 3720.76.
Fear of a big interest rate boost spurred a market sell-off Wednesday that sent ripples through the Asian markets overnight. Asian share markets were generally weaker on Thursday
The Dow plunged 250 points on Wednesday, a 2.34 percent drop that ended at 10,480.13. The tech-focused Nasdaq composite index slumped 78 points -- or 2.06 percent to 3,707.31.
In a speech distributed throughout Washington, Greenspan said, "The possibility that market participants are developing a degree of complacency or a feeling that technology has inoculated them against market turbulence is admittedly somewhat disquieting." He added,"Such complacency is not justified."
Speaking to a banking conference in Chicago, Greenspan reviewed some of the new activities banks are becoming involved in, change that has been accelerated by the passage last year of landmark legislation dropping Depression-era restrictions on banks getting involved in such areas as securities transactions and insurance.
In his speech, Greenspan concentrated on two developments in particular, the growing participation of banks in holding derivatives and merchant banking.
Derivatives are complex financial instruments whose value depends on the value or change in value of an underlying security, commodity or asset. They are used by businesses to guard against losses from unexpected market movements, but also by high-risk investment funds to speculate.
Derivatives played a key role in the near-collapse in September 1998 of hedge fund Long-Term Capital Management, which sent shock waves through world financial markets.
Greenspan said so far bank losses from their derivatives holdings have been small, but he said that does not mean they should not exercise caution going forward.
The government reported Thursday that worker productivity rose in the first quarter, but by a smaller measure than had been expected.
The Labor Department said that the gain in productivity, the amount of output per hour of work, during the January to March period, followed a much sharper 6.9 percent increase in the final three months of last year. That increase that had been the best quarterly performance in seven years.
Economists had been expecting productivity growth to slow in the first quarter, but the 2.4 percent rate was worse than the 3.5 percent they had been expecting. It was the slowest quarterly performance since a 0.5 percent rate of increase in the April-June period last year.
Productivity is the key factor that determines how fast Americans' living standards can rise. Higher productivity means that employers can afford to pay their workers more without triggering inflation pressures.
The slowdown in productivity for all workers outside of farming was accompanied by an acceleration in unit labor costs, which rose at a rate of 1.8 percent in the first quarter after having fallen at a 2.9 percent rate in the fourth quarter of 1999.
In a second report, the government said today that the number of Americans filing new claims for unemployment benefits rose by 20,000 last week to 303,000, the highest level for jobless claims since early February.