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To: JungleInvestor who wrote (80768)	12/5/2000 1:53:57 PM
From: kodiak_bull	Read Replies (2) \| Respond to of 95453

AG on SC in the E&FM: WASHINGTON, Dec 5 (Reuters) - The following is the full text of Federal Reserve Chairman Alan Greenspan's speech issued in New York Tuesday titled "Structural changes in the economy and financial markets": "Good morning. It is a great pleasure for me to join America's Community Bankers for your winter conference. I would like to take the opportunity today to talk with you about some of the structural changes in the economy and financial markets that are challenging both bankers and policy makers. Technological innovation, and in particular the spread of information technology, has revolutionized the conduct of business over the past decade and resulted in rising rates of productivity growth. Accelerated productivity has been elevating standards of living, and it has been containing cost and price pressures, even as the economy operates at unusually high levels of labor resource utilization. Higher prospective rates of return from the application of the newer technologies has led to a surge in business capital spending. And, in recent years, the capitalization of those higher expected profits has boosted equity prices and contributed to a significant pickup in household spending on houses, durable goods, and consumption more generally. Also contributing has been the measurable rise in the turnover of existing homes, engendering a marked increase in realized capital gains. For a long time, those who were advancing funds shared the sanguine expectations of those using the funds for rapid increases in profits and incomes, and credit and equity were available with unusually low risk spreads. During the past couple of years, however, the widespread optimism that was apparent in financial markets has given way to some reassessment of risks and opportunities. This process has been under way ever since the global financial crisis in the fall of 1998. That episode forced many market participants to recognize the potential for international risks to feed back on U.S. markets. Events brought into sharper focus the possibility that liquidity in many markets can dry up simultaneously when fear spurs risk aversion, and an intense, near-term focus on protecting capital values markedly elevates the demand for liquidity. Markets largely recovered from that episode, but an imprint was left in the form of wider credit spreads and more cautious behavior on the part of banks and other lenders. Recently, wariness about risk again has increased as default rates on less than investment-grade bonds have moved higher, debt downgrades have become more commonplace, and many high-flying dot-com ventures have collapsed. More broadly, equity market analysts have been revising down their near-term profit forecasts--with revisions occurring across a range of industries. As a consequence, stock prices this year have given back some of the extraordinary gains posted in recent years, risk spreads have widened appreciably in markets for lower-rated long-term and short-term credits, and--as I'll be discussing in more detail later--banks report that they have tightened terms and standards on business loans. To be sure, our current circumstances are in no way comparable to those of 1998. Financial markets have continued to function reasonably well, and credit continues to flow, although admittedly with reduced availability to less-than-investment-grade borrowers and at interest spreads sufficiently elevated to press on profit margins of those lower-rated borrowers. Both lenders and borrowers are reassessing their positions in light of an apparent uptick in domestic risks, but the palpable fear that dominated financial markets at the height of the crisis two years ago is not now in evidence. Net funds raised by nonfarm, nonfinancial business are estimated to have risen in November from October levels, though remaining below the rates of earlier this year. Why then, one might ask, is this process of reassessment taking place now? In large part, it appears to be the expected byproduct of the economy's transition to a more sustainable balance in the growth of demand and supply. The orders and output surge this past year in a number of high-technology industries, amounting in some cases to 50 percent and more, was not sustainable even in the more optimistic new economy scenarios. Technological innovation combined with intense competition has resulted in some overreaching. Many firmsrushed to gain first-mover advantages of the newer technologies. The successful creation of industrywide networking standards was expected to allow these firms to dominate a particular market niche and, thus, to reap a considerable reward in earnings. Demand for high-tech equipment and fiber optics expanded rapidly, but in some segments of the market available supply appears to have increased even faster. To the extent that some aspiring entrepreneurs entered the tail end of a short-term boomlet, there was bound to be some disappointment. In many respects, the situation may be analogous to a phenomenon of which I am sure many of you are all too painfully familiar--the tendency to overbuild in commercial real estate when low vacancy rates prompt commercial building starts well beyond the point that, on completion, could be supported by the ongoing growth in demand. Problems have even arisen among a number of well-established companies whose forays into uncertain newer technologies have come up short. To a considerable degree, then, the current shakeup in some segments of the telecom and other high-tech sectors seems to reflect an inevitable winnowing process as the market begins to draw firmer conclusions about which firms will be able to establish a long-lived market niche and which will not.