United States Federal Reserve chairman Alan Greenspan is supposed to be neutral on the subject of stockmarkets, but he left no doubt yesterday about what he thought of some of the people running US listed companies.

Dr Greenspan told a Senate banking committee in Washington that "infectious greed" had gripped the business community during the 1990s and that "too many corporate executives sought ways to harvest some of those stockmarket gains".

The result, he said, was a tendency on the part of chief financial officers and chief executive officers to "artificially inflate reported earnings in order to keep stock prices high and rising".

Dr Greenspan said he had been "really, deeply distressed" to discover that accountants were signing off on dodgy figures, because he had previously banked on their integrity. "I was wrong," he said. "The incentives (stock options) overcame the good judgment of too many corporate managers."

He added: "It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed have grown so enormously."

Dr Greenspan's speech initially appeared to satisfy investors, but gains made while he was speaking were not sustained. The Dow Jones Industrial Average closed down again, this time by 166 points, or 1.9 per cent.

The outlook for the markets remains grim, particularly if Dr Greenspan was correct when he said that more business scandals were likely to be uncovered.

"Previously undiscovered misdeeds will no doubt continue to surface in the weeks ahead as chastened CEOs restate earnings," he warned, adding that "falsification and fraud are highly destructive to free-market capitalism and, more broadly, to the underpinnings of our society".

"And even if the worst is over, history cautions us that memories fade. It is incumbent upon us to apply the lessons of this recent period to inhibit any recurrence in the future."

Dr Greenspan backed tougher penalties for corporate crooks, saying that while "we may not be able to change the character of corporate officers, we can change behaviour through incentives and penalties".

He also criticised "lawyers, internal and external auditors and corporate boards" for not doing more to protect investors, saying they had failed to "detect and blow the whistle on those who breached the level of trust essential to well-functioning markets".

At the same time, he was wary of too much regulation, saying that "beneath all the problems, what we have is still a very sound structure. If we endeavour to try to change the system in a fundamental way, we may end up doing more damage than help".

"There is no need to rush. Corporate governance will be just fine for the next two years, because everyone has been chastened," he said.

Dr Greenspan's testimony came as he presented the US Federal Reserve's monetary policy report, which forecast gross domestic product growth of 3.5 to 3.7 per cent this year.

He said the economy had "withstood a set of blows... that in previous business cycles almost surely would have induced a severe contraction", adding that the "mildness and brevity" of last year's downturn indicated a "notable improvement in the resilience and flexibility of the US economy".

He hinted that the official interest rate would eventually rise, but not until the Fed had found "evidence that the forces inhibiting economic growth are dissipating".

Dr Greenspan's speech was applauded by economists for its clarity. Indeed, one member of the banking committee thanked him for making it so "clear and compelling" while another told him flatly that he was "better than (former chairman) Paul Volcker. You had to decode the smoke rings he was blowing from his cigar".