Greenspan said the banking system was healthy, but that credit quality deteriorated and banks belatedly tightened up standards -- too much would be counter cyclical. He followed up with a lesson on shrinking corporate pricing power as higher labor and energy costs fail to be passed on to the consumer, an effect which is spreading globally. This suggested that Greenspan's Fed would be "sensitive" to these effects and implied room for more easing.
Stocks were first spooked by the pricing power argument and more warnings/downgrades in the telecom and tech sectors, but the Treasury curve flattened and the long end rejoiced on the inflation implications. Treasury announcements of a two-year auction and bond buyback fit with the flattener, while the CRB index tumbled to 14-month lows as German and Japan growth faltered.