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NEWS

Saturday, Feb. 4, 2006

It's too soon to know extent of fiscal damage

By BRIAN MILNER, The Globe and Mail
Friday, September 14, 2001

The unprecedented terrorist attacks that destroyed the World Trade Center and severely damaged the Pentagon certainly won't help the global economy come out of its current funk any time soon.

Serious financial and trade disruptions already have occurred; consumer confidence has been rocked, and there is sure to be considerable short-term pain, particularly with the damage to such industries as insurance, airlines and travel, as well as pressure on the U.S. currency.

Sept. 11, 2001, will be etched in our collective consciousness as a day of horror we will not forget, and its impact has yet to be measured.

But it is far too early to reach any conclusions about the extent of the damage to the U.S. economy, let alone the rest of the world. And there is absolutely no evidence to support the gloom-and-doom brigade's view that a handful of suicidal fanatics have been able to push us all off the edge of the economic cliff and to the brink of a new Middle East war.

In fact, what we have seen in the aftermath of the horrific assaults on the U.S. centres of financial and military power is a grim resolve to clean up, get the U.S. capital markets back up and running, and keep the fragile global economy afloat.

The world's major central banks have banded to pump billions of dollars into the financial system, and have made it clear they will provide as much liquidity as is needed. Saudi Arabia and its OPEC partners have pledged to supply whatever oil is required to keep prices within a target range of about $25 (U.S.) a barrel. OPEC sources insist the organization will stick to this plan even if the United States ends up launching a military strike against a Middle East target, although that is not a promise Washington should be eager to test.

There is no panic visible in the markets that are operating, including the Toronto Stock Exchange, which finally summoned the resolve to reopen yesterday.

In the latest developments, the chairman of the powerful U.S. House Ways and Means Committee said the U.S. Congress would quickly approve tax relief for victims of the attacks, both individuals and corporations, and start work on a fiscal package to stimulate the economy.

The European Central Bank, meanwhile, decided not to cut interest rates at its regular policy meeting. But that does not mean it has not eased monetary policy.

The ECB and the U.S. Federal Reserve Board announced a swap agreement under which the euro zone's central bank could draw up to $50-billion to bolster any European banks whose U.S. operations may be affected by the disruptions.

This is a gesture designed to boost confidence, as are soothing comments from top governmental and bank officials. Commenting on the U.S. chances of avoiding a recession, Bank of England Governor Eddie George said: "I remain, perhaps stubbornly, still cautiously optimistic. But I do recognize downside risks.

"You have to wait until you have actually seen the evidence . . . whether or not recent tragic events do damage confidence, in particular among American consumers."

U.S. confidence did plummet in September to its lowest level in almost eight years, according to a survey taken up to Sept. 10, the day before the terrorists struck.

The decline arises directly from steep job and market losses and ensured that the Fed would be cutting rates again, even before the disaster.

But as David Rosenberg, Merrill Lynch's chief Canadian economist, told clients yesterday, "under the right fiscal and monetary policy response, recovery could be quicker and bigger than many now expect."

Mr. Rosenberg relies on the scant historical evidence available to show that tragic events of the kind that occurred Tuesday "generally have not had a lasting effect on the economy or the investment landscape."

A strong banking system, rapid, concerted action by determined central banks, security of oil supply and the long-underestimated resilience of Americans may go a long way toward keeping the faltering economy from collapsing.

The key, at this point, lies with U.S. consumers. If they are too worried about the damage to their financial well-being to continue spending, all the pump-priming in the world is not going to have much effect.

But we often forget just how vast and diversified the U.S. economy is -- just as we often confuse Wall Street with Main Street.

ECB vice-president Christian Noyer insisted yesterday that the tragic events would not knock the global economy off the rails.

The old forecasts are no longer valid. But we don't yet have enough new information to declare him wrong.
bmilner@globeandmail.ca





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  • Six-month Memorial for Sept. 11 - U.S. President George Bush speaks from the White House. "The terrorists will remember Sept. 11 as the day their reckoning began," he said.

  • In Canada - Relatives of Canadian victims of the World Trade Centre attacks wonder why there's no six-month memorial here at home.

    CTVNEWS.com video reports



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