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
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
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
"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
ECB vice-president Christian Noyer insisted yesterday that
the tragic events would not knock the global economy off the
The old forecasts are no longer valid. But we don't yet
have enough new information to declare him wrong.