Amid gloom, there's still reason to hope
By DOUGLAS GOOLD
Thursday, September 13, 2001
In the eye of a storm, it looks and feels like the world will never again be the same. And no wonder, in the current crisis.
The United States and the world are still in shock. That's not only because of the scope of the disaster - the destruction of the World Trade Center and part of the Pentagon, and the massive loss of life - but also because of the element of surprise.
Apart from the continuing Israeli-Palestinian problem, there was no context to suggest a crisis: No Persian Gulf war, no threat from Iraq, no spy plane shot down over China. So, who on Monday could have predicted that, 24 hours later, events would be compared with the attack on Pearl Harbor, one of the most traumatic events in U.S. history? This week's shock is particularly great because the events took place on U.S. soil, and because U.S. security proved to be a hollow reed.
Certainly, the situation is grim. It's bad enough to have financial markets in disarray. But it's even worse to have them closed, as most of them have been in the United States and Canada. Hong Kong shut down its stock exchange during the market crash of October, 1987, with disastrous results. And with fears that consumers, who have kept North American economies afloat, will now stop spending, it's no wonder many observers are pessimistic.
The terrorist attacks "will significantly damage already vulnerable consumer sentiment," concludes Sherry Cooper, chief economist at BMO Nesbitt Burns Inc. "There are no precedents in our lifetime of similar magnitude. ... Global trade will slow further, exacerbating the multinational slowdown that is already in train. This will mean global recession."
In my view, comments like these are too negative, and reflect the shock that we all feel now. The economy and the markets were already doing poorly and will not be helped by the news, but there is reason for hope.
Consider the following:
oInterest rates are the single most important determinant of financial markets and the economy, and there is an almost universal belief that the U.S. Federal Reserve Board, the Bank of Canada and other central banks will now lower rates further and perhaps sooner than they had intended.
oAn immediate financial crisis probably has been averted by the Fed's announcement Tuesday that it would provide liquidity to U.S. banks (exactly what it did in October, 1987) and by the subsequent decision of the Fed, European Central Bank and Bank of Japan to inject $120-billion (U.S.) into the financial system.
oThough the price of oil, the world's most important commodity, could be volatile in the near term, OPEC contributed to the stability of the energy market by announcing that it would ensure supplies are available to meet market needs. The stories of U.S. Midwest gas stations charging $5 a gallon may be alarming, but overcharging has not been widespread or lasting, and the practice was quickly condemned by the American Petroleum Institute, which represents the industry. Oil will become a serious problem only if a big producer, such as Iran, Iraq or Libya, proves to have been involved in the attacks, or if oil becomes a weapon, as it did in 1973-74.
oMarket sentiment is understandably terrible, and it could get worse as the news sinks in and the death toll rises. "Over the next few days, we will go from shock to horror," Daniel Yergin, author and chairman of Cambridge Energy Research Associates, said in an phone interview Wednesday from Boston. But negative sentiment tends to build markets up, rather than destroy them. The price of gold, which does well in crises, rose sharply on the day of the attacks but has since fallen.
When a person, country, institution or company is in the midst of a crisis, it is natural to predict that the crisis could go on indefinitely, with disastrous consequences. However, history shows that most crises pass, the consequences are dealt with and people get on with their lives. That's particularly true of a formidable country with determined leaders such as the United States.
The 1987 stock market crash was supposed to lead to a financial collapse and a recession. It did neither. The gulf war in 1990 was supposed to lead to a long, devastating land war involving millions. In fact, the land war - a rout, really - lasted only a few days, with minimal casualties to the allied forces. And though the attack on Pearl Harbor killed several thousand Americans, destroyed the U.S. Pacific fleet and pushed the United States into the Second World War, that war was convincingly won by the Allies.
Mercifully, this crisis, too, will pass. We may not be on the verge of a global economic and financial recovery, but neither are we are the brink of catastrophe.
Douglas Goold is Editor of R.O.B. Magazine.