Posted on 09/11/2001 11:25:46 PM PDT by lasereye
WASHINGTON (Reuters) - New York's World Trade Center, an icon of global capitalism, crumbled on Tuesday after a series of attacks, leaving Wall Street in clouds of smoke and rubble and raising the specter of a global recession.
Economists said a global economic contraction was almost assured as world stock markets plunged, the U.S. dollar spiraled lower against the yen and euro, and oil and gold prices soared after terror attacks on landmarks in New York and near Washington.
Analysts speculated the catastrophic events could deal a hammer blow to U.S. confidence and could send already wary investors fleeing to gold and other assets which benefit in uncertain times.
President Bush said in a televised address to the nation that the world's richest economy would carry on despite what he called ``evil, despicable acts of terror.''
``Our financial institutions remain strong and the American economy will be open for business as well,'' Bush said.
For years the United States has been seen by investors everywhere as a safe haven -- a place where trillions of dollars could be invested, offering returns typically better than those available in Europe and elsewhere.
But terrorist attacks that caused both towers of the World Trade Center to collapse and left the U.S. Pentagon in flames could have a devastating effect on confidence in the U.S. economy, which was already teetering on the precipice of recession, economists said.
Markets were shut across the United States, which attracts almost two-thirds of all global capital flows, in the wake of the attacks and were to remain closed on Wednesday.
This added to the uncertainty about how American markets would react to the tragedy.
``A full-blown global recession is highly likely,' said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis.
``Recently, the economy has been on a high wire act, straddling between a recession and an anemic growth; (this) damage to confidence will push us into a recession,'' he said.
HELP BEING READIED
The world's major central banks issued statements saying they stood ready to act to counter any potential market turmoil.
The U.S. Federal Reserve said it was open and operating and that its discount window would provide liquidity as necessary -- a tacit admission that it stands ready in crisis mode. Federal Reserve Bank of New York President William McDonough, speaking in Switzerland, said the U.S. central bank would, ''provide that liquidity which is needed.''
Later, the European Central Bank said it also stood ready to provide liquidity to keep financial markets functioning.
Japan's Ministry of Finance said it had provided extra liquidity after the U.S. attacks and that it stands ready to take appropriate foreign exchange actions as needed.
The Nikkei stock index in Tokyo opened Wednesday's trading sharply lower, plumbing levels not seen in 17 years and losing more than 6 percent.
U.S. Treasury Secretary Paul O'Neill, who was traveling in Tokyo, sought to reassure markets, saying he has every confidence in the financial system's ability to weather the latest challenge.
``Our nation's financial markets are strong and resilient,'' O'Neill said in a statement issued from Japan, where he will remain until further notice.
``In the face of today's tragedy, the financial system functioned extraordinarily well, and I have every confidence that it will continue to do so in the days ahead,'' he said.
The closure of markets on Wednesday will mark only the second time the New York Stock Exchange has shut for two consecutive days, the last being in honor of the end of World War Two in August of 1945.
Economists said there could be untold damage to the U.S. financial system, noting many key stock market players in the World Trade Center buildings were likely killed.
Sohn said he expects a ``stampede'' of sell orders once American stock markets reopen, and a run on insurance companies, possibly crippling the financial system and forcing the U.S. Fed to cut interest rates even further.
The Fed has already cut rates seven times this year by a total of three full percentage points to try to reignite sputtering economic growth.
GLOBAL RECESSION?
The unprecedented assault on key symbols of U.S. military and financial might came as growth around the globe slows to a crawl. The U.S. economy is barely growing, Europe's is slowing rapidly and Japan's actually contracted in the second quarter.
Kevin Logan, an economist at Dresdner Kleinwort Wasserstein in New York summed up the feelings of many, saying Tuesday's events meant, ``it won't be business as usual'' anymore.
``People will begin to invest and spend less as they try to determine what the future will bring. I can only imagine the stock market is very vulnerable,'' he said.
Before the attacks, the International Monetary Fund had expected global growth of just 2.7 percent this year, down from almost 5 percent last year, with the risk of a global recession rising -- the top item on the agenda at the upcoming meeting of leading industrial nations in Washington later this month.
Economists said the worst-case scenario could be a massive capital flight out of U.S. assets -- something that could crush already weak U.S. stock prices and banish the American economy into its first recession in more than a decade.
``The major risk is panic in the financial markets,'' said Kathryn Kobe, an economist at Joel Popkin & Co. in Washington. ''If for some reason the United States is no longer seen as a safe haven for capital...there could be some very large capital movements.''
Oil prices, regarded as one of the culprits behind the slowdown that began late last year, spiked more than 10 percent on Tuesday before closing up nearly 6 percent on the day at a over $29 a barrel -- a shift eyed nervously by analysts, who said higher oil prices would also hamper economic growth.
Parts of the U.S. economy, notably the manufacturing sector, are already in recession. But consumers have remained confident, helping prop up the broader economy. However, economists said that faith will be rocked by Tuesday's events.
And the tumble in stock prices -- if sustained when the New York stock market eventually reopens -- could further injure confidence and spending, which in the United States has remained intact in the face of the slowdown.
The U.S. economy grew only 0.2 percent in the second quarter and analysts feared that the attacks could finally turn that paltry growth rate negative.
Mr. Kudlow is CEO of Kudlow & Co.
September 11, 2001 6:15 p.m.
After today's heinous crimes committed by terrorists against the U.S. and the rest of civilized humanity, there must be a sea change in American policies if we are to effectively play the rough hand that God has dealt us.
We are at war. And war changes everything, including policies. We must now embrace war policies.
Among the carnage and massive human suffering there is an important wake-up call that must be heeded by Democrats and Republicans alike: We live in a dangerous world, and we must never forget how utterly important it is to maintain our defenses in order to preserve freedom and democracy and our way of life.
The terrorist invasion of the U.S. mainland underscores the urgent need to rebuild the defense and national security structure that has slowly but steadily eroded in recent years. Barbaric terrorists have revealed significant flaws in our intelligence systems and in our security arrangements at home. This will all have to be changed. The threat of terrorist use of nuclear or other weapons of massive destruction hammers home the urgent need for strategic defense measures and a general technological rebuilding of our defense posture.
In financial terms, this will cost hundreds of billions of dollars. So be it. It's a drop in the bucket for the defense of freedom. We will sell bonds to finance military security. bonds will finance investment in freedom.
In economic policy terms, today's terrorist invasion similarly changes everything. To backstop national security recovery we must take aggressive actions to stimulate economic recovery. It was Reagan who argued 20 years ago that U.S. economic decline in the 1970s stimulated Soviet adventurism and expansionism. Reagan knew that economic recovery at home would insure international recovery abroad.
In an interesting book by Professor Gary Dean Best, entitled Pride, Prejudice, and Politics, a similar point was made about the linkage between domestic economic policy and international security policy. Prof. Best noted that the failure of the U.S. to recover from the Depression — where even as late as 1940 the unemployment rate was 14.6% — created an image that the economically-plagued U.S. would be a weak player on the world political scene. Quite simply, Best argued that economic weakness at home encouraged Hitler and Japan abroad.
In today's terms, one cannot help but wonder whether Mideast-based terrorist groups do not think that their energy-producing state government sponsors can simply turn the dial, tighten oil production, and thereby weaken the American economy even more. Is it entirely a coincidence that the terrorist actions aimed at closing down Wall Street, closing down the Pentagon, and even closing down the U.S. government, have occurred in the immediate aftermath of worsening economic news and slumping stock market performance?
No matter what the cost, the U.S. must be prepared to restore its economy. Phony lockboxes must be thrown out the window. Unnecessary obsessions over debt retirement must be driven away. Now is the time for aggressive fiscal and monetary stimulus to promote growth and finance freedonm. Substantial tax cuts on individuals, businesses, capital investment, and equipment depreciation should be immediately put into place. Lower tax rates across the board will aid recovery by reducing production and investment costs while stimulating an entrepreneurial economic return. The Federal Reserve Board must substantially increase the volume of bank reserves to reliquefy the financial system and the economy. Steps to promote energy production must be taken aggressively.
Here in New York, with the destruction of the World Trade Center, those of us in the financial community will grieve over the sad and tragic loss of husbands and wives who worked Downtown. So many of us involved in politics and government will know people who lost their lives in the plane hijackings. While we grieve sadly, our anger will demand immediate U.S. retaliation to clean out the terrorist criminals and the states that sponsor them. We know who they are. We know where they are. And we will hope and pray that president Bush takes immediate and effective actions.
But amidst the grieving and the anger, none of us should lose sight of the long-term goal of preserving our freedom and democracy. This is a national security goal, and it is also an economic security goal. What happened today changes everything. Lord give us the strength to learn from it and take the right actions to preserve it.
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