Resilience best for rebound

Resilience best for rebound

SINGAPORE: Besides dealing with the tragic loss of lives arising from the terrorist attacks on New York and Washington, the United States will also have to deal with the economic consequences of the tragedy. Stock exchanges that were closed on Tuesday, the day of the attacks, are set to re-open on Monday, but trading may be thin.

Not only was the World Trade Center completely destroyed, but many buildings in the area, the financial heart of the U.S., also suffered serious structural damage. Prominent brokerages and other financial houses that were located in these buildings lost key personnel.

The survivors are now without office space, let alone the computers and telephone lines to conduct business. More seriously, consumer confidence across the country, already shaky before the attacks, may have suffered a body blow. People are sitting at home, glued to television sets; restaurants, shopping malls and theaters are empty; air travel, when it resumes, will probably fall; hotels and tourist attractions across the country will see sharp declines in business.

Consumer spending, which constitutes two-thirds of the economy, had remained resilient in the first half of this year, but may soften now. As a result, growth may be negative in the next two quarters, meeting the technical definition of a recession. The severity of the downturn, as well as the speed of the recovery, will depend on how policy makers respond. Their response thus far has been reassuring.

The U.S. Federal Reserve, together with its counterparts in Europe and Japan, has acted quickly to pump liquidity into the system in an effort to reduce the possibility of panicky investors and depositors causing a financial crisis.

In just two days, the world's major central banks injected more than US$80 billion (S$139 billion) into financial markets; and on Wednesday alone, the Fed purchased US$38.2 billion worth of Treasury bonds from investment houses. In the meantime, President George W. Bush has announced that he will seek as much as US$40 billion in extra spending from Congress to pay for rescue efforts, re-construction work, airport security and possible military deployments.

The debate that raged in Washington just a week ago on whether or not the federal government should "raid" the Social Security Trust Fund to finance next year's budget has thankfully subsided. The debate was absurd before the attacks; now it seems trivial.

As welcome as all these measures are, however, they are but the first steps. Quite aside from the danger of problems in the bond and stock markets affecting the broader U.S. economy, there is also danger of a worldwide downturn.

In addition to providing immediate liquidity, the world's major central banks should accelerate interest rate cuts to buoy investor and consumer confidence. Unfortunately, European Central Bank president Wim Duisenberg downplayed the possibility of such coordinated cuts, saying they would suggest "panic".

But with the euro-zone's inflation rate falling, the ECB can afford to be more aggressive. It is difficult to see how that would constitute "panic", especially since the anemic state of European economies suggests the necessity of further monetary easing.

The Fed, for its part, has already slashed rates seven times this year, and will probably cut rates again when its policy- making committee next meets in early October. On a broader front, the U.S. government should move fast to restore public confidence, as it has already begun to do. Recovering its natural resilience would be America's best answer to terror.

-- The Straits Times/Asia News Network