-Caveat Lector-
Tuesday September 11 4:41 PM ET
U.S. Attacks May Signal Global Recession
By Mark Egan
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.
As global stock markets plunged and oil prices soared after terror attacks on
landmarks in New York and Washington, economists said a global recession
was almost certain.
Analysts speculated the events could prove a death knell to U.S. confidence
and could send already wary investors fleeing to gold and other assets which
benefit in uncertain times.
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 (news - web sites) in flames will 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. 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.
The U.S. Federal Reserve (news - web sites) confirmed it was open and
operating and that its discount window would provide liquidity as necessary.
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.
UNTOLD DAMAGE
Economists said there could be untold damage to the U.S. financial system,
noting many key stock market players in the World Trade Center building
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 total of three full
percentage points to try to reignite sputtering economic growth.
The unprecedented assault on key symbols of U.S. military and financial
power 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.
``This could really trigger a global recession,'' said Frank Holmes, chief
executive of U.S. Global Investors Inc.
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 (news - web sites) 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.
Against that backdrop, 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.
RISK OF PANIC
``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.''
Soaring oil prices in 1999 are widely blamed as a key reason the world
economy began to slow late last year. Tuesday's spike of more than 10
percent in world crude prices to over $31 a barrel was 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 American consumers have remained confident, helping prop
up the broader economy. Economists said that confidence will most likely be
rocked by Tuesday's events.
And the tumble in stock prices -- if sustained when the New York stock
market eventually reopens -- could deal a hammer blow to consumer
confidence and spending, which in the U.S. has proved
