Financial World Reels After WTC Crashes

The attacks that toppled the World Trade Center could also shake the already weakened U.S. economy, some economists believe.

Not only could financial markets plummet in the wake of the attacks on the United States, but consumer sentiment could also suffer, say economy watchers.

"The economy is on a high wire act anyway," says Sung Won Sohn, senior vice president and chief economist at Wells Fargo. "The stock market has been suffering a great deal and this is a great shock."

Investors Run for Safety

Stock futures had plummeted shortly before U.S. markets in New York and Chicago were closed today. Prices of gold bullion, oil and U.S. Treasury bonds surged as investors sought safe havens in more "secure" investments.

The New York Stock Exchange, American Stock Exchange and Nasdaq are all closed Wednesday, with a decision on when trading will resume expected then. Some traders were speculating that when markets do eventually reopen, they could be in for a drop in excess of 5 percent, according to wire reports.

"Our nation's financial markets are strong and resilient," said Treasury Secretary Paul O'Neill today. "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."

Meanwhile, financial markets were hit around the globe as investors digested the implications of the attack. Stocks in the United Kingdom saw their biggest one-day point drop since October of 1987, with a 5.5 percent fall wiping roughly $98 billion off the value of London's FTSE 100 index.

Even worse was trading in Paris, off 7.4 percent, and Germany, off 9.2 percent. Trading was down 4 percent on the Toronto Stock Exchange, before being halted, while Brazilian markets were down 9.2 percent before they were closed.

Sohn says the impact on the economy could be similar to what happened during the recession of 1990-1991, which was aggravated by the Persian Gulf War. But the surprise nature of today's attacks could make the economic impact worse this time around.

"The difference to some extent, is this is worse," says Sohn. "In 1990 we kind of knew what we were getting into and the U.S. to some extent was calling the shots."

Leadership Needed

Also hard hit could be consumer spending, which makes up two-thirds of the nation's gross domestic product. Sohn says consumers spooked by the attacks on the United States could become even more reluctant to spend than they have been. Consumer confidence in August fell to its lowest level in four months.

Other economists note that ultimately, strong leadership from President Bush and the U.S. Federal Reserve will set the tone for how well the economy responds to today's tragedy.

Already the Federal Reserve has announced that it will provide additional funds to banks if they need it, similar to its promise made after the October 1987 stock market crash. But further reassurances — in the form of another interest rate cut from the Fed or additional tax reductions — could be necessary in the wake of the attacks, says Dimitri Papadimitriou, president of the Levy Economics Institute at Bard College.

"Now we need both monetary and fiscal policy," says Papadimitriou. "We cannot pull out of what appears to be a slowing down, which has been helped by this externality which no one has expected."

Financial District in Shambles

As for New York City's financial district, it is anybody's guess when the damage from the collapsed World Trade Center towers will be cleared enough to resume normal operations.

A number of investment banks had operations both in and around the financial center, including Merrill Lynch and Morgan Stanley, which occupied 50 floors of the World Trade Center. Officials from those banks could not be reached for comment.

A spokesman from Bear Stearns, which is headquartered in midtown Manhattan and does not have any offices downtown, says the investment bank was urging its employees to stay put in the aftermath of the explosions downtown. The investment bank had no comment on the long-term impact on the bank's financial dealings.

"Right now, it's too early to even broach that subject," says Bear Stearns spokesman Russell Sherman. "It just all pales in comparison, doesn't it?"