20 September 2001
Text: Greenspan on Economic Effects of Terrorist Attacks
(Federal Reserve chief optimistic about long term) (1390)
Alan Greenspan, chairman of the U.S. central bank, expects some
difficult times ahead for companies and workers but remains optimistic
about the long-term strength of the U.S. economy.
Testifying before the House of Representatives Banking Committee
September 20, Greenspan said that the September 11 terrorist attacks
on the World Trade Center and Pentagon caused considerable uncertainty
that resulted in business cutting back or delaying spending plans.
"Indeed, much economic activity ground to a halt last week," he said.
Such cutbacks will mean somewhat slower growth that had been earlier
anticipated, he said. But Greenspan declined to be more specific,
saying only that in weeks ahead "we should be able to better gauge how
the ongoing dynamics of these events are shaping the immediate
economic outlook."
He noted that consumer spending is down, the airline and travel
industries have suffered major cutbacks, and auto production has
fallen significantly. However, the financial markets, initially
damaged by telecommunication problems, are "mostly functioning now,"
he said.
One positive note, Greenspan said, is that the prospects for launching
a new round of global trade negotiations are much improved as a result
of the universal support the United States has received since the
September 11 attacks. A successful round would be an important tool in
enhancing world growth as well as a statement to terrorists of the
world's trading nations "firm reaffirmation of our commitment to open
and free societies."
Member nations of the World Trade Organization are scheduled to meet
in Doha, Qatar, November 9-13.
"For the longer term, prospects for continued rapid technological
advance and associated faster productivity growth are scarcely
diminished," Greenspan said. "Those prospects, born of the ingenuity
of our people and the strength of our system, fortify a promising
future for our free nation."
Following is the text of Greenspan's testimony as submitted for the
committee's records:
(begin text)
Testimony of Chairman Alan Greenspan
The condition of the financial markets
Before the Committee on Banking, Housing, and Urban Affairs, U.S.
Senate
September 20, 2001
I would like to begin my remarks this morning by noting how deeply
saddened I and my Federal Reserve colleagues are that so many talented
and productive people from so many walks of life were lost or
irreparably harmed last week. Although we are here today to discuss
some of the immediate economic and financial implications of that
tragedy, we are all too aware that the topic we discuss will be a mere
footnote.
The terrorism of September 11 will, doubtless, have significant
effects on the U.S. economy over the short term. An enormous effort
will be required on the part of many to cope with the human and
physical destruction. But as we struggle to make sense of our profound
loss and its immediate consequences for the economy, we must not lose
sight of our longer-run prospects, which have not been significantly
diminished by these terrible events.
Over the past couple of decades, the American economy has become
increasingly resilient to shocks. Deregulated financial markets, far
more flexible labor markets, and, more recently, the major advances in
information technology have enhanced our ability to absorb disruptions
and recover.
In the past, our economy has quickly regained its previous levels
following the devastation of hurricanes, earthquakes, floods, and
myriad other natural disasters that periodically batter various
regions of our country. Although the trauma of September 11 shares
some characteristics with such disruptions, the differences are
important. In contrast to natural disasters, last week's events are of
far greater concern because they strike at the roots of our free
society, one aspect of which is our market-driven economy. All modern
economies require the confidence that free-market institutions are
firmly in place and that commitments made today by market participants
will be honored not only tomorrow, but for years into the future. The
greater the degree of confidence in the state of future markets, the
greater the level of long-term investment. The shock of September 11,
by markedly raising the degree of uncertainty about the future, has
the potential to result, for a time, in a pronounced disengagement
from future commitments. And that, in the short run, would imply a
lessened current level of activity. Indeed, much economic activity
ground to a halt last week.
But the foundations of our free society remain sound, and I am
confident that we will recover and prosper as we have in the past. As
a consequence of the spontaneous and almost universal support that we
received from around the world, an agreement on a new round of
multilateral trade negotiations now seems more feasible. Such an
outcome would lead to a stronger global market system. A successful
round would not only significantly enhance world economic growth but
also answer terrorism with a firm reaffirmation of our commitment to
open and free societies.
But before the recovery process gets under way, stability will need to
be restored to the American economy and to others around the world.
Arguably, that stability was only barely becoming evident in the
United States in the period immediately preceding the acts of
terrorism. Aggregate measures of production, employment, and business
spending continued to be weak.
That said, consumer spending moved higher in August and appeared to be
reasonably well maintained in the first part of September. Industry
analysts suggest that motor vehicle sales were running close to August
levels, and chain store sales were only modestly lower. Purchasing
managers had noted an improvement in the orders picture in August.
Moreover, the dramatic rate of decline in profits was slowing. To be
sure, these signs were tentative but, on the whole, encouraging.
During the past week, of course, the level of activity has declined.
The shock is most evident in consumer markets where many potential
purchasers stayed riveted to their televisions and away from shopping
malls. Both motor vehicle sales and sales at major chain stores, some
of our most current information on consumer spending, appear to have
fallen off noticeably. And, the airline and travel industries have
suffered severe cutbacks.
The unprecedented shutdown of American air travel and tightened border
restrictions have induced dramatic curtailments of production at some
establishments with tight just-in-time supply chain practices.
Automakers, for example, are reported to have pared production and
even closed some plants in the past week, largely owing to supply
shortages, though, doubtless, short-term demand uncertainties have
also played a part.
The effect on financial markets of the devastating attack on the World
Trade Center was pronounced, as telecommunications and trading
capacities were severely impaired. But the markets are mostly
functioning now, albeit in some cases using contingency arrangements,
and, as in the past, the infrastructure will be rapidly restored.
For a brief time, the terrorist attack markedly disrupted payment
transfers that are usually measured in terms of trillions of dollars
each day. Many obligators temporarily lost their technical ability to
pay on time, leaving those counting on receiving payments caught
short. The pressures ultimately ended up concentrated in banks. Those
needs were met by the Federal Reserve, both through record lending at
the discount window and through an extraordinary infusion of funds
through open market operations. To facilitate the channeling of dollar
liquidity to foreign financial institutions operating in the United
States, thirty-day currency swap lines were arranged with major
central banks, again in record volumes. It was essential in such an
environment to meet all appropriate demands for dollar liquidity. As
the financial markets and payment infrastructure return to normal,
loans are being repaid, and the temporarily bloated balance sheet of
the Federal Reserve is now shrinking back to normal.
Nobody has the capacity to fathom fully how the tragedy of September
11 will play out. But in the weeks ahead, as the shock wears off, we
should be able to better gauge how the ongoing dynamics of these
events are shaping the immediate economic outlook.
For the longer term, prospects for continued rapid technological
advance and associated faster productivity growth are scarcely
diminished. Those prospects, born of the ingenuity of our people and
the strength of our system, fortify a promising future for our free
nation.
(end text)
(Distributed by the Office of International Information Programs, U.S.
Department of State. Web site: http://usinfo.state.gov)
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