Natural disasters and the world trade center

[Paul Davidson <pdavidson@xxxxxxx>]

Forstater, Mathew" wrote:
>
> > Paul - You have argued here before, I believe, that PK analysis
> > concludes that natural disasters can end up stimulating the economy by
> > giving rise to various types of emergency expenditures that then will
> > have multiplier effects. I believe you made such an argument with
> > regard to California a few years back.

There is a difference between natural disasters and the WTC disaster --
especially with global financial markets. Mainly the psychological factor
and the question of foreign holders of positions in U.S. bonds and other
securities.

It is clear that Congress and the President will spend whatever is
necessary to rebuild down town Manhattan -- forget about lock-boxes,  the
puritanical devotion to government surpluses, etc. -- so that in the next
year we should see a  swelling of demand in construction trades in the
NorthEast. That per se is expansionary.

But the immediate impact of the terrorist attack not only on the economy of
New York City and the surrounding area -- but on the transportation system,
the airlines, the tourist trade, the hotels, etc will be significantly
depressing. and affect the national economy.

I agree with Henry Liu who suggests that before September 11 we were
tottering into a  recession -- now we can blame the recession on the
terrorists (and even date it from September 11 --- just as we date the
Great Depression is often dated from the stock market crash of October 24,
1929 even though the National Bureau says the Great Depression started in
July 1929) rather then the foolish economic policies pursued by the Fed in
1999-2000 and the Clinton and Gore Administration making a fetish of the
cash flow surplus due to the Social Security surplus.)

I fear that the cash inflow to the transportation, etc industries will
force many companies not only into bankrupcy proceedings -- but by failing
to have the liquidity to meet payrolls --the companies will have tofire
workers. (Already one small airline-- Midway airlines-- has followed this
path.). Thus it seems almost inevitable that the unemployment rate
nationwide should rise in the next couple of months and Xmas sales should
be disappointing..

I think the Fed and the other CBs will do what I have emphasized  in my
PKMT book and my IMCU proposal and my Plumber Vs Financial Architect
article in WORLD DEVELOPMENT namely act as a stabilizing "market Maker" in
the financial markets of the world by flooding the markets with liquidity
so that all who exercise their "fast exit" strategy for a "safe  haven" for
their portfolios can move thgeir funds around without creating huge
volatility in financial market prices.--


If we had capital controls regulations in place (see my IMCU proposal) we
could do control flows into and out of financial markets to  mmaintain
stability in thie face of this emergency and assure that fast exits do not
overwhelm market makers.  NOTE this is what we are doing on the NYSE by
keeping it closed from last tuesday until next monday -- Closing the stock
market is a very strong form of capital controls -- but necessary to make
sure when it reopens  the markets remain orderly -- and what ever disorder
appears can be handled with the liquidity provided by the Fed to the market
makers directly or indirectly via the commercial banks.

 Certainly, the argument has also
> > been made in terms of military destruction. I wonder if you think that
> > we may expect a similar effect as a result of the WTC disaster, and if
> > you think that these effects may more than compensate for any
> > destabilizing effects.

I am less sanguine given the economic advisers to CBs and government
politicians. I have even read in the Wall Street Journal today that some
democrats do not want to give the President a blank check on spending for
rebuilding -- citing that even after Pearl Harbor  Roosevelt had some
congressional limits on spending. If thial balloon  being sent up, I think
it is a bad omen.
> >
> > I also wonder whether there might be other relatively stabilizing
> > effects as well. For example, is it possible that such a disaster gives
> > rise to sentiments (sense of duty, responsibility) that may curb some
> > excessive moves on the part of some market participants?

Like the gas stations that raised the price of gasoline to $5 per gallon in
soem areas of the nation?


For example,
> > is it possible that a 'big player' might resist a big sell-off in the
> > context of this kind of disaster, where they might not under 'normal'
> > circumstances of markets turning sour?

Apparently the CBs are trying to get big players to hold fast -- we shall
see if it works -- It will work if the Fed and other CBs can "assure" that
the market will not decline much and will recover rapidly.

Also, would certain kinds of
> > 'coordination' be acceptable under these circumstances, where they might
> > not usually? Or would certain appeals, e.g. for calm, have a greater
> > chance of being heeded?

Anyone can be a patriot for a day or a week -- the question is can you keep
the spirit going .  In the second world war we did. In the Korean war it
was still there -- but much less.  Need I point out the disorder of the
civilian population during the Vietnam war -- when locals such as the
Weathermen formed their own terrorist organizations -- and probably would
have liked to bomb the WTC.


Paul
Paul Davidson
Holly  Chair of Excellence in Political Economy
Editor, Journal of Post Keynesian Economics
Economics Department - 523 SMC
University of Tennessee
Knoxville, Tennessee 37996-0550
phone # (865) 974-4221
fax # (865) 974-1686
home phone and fax # (865) 692-0802
http://econ.bus.utk.edu/Davidson.html