Economics of the terrorist attacks

Following the Sept. 11 terrorist attacks, comparisons are being made to Japan's attack on Pearl Harbor, which include some economic and financial parallels. But it's difficult to make such comparisons because over time our economy has become much more complex and much more globally interdependent.

Regardless, the recent terrorist attacks have impacted many components of our economy, including liquidity and credit, the stock market, the insurance industry, and perhaps most importantly, consumer confidence.

Liquidity and credit

After these attacks, if liquidity becomes a problem, there won't be as much money available to lend to businesses and consumers. So, if this happens, interest rates could eventually go up and credit could become more costly. These factors could slow consumer spending and affect unemployment. In that case, loan delinquencies, foreclosures, and repossessions could increase. This is the bad news.

But the good news is that steps are being taken to maintain liquidity and credit, including cooperation with central banks of Europe, England and Canada. Our government fully realizes that the U.S. dollar represents the standard of value in markets worldwide and whatever happens to our own liquidity could affect markets around the world.

Stock market

Historically, the equity markets have boomed during times of war. But this is a different kind or war, unlike any other the United States has ever fought. Moreover, the equity markets are more volatile in American society now than ever before. We've already heard of some investors shifting to precious metals and other less volatile investments. But, on the other hand, its possible that patriotic Americans will re-emphasize the "buy American" sentiment which would be very good news.

Moreover, perhaps American stocks will become today's version of "war bonds" that were popular during World War II. And, for certain sectors, the news isn't all bad. Greyhound, Amtrak and other companies are already reporting record increases in their business. And other businesses such as security services and video conferencing companies are booming.

Insurance

Of all industry sectors, insurance could be the most impacted. As insurers they now have and may continue to experience unprecedented losses, even though some policies exclude acts of war from their coverage. But even if insurance companies avoid claim losses because of such clauses, they could still suffer indirectly. Many insurance companies invest in real estate investment trusts and other vehicles. Therefore, as investors in commercial real estate like the World Trade Center, losses from terrorist attacks could still adversely affect their bottom line.

And there are likely to be other changes including the introduction of new types of insurance to cope with terrorist risks. The magnitude and scope of uninsured losses could very well cause the creation of new forms of insurance to prevent future incidents of uninsured risk. Also, how insurance risk is evaluated and coverage priced will also be examined. For example, the height of the building or the number of occupants as a means of quantifying risks and determining premiums may be required.

Consumer confidence

Perhaps the real wild card to all of this is the overall reaction of the American people to the terrorist threat. This raises several questions. Will consumer purchases be postponed because of uncertainties stemming from the terrorist attacks? Will reductions in consumer spending further slow the economy, increase job losses and affect loan delinquencies, foreclosures and repossessions? Will a slow down in spending have an adverse impact in other areas such as home values? And finally, could consumer's fears and a reluctance to resume buying be more damaging than the attacks themselves?

But on a much more positive note, Americans have always coped well with disasters. This has always been a nation of positive thinkers and "can-doer." Throughout our history this unique "can do" attitude has helped us overcome the devastating effects of many natural, military, political and economic disasters. And in meeting these challenges we have all witnessed the extraordinary resilience, determination and the unifying effects such incidents have inspired.

Robert Bunn is a management consultant in Cape Girardeau. (335-3351 or rbunn@igateway.net)