Incalculable? Economists Count Attack's Financial Fallout

At the time the implications seemed too huge to calculate.

But just weeks after the once unimaginable attacks on New York and Washington, financial strategists have gone back to business, pretty much as usual.

In the days immediately after the Sept. 11 attacks, few were brave enough to speculate on the economic implications.

Some deemed it inappropriate, some deemed it impossible and many were grieving for friends and colleagues, lost in the New York attacks that directly targeted the financial markets.

But some markets never close, and foreign exchange players followed the textbook, buying the Swiss currency because the country is viewed as a safe haven of political neutrality.

Investors also bought oil, fearing conflict involving oil-producing nations. They bought gold, another traditional refuge in troubled times.

And where they could -- the New York Stock Exchange remained closed for days -- they sold shares.


For economists, used to forecasting growth to two decimal places, none of this helped in reformulating their views. Just counting the unknowns took long enough, even for those who did not have to check forecasts with New York colleagues.

Initially, "many people were just unavailable," said Trevor Williams at Lloyds TSB in London. "And you can't give a forecast straight after (such an event), it takes a few days to work through the effects."

Would shocked U.S. consumers stop shopping, and for how long? They had stopped flying -- would that just hurt airlines or cripple the whole world economy?

Would the world's central banks lend enough money to stop shattered U.S. banking and broking firms from defaulting on recent trades? If Japanese investors rushed to repatriate funds from the United States, selling dollars in the process, would central banks be able to stabilize the currency turmoil?

Above all, would the United States be provoked into immediate and savage military revenge?

It all became clearer, said Williams at Lloyds TSB, "once the scale became obvious. The U.S. could have gone on a blitzkrieg, but they didn't."

At that point he decided, "It was a man-made disaster but it's like a natural disaster. It's like Kobe (scene of the 1995 Japan earthquake.)" Other comparisons included the Gulf War. "You use your whole experience of disruptions to the economy."


For European-based forecasters, one comparison that began to emerge was the region's long experience of bombings at shopping locations and businesses.

The death tolls were smaller and the horror wasn't broadcast live on international television. But the bombs planted by nationalist and separatist guerrillas in countries like Britain and Spain were also meant to terrify and to disrupt commerce.

They did -- but after a while, the shoppers returned.

Williams studied consumer behavior in Britain and found that Irish republican bombings had had limited impact.

"The UK experience of terrorism is that the key driver of consumer confidence remains the same, which is rates of unemployment," he said.

Even so, many economists with long experience of the markets found it hard to evaluate how the United States would react.

"I would say absolutely none," said Klaus Baader at Lehman Brothers, asked if he could think of comparable events. "There really hasn't been this kind of attack on the U.S. mainland."

He said the uncertainties were so great he had to adapt his forecasting style.

"Normally we try to convince people that growth is going to be x percent at a certain point in time. We decided in these circumstances it was plain silly to try to come up with something like this," he said.

Instead, "we approached it from the perspective of how bad can we imagine things are going to be, and how good can we imagine things are going to be, and we came up with some reasonable worst case and best case scenarios."

Others just adapted their normal forecasting process. "This tragedy has had a heck of an impact and I don't sit here and forecast tragedy," said Tim Mazanec at Investors Bank and Trust in Boston.

But business goes on. "I think for the most part emotions are kept out of it," said Mazanec. "Maybe there's a bit of nationalism at times that comes in."

There is still talk the attacks could generate long-term lifestyle changes.

Many admit privately to fear of working in tall buildings, or to traveling on London's Underground after the attacks revived memories of a chemical attack on a Tokyo subway by a doomsday cult in 1995.

But personal and global uncertainties have been put aside as the world's financial system rolls on.

"We all know there are financial shocks...political events, that come under the category of event risk," said MacKinnon at Merrill Lynch. "And we know that's a fact of life, and you've just got to deal with that as best you can. Trying to predict what can happen...I guess that's what we're paid for."