How To Rise from These Ashes

Decisive action by Alan Greenspan and the world's central bankers and policymakers could avert global recession

By Christopher Farrell

The global economy has been sliding toward recession. Japan, the world's second-largest industrial nation, is in a deflationary downward spiral reminiscent of the 1930s. Growth is faltering among the economies of the European Union. The U.S., while officially avoiding a recession so far in 2001, is flirting with negative growth. Indeed, following the recent jump in the unemployment rate to 4.9%, many Wall Street prognosticators are trimming their forecasts through the first half of 2002. More pink slips suggest consumer confidence and spending could take a nosedive.

Then comes the heinous crime of the massive terrorist attack against America. Is this the tragic event that tips a deteriorating world economy into a global recession?

Certainly, economic activity has ground to a halt. Wall Street, the hub of global capitalism, is shut down. In New York, no airplanes are flying, and lot of business and vacation travel has been canceled. As I pen these thoughts Sept. 12, I'm stuck in a hotel room in Silver Spring, Md. I flew from the Twin Cities to Washington, D.C., for work late Sept. 10 and was supposed to return Sept. 11.

Instead, I remain on the East Coast, checking in with friends and colleagues, and watching the news on TV. When I cross the street to get a sandwich at a nearby deli, the counter is jammed with people ordering lunch. But mostly, everyone just stands and watches the news. Not a lot of work is getting done.

OPEN THE SPIGOTS.

  It may be counterintuitive, but a global recovery led by the U.S. could unfold following the terrorist attack. For one thing, the economic effect may be reminiscent of a major earthquake. The local economy takes a sharp dip when a giant temblor hits Los Angeles or San Francisco. But in the following quarters, it surges ahead as construction spending kicks in, insurance payments start flowing, and projects that were delayed finally get under way. A similar effect could be at work in the national economy.

The gains should be sustainable, assuming economic policymakers show leadership. Federal Reserve Board Chairman Alan Greenspan -- the world's most powerful economist -- is steeped in economic history. He's well aware that the Fed's eight-month campaign of monetary easing has stoked consumer spending, but that consumption has been sluggish recently.

Now is an opportune time for the Fed to reassure the public and shore up the economy with an aggressive cut in interest rates. In times of trouble, the Fed should let investors and consumers around the world know that the monetary spigots are open and that the financial system is sound. The Fed can worry about inflation another day.

LOOSEN UP.

  The crisis may even break the political gridlock in Washington. The Bush Administration and Congress have a rare opportunity to rally around a budget that's geared toward reviving the economy now, rather than wasting time posturing over who lost the budget surplus. The European Central Bank can also use the terrorist bombing to justify abandoning its too-tight monetary policy.

There are many imponderables at this terrible juncture in history. But an opportunity is at hand for a concerted effort to keep the world economy out of recession. I'm betting that economic policymakers are up to the task.

Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BW Online

Edited by Beth Belton