Greenspan's Post-9/11 View

From the Washington Wire:

In the Federal Reserve’s Sept. 13, 2001 conference call, Fed Chairman Alan Greenspan remarked on what the terrorism attacks, just two days earlier, would mean for the U.S. economy and world politics. The meeting came ahead of a series of interest rate cuts meant to stabilize the economy. The Fed released the transcripts of all its 2001 monetary-policy meetings today.

In view of the circumstances of the last few days, I think it’s worthwhile for us to review where we are because events are occurring at a fairly significant pace and the situation is changing. Just to set the context, the data bearing on the economic outlook up to Tuesday continued to be mixed. … In sum, as we stood in the early days of September prior to the crisis, we were still in that very precarious balance with regard to which way the economy was going to go.

The shock event of this past week is clearly a negative one. It is negative in the most important sense that it presumably increases the real risk premium for long-term capital investment, for fairly obvious reasons. …

How significant that deterioration is I think is exceptionally difficult to judge. Indeed, one can envision a scenario–it’s a low probability scenario but scarcely zero–that this tragic event could create a fairly pronounced and significant shift in the political structure in the world and that as a consequence, the areas that in the last several decades have been of longer-term concern, mainly those relating to the availability of crude oil, could conceivably change. The widespread shock effect and some of the implications of the current politics could get a lot of people turned around, including those in moderate Arab states. Indeed, I just received a fax about half an hour ago expressing condolences to the American people from the head of the central bank of the United Arab Emirates. Clearly, that is a moderate Saudi-type regime, but there is the possibility that at the end of the day some positive effects could come from all of this.

I want to emphasize, however, that that is a low probability outcome, and I think we have to be careful not to get taken in by the way in which the reactions to these types of events usually evolve. There is a shock; the shock wears off; there is a period of mild euphoria as the shock wears off; and then there’s a secondary negative effect. With this extraordinary outpouring of activity favorable to the United States position, we may well be looking at part of the euphoria phase. Read the full 9/13/2001 transcript.