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Finanical Crises Essay

1719 words - 7 pages

On September 11, 2001 (9/11) four planes were hijacked and three out of four crashed into buildings, killing more than 3,000 people. Economically the immediate consequences of 9/11 were a massive drop in the stock market, crippling losses in the airline and other transportation sectors, and widespread uncertainty. The Bush administration and Congress responded with a law that bailed out the airlines, and the economic issues temporarily receded politically.
The Federal Reserve had a major challenge on September 11, 2001 as the attacks by terrorist on Washington, Pennsylvania and New York were disruptive on the U.S. financial markets. The Federal Reserve immediately issued a short statement (FRB, 2001) “The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs.” The results, the Federal Reserve lowered interest rates and loaned more that $45 billion to financial institutions in order to provide stability to the U.S. economy. Within a little over a week, the Federal Reserve lending had returned the financial markets to pre-9/11 levels and a liquidity scare had been averted (History of the Federal Reserve, 2013).
The Effects of September 11th
In the weeks following the attacks consumer spending dropped sharply with the exception of items purchased in-relation-to preparation for possible additional attacks. Items with increase in sales were: groceries, security devices, bottled water and purchases of insurance. The weakness in customer spending, falling stock prices and higher unemployment was rising before the attacks (Figure 1) and the attack itself may have been the overall objective to cause further economic hardships. Unemployment continued to rise since September 11; October’s unemployment data did show the economic impact. October figures were largest one-month decline in more than two decades, with the rate jumping from 4.9 percent in September to 5.4 percent in October. The grounding of aircraft caused some very short-run effects. The transport of fresh fruits and vegetables from the West Coast to the East Coast was disrupted. The supply chain of parts to manufacturers also was interrupted from dislocations in air transportation, as cargo was rerouted through ground networks. The weakness in the airline industry pre-9/11 was amplified by the attack that resulted in larger layoffs than previously anticipated. The impact was particularly evident in Manhattan’s real estate, retail trade and tourism. The New York Manhattan area lost roughly 7 percent of its office space in the 9/11 attack, mostly space that supported national and international financial industries. (Federal Reserve Board, 2013)
The events of 9/11 further set back an already fragile economy (Figure 2). It heightened uncertainty, shaken confidence, and caused a widespread pullback from economic activity. Equity prices fell sharply for several weeks and credit risk spreads widened. The main focus of the Federal Reserve in the...

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