Terrorism Strikes: An Eyewitness Account

by Richard Berner (New York), September 2001

Key Points

Ground zero
The building shook as the first explosion interrupted our meeting at a World Trade Center hotel. But it wasn't until I saw the jetliner smash into the second tower that it really dawned on me: Terrorists were intent on destroying our society and our economy. Would they succeed?

Odyssey to midtown
Our immediate goals were clear: Walk as quickly as possible to the north, and call loved ones to let them know we were alive. I kept trying to compartmentalize the horror of death behind me by focusing on the grim reality of what lay ahead for the economy and markets.

Shock to confidence
The shock had two critical dimensions: People feared for their lives and freedoms. And they would fear for their economic well-being at a time of global economic vulnerability.

Supply shock
The attack was also a shock to supply: It disrupted commerce and increased uncertainty and risk premiums in doing business. And unless energy supply increased, consumers would fear higher energy prices.

Policy responses critical
Political leadership would be essential to offset the first shock. Economic policy leadership — coordinated monetary ease, backing away from fiscal restraint — would be just as important.

Orders of magnitude
Clearly the impact would make worse our already-fragile economic scenario. But gauging magnitudes would be pure guesswork. A loss of one to two percentage points from consumer spending growth, and a few percentage points from the decline in capital spending might be enough to flatten the fourth quarter.

Details

The building shook and the glass pendants in the Grand Ballroom rattled as the first explosion interrupted our post-breakfast meeting at a World Trade Center hotel. We were wrapping up the Annual Meeting of the National Association for Business Economics (NABE), and I was feeling good about turning over the President's gavel to my very capable successor, Harvey Rosenblum from the Dallas Fed. Ironically, Morgan Stanley President Robert Scott was addressing us on the future of the financial services industry. Little did we know that plans were well under way at that very moment that would extract a heavy human toll and pose new risks for the financial system.

Shaken, we looked at each other and without saying a word, quickly left the room. We heard that an airplane had hit one of the buildings. A commuter plane gone off course? Looking up at the North Tower, we saw fire and smoke coming from what seemed like the top twenty floors. This was no Piper Cub. Debris littered the streets and people got edgy. In a split second we realized that our lives might be at stake. Hotel security people urged us to leave the building and, abandoning personal property, we quickly crossed the street toward the World Financial Center.

We stood watching from four blocks away, hoping against hope that the fire would be quickly extinguished. The towers looked solid; this was horrible but contained. Then, a deafening roar, like standing near a runway. A huge jetliner filled the sky, smashed into the second tower and disappeared in a massive fireball. Finally, it really dawned on me: Terrorists were intent on destroying our society and our economy. People screamed and panicked. I stopped to help a woman trampled behind me in the stampede.

Our immediate goals were clear: Walk as quickly as possible to the north, and call loved ones to let them know we were alive. Cell phones failed. We detoured into an apartment building to use a phone. I called my assistant, Marco, to ask him to put out the word to my family and that of a colleague, Ellen Hughes-Cromwick from Ford. Marco coolly took all the information and wished us luck.

Terrified inside, we still had no idea whether more attacks were coming. We continued walking. Some on the walkways seemed grotesquely calm; while others were dying, I heard them ask each other whether they thought they should show up for work tomorrow. We walked past the marina at the World Financial Center and heard another deafening roar followed by a huge explosion and billowing clouds of smoke, possibly the aftershocks of the exploding airplane. No stampede here. People were stopped, taking pictures. We continued on, passing an exodus of thousands of refugees in business suits. A mile from our starting point, another roar as the first tower imploded.

Watching the twin towers collapse in a heap of rubble, my faith and resolve were frayed. I wondered: Would the terrorists succeed? We kept walking north, towards my office in midtown, some three miles away. I kept trying to compartmentalize the horror of death behind me by focusing on the grim reality of what lay ahead for the economy and markets (see below).

When we arrived at my office, I came back to reality. We found the building evacuated save for the retail branch on the ground floor. A manager was still there, and he graciously made telephones, restrooms and water available to my colleagues from the NABE meeting. I turned my attention to helping them sort out their lives. Husbands were still anxiously trying to contact wives. Doctors were needed to fill critical prescriptions. Hotel rooms were sought for out of towners. I led a parade to Grand Central where we heard train service had been restored following a bomb threat. Metro North was uncharacteristically wonderful. As we headed further north, we still feared for those who lost their lives. We knew the economy would eventually recover, but they would not. Yet we also heard heartwarming stories about many who escaped, and the heroism of many who helped. For now, that was comfort.

A diversion from catastrophe: Thoughts on the economy and markets

The shock would have both political and economic dimensions, both important. First, people feared for their lives and freedoms. We felt helpless and defenseless. War in far-off Kuwait a decade ago was a movie we'd all seen, but never experienced. War here had been unthinkable. Second, they would fear for their economic well-being at a time of growing global economic vulnerability. As I walked, I thought: Markets must be plunging, people must be losing confidence that recovery wouldn't come any time soon. Business plans would be shelved. I knew Steve Roach would agree that these could be powerful negative shocks to demand (see his accompanying Forum).

The attack also represented a shock to supply: It had already disrupted commerce and increased uncertainty and risk premiums in doing business. The amount of further disruption was incalculable. The increased uncertainty would also be impossible to fathom. The increase in costs just from added security precautions was sure to arrest cross-border commerce. And unless energy supply increased, consumers would fear higher energy prices. Unbeknownst to me, consumers were already lining up in the Midwest to hoard gasoline.

The policy response would be absolutely critical to reckoning the outcome. Political leadership would be essential to offset the fear that terrorism could corrode our freedoms. Strong words and appropriate actions would be critical to defusing uncertainty. I wasn't sure what to expect, especially from abroad. President Bush faced his sternest test. Economic policy leadership — coordinated monetary ease, backing away from fiscal restraint – would be just as important. I had complete faith that the Fed would lead other central banks in coordinated action, if needed, to provide both liquidity and appropriate further monetary ease. As Dave Greenlaw notes in his accompanying Forum, the Fed could ease as soon as Thursday. And I had little doubt that the partisan bickering in Congress over dipping into the fictitious Social Security “surplus” would quickly dissolve as threats to the economy mounted.

How to reckon the impact of these shocks? Clearly they would make worse our already-fragile and still below-consensus economic scenario. But because the shocks are partly ones of confidence and because it is still early days, gauging magnitudes is pure guesswork. Dave correctly notes that consumers will disengage and focus on news. This “CNN effect” and the uncertainty over income and wealth prospects could deflate consumer spending growth. A loss of one to two percentage points from consumer spending growth, and a few percentage points from capital spending might be enough to flatten the fourth quarter, or even push it into negative territory.