GWEN IFILL: We begin our look at the markets and the broader economy with David Jones, chief economist at Aubrey G. Lanston and Company, a securities firm in New York; Donald Marron, chairman of U.B.S. America, a global financial services company, Hugh Johnson, the chairman and president of First Albany Asset Management Corporation where he also serves as chief economist and Diane Swonk, the chief economist at Bank One Corporation in Chicago.
Donald Marron, we just heard the president say that the stock markets had already been correcting themselves prior to this. What was it that happened today?
DONALD MARRON: Well, I think the most important thing that happened today was the market opened, it worked, it took care of record volume and it did all without interfering with most important thing, which is the rescue operations downtown. And the market worked the way it should. Airline stocks went down and defense stocks went up. So to have a market of over four billion shares in one day and to have this kind of result is something that most of us in the business would see as what would come out of this terrible calamity. And I think one other thing, which is there is a pent-up demand here or supply, given the fact that the market was closed for four days.
GWEN IFILL: So you're saying we shouldn't be worried too much about what looked like a pretty big sell-off?
DONALD MARRON: Well, I think expect that you'll have a sell-off in here, but how people acted in this sell-off is the most important. This is the first post 401(k) real big sell-off, which means that you now have a very high percentage of Americans whose future on a financial side is in their own hands. They have a 401(k)s and Keoghs and other programs that they're administrating. And those individuals acted very rationally. In fact our early indications are, is they were net buyers on balance of what's going on. So the market and the users of the market seem to be in conjunction. Foreign buyers, perhaps, were selling more than American buyers. And, again, because there's a pent-up demand over four days, we'd have to look to subsequent days to learn a little bit more about people's longer-term intentions.
GWEN IFILL: Diane Swonk, did it look the same way to you from Chicago?
DIANE SWONK: Well, I think that's a very good analysis. I would add to that that I walked out of those clouds and saw Wall Street leaving the World Trade Center on Tuesday. And I can't imagine, I got to come back to a nice clean office in Chicago. I can't imagine the emotional issues going back. I'd also add to that the foreign aspect is very important. This is the first time, up until a little before 9:00 on September 11, the U.S. was not only seen as an oasis of prosperity in a world of global turmoil but also as an oasis of safety. And, after that, that safety was questioned. To some extent this U.S. seen as a safe haven for foreign investors had to be undermined at least to some extent. And I think the foreign selling was evidence of that. We saw it also in the Euro markets today. But I don't think over the long haul that's going to be where we go.
In fact, I think what we're adjusting to right now is the near term, front term losses that we all have to endure emotionally and physically, but there are ironically a silver lining, there is a silver lining to that cloud I walked through, and that is, we now have a Federal Reserve that is stimulating even more than previously thought. Fiscal stimulus, it's a blank check in Washington right now. And the ripple effects for the economy for the tech sector, telecommunications, all the things that need to be fortified and rebuilt in this economy, as a result of this incident, are going to stimulate the economy in 2002.
GWEN IFILL: I have to ask you -- you say you walked through that cloud away from that part of town on Tuesday. This is not an illusion. You were actually physically there when this happened.
DIANE SWONK: I was in the Marriott at the World Trade Center at the National Association for Business Economics Conference site that I chose actually in 1998 for our 2001 conference, so I felt very responsible for the people there.
GWEN IFILL: Hugh Johnson, how does this look to you what happened today on the markets?
HUGH JOHNSON: The first thing, I don't think it's very surprising, if you look back through financial market history, World War I, II, Vietnam, if you look at various crises such as Cuban missile, Iranian hostage or Persian Gulf, you ordinarily have this so-called flight to safety, which means investors sell their stocks and move into cash or gold or some perceived safe haven. And that's the first response you get from investors. So what we saw today was unexpected or in the magnitude but certainly was certainly predictable in that we saw that flight to safety. So I'm not really surprised nor am I alarmed by what I saw today. The magnitude was a little bit much. But generally speaking what happened was expected.
GWEN IFILL: David Jones, all the action was not on Wall Street. In fact the action by the Fed today a week or so ago would have been the big story all by itself. What effect was that designed to have?
DAVID JONES: Well, certainly the Federal Reserve, I think had two purposes really in their half- point cut -- I might add back to 3 percent where we were in the recession after the Gulf War in 1990-91. One was to give some measure of confidence to the markets. While they fell a lot as we have just heard, I think it was an orderly process. And so I certainly think that that was of some help. Obviously there was going to be open selling given the fact that we have to adjust the market to the anticipated realities of perhaps at least a brief recession in coming months. The second thing is the Fed was aiming at trying to help the economy later on, even before this terrible terrorist attack, the economy was shaky on the verge of recession, and I was expecting the Federal Reserve between policy meetings to cut rates. So I think it was to build confidence and to build a base for future recovery obviously not coming until next year.
GWEN IFILL: Was there anything in today's events that surprised you in the way that consumers behaved, in the way that the market behaved or the way that the Fed behaved?
DAVID JONES: Actually I was not greatly surprised. I actually used the European stock markets as a very rough guide. There is really no precedent for this situation, but European markets in the post terrorist attack period fell between 5 and 10 percent -- that is European stock markets. So that was a starting point for looking at today. And, of course, we did fall within that range. And I think it was inevitable the markets would look ahead. We were just on the brink of recession. I think now for perhaps a couple of quarters we'll see negative economic growth, which, of course, by definition is a recession. But the fact that we fall more perhaps because of this crisis, consumers pull back, I think it could mean that we'll recover stronger perhaps in the second half of next year, given monetary stimulus and given the fact we will see a federal budget that moves to boost the economy as well.
GWEN IFILL: Donald Marron, David Jones just alluded to what happened in foreign markets and that the recession that some people are anticipating in the United States will also happen in Europe, will also happen in Japan. What is your take on that?
DONALD MARRON: Well, I think it's perfectly clear that the economy of the United States is a dominant economy in the world and that other economies around the world are very much affected when ours is. So I think it's not practical to say that somehow we can be separate from Europe or Europe, more importantly, can be separate from us. I think what's happening here and now in terms of the stock market is the stock market and the economy have separated themselves, at least in the short term. What you're seeing is the emotional content of capital flows in the United States and in the rest of the world. What you'll see over the next couple of weeks and months is essentially a referendum on where people want to put their capital. This is a world in which there's a large amount of capital -- here, Europe, Asia and other places.
I think what we'll find is that the United States, notwithstanding this dastardly deed, is the place that the people feel the most comfort able with their capital. How they put their capital in this market, whether it's in the bond market or in the stock market, will inevitably depend on their outlook for our economy and the companies that comprise it. But basically that's the issue going forward: Will America continue to be the recipient of these capital flows, because it's 54 percent of the world's economy? And I think the answer going to be a resounding yes.
GWEN IFILL: Diane Swonk, when we think about the economy and the markets, we don't often think about emotions but it seems like emotions are playing a big role in what happens to the economy in the near and the long term. How do you interpret that?
DIANE SWONK: Well, I think emotions are playing a very big role especially in the near term. There are three ways I'm thinking about this current situation is, the up-front losses that are both emotional and real. They do have real consequences for the U.S. economy. But then the medium-term gains, the silver lining to the cloud that I walked through, is that we are going to see more stimulus in this economy than had previously thought. There's going to be ripple effects through the economy in terms of how everybody thinks about security, their infrastructure systems could breathe new life into a tech sector that had been left for dead. And on that side of it, I think we will be very... many people will be very surprised at the bounce-back not only in the markets, a catch-up rally, I'm very careful at using my words there, not a return to what we saw in the 1990s but a catch-up rally in that. And I do think we will see a return of foreign investors as well. But we're going to have to go through this very rocky emotional period. Consumer confidence will no doubt drop or plummet dramatically. The way the surveys are designed consumers are asked basically is it a better world today than it was yesterday, and anyone answering yes would have to be wondering if they're crazy or not.
On the other side of it, though, we've seen consumer actions speak louder than their words all year. Now, we've had a definite interruption to economic activity even for consumers as people were glued to their TV sets, not moving, businesses were shut down. And there's real repercussions of that that will fall into both the third and fourth quarters. But I don't believe we're going to actually have the full-blown recession quite as severe as some do. I do think we are going to have a dampening effect, we'll have a negative third quarter as a result of this, no question in my mind. But the bounce-back, people may be very surprised going forward at the bounce-back. This is one thing where war actually is a stimulus to the U.S. economy. In 1990 it wasn't. 1990 was the only war we ever fought in this country that was not a stimulus to the U.S. economy. We essentially just drained the inventories, all that we built in the 1980s. This is a real stimulus.
GWEN IFILL: I want to come back to that point about whether war is a stimulus. First, I want Hugh Johnson to pick up on another point you made about the ripple effect. What is the ripple effect of this kind of an event? We saw today at the stock market, for instance, that airline stocks were very heavily affected. Are there other industries which will be feeling the ripple effects of what happened not only last Tuesday but what's happening in the market now?
HUGH JOHNSON: There's a lot of companies that will be somewhat positively affected. Some will be negatively affected. You mention the airlines industries, quite clearly negatively and insurance companies negatively affected. On the positive side lots of companies in the defense or the reconstruction process will be positively affected. You know, I think overall let me get back to one point that has been mentioned by a number of the panelists, and that is that the markets tend to be somewhat emotional. Just as we became very emotional and became sort of very high in price in 1999 and the year 2000 particularly in the technology sector, now I think emotions have driven this market to levels that a lot of institutional investors say really overstate the case, that is, the market has gotten somewhat undervalued.
If we have some stimulus, further stimulus in the form of Federal Reserve interest rate cuts, stimulus in the form of fiscal stimulus or more spending out of Washington, if for some reason at some point investors become even a touch more optimistic about what lies ahead for the economy in the, say, second, third and fourth quarters of next year, you'll see the stock market turn and surprise everybody, even though economic conditions then might be difficult, you'll see the market going up during that period, again signaling to us that there are better times ahead. So these emotions might have driven this market to levels that are now starting to get undervalued very interesting.
GWEN IFILL: Okay, David Jones, how about Diane Swonk's point about the prospects of war being its own stimulus in addition to the other stimulus which they're talking about here in Washington for this economy.
DAVID JONES: Well, I think economists have to disagree on some things respectfully. I will disagree. This incident, indeed, crusade or war, could not have come at a worse time for the economy. As a matter of fact, consumer sentiment measured by the University of Michigan had begun to crumble just before this incident and certainly will be driven down more. I think it's very unlikely consumers are going to go out and buy big ticket items in the face of this kind of political risk and uncertainty that we see. So, I'm somewhat skeptical that this incident is going to help us. Now, by the same token, I will give some emphasis to the fact that Washington has finally come to its senses. They were practicing Herbert Hoover economics for a while in trying to preserve a huge surplus in the face of a major downturn in the economy.
Those days are over. We will see a lot of spending, could see more tax cuts, combining that with more Fed rate cuts, I'm looking for the overnight Federal Funds rate to go down to, say, 2.5 percent from the 3 percent level. And that's way below the 6.5 percent level these last easing moves began at. So I am optimistic. And I think this will come to bear on a better economy in the second half of next year, but I don't think we have... I would hope that we don't have to rely on war to get those kinds of economic results.
GWEN IFILL: Donald Marron -- I'll get back to you in just a moment, I'm sorry. Donald Marron, what is your thought about this whole idea of the economic stimulus and capital gains tax cuts and other government-led stimulus? Do you think that that's essential?
DONALD MARRON: Well, I think first of all what's happened is the president's leadership here has been strong and direct. He's meeting with his economic advisors today. This, having a common enemy, will bring the Congress and the president together very quickly on these issues. So that the concerns that we may have had, that the government would not act in a crisp and pointed way, are probably not founded any longer. The surplus, which is a fine thing to have and important, has to be used at various times in the economy. This is a time to start spending it and to spend it quickly and correctly. So I think that part of the economy is going to work better: The government working with the highest priorities. I think that's a very positive element. In what's going on in this country at the moment.
On a broader front, what you have now is the economy probably focusing more and the individuals focusing more on how you build this country in a stronger way. One reason that this country and the stock market has not been doing as well in the last year or two is that a decline in the rate of gain in productivity -- in part I think because the country's research base has been depleted. You'll see more investment in the basic areas of the economy that will allow it to continue to grow. And it will all come together at a good time. We were moving into a quieter economy. Consumer spending was going down. This is going to help. Also we're in a very different economy in other ways. Inflation is very low. We have a surplus, and while we have a higher rate of unemployment, it is still relatively low compared to other periods where there are problems. Bringing everybody together at this point to focus on what most of us will think are logical actions may turn out to be a positive for the economy, although at a huge price.
GWEN IFILL: We're almost out of time but I do want to give Diane Swonk a chance. I'm sorry. I interrupted you a moment ago. You wanted to respond to something.
DIANE SWONK: Well, I just want to make a couple of more points. I didn't say that this recovery was contingent on war; I don't think it is. I think it's enhanced by the spending that's going to come out of Washington. We're already working through an inventory cycle and the lags that were implicit in monetary and fiscal policy were going to be hitting about 2002 anyways. This exacerbates those stimulus to the U.S. economy at a time when it going to be about ready to come back anyways in my view. With that said I think we also can't leave without thinking about not just the up front losses, medium-term gains, but the long-term consequences.
We all should be very aware, although I think it's certainly justified, we're going to be seeing deficits much sooner than anybody thought. If this economy does come back as I think it will in 2002 where we'll see inflation sooner in the next three- to five-year horizon much stronger than people any at this point in time. These issues we'll have to deal with later with deficits as well. And I think that's a very familiar environment. We've been in it before. But it's not exactly a fun environment.
GWEN IFILL: Well, we'll all be tracking it. Thank you all for joining us.