- The Washington Times - Thursday, September 20, 2001

As a new era dawns in the wake of the horrific events of last week, one of the immediate challenges facing our

national leaders is to help prevent a contagion of fear from spreading to financial markets. The plunge in world stock markets signals that the attacks on the Pentagon and the twin towers may be the straw that breaks the camel's back and pushes our economy and the world economy into recession.

The effects of the Sept. 11 events on the economy will not be easily gauged by simply following the ups and downs of the market averages over then next few days. Preventing post-traumatic economic disorder means solidly reinforcing investor faith in the immediate aftermath of a tragic event.

The Federal Reserve action of first providing liquidity to the banking system and then cutting interest rates were important first steps in making sure our economy does not gradually become part of the collateral damage of the Sept. 11 terror. But preventing immediate fears and concerns by investors from translating into actions that destabilize financial markets will likely require additional aggressive and creative government action.

One step that government can take rapidly would be to legislate a limited capital-gains tax amnesty. Investors who purchase shares in equities or non-commodity mutual funds would pay no tax on the capital gains they achieve from their investments made during the period of the tax amnesty. Investors would be required to hold their purchases for a minimum of six months. The amnesty period during which a purchase can be made would be limited to 30 days from a date specified by the legislation. The amnesty would not apply to the sale of stocks or mutual funds during this period, only to the act of buying.

A capital-gains tax amnesty would serve a number of immediate goals. Investor fear about what may or may not happen today, tomorrow, or in the upcoming weeks raises their calculation of systemic risk costs. As this happens, investment options such as cash, and cash equivalents such as short-term government debt, may be perceived as significantly more attractive safe havens. Not only may investors not move their existing cash into the market, such an environment threatens to create a spiral of selling and enormous loss of market value.

A zero capita-gains tax rate, by increasing the potential of investors to achieve greater returns on their investments in equities, would rebalance risk calculations to reflect longer-term realities rather than short-term fears and uncertainties. This would reduce dramatically the potential for the kind of short-term sell-off in stocks that has historically accompanied a prolonged national crisis.

Can Congress and the president act quickly enough to consider and pass such legislation? Absolutely. The legislative process has many effective procedural roadblocks that can stop or slow down legislation. But if faced with a crisis, a national consensus can swiftly overcome procedural barriers, including budgetary costs. The issue we may possibly face is not a budget crisis, but an economywide instability that can result from a failure to act. This would immediately overwhelm the meager costs of a short-term tax incentive.

Investors, in this difficult moment in our history, need to be reminded that their leaders understand the critical role our government plays in our economy and that the government stands with them in expressing confidence in our immediate and long-term economic health. A partnership between the public and private sectors of shared risk, particularly in the first days of a crisis, would aid our traditional institutions in managing the transition to long-term stability.

We hope that over the next few days the markets tell us we are wrong to propose this contingency. We hope investors look past the short-term uncertainty and act upon the underlying solid fundamentals of our economy. But in case they do not, we must be ready to act. Like it or not, being prepared for the unthinkable is now part of the new reality America must face in the wake of last week's tragedy.

Elliot J. Millenson, a New Jersey-based businessman, has served as a CEO of several companies. Steven Hofman is a former director of research and policy for the House Republican leadership.

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