- The Washington Times - Sunday, September 16, 2001

Immediately reacting to Tuesday's terrorist attack at the heart of the nation's financial center, the Federal Reserve Board issued a press release announcing that its "discount window is available to meet liquidity needs." Thursday morning, to provide additional liquidity to the international financial system, the Fed and the European Central Bank (ECB) agreed on a $50 billion swap arrangement. Both actions were welcome, but they did not go far enough. The global economy desperately needs the liquidity generated by cooperative interest rate reductions by the Fed and the ECB, buttressed by a significant acceleration of monetary expansion by Japan.
In recent months, the world economy has been rapidly approaching the first simultaneous recession involving its three primary pillars — the United States, Europe and Japan — since the severe global recession of 1974-75. In addition to the adverse effects upon the airlines and financial services companies, including, notably, the insurance industry, the terrorist attack threatens to sap consumer confidence in the United States, setting the stage for America to fall into recession. Given the fragility of the world economy, such a development could be catastrophic.
Irresponsibly, the ECB, which has reduced its short-term benchmark interest rate by only one-half percentage point this year, declined to reduce it again on Thursday. Incomprehensibly, the ECB justified its decision in part by citing "the fundamental strength and resilience" of the U.S. economy, which is on the brink of a recession.
The Fed's next scheduled meeting does not take place until Oct. 2. The global economy's thirst for real liquidity cannot wait until then for Fed Chairman Alan Greenspan and his colleagues to satiate it by reducing short-term interest rates. Indeed, two precedents during the Greenspan regime cry out for immediate action. On the day after the world's stock markets plunged in October 1987, the Fed slashed the federal funds rate by three-quarters of a percentage point, making good on its promise to "serve as a source of liquidity to support the economic and financial system." In the fall of 1998, reacting to widespread concerns that the Asian financial crisis might devastate economies around the world, the Fed reduced the federal funds rate by a quarter of a percentage point three times within 50 days, including two surprise reductions between regularly scheduled meetings.
The massive terrorist attack upon America cannot be permitted to tip the increasingly fragile global economy into a worldwide recession. The Fed has shown how to provide emergency liquidity in the past. Now is the time for it to do so again. In the wake of an act of war perpetrated at the heart of the nation's financial center, the U.S. economy desperately needs an immediate, substantive interest rate reduction of at least one-half of a percentage point. The ECB needs to get out of its funk and follow suit. And the Bank of Japan must attack its downward spiraling deflation by substantially expanding its money supply. The downside of not taking immediate action is potentially too catastrophic to contemplate.

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