Politics

Greenspan To Congress: Don't Panic

By CBSNews.com staff CBSNews.com staff

September 19, 2001 / 10:52 AM EDT / CBS

The titans of U.S. economic policy are telling Congress how to keep the economy on track following last week's terrorist attacks.

Treasury Secretary Paul O'Neill, Federal Reserve chairman Alan Greenspan, and the heads of the Securities and Exchange Commission, New York Stock Exchange and Nasdaq are the witnesses at a Senate Banking Committee hearing Thursday.

Greenspan admitted the attacks will damage the economy in the short-term by making Americans fearful of the future but won't dampen bright long-term prospects.

"The shock of September 11, by markedly raising the degree of uncertainty about the future, has the potential to result, for a time, in pronounced disengagement from future commitments," he said.

Housing Starts Stopped

New housing construction plunged in August by the largest amount in 17 months as the slumping economy made builders and prospective home buyers more cautious.

The number of new housing units fell by 6.9 percent last month to a seasonally adjusted annual rate of 1.53 million, the Commerce Department reported Thursday. The drop was the steepest since March 2000 and left housing starts at their lowest level in 10 months.

Housing activity, helped out by low interest rates, has been a pillar helping to support the nation's ailing economy.

But the Sept. 11 attacks on the World Trade Center and the Pentagon could change that. Builders say they are monitoring the situation closely to get a better idea of the attacks' impact on consumer confidence, employment and demand for homes.

"Indeed, much economic activity ground to a halt last week," the Fed chief said. "But the foundations of our free society remain sound, and I am confident that we will recover and prosper as we have in the past."

Treasury Secretary Paul O'Neill also said the economy remains strong but it is too soon to say how badly it was affected.

"Our economy — our prosperity — will not be destroyed," O'Neill declared.

"The economy of the United States remains strong and resilient. And the nation's financial markets, in spite of having sustained a terrible blow, continue to function," he said.

"The markets will inevitably have ups and downs. Americans should not react with fear that the stock market has declined but rather marvel in that it is open, that for every seller there is a buyer," he said.

In a closed-door meeing Wednesday, Greenspan urged Congress to move slowly before enacting a massive stimulus package to deal with the economic fallout from last week's terrorist attacks.

President Bush, however, has pledged "to send a clear message to America, American workers, American business people that this government will respond to this emergency."

Greenspan is more cautious. Congressional leaders said he told them Wednesday to focus on restoring economic confidence but to be careful before enacting big tax cuts or spending increases.

"We're trying to make sure what the problem really is before we stick our necks out," House Speaker Dennis Hastert, said after the discussions with Greenspan.

Over the past week, the Fed has cut interest rates for an eighth time this year and flooded the banking system with money in an effort to keep the terrorist devastation in the heart of New York's financial district from derailing the U.S. economy.

Many economists, however, are warning that the risks of a recession this year have been greatly increased because the terrorist attack occurred at a time when the economy was still struggling to rebound from a yearlong economic slowdown.

So far, financial markets, which were shut for the longest period since the Great Depression, have been unable to mount any kind of sustained recovery, with the Dow Jones industrial average down 747 points in the first three days of trading.

A continuing sell-off in stock markets, with about half of American households now stock owners, would heighten economic risks around the globe with U.S. consumer confidence already in a fragile state.