Closing ranks to defend our financial markets

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The Independent Online

Disbelief, fear, shock, grief, anger – the words come showering down like confetti, mere platitudes in the face of such outrage, wholly inadequate to describe the bewildering range of emotions that has swept the civilised world in the wake of Tuesday's devastation.

Disbelief, fear, shock, grief, anger ­ the words come showering down like confetti, mere platitudes in the face of such outrage, wholly inadequate to describe the bewildering range of emotions that has swept the civilised world in the wake of Tuesday's devastation. And then in the aftermath, another cliché ­ "a day that changed the world".

The veracity or otherwise of this label will be for history to judge, but for those of us who make our living from the world's capital markets, whether directly or, like myself, as observers and commentators, it already seems incapable of describing the enormity of what has occurred.

Everyone, the world over, will have been affected in some shape or form but nowhere is the pain and shock felt more deeply than among those who work in the financial markets. Both physically and psychologically, terrorism has struck with devastating consequences at the very heart of the world's financial system. Here, in London, we feel New York's grief with an intensity others perhaps cannot share, for in the past 20 years we have become twinned as never before through our capital markets with the US's largest city.

America's markets have reached out and colonised our own, helping to underpin our stature as the world's leading international financial centre, and underwriting our continued prosperity. There is a constant interchange of executives, traders and financiers between the two centres, which have become like two halves of the same whole, joined at the hip by the organisations, trading strategies and people they have in common. Wall Street's tragedy is very much our own.

I've been reporting and commenting on City affairs for some 25 years and I cannot think of an event during that time that comes anywhere close in terms of its immediate and likely long-term impact on capital markets. Normally change creeps up on us unawares, a constantly evolving pattern of cause and effect that alters the world in small, almost imperceptible steps. It is often only after the event that a great change comes to be recognised.

Then there are the big events. In my working life, I think of the crash of 1987, the fraudulent collapse of Barings and Robert Maxwell, Sadam Hussein's invasion of Kuwait, the emerging markets crisis of the late 1990s and so on and so forth. But none of them are on this scale, an attack on the very nerve centre of the free market, capitalist system. We live in a world of hype, exaggeration and hyperbole and nowhere is this more a part of the landscape than in the capital markets. In moments like this, it is easy to get carried away and assign a significance to events that the passage of time renders largely obsolete.

Is it possible this is a case in point? Already things are turning out to be not quite as bad as they might have been. Extensive and tragic though the physical damage and loss of life is, it seems mercifully not to be as great as initially feared, and it has only temporarily halted the operation of New York's capital markets. The banking community seems to have been better prepared than generally thought, even for a terrorist event of this magnitude, and through business continuity centres, backup computer systems, and mutual support, Wall Street will be up and running again by Monday. Meanwhile, central banks stand ready to inject liquidity and support at the first sign of failure.

All this is positive. It shows that the system can take a frightful hit and still function. What's more, the way in which capital markets enable human beings to band together to protect themselves against the risk of catastrophic loss is also working just as it is supposed to. In the months ahead, the worldwide insurance industry will be fulfiling the purpose for which it was created and, huge though the losses are, they will be covered. The system has ensured an industry largely well capitalised enough to meet its obligations.

There is also an enormous will not to let the terrorists succeed, and this is not a force to be underestimated. Both the financial community and the Federal authorities will move heaven and earth to re-establish stability and make things carry on as before. Even so, it's still too early to be sure, and it would be unrealistic to think the collateral damage anything other than dramatic. In terms of the likely economic impact, you have to go back to the first oil shock in the mid 1970s to find a single event which is in any way comparable. Sir Edward George, Governor of the Bank of England, said this week that he remained optimistic, as he must, but it is hard to share his cheeriness and see how the US is going to avoid recession post this unspeakable atrocity.

The hiatus in spending, travel, and business activity that now grips the US, and some other parts of the world, will alone almost certainly be enough to tip an economy, already teetering on the brink of recession, right over the edge. The best we can hope for is that it will be mild and short, but that depends critically on how business and consumer confidence respond over the months ahead, and on just how seriously the international position deteriorates.

Still, gloomy, depressing and unsettling though modern recessions are, they haven't yet changed the world. For that to happen requires something more and this potentially has all the ingredients. It seems to me that the real long-term impact of this catastrophe will be in the degree to which it is allowed to threaten the free trade consensus and put into reverse the process of globalisation. To many, globalisation is a dirty word, and it is certainly not without some disturbing downsides.

But in its totality, it has been an enriching process for all those that buy into its free trade consensus, a great dynamo of growth, stability and progress. As the meltdown in airline industry share prices only too plainly indicates, one vital part of the globalisation process ­ the explosion of air travel worldwide ­ might now be in danger. People who don't travel so much, don't do so much business, they inter-react and talk less, and they generally close in on themselves and their communities. The desire to trade begins to wane, and the need to keep other people's goods and services out grows.

Then there are the capital markets themselves. Financial markets are the real engine of globalisation, ranking higher than both travel and communications. They are the conduit through which capital flows around the world, constantly chasing the best investment opportunities and the highest rates of return, sifting the wheat from the chaff, indiscriminately allocating and withdrawing capital according to just one law, freedom of movement. The moment that freedom is curtailed, the capital gets switched off. Why, even Osama bin Laden, the prime suspect, is a part of the capital markets that make this possible, with a reputed $300m personal fortune invested around the world through various offshore trusts. It is these great dynamos of progress and growth ­ the capital markets ­ that the terrorists have attacked.

If the effect of Tuesday's outrage is for the financial markets to shut up shop, contract, retreat behind closed doors and erect the barricades, then the terrorists will have achieved all their goals and more. There but for the grace of God, was one of the most prevalent emotions in the City this week. It could so easily have been us.

Which is why it is so essential that we continue to fly the flag of economic inclusion, the freedom to trade and to expand, and be there at our desks to cheer and carry on as before when the bell rings out at the start of trading on the New York stock exchange at 9.30 local time on Monday morning.

j.warner@independent.co.uk

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