A time for strong nerves and serious reflection

For most of those who earn their living from financial markets, the over-riding reaction to Tuesday's catastrophic events is still one of profound shock and disbelief. At Canary Wharf in London's Docklands, linked as the complex is through the umbilical cord of its investment banks and skyscrapers to the atrocities perpetrated in New York, the sense of unease, even grief is tangible. Where normally there is bustle, hurry, purpose, and self confidence, there is emptiness, drift, and fear.

For most of those who earn their living from financial markets, the over-riding reaction to Tuesday's catastrophic events is still one of profound shock and disbelief. At Canary Wharf in London's Docklands, linked as the complex is through the umbilical cord of its investment banks and skyscrapers to the atrocities perpetrated in New York, the sense of unease, even grief is tangible. Where normally there is bustle, hurry, purpose, and self confidence, there is emptiness, drift, and fear.

It is not just that friends and colleagues may have been lost in Tuesday's carnage, though tragically that is certain to be the case; it is also the realisation that it could have been us (this newspaper, by the way, is located only a stone's throw away from the Wharf, probably the most concentrated area of investment banking and financial trading anywhere in the world), and it is also the disorientation that comes from not knowing what the future might hold.

Suddenly everything has changed. The confidence and mastery of once all powerful global capital markets seems to have been shattered, brought low by a handful of unknown maniacs, following an unknown cause. The masters of the universe have been made mortal by a small coterie of knife-wielding fanatics whose ideology, bitterness, and hatred we in the civilised world cannot even begin to understand. It would be hard to imagine a more Kafka-esque calamity, ignorant as we still largely are of both its perpetrators and the great bulk of its victims. For many, it already seems like the passing of an era, a defining moment, the point at which a golden age of prosperity and progress gives way to ... well, we know not what.

That, in any case is the mood, and in the present atmosphere of anger and despair, it would seem almost callous and insensitive to challenge it. But challenge it we must, for the reality is that our capital markets and Western prosperity must and will prove a good deal more resilient than the apocalyptic headlines might suggest. In the drama of the moment, it is all too easy to get carried away. A calmer assessment is required, and although there is plainly nothing positive that can be said about such terrible events, financial and economic Armageddon are not the most likely outcome. There is a caveat, however. We don't yet know whether these attacks had state backing nor, if they did, which country is involved. If the endgame is widespread war in the Middle East, whether confined to the region or not, then all bets are off.

But in the meantime, life goes on and even at Morgan Stanley, obliterated as large parts of its operations and personnel were by Tuesday's attacks, there was a semblance of business at usual maintained throughout the group yesterday. The asset management and retail financial service functions that were located in the World Trade Centre were switched to the business continuity sites that all banks have maintained since the Bishopsgate bomb in the City in the early 1990s. Global capital markets have proved better prepared for a terrorist event than generally assumed.

Elsewhere, there was no sign of the anticipated credit crunch in world banking and bond markets, nor even much sign of the gathering oil crisis that accompanied the Gulf war. In fact, the oil price went down after a statement from Opec guaranteeing supply. By the way, if there's going to be a recession, if only a mild one, this is the logical response, since it means less oil will be used and a consequent easing of pressure on supplies. Meanwhile, a commitment from central bankers in the US and Europe to provide billions of dollars in extra liquidity helped steady nerves in financial markets.

It is early days yet. The mood of calm that settled on markets yesterday had an eerie and unreal quality about it, and until Wall Street opens again, probably on Monday, it's impossible to be certain how things might play out. What is clear, however, is that financial markets don't have to plunge into the abyss. It will take steady nerves and cool heads, but it is essential that these forces prevail. America at War, said the headlines, but against whom? If Tuesday's atrocities come eventually to be seen as more the acts of determined madmen than a symptom of all embracing global instability, then there's every reason to believe the worst consequences might be avoided.

None of this is lightly to dismiss the catastrophe as an aberration that might, once the tears have been shed and the retailiation delivered, be assigned to the history of tragic events. The immediate economic consequence is almost certain to be a hiatus in US spending, travel and business activity. Coming on top of the already serious business downturn, this could easily push the US economy into recession, and with it, the rest of the world. The moment a second Boeing 767 ploughed into the World Trade Centre, confirming beyond doubt that this was a terrorist attack on American soil, the odds shifted dramatically from being against a recession to odds-on.

Physical destruction of this magnitude will create some big countervailing influences. The massive task of reconstruction, the huge upswing in spending on security and intelligence that will inevitably follow, these things are likely to prove powerfully reflationary. Not by enough, though. The overriding effect will be further to damage already fragile consumer and business confidence, and there's no knowing where that could end.

The parallels with the Gulf crisis of the early 1990s are obvious and many. The invasion and subsequent war hugely depressed consumer confidence in the US and the UK at a point when the business cycle was already beginning to turn. It also created a spike in the oil price, greatly adding to business costs and compounding the deflationary effects of collapsing consumer demand. That could easily be the way this crisis plays out, too.

The important thing, however, is for financial markets to remain optimistic, even though the easier thing to do is to despair. Consumer and market confidence are two halves of the same coin, and they help to determine each other. Everything rides on the way these key economic barometers decide to play out the coming couple of months.

There are big lessons for capital markets in these frightful events, even if this might not be the moment to air them. But since this is a time for the bearing of souls, one or two might none the less be ventured. The hypocrisy of some investment banks in yesterday ordering their traders not to attempt to profit from New York's tragedy defies belief coming from organisations that habitually earn vast commissions, turns and bonuses from calamity where ever else in the world it occurs. It is in the nature of capital markets that they amorally attempt to profit from whatever they can, and in the process they often greatly exacerbate the misery felt.

And it is their very power and arrogance is what has made them and their totems, of which the World Trade Centre is only one, into a target for anti-globalisation protesters, and now, tragically, suicidal terrorists. It is vital, in the months and years ahead, as policy makers, businessmen and financiers grapple with the enormity of this week's events, that these lessons are learned and addressed. Global stability is not just about annihilating terrorists.

j.warner@independent.co.uk