|
Dean Edward A. Snyder
|
COVER STORY
What's Next?
The Economic Effects of September 11 (Continued)
Implied Volatility: The Indicator to Watch
Will this worst-case scenario actually transpire? Kaplan said
he was uncertain, but he pointed to implied volatility in the
stock market as an important indicator to monitor. In August,
he said, the implied volatility averaged 24 percent. The week
of September 17, it soared to 40 percent and got as high as 50
percent. As of October 17, the day of the panel, it was 37 percent.
“This is very high, historically,”
Kaplan said. “On fewer than 4 percent of the days since 1986,
you have seen volatility above 35 percent. And it’s been
that high for quite a while. If uncertainty remains that high,
you worry more and more about corporate investment.
“I think implied volatility is something
I’d keep my eye on.”
He noted that implied volatility has gone above
30 percent only four times since 1990—during the Gulf War,
during the Long Term Capital Management crisis, in the spring
of 2000, and in the spring of 2001. In mid-October, he said, it
was above 35. “It’s unusual and is correlated with events
where there’s a lot of uncertainty and a lot of cutback in
investment.”
Appropriate Government Response
A limited expansion of government is the right response to the
crisis, according to Becker. “It’s which activities—and
at which point—that is crucial,” he said. “The
appropriate response will involve, in part, larger government
activity in certain areas like security and police.”
| “As long as we continue to resolve the
uncertainty in a positive direction, which I think we have,
we will see a recovery.” —Kevin M. Murphy |
What’s difficult to accept, he said, is government
expansion that isn’t directly connected to quicker emergency
response, a stronger military, or better preparation to combat
terrorism. “I can see a legitimate case in the airline industry
for helping them with liabilities that will arise from these deaths,
maybe helping them in some other ways, but not in the magnitude
of the bailout that we have now given this industry,” Becker
said. “I think that was a mistake. We acted hastily and excessively
in helping this particular industry, and I’d say the same
thing would apply to all the other industries that are coming,
cap in hand, and saying, ‘If you do it for the airlines,
why not do it for us?’”
Fast and Full Recovery
Despite the short-term slowdown after the attacks, Becker predicted
the downturn would give way to a full recovery in a relatively
short time. “The long-term response to this will bring us
back in large measure to where we were before, barring any major
additional events that one cannot anticipate fully,” Becker
said. Recovery is possible because the economy makes adjustments,
he explained. “We shift between categories—maybe air
travel will be permanently down to some extent, but other categories
in the economy will be up: surveillance, videoconferencing, security
measures,” he said. “Secondly, and of equal importance,
investments recover and begin to make up for the small loss of
physical capital experienced on that horrible day.”
Although he didn’t offer a specific time
frame for recovery, Becker noted that history shows the economy
often recovers rapidly from destructive events. “It’s
not immediate, but [it occurs] in a surprisingly short period
of time relative to initial expectations,” he said. “If
an economy maintains its stock of knowledge, skills, and information—which
we surely have done in this episode—then it has the foundation
to recover. The main asset in a modern economy is human capital.
We’ve lost 5,000 precious individuals, but we still have
retained basically all the human capital we had prior to this
event, and that’s going to enable us to recover— and
recover fully.”
Murphy agreed that the economy’s prognosis
is good despite the immediate contraction in investment and consumption.
“[The contraction] was dramatic, and it was in the areas
where you would think it would most likely occur,” Murphy
said. “Subsequently, things have started to rebound. Look
at air travel. It was down 50 percent initially, then it went
back up close to 80 percent. Look at attendance at Broadway plays—way
down, recovered. Most of the dire predictions have not panned
out. As long as we continue to resolve the uncertainty in a positive
direction, which I think we have, we will see a recovery.”
—Melissa M. Bernardoni
<<
Back
|
