I couldn't agree more with my namesake about the exaggerated concerns many
commentators have expressed about an "imminent economic downturn" resulting
from last week's tragic events.  I would only add that pending a repeal of
the "efficient market hypothesis" stock prices have already discounted all
available information. While it is certain that the commercial aviation
industry and all of its Hirshchman-like backward linkages will experience
disequilibria, adjustments in other industries will more than offset the
temporal changes and restore a stable general equilibrium.  We may not all
be New Keynesians or New Classical theorists, but for sure we must be all
Walraisians when called upon by the popular press for insight and analysis.

Bill Dickens [FL-based but a fan of DC-based B. Dickens :-)]

-----Original Message-----
From: William Dickens [mailto:[EMAIL PROTECTED]]
Sent: Sunday, September 16, 2001 9:44 AM
Subject: Posts on Stock Market

First, on Monday I gaurantee you that if the market functions, there will be
a buyer for every seller. Every transaction has two sides. Whenever you hear
commentators saying "there were more sellers than buyers today so the market
went down" you should wince. 

Second, you don't have to be a "patriot" to think that the market will go
down, but that you won't sell. The market could open down -- prices
significantly lower than last Monday's close. That is typically what happens
when there is bad news between the close and the open. If that is the case
there is no point in selling even if you know for certain that the market is
going down because there is no opportunity to get out before the prices go
down. Sometimes it seems that the market is dropping over time. That's
because the indicies that are reported in the media are calculated on the
basis of the last transaction. When the market opens in the morning after
bad news it can take some time before all stocks are trading. During that
time the indicies are being calculated using a mixture of the new prices and
the last closing price. Thus the appearance of stock prices dropping over
time after the open even though prices are simnply opening lower. 

Third, world stock prices were somewhat lower on Friday than on Monday when
US exchanges were last open. So we probably should expect that the market
will open down. 

Fourth, as horrible as the events of last week were I don't think they have
much economic significance. a) For all the talk of consumer confidence,
empirical analysis suggests that it is a very minor factor in consumption
demand (comparable to interest rates) and is dwarfed by the importance of
income. Further, we don't know how this is going to affect consumer
confidence or purchasing decisions. If people fear ratioing or shortages
they might spend like crazy. Or people may be feeling better about
themselves and their country as a result of the burst of patriotism. b) This
isn't going to be much of a war. We probably don't have much of an enemy.
Unless we can link Iraq pretty tightly to the attack (which seems unlikely)
our only enemy is going to be a handful of terrorist training camps which
have probably already been emptied out and the government of Afganistan. Its
not clear what our objective in a war against Afganistan would be, but
assuming we don't try to go in and occ!
upy territory we won't need to spend a whole heck of a lot more money to
fight this war so no big fiscal effects (unless we use this is an excuse to
build up our military, build a missle defense, etc.) c) Rebuilding will take
place over time and will be a tiny tiny drop in the bucket when measured on
the same scale as GDP. No fiscal effect there. (But Fabio, do you really
think that Keynsianism is so dead that an exogenous shock to demand won't
affect the economy? Your joking right? Even the most hard core RBC people
are building sticky prices into their economic models these days and a
negative shock will have effects on output in such a model.) d) So that
leaves impacts on financial markets as one more way that this could have an
effect. But world financial markets have been mostly open. Only US equity
markets have been closed. I don't see any reason to expect anything more
than a decline at the open of the magnitude we've seen in world markets over
the last week.  

Finally, despite all these relatively optomistic thoughts I'm considerably
more pessimistic about the state of the economy today than a week ago. But
this is mainly because of several statistics that came out last week
reporting data from before the bombing that suggest that what looked like a
turn around in the late Summer hasn't materialized. I had thought we might
be seeing growth pick up in the third and fourth quarter. I don't see that
happening now. 

-- Bill Dickens

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