Chart of the Day: 9/11 Vs. Subprime Shocks

From a new I.M.F. working paper by Hui Tong and Shang-Jin Wei, a look at how forecasts for G.D.P and consumer confidence changed after September 11th and the subprime implosion:

The major difference between the two is that while 9/11 was mostly a consumer confidence shock, the subprime mess is a liquidity and confidence double whammy.

It is certainly true that market interest rates went up in the first few days following September 11, 2001. However, the Federal Reserve took a decisive action to calm markets. The market interest rate went back to a level very close to the pre-9/11 level within two weeks, indicating that the market regarded the Fed's action as adequate in restoring the liquidity needed in the economy. At the same time, both economic forecasts of U.S. growth rates and consumer confidence measured by the Michigan consumer sentiment index took a sharp downturn immediately following the 9/11 attack. The sharply more pessimistic view of the U.S. economy lasted for at least six months. This suggests that the 9/11 shock, measured over a month's period after the terrorist attack, reflects mostly a negative shock to consumer confidence, with virtually no liquidity element.