Solidarity and patriotism have taken hold in the US. So despite the general gloom, there could be support for equities when US stock markets reopen today. What better way could there be to show that America's financial heart cannot be cowed?

Such sentiments may be reinforced by the expectation that monetary and fiscal policy will be loosened to calm the markets and to help the economy.

Central banks have already shown resolve by providing ample liquidity to ensure that short-term interest rates have remained low. Bond markets expect the next step will be an aggressive reduction in interest rates, possibly starting as early as today.

By the end of the year, they have priced in close to a three-quarters of a percentage point reduction of the Federal funds rate. Additional government spending of up to $40bn over the next two years will provide another stimulus. It is to be spent on counter-terrorism measures and the rescue efforts in New York and Washington.

History also suggests that shocks to the financial system can be deep but brief if policy responds quickly. Recoveries were swift after the 1987 stock market crash and after the 1998 financial crisis.

Unfortunately, little that was true then holds now. Directly and indirectly, the terrorist attacks threaten to have serious economic effects. Policy action is likely only to mitigate a further downturn in the US at best; at worst it might be ineffective. This fear led to a reappraisal of prospects for equities around the world last week. Stock markets fell by 4.8 per cent in Tokyo, by 6.2 per cent in London, by 11.4 per cent in Paris and by 12.3 per cent in Frankfurt.

Impact on industries
Specific sectors are certain to suffer as a result of Tuesday's attacks. Airlines, the insurance industry, tourism and banking are especially vulnerable to a sudden drop in demand. An indication of concerns is reflected in European airline shares. They were particularly hard hit last week: shares in British Airways, Lufthansa and Air France each fell by more than 30 per cent.

Temporary paralysis
The spending diverted from air travel is by no means certain to migrate to other sectors. The temporary paralysis of the US economy will also reduce economic growth. Speaking at the start of last week, the president of the San Francisco Fed recognised that economic growth was unlikely to improve for the remainder of the year. If he was right then, these direct effects could be enough to tip the economy into recession.

Worse is the unknown indirect effect on consumer confidence and consumer expenditure. US officials had hoped that an economic recovery would start once companies stopped reducing inventories. Production would increase and, in the longer term, investment would also recover. These hopes were always too rosy. Consumer confidence in August fell to an eight-year low and unemployment jumped to 4.9 per cent. And now, with a further fall in confidence likely, the one remaining prop for the US economy looks shaky.

Were the US or the world economy strong, the economic consequences of the disaster would have been easily manageable. But given the current delicate state of all big economies, the last thing the US needed was the uncertainty, the sense of vulnerability and the prospect of protracted conflict that Tuesday's outrages brought.

Insecurity is not the environment that will foster investment. Policymakers must also consider the likelihood that households will retrench. In this more uncertain world, people are likely to become more risk averse and more prone to save.

The terrorist attacks on New York and Washington may come to symbolise an economic turning point. The risks in the US economy have existed for a long time. A week ago, policymakers faced difficult choices. Now they confront the serious possibility of a global recession.