How High a Penalty? Try Global Recession

Edward Yardeni, chief economist for Deutsche Morgan Grenfell Inc., takes what he describes as an "alarmist" view of the year-2000 problem. He believes there is a 60% chance of global recession caused by the millennial glitch.

In a talk earlier this month to a year-2000 roundtable sponsored by the Bank for International Settlements, he explained his viewpoint. Below are excerpts from that talk.

Let's stop pretending that Y2K isn't a major threat to our way of life. There is too much at stake for such uninformed wishful thinking. Perhaps the time has come to act as though we are preparing for a war. This may seem extreme and unnecessary. However, if we prepare for plausible worst- case Y2K scenarios, then perhaps we can avoid at least some of them.

I do have a Y2K strategic plan to share with you. It is not targeted at fixing the computer problem, but rather on preparing for the inevitable disruptions when the problem is not completely fixed in time.

As representatives of the world's banking and financial community, you are in a position to prepare the public for the upcoming upheaval. You are already doing so in the banking and finance industry. I urge you to use your experience, influence, and power more broadly to influence top policy makes to take bolder measures.

Here is my seven-point plan:

1. year-2000 Alliance. We should draft and sign a resolution insisting that the leaders of the Group of Eight, at their May 15-17 meeting in Birmingham, form a Y2K Global Alliance to coordinate both national and multinational campaigns.

2. Commander in Chief. The alliance could use the expertise of military personnel who should be involved because they have the necessary training and experience for marshaling and mobilizing resources for such a potentially huge global campaign.

3. Military Fail-Safe Systems. Military leaders of the United States, other NATO members, and Russia must jointly assess the risk of an accidental nuclear missile launch or a provocative false alarm. Measures must be taken to thwart terrorists, hackers, and other malevolent opportunists.

4. Securing Infrastructure. Y2K sector alliances should be responsible for the Y2K campaigns in specific global sectors. The top priority must be to secure the supply of electricity worldwide.

5. Change Freeze. Governments should freeze all legislative, regulatory, and information technology changes that might divert resources from the effort to prepare government and business computer systems for the century date change.

6. Mandatory Y2K Holiday. The alliance should consider requiring all nonessential employees to stay home during the first week of January 2000. Financial markets might have to be closed during this period. This holiday would give information technology personnel the opportunity to stress test their systems with a slow reboot, rather than under peak load conditions.

7. Emergency Budget. The alliance should require all participants to fund a Y2K emergency budget with an initial minimum balance of $100 billion. The budget should be spent on both last-ditch efforts to repair or replace key computer systems and to implement contingency plans once the weakest links have been identified.

If information is harder to obtain, the amount of commercial and financial transactions, i.e. gross domestic product, we can support will necessarily be reduced. In the United States, it dropped 3.7% from peak to trough during 1973-4. Unfortunately, this might eventually be an overly optimistic outlook. A year-2000 recession is bound to be deflationary. In the United States, a $1 trillion drop in nominal GDP and a $1 trillion loss in stock market capitalization are possible.

Our global and domestic markets for financial securities, commodities, products, and services depend completely on the smooth functioning of the vast IT infrastructure. Information is the lifeblood of our domestic and global markets. If the information flow is severely disrupted by Y2K, then markets will allocate and utilize resources inefficiently.

Why am I so sure that we will fail to have all our systems ready and that the disruptions will be severe enough to cause a major global recession, perhaps even a depression? Fixing and responding to the Y2K problem requires a cooperative and collective approach which is rarely an outcome of the division of labor.

The current Y2K global battle plan is virtually guaranteed to fail. It has these major flaws:

Unorganized. There is no plan, or if there is one, it certainly isn't global or even national.

Unaware. There is no global plan to maximize awareness of Y2K.

Uncontrolled. Each fixing entity independently establishes a triage process. No authority has defined "mission critical."

Unverified. Y2K managers are free to reclassify systems as noncritical.

Unprotected. Information systems may easily be contaminated by data from noncompliant systems.

Untested. Even fixed systems could fail once they are tested in "real time."

Unaccountable. Without a collective approach, some entities will doom noncritical systems that are actually mission critical to some of their dependents.

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