U.S. Federal Reserve Board chairman Alan Greenspan addressed the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate this morning on the state of financial markets in the wake of last week’s terrorist attacks.

In his speech he admitted that although much is uncertain in the wake of the attacks, only short-term weakness appears definite.

In his first public remarks since last week’s attack, Greenspan said, “The terrorism of September 11 will, doubtless, have significant effects on the U.S. economy over the short term. An enormous effort will be required on the part of many to cope with the human and physical destruction. But as we struggle to make sense of our profound loss and its immediate consequences for the economy, we must not lose sight of our longer-run prospects, which have not been significantly diminished by these terrible events.”

He noted that the American economy has become increasingly resilient to shocks, thanks to deregulated financial markets, more flexible labor markets, and advances in information technology. But he also noted that this attack is a unique event. “In contrast to natural disasters, last week’s events are of far greater concern because they strike at the roots of our free society, one aspect of which is our market-driven economy. The shock of September 11, by markedly raising the degree of uncertainty about the future, has the potential to result, for a time, in a pronounced disengagement from future commitments. And that, in the short run, would imply a lessened current level of activity.”

Nevertheless, Greenspan insisted that he is confident that the U.S. will recover and prosper. “As a consequence of the spontaneous and almost universal support that we received from around the world, an agreement on a new round of multilateral trade negotiations now seems more feasible. Such an outcome would lead to a stronger global market system. But before the recovery process gets under way, stability will need to be restored to the American economy and to others around the world.”

He observed that the U.S. economy was teetering on the brink of instability before the attack anyway, with aggregate measures of production, employment, and business spending continued to be weak. Sine then consumer spending has been eroded.

Ultimately, Greenspan admitted that these events primarily give rise to uncertainty. “Nobody has the capacity to fathom fully how the tragedy of September 11 will play out. But in the weeks ahead, as the shock wears off, we should be able to better gauge how the ongoing dynamics of these events are shaping the immediate economic outlook. For the longer term, prospects for continued rapid technological advance and associated faster productivity growth are scarcely diminished. Those prospects, born of the ingenuity of our people and the strength of our system, fortify a promising future for our free nation.”