NEW YORK // After the September 11 attacks deepened the economic malaise then gripping New York City, Juan, a personal trainer, allowed one of his clients to train free for one year after she lost her job in corporate finance. She eventually returned to work and repaid Juan's faith with a US$10,000 (Dh36,700) cheque.
After last week's turmoil at investment banks and companies on Wall Street, the survival instincts of New Yorkers will again be tested. Juan believed he would have to offer similar deals to more clients in order to stay in business and remain self-employed. "I really began to notice the downturn around March after Bear Stearns was sold to JPMorgan Chase," he said. "A lot of my clients work on Wall Street and are very scared about the future. But most Americans are only just beginning to realise we've been living beyond our means for too long thanks to credit cards and debt."
In the past week, Lehman Brothers filed for bankruptcy, Merrill Lynch was bought by Bank of America, and Washington spent $85 billion on a bailout of the insurance group American International Group. Most Americans are trying to work out how and when Wall Street's troubles will impact further on Main Street - meaning ordinary people - as analysts spoke about the US facing the worst economic distress since the Second World War or even the Great Depression in the 1930s.
But New Yorkers were already bracing themselves and the immediate economic effects will hit sectors from real estate and restaurants to hair dressers and limousine drivers. New York City's unemployment rate of 5.8 per cent is still lower than the national rate of 6.1 per cent, but is certain to rise in the months ahead. In the longer-term, many hope that Wall Street's woes will be overcome, although it might take a few years. Others fear the heady record profits of the last boom cannot be repeated and believe the city will have to diversify away from a reliance on finance for revenues and jobs.
"The average 2007 salary and bonus earned by securities and commodities brokers and traders was $280,000. For all other industries, it was $57,000," said Rosemary Scanlon, an economics professor at New York University, who was a former deputy New York state comptroller and chief economist for the Port Authority of New York and New Jersey. "While Wall Street accounts for only 5 per cent of the city's jobs, it provides 23 per cent of incomes and salaries. Each Wall Street job helps to fund an additional two jobs in the city."
Unemployment will mean greater strain on budgets. Ms Scanlon said the city received 10 per cent of its tax revenues from the financial sector while the state, which does not benefit as much from high, city property taxes, was even more dependent and got about 20 per cent. Nonetheless, she said that having lived through previous long recessions, including one lasting from 1969 to 1977, she was optimistic and believed the city would recover.
"Every time there's a recession, people say everything's over but the city comes back. Look at real estate; we're not overbuilt as London has done recently and are much more resilient. And we're already diversified if you look at how every publishing, media and TV group has a presence here," she said. "I would say it will take three to five years to reach again the peaks of last year." But Kenneth D Lewis, the chief executive of the Bank of America, was less optimistic. "We've gone from a golden era of banking and financial services," he said on Monday. "It's going to be tougher. There are going to be fewer companies and we are going to have to be better at what we do."
One analyst who had long warned of a major upheaval in the financial sector, and accused Mayor Michael Bloomberg of acting with complacency in the last few years, was still upset at recent events even though they proved her right. Nicole Gelinas, of the Manhattan Institute, an economically conservative think tank, said the city had to find new jobs because Wall Street's decline was terminal. She cited state comptroller figures showing Wall Street earned $21bn in 2006, but had since lost $33bn.
"I don't feel happy about being right. The city is really going to have to start planning in a more visible way. Its budget figures are based on bonuses only being down by 20 per cent and Wall Street earning $7.1bn profits in the second half of this year, but that's all a fairy tale," she said. "In the longer term, the city has to cut taxes if it's going to remain competitive with other places such as Florida or Texas. New York is still a good place for the creative field, such as the arts or computer engineering and that needs a high density of human capital."
Mr Bloomberg, who originally made his fortune as a bond trader and then from the financial data company that bears his name, has enjoyed popularity in the city, leading to speculation he may seek to overturn a law that limits him to serving two terms as mayor. Close aides said it was unlikely he would mount a legal challenge, but floating the idea had helped to keep him in the headlines before the crisis broke. He now needs no help to make the news and it remained to be seen exactly how his old contacts in the financial world might help the city.
"The amount of money we are going to have to pay our labour force, make investments and contract for services is going to be less, while the demand for services from New Yorkers in need is certain to grow," Mr Bloomberg said last week. Justin Phillips, a political-science professor at Columbia University, said New York was most unlikely to go back to the dark days of the 1980s when whole neighbourhoods were overcome by crime, drugs and poverty.
There might even be a silver lining if Wall Street incomes failed to recover and property prices took a dive. "Maybe the city will become more affordable for those of us not on million-dollar bonuses," he said. sdevi@thenational.ae World markets, b8-b9