Those who deny the reality of financial terrorism tend to use the same basic arguments. One of those is built on the idea that everyone is motivated by money and so no one would intentionally harm America's economy. There are many flaws in this reasoning and we will likely catalog them in a future post. Another set of arguments is built on the idea that we brought on the decline all by ourselves through terrible monetary and fiscal policy. There is truth in this line of reasoning but it is not the whole truth.
Few people recall that a little over a decade ago our government was running a budget surplus. In fact in December 2000, the Office of Management and Budget projected that the entire Federal debt would be paid off by 2010. Imagine that. It was less than a dozen years ago but it seems like more than a lifetime. Now, we are almost $16 trillion in debt with $1 trillion deficits projected for years to come.
It was in this context that al Qaeda attacked the World Trade Center with the intention of harming the American economy. Bin Laden even stated as much in his December 2001 speech taking credit for 9/11. This was noted in a September 11, 2007 US News article that actually made the case that bin Laden had failed in his economic attack. Ironically this article was written right as the stock market was peaking just before the horrible 2008-09 collapse still haunting us today.
So How Goes Bin Laden's War on the U.S. Economy?
Six years ago, Osama bin Laden and al Qaeda weren't just attempting to bring down the twin towers of the World Trade Center. They were trying to smash the American economy as well. Here is what bin Laden himself said about his goals and motivations back in December 2001: "If their economy is destroyed, they will be busy with their own affairs rather than enslaving the weak peoples. It is very important to concentrate on hitting the U.S. economy through all possible means." And here is what al Qaeda second-in-command Ayman al-Zawahiri said in September 2002: "We will also aim to continue, by the permission of Allah, the destruction of the American economy."
With that in mind, evaluate the argument that it was solely flawed monetary and fiscal policy that led to the 2008 collapse. Looking at the bigger picture makes it obvious that the attack of 9/11 directly led to the excessive Federal spending (including two wars and major economic stimulus) and massive money creation (causing the housing bubble with interest rates held too low for too long). These points were made by some of the best financial economists in a 10th anniversary rememberance of 9/11 contained in a September 2011 MarketWatch article with the benefit of hindsight. We have selected excerpts to share. You can read the whole article here:
How 9/11 changed investing
Investing experts share their views about how the terrorist attacks have affected the US financial system — and changes that are likely (or needed) now.
Put in this context we can better understand how our economy became so vulnerable in 2007-08 although few recognized it at the time. These vulnerabilities were a direct, fully intended, and undeniable result of terrorism. The message of Secret Weapon (www.secretweapon.org) is that bin Laden did not cease in his attacks with 9/11. In his mind, that was just an early attack in an ongoing war. As we document, he created vulnerabilities with 9/11 and then knowingly exploited them in 2007-09. In this respect, he was following the doctrine set forth in Unrestricted Warfare. It is important to understand that Secret Weapon does not deny the economic vulnerability created by the fiscal and monetary policy of 2000-2008 (and continuing since). Rather, it explains the origins of these policies and how our enemies intentionally exploited these vulnerabilities in a new series of attacks. That is how a war is fought. This is not a fringe conspiracy theory. In fact, it has been vetted by some of the top defense, intelligence, and economic experts in the country from all parts of the political spectrum. These include Clinton's CIA Director, Reagan's Attorney General, and some of the leading economists in the country. You can read some of their comments at http://secretweapon.org/reviews/. Unfortunately, too few have stopped to consider the Big Picture. Unless the right people start to get the big picture soon, the Phase Three attack will be devastating.
The United States may be safer from a terrorist attack on the scale of 9/11, but its financial markets somehow seem more dangerous for investors. The events of Sept. 11, 2001, left the investing landscape in disarray. The markets eventually regained a sense of normalcy but, 10 years on, the disaster's legacy has been to expose the vulnerability of the U.S. financial system to both internal and external shocks.
Ed Yardeni: ‘In a way, the terrorists succeeded'
Ed Yardeni was the chief investment strategist at Deutsche Bank Securities in 2001. The Wall Street veteran now runs Yardeni Research, an independent institutional advisory firm in Great Neck, N.Y.
"The impact of 9/11 was to destroy any semblance of fiscal discipline in Washington. (There's been) a tremendous widening in the federal deficit and the government's involvement in the economy, and expansion in our overseas military commitments, all under the flag of defending ourselves against terrorism."
Marc Faber: Financial conditions are ‘much worse'
Marc Faber, also known as "Dr. Doom," writes the monthly investment newsletter "The Gloom Boom and Doom Report" from vantage points in Thailand and Hong Kong.
"There's no question that today, 10 years after 9/11, the financial structure of the United States is much worse than it was in 2001. Household credit, mortgage debt, government debt, unfunded liabilities, fewer people employed . . . the U.S. is much worse off than before 9/11.
For that we have to thank expansionary monetary policies. The Fed cut interest rates in January 2001, but because of 9/11, they cut it to 1% and left it at 1% until June 2004. The recovery in the U.S. began in November 2001. Interest rates were far too low, far too long. And even after June 2004, credit growth increased. 9/11 gave (the Fed) ammunition to keep an expansionary monetary policy that led to excessive leverage and excessive credit growth that led to the housing bubble of 2007/2008."
Mark Zandi: ‘More vulnerable'
Mark Zandi is chief economist of Moody's Analytics, where in 2001 he provided commentary on the economic impact of 9/11.
"One significant macro result was the very aggressive easing and monetary policy in the early and mid-part of the last decade, which contributed to the housing bubble and the subsequent financial panic and Great Recession and everything else that's happened.
I don't think (former Federal Reserve) Chairman Alan Greenspan would have pursued the same aggressive policy if not for 9/11. People were really scared and didn't know what was next. In that context, I think he felt he needed to be aggressive, and stepped on the accelerator harder and longer than he should have . . .
This has made the economy more vulnerable. If you're growing at a lower growth rate, it's harder to digest anything that goes wrong. There's less of a buffer. You're more likely to tip yourself into recession."
Axel Merk: ‘Credit becomes the enemy'
Currency-mutual-funds manager Axel Merk moved his firm, Merk Investments, to the United States from Switzerland in 2001.
"We compensated by making credit easier and lowering taxes. We accelerated the shift toward a credit-driven society as we lowered interest rates and taxes to keep America rolling. The monetary policies shifted the United States into an even more credit-sensitive society, and that made it more vulnerable to shocks."
Donald Coxe: ‘The China syndrome'
Donald Coxe, the chairman of Coxe Advisors and a strategy adviser at BMO Capital Markets, was the chief investment strategist at Harris Investment Management in 2001.
"What 9/11 did in a perverse way, with the response to it, was (get) people thinking once again of the United States as a superpower. But it distracted people, (such) that the U.S. no longer had a basic economic model for progress . . .
Also, we have been in a mostly sustained commodities boom since then, coinciding with a fall in technology. The United States was resource-deficient. Those who had the reserves, of metal and of oil, have had the big stock victories since 9/11. Gold entered a new long-term bull market right after 9/11. Gold's bull market is the antithesis of financially or economically driven bull markets. It is an asset you buy because you don't believe in the alternatives.
These are all bets against the U.S. dollar. What they are reflecting is a transference of power from the United States to somewhere else. The biggest beneficiary was China. This would not have been on anything like this scale had it not been for 9/11 and the ensuing wars. The fact there was a war on, which got bigger and bigger, and a buyer that was not interest-rate sensitive, allowed the United States to get deeper and deeper into debt."
David Rosenberg: ‘Unintended results'
David Rosenberg, the chief economist and strategist at investment manager Gluskin Sheff in Toronto, was Merrill Lynch's chief Canadian economist and strategist in 2001.
"9/11 led to a chain of events which still has an impact today. You can circuitously connect the dots. We ultimately fought a couple of wars and erroneously cut, instead of raising, taxes. It comes down to decisions to fight not just a war but a few wars against terror and at the same time trying to stimulate spending by cutting taxes. This caused the deficit to spiral out of control.
The Fed took the funds rate down to 1% and left it there well into 2004 as the economy was booming. The Fed was consumed with deflation fears, and the economic impact 9/11 had on the economy played a role. That produced all sorts of unintended results; one was the leveraged speculative bubble in housing and credit."
Rob Arnott: ‘A very clever attack'
Rob Arnott is the founder of Research Affiliates, a Newport Beach, Calif., investment management firm. In 2001, he was with First Quadrant, an investment firm in Pasadena, Calif.
"Ultimately it was a very clever attack because the cost to the United States of 9/11 is measured in multiple, multiple trillions of dollars. You could draw a direct line to 9/11 for some of the debt issues we face now.
The goal was to massively disrupt the United States and to initiate a war between the West and the Islamic world. On that score, it's fair to say the attack was an overwhelming success. To sacrifice 19 warriors to achieve multiple trillions of damage is really quite remarkable. The efficacy is undeniable."