Bill Emmott - International Author & Adviser


The world economy is Osama´s biggest victim
The Times - September 5th 2011

Do you remember the video of Osama bin Laden watching himself on television in his house in Abbottabad, which the Americans released just after having killed him? What’s the betting that much of the time, when his friends weren’t filming him, he was actually watching Bloomberg, CNBC or other business channels? Whatever countless political analysts may say, the biggest and most lasting consequence from his destruction of the Twin Towers and the deaths of nearly 3,000 people on that calamitous, shocking day ten years ago is the economic mess that America and Europe now find themselves in.

            Unless he was truly delusional, it is hard to believe that bin Laden ever actually believed he and his followers could defeat America in any permanent way, nor establish the new caliphate he wrote about in some of his manifestoes. But he also had it in for western capitalism. In that effort, he has been more successful—though also, we must assume, not permanently.

            As with all the “what ifs” of history, it is impossible to prove what would have happened had the 9/11 atrocity not occurred. But think back to the economic situation that the West was in as that autumn began. After the 1990s stockmarket bubble led by internet and technology shares had burst during the previous year, a mild recession began, which affected both sides of the Atlantic. The Federal Reserve Board, America’s central bank, responded by cutting interest rates, thus reversing its six interest-rate rises of the previous year.

            There was never really a recession in America that year, or so the official arbiter of these things, the National Bureau of Economic Research, later concluded, as there were never two consecutive negative quarters. What there was, however, was 9/11, which froze economic activity briefly, especially the visible sort represented by civil aviation and tourism. And yet the Fed, chaired by the then beatified Alan Greenspan, kept the monetary taps open as if there had been.

            The rest is history, and arguably history-making. The next bubble was created, this time in credit of all kinds, expressed noticeably in house prices on both sides of the Atlantic but more invisibly in the boom in derivatives creation by the “shadow” banking sector. It turned out to be much, much larger than the dotcom bubble of the 1990s because it involved much more of the economy. And then its bursting was finally confirmed when Lehman Brothers collapsed in September 2008.

            Surely, you might say, this would have happened anyway, despite the horrors seven years earlier. Mr Greenspan was already known for his argument that financial firms would not self-destruct, for he thought they would realize that it was not in their interest to do so. He and others might still have ignored the absurd boom in sub-prime mortgages. Gordon Brown might still have insisted on “light-touch” regulation in the City, leaving financial firms to make merry with their special-purpose vehicles and other mouthfuls. European banks and insurers would still have lined up to buy derivatives, and the evasion of sovereign-debt “rules” that is now crippling the euro might still have occurred.

            Maybe, but think of the psychology. If Mr Greenspan was so ideologically determined to keep his hands off the markets, why did he raise rates six times to burst the dotcom bubble in 1999? Why after 2001, by contrast, did he keep pumping in credit to housing and banks, even as another bubble formed? Why did American fiscal policy under the presidency of George W. Bush, a supposed conservative (compassionate or otherwise) also turn expansionary, with spending soaring and taxes cut? Why, in the run-up to the 2005 British election did Tony Blair and Mr Brown keep up their spending splurge on health and education?

            The answer is simple. There was a war on, or rather two to be precise, not even counting the vague one on terror. At such times the inclination to risk an economic slowdown or new recession diminishes: after 9/11, President Bush said that Americans should do the patriotic thing and go out spending again.

            Depending on what you count, about $1.5 trillion or so of America’s $14 trillion in public debt, the ceiling for which recently caused such a row in Congress with the Republicans, can be attributed to the costs of Afghanistan and Iraq, to which can be added the expansion of government to create “homeland security”. Had it not been for Iraq, moreover, Mr Blair would not have been running at all scared in 2005 and so not so inclined to fiscal laxity.

            Mistakes would still have been made, especially on financial regulation. Perhaps some sort of financial crash would still have occurred. The softness of the post-dotcom recession might well have induced complacency, and an argument was afoot that cheap Chinese manufactures were holding down inflation for good. But the credit bubble was allowed to be inflated to levels, and for a time, that continues to stretch credulity. Without 9/11, historians will struggle to explain it.

            In 1987, in his bestseller “The Rise and Fall of the Great Powers”, the British historian at Yale, Paul Kennedy, warned that America was suffering from what he called “imperial overstretch”. The end of the Cold War brought a peace dividend and put that argument out of fashion, especially as the then apparent threat, Japan, itself flew too close to the sun and crashed to earth.

            His arguments now look prescient, even if his timing was off. But he is a historian, after all, not a pundit: he was talking of the great sweeps of history, not just a decade here or there. The big trends that were already under way in the 1980s and 1990s—the rise of Asia, the inability even of superpowers to win guerrilla wars, the pressures of technological change, the capability of terrorists to do as much damage as states—were not invented by September 11th, even if some may have been accelerated by it or at least brought out into the spotlight.

            American policymakers never truly thought they could exercise hegemonic power, exploiting the “unipolar moment” first identified in 1991. Bill Clinton spent much of that decade trying to avoid sending America’s military overseas. President Bush pledged in the 2000 election campaign that America should be “humble but strong”. What 9/11 did was to make Americans believe that they had to act unilaterally on a much larger scale than they had done so since Vietnam, and damn the expense or economic consequences.

            Those consequences, alas, were seen first in the financial disaster of 2008, and now in the anaemic job-creation figures announced last Friday. The Sheikh probably never used the phrase “double-dip”, but he might have heard it used on Bloomberg.  


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