September 11th, 2001: Did the terror attacks cause and prolong an ultimately unnecessary recession?

12th September 2011

The 11 September attacks were followed by the end of ten-year bull run which had seen share prices hit high after high, and the conclusion of the tech boom which had helped companies like Amazon become the largest – by market capitalisation – in the world.

It wasn't a recession but it was the beginning of something big; months later Enron was on its knees.

In 2002 The Observer was proclaiming that "Osama bin Laden killed Enron". "He was an accomplice in the attempted murders of engineering conglomerate Tyco and cable operator Adelphia."

"He was seen lurking in the bushes after Xerox bombed, and federal agents want to interview him in connection with Andersen's disappearance."

"The explanation was offered that "if al-Qaeda had not killed almost 3,000 civilians last year on 11 September, several of America's biggest businesses might still be around",

But if only because, The Observer notes, the " financial foibles and frauds yet to be exposed in the glare of a market meltdown".

So could the response to the bombings have simply propped up markets?

The Observer thinks so, "11 September managed to arrest a 10-year bull run that ultimately failed to deliver on its promises. For the destruction of the World Trade Centre brought into acute focus a recession that America had tried doggedly to ignore."

Nine years later Jeremy Warner of The Telegraph argues how emotional reaction to the events helped shape US economic policy and ultimately bring about a prolonged and unnecessary recession.

He write that policies put in place to address these two events – "first the dramatic accumulation of foreign exchange reserves by Asian economies to bolster themselves against future crises, and then the monetary easing applied by the Federal Reserve to deal with the aftermath of the dotcom boom"  led directly to the banking and debt crises.

He goes on: "Not in his wildest dreams could Osama bin Laden have imagined the long-term damage his atrocities would unleash on Western economies"

Warner also quotes the Independent's Robert Fisk, one of the few Western journalists to have interviewed Bin Laden, quoting him as promising to turn America into "a shadow of itself".

America's reaction to 9/11, mainly running into two expensive wars, ultimately ended up in unleashing the credit bubble, because Warner argues "in neither of the two downturns which followed the end of the dotcom boom was the business cycle allowed to run its course".

"Instead, the natural rhythm of corrective economic adjustment was countered by massive monetary easing, which in turn was made possible by the disinflationary forces of rapid emerging market growth."

"In keeping the renminbi low to ensure its goods remained competitive, China embarked on a period of reserve accumulation of unprecedented proportions. The consequent tidal wave of cheap credit into the US and elsewhere was to sustain the illusion of growing prosperity for half a decade or more."

At a time when the balance of productive advantage in the world economy was shifting decisively from West to East, limitless credit enabled Western living standards to continue rising even as competitiveness was steadily eroded."

The Financial Times' Lionel Barber (paywall) gives his take on the decade after 9/11, and notes how the world's most powerful nation had seemed "at peace" a peace shattered after 11 September.

"On the morning of September 11, 2001, America's prospects appeared as bright as the clear blue sky over Lower Manhattan. The price of Brent crude oil was $28 a barrel, the Federal government was running a budget surplus, the US economy was turning (albeit imperceptibly) after the dotcom crash. The most powerful nation on earth was at peace."

Ten years on, he notes how oil is $115 a barrel, and the US budget deficit for 2011 is $1,580bn, the largest in its history; the economy remains deeply troubled after the financial crash of 2008; and America's military and intelligence services remain at war, battling insurgency and radical Islamic terrorism, from Afghanistan and Pakistan to Niger and Yemen.

On the positive side he says America has so far escaped another terrorist attack on its own soil and that Al-Qaeda is down although not entirely out.

However Barber believes that it is the distortions created as a result of the US turning its attentions away from its own problems that make the true legacy of 9/11.

"Americans living on cheap credit and Chinese exporters and savers contributing to a vast current account surplus. the world economy has been turned upside down. The US is diminished, Europe sidelined, and Asia, for now, in the ascendant."

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