9/11: How Osama bin Laden caused our banking meltdown and financial crisis
The 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 - were to lead directly to today's banking meltdown and accompanying, rolling series of debt crises.
Yet these events were only the beginning. What really set the future in stone was the policy response to 9/11, the shocking series of terrorist attacks which have their 10th anniversary this weekend. Not in his wildest dreams could Osama bin Laden have imagined the long-term damage his atrocities would unleash on Western economies.
Before the horrendous events of 10 years ago, the Independent's Robert Fisk, one of the few Western journalists to have interviewed Bin Laden, had managed to elicit the following extraordinary claim from the world's most notorious terrorist - that he would turn America into "a shadow of itself" in much the same way as the insurgency he had helped ferment in Afghanistan had helped destroy the Soviet Union.
At the time, these claims seemed ludicrous - no more than the puffed-up, delusional conceit of the hunted and, frankly at that time, largely insignificant fugitive. Yet there is a sense in which Bin Laden did indeed manage to deliver on his promises.
With all major catastrophes, the long-term damage tends to be inflicted not by the event itself but by the response to it. America's reaction to 9/11 was to rush headlong into two, essentially unaffordable wars. What is more, to keep the economy going during the turbulence of these years, the US and its European counterparts unleashed what was to become perhaps the biggest credit bubble of all time.
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 job of a central banker is famously to take away the punch bowl just as the party gets going. The catastrophe of 9/11 persuaded the Fed to either ignore or forget these duties.
It is possible that this same pattern of economic development would have happened anyway, regardless of 9/11. The relative decline of Western economies may already have been pre-cooked by this stage. It seems quite likely that even if Bin Laden had never existed, Western policymakers would still have done all they could to avoid facing up to the truth of lost economic hegemony.
Yet it is equally possible that without al Qaeda's atrocities, wiser counsel might have prevailed and Western economies would today be living more within their means. At the very least, its activities helped turbo-charge the subsequent over-accumulation of external indebtedness.
When the banking crisis finally hit home, the policy response was in some respects quite similar to that applied to the shocks of 9/11 and the Iraqi invasion. The system was flooded with central bank liquidity, interest rates were cut close to zero, and when even these measures failed to work, the money printing presses were cranked up, too. At the same time, governments opened up the spending taps, ruinously adding public over-indebtedness to the pre-existing private sector debt burden.
By doing so, they have at best only smoothed and stretched the adjustment; they cannot eradicate it, and as always occurs when big trade and credit imbalances are allowed to grow unchecked, creditors and debtors are now tearing each other apart attempting to agree a mutually acceptable degree of burden sharing.
A deep-seated banking crisis has transmogrified into a sovereign debt crisis. The problems are so intractable that it remains impossible predict with any credibility how they might play out. Every time growth looks like stalling, Western policymakers engage in another burst of monetary expansion. On previous occasions, these actions have succeeded only in pumping up new bubbles, and now they don't seem to be working at all. Policy has run out of road.
There comes a point when the debt overhang gets so big that nothing, other than capitulation by creditors and a massive programme of debt forgiveness, is capable of resolving it. As things stand, the mechanisms don't exist to allow for such a resolution.
The normal conduit is currency adjustment, which has the effect of devaluing the external indebtedness of deficit nations and clawing back lost competitiveness. But that cannot happen within the eurozone, while the mercantilism of Chinese economic policy prevents in the Asia/America trading relationship either.
The same sort of currency wars that plagued the interwar years are already fast establishing themselves. Horrified by the effects of its safe haven status on industrial profitability, Switzerland has promised to print as much money as it takes to depress the Swiss franc to more tolerable levels.
Repeated rounds of quantitative easing in the US and UK have much the same effect of debauching the currency and gaining trade advantage. It can only be a matter of time before Japan follows Switzerland into similar action.
Urgent international action to establish a new equilibrium is required, but meaningful agreement is as far away as ever. Yes indeed. Bin Laden cannot have dreamt of the trouble he'd cause.
[Source: By Jeremy Warner, The Telegraph, 08Sep11]
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