Now that the euphoria over Osama Bin Laden’s demise is over, it is perhaps a more appropriate intellectual exercise to assess his legacy rather than dwell over the ultimately pointless debates on the legality of the operation which finally nailed him. It seems, after all, that even in death Bin Laden appears destined to polarize opinions: be it by the ridiculous and downright false claims by conservatives that the intelligence gathering which led to his hideout justified torture (
As a result, from a peak of 6.5% in 2000, the US federal funds rate fell to 2% by late-2001. This was not enough and by mid-2003 the rate stood at just 1%. Of course, we all know what followed: low interest rates led to a flood of cheap credit. With stock markets still reeling from the dot-com crash (one decade later, Nasdaq has yet to recover from its 2000 high), investors poured their cash into the increasingly lucrative housing market which had already began exhibiting bubble-like characteristics years before 9/11. And with the availability of new and exotic credit derivatives such as MBSs and CDOs, banks were able to recycle their highly leveraged debt throughout the entirety of the financial system. It’s hard to believe that all this happened over the course of barely 4-5 years, such was the speed in which global finance became intoxicated with the bountiful profits of history’s most massive asset bubble. And all it took was Greenspan reversing his put to make it burst. The rest is history: the subprime crisis, the credit crunch, and the ultimate collapse of Lehman Brothers which has been the closest humanity has gotten to a complete global economic meltdown.
Was it really Osama’s fault?
Although creating economic disruption and panic was surely an intended part of his insidious act of mass-murder, I truly doubt that Bin Laden had the knowledge and foresight to predict the actual consequences of the 9/11 attacks (forgive me for thinking that courses on monetary policy and structured finance are not part of the curriculum at Al Qaeda’s terrorist training camps). But in retrospective it’s difficult to deny that 9/11 didn’t play at least some part in influencing the economic events which caused the crisis, if only to force the Fed to respond more aggressively to the recession which the country was already in. That said, I am certainly loathe to suggest that 9/11 was the leading cause of the crisis – it’s very probable that the housing bubble would have still blown out of proportion if interest rates had been kept, say, at 2-3% rather than 1%. But the fact of the matter is that 9/11 made a bad economic situation even worse, put pressure on the Fed to take a far more accommodative monetary policy to combat recession, and led to an environment of even cheaper credit which was to have disastrous consequences just a few years later.
In closing, although this argument rests on the premise that the US is inevitably condemned to a slow and painful decline, history has an uncanny knack for plot twists and surprise endings. Maybe China will implode under the weight of its own success, or dash recklessly into a disastrous war. But if it doesn’t come to this, how will historians of future generations describe the end of American world dominance? Will they speak of nation defeated in glorious battle? I doubt it. Engulfed in civil war or social decay? There may be elements of this but still a far cry in my opinion. Most likely they will speak of a nation saddled with debt, politically deadlocked by extremism and populism, and burdened by global responsibilities while China and India and other rising powers soared ahead, perhaps (and hopefully) without ever firing a shot. If this is case, I see the global recession as the defining moment in which things took a definitive turn for the worst, barring of course an even more catastrophic crisis, which is a real and frightening possibility. And ultimately this will have condemned the US to a fate even worse than nuclear annihilation: playing second fiddle to Beijing.
In which case, surely it won’t hurt finding a scapegoat. Blame Osama!