How Terrorism Affects our Economy

There’s an interesting MSN article entitled Did Terrorists Cause the Housing Mess?which made me stop to think about how terrorism really can and does affect our economy.

It’s easy to see/predict how terrorism can affect the economy in the short term – people generally panic, spending plummets, the GDP growth slows or stops. But what about the long term? After 9/11 for instance, things seemed to get back to “normal” with relatively little problem.

One of the Fed’s little-known functions is to keep the banking and finance industry running smoothly to avoid any type of panic in case of terrorism or natural disaster. I toured the Federal Reserve Bank in Dallas once and found out that they have all sorts of emergency systems in place to prevent a panic and/or economic collapse. Seemingly small things like making sure ATMs don’t run out of money are paramount. People have to have faith in the system or else it could all just unravel (which is pretty scary, but not the topic of this post).

Of course, the Fed also has the more well-known ability to affect short-term interest rates. After 9/11 they did just that, cutting the fed funds rate to a low of 1.75%. This temporary infux of basically free money kept our consumer-driven economy from sputtering to a stop after the attacks. Which is a great thing.

But the author in the MSN article points out that it also enabled people (and businesses) to borrow exorbitant amounts of money with credit cards, home loans, and other lines of credit. He argues that the ensuing housing bubble and our current credit crunch would never have happened if the Fed hadn’t cut interest rates so dramatically – which of course never would have happened if there was no 9/11.

I think the author goes to far in insinuating that the terrorists themselves could have foreseen this situation and that they are “bleeding” us externally with expensive oil and defense costs and internally with our credit crunch and other economic problems. But I can’t deny the connection between terrorist attacks and our economy – even over the long term.

What do you think??

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10 thoughts on “How Terrorism Affects our Economy”

  1. They must be connected, Bush told us to go shopping after 9/11. That way the terrorists don’t win!

    Um, what?

    I don’t think any sort of deep thought went into the attack, other than about flying an airplane into buildings.

  2. I think the connection to terrorists is a bit much, but the effect it had on the market, and subsequently the interest rates did have an impact on the current situation.

    We were coming off of the most profitable decade in history in terms of stock market and real estate gains, and the uncontrollable growth had to correct itself. It began to, and then not too long after, we just happened to have 9/11, which accelerated the “corrective” action that the government took.

    This probably would have happened anyway, but not in such a short amount of time. The drastic measures that were taken as a result just made money even easier to get relatively close to the top of the market, so people had money to blow in real estate and the like.

    So, did the terrorists cause the housing mess? No, but their timing with the current state the of the economy, combined with the measures the government needed to take to right the ship didn’t help either.

  3. That’s really interesting…I would have never connected the two, but the MSN article makes a pretty good case. I don’t think we can blame the terrorists for everything, but I think it’s safe to say they contributed to financial uneasiness in America.

  4. I think that the attacks have had a diverse affect on the world’s economy. America is the biggest superpower in the world. The rest of the world follows America and whatever happens in America effects the reat of the world. I live in England and we have had a really good economy for years now. The pound was strong, the housing market excellent. Even before the terriost attacks we had a good economy but what has happened with the american economy in the past year has affected our economy. So in a way it is all connected. I am currently doing research on this topic and anyone with some different views would be helpful for me.

  5. It’s easy for me to believe that if all this has occurred from Terrorist attacks, that this was apart of their plan.
    Basics of war, even from ancient times, interrupt the enemies resources and watch them crumble.

  6. I/ve always thought that the terrorists (whose leaders are bright people) had decided they couldn’t beat us militarily, but they surely could bankrupt us.

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