By JLP | February 13, 2008
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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