The war on terror and the economic crisis

The thumping Humvee parked in a brand-new palacial driveway in a gated community somewhere in the Mid-West was the dominant image of the long boom that came after 9-11 and has ended in tears.

The nature of this boom and the crisis that has followed has much more to do with the climate of fear that accompanied the reaction to 9/11 than purely economic analyses of the decade suggest. The desire of millions in America, Britain and much of the "Anglo-Saxon" developed world to retrench into the privacy and security of newly-built castles we could call our own was a necessary component of the specific form taken by the boom and the crash. And that desire would not have so dominated consumer fantasies without the sense of fear-of-the-world that the War on Terror so stoked.

The best economic accounts of the noughties boom, for example Martin Wolf's "Fixing Global Finance", essentially tell the story of Far Eastern powerhouses unleashing their productive potential and accumulating great quantities of savings which get recycled - partly because of the fear of a repeat of the 1998 Asian crisis - through the American financial system. In America, the financial system responded by inventing the "safe" returns for which there was such a huge demand. Here is the process described in my review of the book:

Martin Wolf provides an excellent account of why there was such a huge supply of credit early in the century: that was largely due to China's break-neck speed development. Those savings would be invested somewhere or other by the bankers because, through all its specialistion and pseudo-complexity, the job of the financial sector boils down to exactly this: selecting this project rather than that as a good place to park savings.

The task that Wall Street faced after the end of the first dot com bubble in 2001 can easily be summarised in the two graphs below. Compare the Federal Funds rate (the cost of short term money to banks) to the bank prime rate (the cost for a credit-worthy customer of borrowing from the banks):

Short-term wholesale borrowing was very cheap - under 2% - from the end of 2001 to the start of 2004. The prime rate, on the other hand, stayed above 4% throughout the period. So banks with access to cheap money at 2% were being paid the handsome fee (over 2%) for finding safe projects that would yield returns in excess of 4%.

Why did thousands of intelligent people decide that new homes and SUVs were just that kind of project? Only five years before, that same sector had discovered the Internet. They had invested in fibre-optic cables, mobile phones, new computer chips, the first generation of web companies ... There was a generalised excitement about the transformative potential of technology that created a herd effect: investors had to "get IT", be into "clicks". Of course, this vision led to its own exuberance, bubble and bust, as the graph of NASDAQ closing values between 1998 and 2002 shows. But the graph for 2001 also points to the uncertain state of sentiment for the early part of the year - false starts, plateaux, as dips as investors considered new visions for the future - what could work and what was blemished with the tech-topianism of the recent past. It felt like an unusually open time, when many possibilities were plausible, a time for both experimentation and realism.

Nasdaq index closing value, source WolframAlpha

Early 2001 was a time of reconsideration of that technological vision. Which bits of the last 3 years' optimism were real and which were not? It seemed that many companies - for example WebVan, which wanted to make web retailing work by fixing the problem of home deliveries once and for all - had simply assumed in their business plans that the transformation of habits would be faster than anything possible. Others, like Amazon, with more gradual approaches, had got it spot on.

In this climate of post-bubble reconsideration, a delicate time in investor mentalities when everyone is searching for a dominant narrative, a trend on which to base decisions for the five or ten years to come, 9/11 was a caesura: before we had a process of picking the right from the wrong in the technology revolution; after it, the question became one of system survival. I was in Silicon Valley in the months after 9/11. What had been, despite the burst tech bubble, excited conversations about what was next became silences, cancelled meetings, endless security checks before going into an Intel or a Motorola office building ...

Fear and security-obsessed thinking entered financial decisions at all levels and conspired to create the character of the boom and bust that followed. The demand for consumer debt was fuelled by specific and new desires: the desire to drive a Hummer in sympathy with "our boys". The advertising that drove the SUV craze understood the link of these vehicles to the militaristic mood: one Vanity Fair advertising campaign carried the text: "Threaten the men in your office in a whole new way,"; another had "Excessive. In a Rome at the height of its power sort of way." The much intensified desires for homes also rested on fear: the sense of relief in returning to a home that was your own, was secure and cherished, a place of autonomy, a promise of independence from a world that wanted you harm.

Those desires created the opportunity for the whole chain of professionals, from the cold-calling NINJA mortgage salesman to the synthetic-CDO-selling geek whizz to deploy their abilities. At each step in that chain, with varying degrees of responsibility, it was necessary to feel comfortable with the picture of the world that the investments entailed: a threatening world kept at bay by war, by the development of a huge security state, financed by the hard-working poor of East Asia and servicing our very private aspirations for isolation, security and privacy.

To understand the full importance of fear in creating the environment in which this wasteful boom took place, consider what could have been. Tony Blair's speech to the Labour party conference in October 2001 is - maybe surprisingly, given what followed - a good statement of that alternative:

The speech makes it clear that security will not come from building protective walls; it needs more than anything a world in which everyone feels secure. That would require concerted work at multi-lateral, governmental, diplomatic, economic, cultural and individual levels. This was the silver lining that could still be glimpsed immediately after 9/11. Like European and Japanese reconstruction after WW2, the climate of opinion, so fragile for so many reasons at the end of 2001, could have been transformed. The savings of booming China and of the natural-resource rich sovereign wealth funds could have been channelled into the kind of productive investment that so much of the world needs. Indeed, if the Chinese themselves had felt more secure, more of their savings could have been absorbed domestically as household consumption. The "re-balancing" of the world economy that we so desire today could have been the security-inspired goal of our response to 9/11. It is a testament to failed leadership in the USA and the UK, how little of that 2001 speech was put into practice.

Martin Wolf's account of the structural imbalances in the world economy during the noughties is that the American financial sector had to lend massively and America had to spend: it would otherwise have suffered a recession caused by China's build-up of savings. That is exactly right, but we need to ask why it spent in such an unproductive and ultimately catastrophic way. This can only be understood in the context of the US's and the UK's overall reaction to 9/11. I agree with Jonathan Freedland who writes in the Guardian that the tenth anniversary should be the occasion for most of us - those not directly affected or actually embroiled in the nightmare of the War on Terror - to "close this sorry and bloody chapter – and bury the mentality it created". Burying the mentality in the economic sphere means reverting to the large-scale hopes for a world made secure through the eradication of misery and care for the environment.