Paul Bracken on why 9/11 had little financial impact...

Osama Bin Laden

Economics Lesson for Osama...

(Image from BBC News, October 7, 2001)

In the aftermath of 9/11, Osama Bin Laden exulted in what he considered America's weakened condition:

America was hit by God in one of its softest spots. America is full of fear from its north to its south, from its west to its east. (Mark Tran, "Bin Laden makes defiant TV appearance," Guardian Unlimited, October 7, 2001)

I can recall many different emotions from that confusing time. Some fear and anxiety. A lot of sadness. A great deal of anger.

But I don't remember many Americans worrying about economic or financial collapse, though Bin Laden seemed to believe that his terrorists had struck at this 'soft' spot, for I recall other statements by him urging further attacks on the U.S. economy, which he thought was tottering.

Bin Laden seemed to assume that the U.S. economy was centrally directed and that all one need do was knock out its center, which he apparently thought had been accomplished. I suppose that he's learned something since then, namely, that modern economic and financial systems are not centralized but are widely decentralized systems highly resistant to attacks.

Recently, I read something on this point in a paper by Paul Bracken, Yale professor of Management and Political Science:

[T]errorist attacks beginning with 9/11 have had little economic or financial impact. After 9/11, the NYSE was closed for only four days. Within a year, the job market on Wall Street (and the New York City real estate market) was again booming. Even the New York firms hardest hit showed extraordinary resilience. Cantor Fitzgerald, Aon, and Marsh & McLennan lost hundreds of employees in the WTC attacks. Yet they all came back, most in weeks, some in months. The resilience of markets and business is not to be underestimated. (Paul Bracken, "Financial Warfare," Foreign Policy Research Institute, September 7, 2007)

Still, one might wonder why the effects of that were so small. Bracken explains that the America was already prepared:

One reason Wall Street responded so quickly after 9/11 was that planning for a possible attack had been undertaken earlier. In 1997, a war game of a Wall Street attack was played. Leaders from the White House, Treasury, the Federal Reserve, the Pentagon, and the intelligence community came together with leaders of Wall Street's largest financial institutions to simulate a terrorist attack designed to disrupt the U.S. economy. The game was played in the WTC's north tower, and some of the actual players were working there on 9/11 and were killed in the attack. The terrorist scenario was nothing like what actually happened on 9/11. The war game attacks focused on key nodes, like computer clearing houses and telephone switching centers, whereas on 9/11 a primitive yet highly effective attack was launched. Nonetheless, the lessons drawn from this game included the need to disperse key facilities away from lower Manhattan, as well as to back up important data at remote locations. All of this proved highly useful to the quick restoration of Wall Street on 9/11.

Since 9/11, this dispersal of key facilities has been further implemented, though much remains to be done in decentralizing the electrical and telephone grids upon which America's decentralized financial system is dependent:

Since 9/11 the concern to reduce the U.S. financial system's vulnerability to terrorist attacks has greatly increased. Virtually every major U.S. bank and financial institution has thought through its vulnerabilities. In addition, the Treasury Department has taken major steps to ensure that financial systems are more redundant and hardened and that back-up alternates are ready to take over in case of disaster. Sarbanes-Oxley and other legislation require financial institutions to monitor carefully their internal processes. Basle II, from the Bank for International Settlements in Basle Switzerland, reinforces this trend by requiring banks to reserve capital against so-called operational risks, i.e. internal process breakdowns such as those from cyber attacks or inside theft.

In addition, the pattern in the New York financial industry is to disperse back office operations to New Jersey and elsewhere. The hedge fund business is concentrated in nearby Fairfield County, Connecticut. The pattern from San Francisco to Miami is to shed high-cost downtown locations as much as possible. These trends have the combined effect of reducing the U.S. financial system's vulnerability to terrorist attack. However, interdependencies among the financial system and other complementing systems remain. The electrical and telephone grids, in particular, are essential for the smooth operation of the financial system. One of the peculiar features of the New York financial market is that 40 percent of the workforce uses mass transit to get to work. In the event of a bio-attack in New York, this might be a major vulnerability. But in sum, the U.S. financial system is getting much harder to take down.

Here's an irony that Bin Laden has perhaps missed, namely, that his attack upon the World Trade Center has resulted in a strengthening of America's financial system against attack.

It might get taken down by the subprime crisis, however.

Perhaps Bin Laden is now sitting in some room in Pakistan's Northwest Territories, reflecting on the current financial news and thinking, "If only I had trained Al Qaeda's terror cells to apply for those subprime loans with the aim of defaulting to bring about America's financial collapse..."