American combat troops have headed home from Iraq, leaving behind a democracy without a government and an ethnically divided nation. In Afghanistan the Taliban army continues to advance and Osama bin Laden is still at large. Far from being victorious in the war on terror, Washington and its closest allies are broke. Plagued by overwhelming debts and suffering from the worst recession since 1929 these countries now live in fear that the rating agencies will downgrade their economies. Is there a link between such events?
To answer we need to revisit bin Laden’s absurd idea that 9/11 would inflict a mortal blow to America’s economy. Though the attack did negligible damage to Wall Street, the Bush administration’s response set in motion a chain of negative events. The Patriot Act, introduced a few weeks after the destruction of the Twin Towers, failed to curb terrorist financing but did prompt massive flight from the Dollar: out of fear of being prosecuted, Muslim investors repatriated investments worth about 1 trillion Dollars; to avoid the scrutiny of the US monetary authorities, international banks suggested clients switch from Dollar to Euro investments; finally, criminal and terrorist organizations relocated most of their money laundering activity from the US to Europe. As early as December 2001, these events caused global demand for dollars to shrink, pushing the value of the greenback downwards.
In 1993 Dick Cheney clearly stated the neo-con desire to re-launch America’s world hegemony. Ironically, the war on terror provided a much-sought-after opportunity to achieve this desire. Consequently, regime change in Iraq was deemed necessary to secure a friendly base at the heart of a strategically important region. In order to raise funds to finance such an ambitious military adventure the Bush administration tapped the international capital market by selling 4 billion dollars worth of treasury bonds in a few years. To make the US debt competitive, the Federal Reserve progressively slashed interest rates, which fell from 6% on the eve of 9/11 to 1.2% by early Summer 2003, when Washington thought it had won the war in Iraq following the initial invasion. Fed chairman Greenspan went along with this strategy even though the world economy was growing too fast and actually needed higher rates to prevent the formation of financial bubbles. For over a decade, lowering interest rates had become instrumental to counteracting the recurrent economic crises of globalization – such as the Ruble and the Asian Crisis – and 9/11 had triggered a mini recession in the Western world. Today we know that this policy of lower interest rates never actually solved the underlying problems. It merely hid them until the next crisis.
If the White House and the Federal Reserve had paid attention to the signs of an overheating globalised economy – the booming housing market and the growing indebtedness of the 1990s – things would have been different and possibly the world would have avoided the serious economic crisis in which it finds itself today. The steep fall in US and world interest rates between 2001 to 2003 created the ideal conditions for the spread of the subprime mortgage crisis and for the securitization of bad debts, the genesis of the credit crunch. That policy also precipitated the bankruptcy of Iceland, a country that accumulated a debt 12 times the size of its GDP, and the solvency crisis of Greece. In both circumstances, Wall Street giants such as Goldman Sachs and J.P.Morgan took advantage of declining interest rates to allow countries as well as corporations and individuals to live beyond their means. Naturally, in the process, they pocketed large sums of money.
Washington’s fixation with a military intervention also prevented the formulation of an effective policy to thwart terrorist financing, which nobody ever regarded as a real priority. European countries, which had long-standing experience in counter-terrorism, went along with this folly. They could not even reach an agreement on regulating offshore facilities until the recession shrank tax revenues, prompting finance ministers to go after tax-evaders. This is how Europeans learned that since 9/11 their continent had become the global epicenter of money laundering, thanks principally to several joint ventures between Italian organized crime and the cocaine barons from Latin America.
While fighting America’s war on terror the world changed dramatically: the West spent money it did not have to fight a war which had nothing to do with bringing Osama bin Laden to justice; to fund this war, America fueled a massive financial bubble which eventually exploded; from Latin America, narco-business reached Europe via West Africa, thanks to a new joint venture with armed organizations such as al Qaeda in the Maghreb; and the Taliban successfully tapped into the heroin trade, using it to fund their war against coalition forces.
The hidden interdependency between terrorism and the global economy goes well beyond the credit crunch, the recession and the crisis of the euro. Since 9/11 it has been extending the boundaries of a shadow world that threatens to replace our own if we do not break away from the legacy of the war on terror. Bringing the troops home is not enough; we need to focus on the true target of this war, on the lifeline of terrorism: We need to focus on the money.