September 11, 2001: The Price of Terror – Economy

On the morning of September 11, 2001, Tuesday, the New York Stock Exchange was preparing to begin trading at 9:30 am. But it should never come to that. At 8.46 a.m. (2.46 p.m. CET) the first hijacked aircraft flew into the north tower of the World Trade Center. The stock market launch was then postponed for the time being. When the second aircraft crashed into the south tower at 9:03 a.m., there was no longer any doubt: it was not an accident, but a planned attack of a previously unknown dimension. To avoid panic, the exchange closed for the rest of the week. The last time there was such a long interruption in trade was in 1933 at the height of the Great Depression. In Frankfurt, where trading continued, the Dax lost 8.5 percent on Tuesday alone, gold and oil suddenly became more expensive.

Nearly 3,000 people lost their lives in the attack on the Twin Towers in New York and the Pentagon in Washington. The al-Qaeda terrorists wanted to hit a symbol of American capitalism, globalization and the western lifestyle. They undoubtedly succeeded in doing so. It was on Wall Street, a few blocks from the World Trade Center, that was where the economic fallout of terror first showed itself in full force. And the whole world could watch.

The Federal Reserve was the first helper in an emergency. Its boss Alan Greenspan tried to calm the markets by making it clear immediately that the Fed would provide practically unlimited money. Liquidity shouldn’t be an issue, which would still happen. When Wall Street reopened the following Monday, the mood was still extremely tense. The Dow Jones lost 7.1 percent or 684 points. In absolute terms, that was the highest daily loss in the history of the index. The week even ended with an overall loss of 14 percent. That was dramatic, but not an expression of panic. The Federal Reserve managed to stabilize sentiment in the financial markets.

The central bank was responsible for the rapid recovery

However, that did not change the fact that the aftermath of the terror hit some companies hard. For example airlines. Many people were now afraid to board a plane, air traffic fell by 2.7 percent in 2001, the Belgian Sabena and the Swiss Swissair had to give up. In addition, high investments in security were necessary. The city of New York itself was also badly hit. According to rough estimates, 430,000 jobs were lost in the metropolis as a result of the attacks, and 18,000 small businesses had to give up. Tourists avoided the city, which meant that one of New York’s most important economic factors was lost for months.

After that, one had to fear the worst for the world economy. She had been in critical condition before September 11th. In March 2001, a recession had begun in the United States. The trigger was the collapse of speculation about new Internet-based companies, the so-called dot-com bubble. In fact, however, the great crisis after the terrorist attack did not materialize. New York recovered quickly and was soon more attractive (and expensive) than ever. The recession ended in November 2001, making it one of the shortest in history. The central bank was again responsible for the rapid recovery. The Fed cut its key interest rate four times during the year to 1.75 percent, the lowest level since the 1950s.

The cheap money policy worked as planned, but it also had undesirable side effects. Because loans were unprecedentedly cheap, a real estate boom began in California, Nevada, Florida and other states, driven by increasingly dubious financing models. In August 2007 the real estate bubble burst and the financial crisis began. In this respect, a direct path leads from the terrorist attacks on September 11th to the bankruptcy of the investment bank Lehman Brothers in 2008, which almost triggered a collapse of the global economy. The financial crisis deeply shook confidence in American capitalism.

One of the consequences of September 11th, however, is that security has become more important and more expensive in the western world. It starts with the complex checks at airports and does not end with security gates in high-rise office buildings.

The critical state of US public finances has something to do with September 11th

Above all, this includes the “war on terror”. President George W. Bush declared it in front of both Houses of Congress on September 20, 2001. Just two and a half weeks later, the United States and its allies attacked the Taliban regime in Afghanistan. The Iraq war followed in 2003. The US financed the war on terror, like the Vietnam War once, mostly with debt, which was made easier by the low interest rates. This was a turning point in American financial policy. Before Bush, Democratic President Bill Clinton had ended his predecessor’s deficit policy and generated rising budget surpluses. The US debt level was falling rapidly. Bush finished this course. The first step was a generous tax reform, which primarily relieved companies and the wealthy. The second step was the fight against terror. Today, 20 years on, the American state’s debt burden is almost as high as it was at the end of World War II.

Open detailed view

The turn in financial policy under Bush changed the country. This is in the latest issue of the magazine Foreign Affairs an informative article appeared. Author is former officer and war veteran Elliot Ackerman. Because the war on terror was funded by credit and fought by a volunteer army, the majority of Americans have been “stunned” of the cost of the war. This had “profound consequences for American democracy”, “consequences that can only now be fully understood”: The expenditures for the war had been decided without public debate, while the government decided on other tasks, such as health care or the Fight the pandemic, always justify it. The critical state of America’s public finances also has something to do with September 11th.

Economic and political consequences work together here. For the economist Hans-Werner Sinn, September 11, 2001 was therefore a “turning point”. The terrorist attacks had “demonstrated the vulnerability and impotence of the USA before the eyes of the world,” says the former president of the Munich Ifo Institute. The Iraq war, the Afghanistan war, the Jasmine Revolution in North Africa and finally the Syria war followed. “The Islamic world destroyed itself, while America was weakened and stripped of its radiance and remained on the edge of the rubble. The emaciated peoples of Arabia are pushing into the EU and Germany. In the chaos that has arisen, China is preparing a change of power,” believes Sense.

The catastrophic defeat of the West in Afghanistan – almost exactly 20 years after the terrorist attack on America – proves this.