9/11 'the root' of the financial crisis

The roots of the global financial crisis lie in the September 11th 2001 terrorist attacks and the US reaction to rebuilding the nation, it has been claimed.

Analysis by Dr Andrew Baker at Queens University sees the then chairman of the Federal Reserve Alan Greenspan as the architect of the today's crisis and the financial bubble that grew from it.

"The perfect epitaph for Greenspan would be Chairman Bubbles," explained Dr Baker to myfinances.co.uk.

"He just kept on cutting interest rates after September 11th and pushed financial innovation."

In the wake of the attack on New York interest rates in the US dropped from six per cent to one per cent by 2003 – where they stayed until 2004.

"While there is no simple, straight-forward explanation for the recent economic downturn, we can trace the roots of the crisis back to the 9/11 terror attacks," he explained.

"After 9/11 American people were encouraged to spend, spend, spend in the spirit of patriotism, to help restart the flailing economy.

"To fuel that spending, in the extraordinary political and psychological climate of that time, US policy makers actively encouraged levels of borrowing and lending that would never otherwise have been allowed."

He added: "There was the belief that ultimately the market would work its magic. Greenspan was being feted for his miracle that allowed low interest rates, low inflation and growth."

But Dr Baker explained the miracle lay within complex bundling and selling on loans and mortgages and the creation of new vehicles people did not understand.

He explained the markets are a psychological beast that responds to stimuli and Greenspan was spreading the message it was patriotic to encourage growth, to borrow and to spend.

A further problem he outlined is the growth of incentives and compensation packages that rewarded those who could see on the bundles of repackaged loans.

"They tried to make the unsustainable sustainable, but much of these investments depended on property prices rising.

"As property prices came down, banks were left with a lot of debt."

Dr Baker explains many were quick to blame irresponsible individual bankers for the crisis as illness spread between banks "but the reality is that the free market society in which we lived encouraged risk taking and has created a complex system whereby losses in one sector, such as property, have implications for the entire economy.

"That system of financial complexity was created, endorsed and promoted by the regulatory and policy decisions of governments, as well as by the innovations of banks.

"The problem was that the complexity of the system was so great that too few people understood how it worked and its implications."