Before Hurricane Katrina in 2005, the state of Louisiana asked the Bush administration several times to fund the Southeast Louisiana Urban Flood Control Project, resources that would have gone toward building up drainage and flood-protection infrastructure in New Orleans. Instead, the federal government cut its funding every year, starting in 2002. A January 2005 memo from the Office of Management and Budget (OMB) denied the project's last request before the storm, explaining that flood protection was not one of the administration's priorities; at the time, "fighting the War on Terror," "strengthening our homeland defense," and pro-growth economic policies took precedence, the OMB explained.
Even after New Orleans and other parts of Louisiana and Mississippi were underwater, the federal government's focus abroad kept it from responding effectively: 8,200 National Guard troops whose job it would have been to respond to just such a crisis, along with two brigades' worth of their equipment, were stuck in Iraq. The financial cost -- not to mention the cost in human lives -- of Hurricane Katrina weighs in at around $100 billion. "It is undeniable," says Anita Dancs, an economics professor at Western New England University who writes on the economics of war, "that we would not have had such a poor response had we not been in Iraq."
The wars in Iraq and Afghanistan, which were in response to the attacks ten years ago, were an enormous drain on the nation's money and resources. The Costs of War project, which draws on research from numerous academics to tally the economic and human costs of the wars, has put this number at $1.3 trillion in appropriations to the Pentagon, or between $3.2 trillion and $4 trillion overall. But the real financial cost goes beyond the wars' price tag. Hurricane Katrina, to be sure, was not caused by 9/11, but it would not have wrought the damage it did -- both financial and humanitarian -- had we not diverted our resources to Afghanistan and Iraq.
The wars ended up exacerbating the two biggest disasters of the last decade: the first being hurricane Katrina, the other, the financial crisis. Like Katrina, the financial crisis would not have been so severe had our response to 9/11 not set the stage.
When I spoke to Harvard economist Linda Bilmes about the costs of 9/11, Bilmes stressed the far-reaching effects of 9/11 -- a chain of events leading to Iraq and Afghanistan, then boomeranging back in the form of rising oil prices, which led the Federal Reserve to lower interest rates. As Columbia University economist Joseph Stiglitz wrote in Slate last week, while the Fed's monetary policy between 2002 and 2005 helped mask the economic toll the wars were taking on the economy, it "[engineered] a housing bubble that led to a consumption boom." As we all know, that bubble burst by September 2008.
It may seem far-fetched to count the country's response to 9/11 among the causes of the financial crisis, but let's start from the beginning. When the planes hit the Twin Towers, interest rates were at an already low 3.5 percent. A few weeks later, the Fed cut them to 2.5, saying that "the terrorist attacks have significantly heightened uncertainty in an economy that was already weak." By the end of 2001, interest rates were less than 2 percent, fell further through 2003, and stayed low as the Fed tried to buoy consumer demand after oil prices shot up, largely in response to the wars in Afghanistan and Iraq.
The Financial Crisis Inquiry Commissions (FCIC), the bipartisan group asked by Congress to determine the causes of the crisis, wrote in its final report that in that during this time, "money washed through the economy like water rushing through a broken dam. Low interest rates ... helped fuel the boom."
One of the consequences of money flowing through the economy, combined with low-interest rates, was that banks were able to entice homebuyers with adjustable-rate mortgages that had low interest rates in the short term. But the Fed couldn't -- and didn't -- keep rates down forever. When they shot up starting in 2005, mortgage payments followed. Then the defaults began, and soon banks' balance sheets were wiped out. After September 2008, the economy lost $648 billion to slower economic growth; the Troubled Assets Relief Program (TARP) cost taxpayers $230 billion; declining home-values cost homeowners $3.4 trillion; and the stock market lost $7.4 trillion in value.
"This is a 'connect the dots' situation," Bilmes wrote in an e-mail. The instability in the Middle East, she says, "was one of the factors that led the Fed to lower interest rates so much which was one of the factors that contributed to the housing and credit bubbles, which were part of the reason for the financial crisis." The point for Bilmes is that the wars had an impact on the economy beyond just increasing the Pentagon's budget.
However, not everyone buys this argument. "It's a perfectly valid perspective," says Ryan Edwards, an economist at Queens College-CUNY who studies the macroeconomic impact of war spending, but as "the old adage goes, get two economists in a room together, and they won't agree on anything." Edwards doesn't see the pieces adding up the same way Bilmes does; he's "dubious" that the Fed's monetary policy "can be held responsible for the housing bubble" or that the wars significantly affected the price of oil. "Without higher interest rates, we would have seen less of a bubble," he agrees, "but also less expansion over that period." But of course the size of the boom was part of the problem.
We are still living the legacies of 9/11, and it is difficult to say where the costs of 9/11 end and where our own financial mismanagement begins. But it is nonetheless hard to imagine that the financial crisis would have been as bad had it never happened.
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