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Friday, September 9, 2011

9/11: Ten Years On, and the World Is No Better

It was 10.00 p.m. on September 2001. I was hurrying through washing the dishes, for I was already late for making the dinner, an act I had never been summoned before to do in the history of my long married life, while my wife was watching the TV reclining on a chair. Even now I would not have gone into the kitchen but for her fractured leg and the resultant immobility.

Overridden by feelings of guilt—for, it had been a while since she had her lunch and nothing in between, except perhaps coffee from the flask, and it was already 10 p.m. and I had not yet put the pressure cooker on the stove—I didn’t pay attention when all of a sudden my wife called out to me to hurry and take a look at the TV. She was shouting, “Look! Look, America meeda evaro attack chestunnaru ... choodu, choodu plane attack.”  

I shouted back from the kitchen, “Stop it, who could touch US … it might be a movie.”

“No, it’s real! New York … someone is attacking, it’s all live … another plane is coming,” shrieked my wife from the chair swinging restlessly. Dropping the vessel in my hand into the sink, I went to the hall. On seeing what was happening on the TV screen, my jaw dropped wide … it’s real … one tower is already up in flames … and a plane is heading towards the other. I cried, “What the hell Pentagon is doing? Are their satellites dead or what? Do they capture signals from only outside the US or what?” I was mad … “Come on, Airforce, where are you, intercept it … shoot it down! But nothing of that sort happened … the tower was slowly going up in smoke, literally.

It was blood-curdling to watch two mighty towers getting leveled, don’t know with how many lives … my mind rushed to the Indian girls and boys who could have gone down with the towers … how many? The very thought benumbed me … for a while … Incoherently I wondered: “Could this happen to US? No, history is no guarantee for the future, or what?”

Ten years on, and looking back at all the might that the US and its allied forces have deployed in different pockets of the world, one wonders if we are in anyway safer today. The lynchpin of the Al-Qaeda might have been eliminated by the SEALs of the US; many of its second-tier leaders might have been killed, its plots might have been thwarted now and then; and the US might even claim to be all set to inflict “strategic defeat” on Al-Qaeda, yet can one safely assume that the world is free from terrorism? Look at Pakistan and India: they are suffering the worst form of terrorism. India is made to bleed heavily every now and then, the recent one being the attack at the Delhi High Court. Pakistan is similarly placed but, of course, for a different set of reasons— an outcome of its double game. Even in Iraq and Afghanistan, Al-Qaeda continues to make its presence felt—off and on. Even the presence of US forces there all these years could hardly make Iraq a democratic country, except for merely removing Saddam Hussein, its erstwhile dictator. It is still worse in Afghanistan, and no one could be sure of an American victory there, particularly after seeing what happened to its SEALs flying on a helicopter recently.  

Despite these woes, one may say that America is moving on—but moving on to where? It might be internally better secured today than on 9/11. Is that all? What about its economy? What about, for that matter, even the world economy?

Following the collapse of the twin towers in New York, its stock market took a severe beating. The origin of this could, of course, be traced to the US tech-stock bubble burst, but it was only aggravated by the 9/11 terrorist attacks that ultimately pushed the US economy into recession. This was further made worse by the cost of two wars—in Iraq and Afghanistan—following which the American economy simply plunged into darkness.

The Fed, taking a cue from the experience of the Japanese central bank’s inability to stimulate economic growth and shovel its economy out of deflation, has undertaken a series of interest rate cuts in its anxiety to checkmate recession turning into a depression. The lowest interest rate of 1% stayed almost for a year—all in the hope that low interest rates would encourage housing and consumer spending till at least the business investments and the resulting exports picked up momentum, so that deflation could be kept at bay.

But the continued low interest rates, that too for such a long period, over-stimulated the US housing market, creating hype around real estate. The low interest rate policies of the Fed made the Wall Street banks look for profitable alternatives. In this jamboree, home loan lenders, taking advantage of the strong investor appetite for high-yielding securities, could easily sell their portfolios of high-return and high-risk home loans to the Wall Street banks. These banks, in turn, could repack these loans into investment securities and sell to investors such as international banks, hedge funds, pension funds, university endowments, and private investors around the globe. With such easy flow of credit, the origination of mortgage loans almost touched an astronomical figure of $600 bn in 2005 and 2006, as against $160 bn in 2001.

What is ironical about the whole episode is that the very mechanism of distributing risk by bundling it into marketable collateralized debt obligations and selling them to willing investors across the globe as a scientific tool for management of liquidity and interest rate risks has itself created a contagion. Yet, investors have gobbled up the issues, tranche after tranche. Such was the hunger for these investments among those classes of private investors who, driven by stock market collapse and low interest rates prevailing between 2001 and 2004, looked for exotic securities to boost their returns. And importantly, all this became possible only because there was no rigorous supervision of mortgage lenders.

The net result is: defaults on home loan repayments and inter-bank repayments, repayment crisis among investment banks, and the ultimate spread of contagion globally pulling down the global financial architecture. This finally threw the global economy into turmoil. And the world is still struggling to wriggle itself out of this mess.   

With its growing budget deficit, growing unemployment, widening current account deficit and degraded credit rating, American economy is languishing. Nor does the European economy look any better. Country after country in the European Union is struggling to wriggle out of the sovereign debt crisis. Japan is equally worse off—both politically and economically.

Only China appears to be alright—but how long? No one knows how long it can sustain its mounting accumulation of dollars without the associated risks not undermining its economy.

So, where are we? Everything is in pell-mell. But one thing is certain: no country could afford to be less vigilant today—politically, economically and militarily—than it was before 9/11.

 Is India listening?

-         GRK Murty

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