**Money trail links the war on terrorism to the global financial crisis **
August 30, 2010
**Loretta Napoleoni **
American combat troops have headed home from Iraq, leaving behind a democracy without a government and an ethnically divided nation. In Afghanistan, the Taliban continue to advance and Osama bin Laden is still at large.
Far from winning the ‘‘war on terror’’, the US and its closest allies are broke. Plagued by overwhelming debts and suffering from the worst recession since 1929, these countries now live in fear the ratings agencies will downgrade their economies. Is there a link between these events? To answer, we need to revisit bin Laden’s theory that September 11 would inflict a mortal blow on the US economy. Though the attack did negligible damage to Wall Street, George W. Bush’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 it did prompt a massive flight from the dollar: fearing prosecution, Muslim investors repatriated investments worth $US1 trillion.
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Then, to avoid the scrutiny of US authorities, banks suggested their clients switch from dollar to euro investments. Finally, criminal and terrorist organisations relocated most of their money laundering activities from the US mainland to Europe.
By December 2001, these events caused global demand for dollars to shrink, reducing the value of the greenback. In 1993, Dick Cheney clearly stated the neocon desire to relaunch America’s world hegemony.
Ironically, the ‘‘war on terror’’ provided a much-sought-after opportunity to achieve this desire. Regime change in Iraq was deemed necessary to secure a friendly base at the heart of a strategically important region.
To raise funds to finance such an ambitious military adventure, the Bush administration tapped the international capital market by selling billions of 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 per cent on the eve of September 11 to 1.2 per cent by mid-2003, when Washington thought it had won the war in Iraq following the initial invasion. The then-chairman of the US Federal Reserve, Alan Greenspan, went along with this strategy even though the world economy was growing too fast and needed higher rates to prevent the formation of financial bubbles.