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How the Patriot Act created conditions for economic malaise

Guest Blogger

The war on terror has had the unintended consequence of landing the world economy in the doldrums, according to Loretta Napoleoni, author of “Terrorism and the Economy: How the War on Terror is Bankrupting the World,” due out in May from Seven Stories Press. Napoleoni, whose previous book is “Terror Inc.: Tracing the Money Behind Global Terrorism,” focuses here on the financial dominoes set in motion by the Patriot Act. Napoleoni is an economist who has been the London correspondent and a columnist for La Stampa, La Repubblica, El País and Le Monde. She is a former Fulbright Scholar educated at Johns Hopkins University and the London School of Economics.

By Loretta Napoleoni

Could the war on terror have plunged the United States and the world economy into the current crisis? The answer to such an unconventional question rests on the legacy of the Patriot Act.

Legislation that greatly reduces the liberties of U.S. citizens, the Patriot Act includes financial provisions that are the toughest anti-money laundering regulations so far introduced in a Western country. Too bad they only apply to transactions in U.S. dollars involving U.S. banks and U.S. registered foreign banks.

How did this happen? In the aftermath of 9/11 Washington did not consult with other governments about its anti-terrorist strategy and instead produced the Patriot Act in record time and unilaterally.

Far from destroying terrorist finance networks or even curbing money laundering, the new financial regulations prompted an outflow of money from the United States. Banks did not like the Patriot Act and advised clients to move away from dollar-denominated investment into euro investment. The infant euro at the time offered a perfect alternative.

Money launderers took similar decisions, and simply moved their activities across the Atlantic where the absence in the European Union of any legislation similar to the Patriot Act encouraged such a decision. In the space of a few months, Europe became the epicenter of money laundering activity in the world.

The sudden outflow weakened the dollar. A study conducted by economists from the Organization for Economic Cooperation and Development shows that the immediate reaction of the markets to Bush’s war on terror was positive: the dollar in fact rallied. However, the medium to long-term reaction was negative. Following the invasion of Afghanistan the U.S. currency began to fall, never to recover -- and well ahead of any worries about the U.S. budget deficit.

But the impact of the war on terror upon the world economy and upon our daily lives goes well beyond the changing flows of money laundering. The Patriot Act represented the first step towards the neo-con new world order which required, among other things, a regime change in Iraq.

To fund the Iraqi military misadventure the Bush administration went into debt. And to make U.S. government bonds more competitive on the international capital market, Federal Reserve chairman Alan Greenspan slashed interest rates that went from 6 percent on the eve of 9/11, to 1.2 percent, at the end of the official war on terror, in the early summer 2003. Thanks to this strategy, Bush had no problem borrowing the $4 trillion the war on terror cost his administration.

Against the background of a falling dollar, the sudden drop in interest rates created the ideal conditions for the spreading of subprime mortgages at home and abroad, which seemed a profitable albeit risky investment. Today we are still battling with the consequences of such policies: while the world economy needed a tight monetary policy to cool down credit growth, Bush slashed rates in order to fund the war on terror, preparing the grounds for bankruptcy and insolvency.

Paradoxically Bush’s response to 9 11 contributed to Osama bin Laden’s absurd dream: a terrorist strike at the heart of America, seriously damaging its economy and its global financial leadership.

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By Steven E. Levingston  |  April 7, 2010; 5:30 AM ET
Categories:  Guest Blogger  | Tags: Alan Greenspan, European Union, Johns Hopkins University, Money laundering, Osama bin Laden, Patriot Act, USA PATRIOT Act, United States, patriot act and recession; war on terror and economy  
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Poorly argued. Assuming Napoleoni is correct that money laundering moved from the US to Europe, why is it that moving from one place to another weakened the economy of the whole world? A drop in US interest rates doesn't affect the mortgage market in Europe, particularly if the euro was moving the other way.

Further, if Napoleoni wants to argue that money laundering is such a large part of the US economy that it significantly drives currency flows, she's going to have to come up with some numbers. I'm guessing that it's actually a drop in the bucket of currency flows.

Finally, just step back and embrace the whole argument for a moment. The Patriot Act was successful in deterring criminal money laundering -- and Napoleoni says that's a bad thing. In other words, she says that our economic health depends on there being lots of financial crime. IS that really the country we want to be?

Posted by: tomtildrum | April 7, 2010 1:57 PM | Report abuse

Tomtildrum, I think you skipped over the entire center of Napoleoni's argument. She doesn't jump from money laundering to the global financial crisis. She actually says that first legit banks advised presumably legit clients to move away from the dollar. It was this plus the money launderers moves that weakened the dollar, which fell, longterm. Then Bush decided to spend spend on the war which led the US to slash interest rates in order to sell more US govt bonds. This created the ideal conditions for subprime speculators to take huge risks. I think she is saying that because the Patriot Act regulations were not coordinated with the rest of the world, the money laundering was only curbed in the US, and both legit and illegit funds went into the euro. So she's not saying there needs to be criminal money laundering for the sake of our economic health - she's saying that it was the US/Bush administration response to terrorism, in the form of the Patriot act and the war on terror, that gave rise to the conditions that have resulted in a global financial crisis.

Posted by: dianafinch | April 7, 2010 3:21 PM | Report abuse

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