Early afternoon, thirteen years ago today, I was sitting right under a TV screen on the trading floor of Banc of America Securities here in London waiting to hear from my colleagues as they arrived for the new trading day in New York. All the talk was of the slowing economy and what the Greenspan Fed would do to engineer a soft landing. On January 3rd the FOMC had, between meetings, cut the Funds rate from 6½% to 6% and at every meeting since, as well as at one further extraordinary occasion it eased by a further ¼ or ½ point. As at 9/11/2001 rates were at 3½%.
When I first heard over the squawk box that a plane had hit the World Trade Center in Manhattan, my comedic best prompted the reaction that soft landings were off. It did not take long, however, for pictures to pop up on CNN and it became clear that this was not a laughing matter. By the time I found myself, along with the rest of the bank’s staff, hurriedly cleared out of the building and watching events unfold on a large TV in the pub next door, it was perfectly clear that we were watching history being made and that the world would never be the same again.
The reason I make this point, as I seem to every year on this date, is to bring back to mind the reason we are where we are in terms of the economy and of markets. In mid-2001 markets were in the midst of the bursting dot.com bubble. The tech-heavy Nasdaq index had peaked in March 2000 at 5,132.32 points, on September 10th 2001 it had closed at 1,695.38 points and the Fed was under pressure not to let the imploding wealth-effect bring the economy to its knees.
With or without the events of 9/11, the scene was set for what was about to follow. America was being offered cheap money. Punting equities had proven to be a mug’s game. Brick and mortar or, in the case of American residential real estate, chipboard and staples had to be the way to go. What followed, driven by the Fed’s panic reaction to the Al Qaeda attacks and their putative effect on the economy, was a housing bubble of monstrous proportions.
On September 17th – Wall Street was still only working in parts – the Fed made another inter-meeting rate cut. By year end of 2001, rates were at 1¾%. Fed Funds had been cut by 425bp inside of one calendar year and house buyers were off to the races. Yet, the 30-year rate which determined the cost of mortgage borrowing spent the next five years oscillating either side of 5%. Borrowing might not have been all that cheap but the banks’ carry was staggering, and thus the supply of credit seemed endless. That drove real estate prices higher and higher and, well, we all know where it ended.
No magic
Aided by the growth of Chinese manufacturing and imported disinflation, the Fed deceived itself into believing it had found a magic formula. By June 2003, Funds were at a historic low of 1%. That might not seem special to some of the younger members of our trading community but to those amongst us who remembered rates at 20% in the early 1980s it looked like manna from heaven. Stupidly cheap leverage and a real estate bubble of epic proportions were the economic legacy of 9/11, but politically it was The War on Terrorism in which Washington determined to eradicate Al Qaeda – did anyone hear Barak O’Bama address the nation last night vowing to do the same to ISIL? – and there followed the invasion of Afghanistan and the Second Gulf War. A few hundred mindless radicals have become tens of thousands.
And here we are, 13 years on, and I think it might have been the first time that there was no mention of the auspicious anniversary on BBC news. Other than leaving our children the legacy of an ungovernable Mesopotamia, a nearly ungovernable North Africa and crumbling authority in parts of the sub-Saharan area, staggering public sector debt in the West and a business environment corseted by layer upon layer of regulation, compliance and control imposed by a political class, most members of which have never held a job outside of party and lobbying work – a couple of years in PR don’t count – we have precious little to show for it.
The great credit bubble of the mid-2000s also created awesome fiscal revenues which politicians handed out with glee, thus creating in many cases a false reality of the material kind to which our society became very quickly accustomed. The much vaunted “entitlement” class was not a creation of the recipients but of the donors. Now, in subsequence, banks and their shareholders are being fined tens of billions by those who should have prevented it from happening.
Yet, every morning we get up, travel to work and give the best we can for our employers and hence, by proxy, for our families. Many of us lost friends and most of us lost colleagues in the events which, 13 years ago today, befell the United States and subsequently many parts of the rest of the world.
Let us not forget. Mike, you were a hero.
PS: No firm suffered greater losses on 9/11 than did Cantor Fitzgerald. In keeping with their tradition, they are broking today for charity. I wish them the best of luck so long as they don’t nick my business.
