Responding to terrorism and achieving stability in the global financial system: rational policy or crisis reaction?
| Published date | 01 October 2004 |
| Date | 01 October 2004 |
| Pages | 380-396 |
| DOI | https://doi.org/10.1108/13590790410809338 |
| Author | Jon Mills,Robert Ware |
| Subject Matter | Accounting & finance |
Journal of Financial Crime Ð Vol. 11 No. 4
Responding to Terrorism and Achieving
Stability in the Global Financial System:
Rational Policy or Crisis Reaction?
Jon Mills and Robert Ware III
INTRODUCTION
The terror of 11th September, 2001, fractured globa-
lisation in one day. The horri®c attacks of 2001 have
permanently changed how the world does business,
travels and interacts. While there were 14,000 reported
terrorist attacks between 1968 and 1999,
1
it was
11th September that had the greatest policy eect;
perhaps because it was on US soil, but also because
of its shocking eect in the new global communica-
tions and transportation network. Virtually everyone
on the planet saw the twin towers fall, saw men and
women jump to their death, and saw New York
City appear to be a war zone.
Unquestionably, the world has become more inter-
connected and more interdependent, and, it is said,
more stable. Stability has evolved as a value of civilisa-
tion and of systems, including political, legal and
®nancial systems. Today, sustaining and achieving
stability is a global value. But some of the essential ele-
ments of stability in the 21st century, interdependence,
connectivity, and technology, also are fundamental
vulnerabilities to the new global terrorist. The attack
on the World Trade Center had a destabilising global
eect because transnational commerce, global com-
munication and international transportation virtually
stopped and stared for a day. Corporations worldwide
actually had employees die in the towers Ð could that
have happened 200 years ago? For the ®rst time in
modern aviation history, no planes ¯ew. Every televi-
sion in the world conveyed to hundreds of millions of
humans a visual depiction of terror.
None of these circumstances would apply even
100 years ago. It is no wonder that the policy
responses have been global. Policy makers in the
face of crises always react Ð always. However, they
do not always react rationally and in the long-term
best interest of solving the problem, even if they act
in good faith.
To devise policies that achieve stability in the face of
terrorism, terrorism must be understood. Many of
today's terrorists, al-Qaeda included, have no national
loyalty, but are part of movements.
2
As a matter of
international law, they can be considered unlawful
combatants
3
or criminals. There are highly relevant
legal, ®nancial and psychological consequences to
how they are de®ned. Constitutional democracies
provide rights to accused criminals and international
treaties provide rights to combatants. The reforms
and policies in response to 11th September have
attempted to prevent and deter terrorism through
interdiction and detention and have, as a consequence,
avoided many of the rights conferred on traditional
criminals and regular soldiers.
4
Furthermore, to deal with terrorists, their goals
must be understood: shock and trauma, political com-
munication, ®nancial disruption, destabilisation of the
system.
The operation of these goals is best understood by
the events of 11th September. The shock of the
event is undeniable. The purpose of shock is to aect
individuals' conduct. Fear and trauma lead to beha-
vioural change, and ultimately have ®nancial and poli-
tical consequences. Political change is the primary goal
of most terrorists. In the case of al-Qaeda, its purpose is
to bring down western civilisation. Consequently, the
terrorist act must be consistent with the goal. For
example, a terrorist act that harmed sick or starving
children in a developing nation would not ful®l its
communication goals. By contrast, an attack that
killed thousands of business people working the
global symbol of commerce conveys a message.
Lastly, the goal of destabilisation is achieved
through shock, political communication, and ®nan-
cial harm. A key asset of the destabilising eect is the
unpredictability of the actions. Thus, an assessment
of the 11th September, 2001, attacks, based on the
goals of shock, political communication, ®nancial
impact, and destabilisation, must be viewed as reach-
ing all of the terrorists' goals at the highest level.
While there were ®ction writers and even researchers
at the Library of Congress
5
who presaged some of the
events of 11th September, the world was not prepared
for the shock. Interestingly, it may be more dicult to
shock the world in the future.
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Journalof Financial Crime
Vol.11,No. 4, 2004,pp.380 ±396
#HenryStewart Publications
ISSN1359-0790
Psychologists conclude that human-generated disas-
ters are, in fact, more traumatic than natural disasters.
6
Fear aects human conduct in terms of travel and com-
merce, and it is a fact that fear aects investment.
7
Policy makers should recognise that the ®nancial con-
sequences of natural disasters far exceed the ®nancial
consequences of terrorism. The dierence is that no
policy can change or avoid ¯oods, hurricanes or earth-
quakes Ð although policies can mitigate the impacts.
Policy makers try to prevent, punish, and restore as
a response to terrorism. It is acknowledged that the
function of deterrence is useless and punishment
seems of little value. The focus here is therefore on
the interdiction component of prevention. In terms
of ®nancial restoration, the global system combines
private insurance and public ®nancial support to
rebuild after terror. The two major legislative
actions in response to 11th September are the USA
PATRIOT Act and the Terrorism Risk Insurance
Act of 2002.
Throughout history all crises generate reform.
Terrorism and 11th September, 2001, are no dierent.
The goals of the USA PATRIOT Act are to identify
and stop terrorists from their planned actions. Such
surveillance and detention have occurred in the USA
in times of war, for example, during the Second
World War. The Terrorism Risk Insurance Act of
2002, similarly, is aimed at preparing the insurance
industry for another 11th September.
Theserecent reforms have added tools to assist lawful
governments and law enforcement. However, there
are issues of impairing legitimate businesses and aect-
ing the human rights and individual liberties of law-
abiding citizens. Another frustration of the civilised
world is that policies enacted and pursued as a result
of these attacks may themselves act to fragment,
deter and frustrate eorts at global stabilisation and
harmonisation. In other words, some of the terrorists'
goals, by the responses to their actions, are unwillingly
being ful®lled. The balance is delicate but seeking the
balance is critical. Ultimately, the direct ®nancial
impact of terrorism may be more manageable than
the indirect ®nancial impact and the impact on the col-
lective psyche. Long-term policy responses based on
short-term reactions of fear rather than logic are dan-
gerous if fear wins. It is necessary to distinguish
between fear and substance and respond accordingly.
THE NATURE OF STABILITY
It is human nature to prefer stability over chaos.
Most man-made systems, institutions, and devices
are designed with stability in mind. Stability means
that the system, institution or device is predictable
and reliable, ie that there is little risk of the system,
institution or device not working as expected. This
is never more true than in ®nancial systems, institu-
tions, and devices. Finance is a man-made, intangible
innovation. It is science that is expressed in terms of
the systems, institutions, and devices that represent
®nancial interests in the physical world. A key factor
of a successful ®nancial system is that it is a predictable
and reliable vessel for wealth. Financial systems that
are unpredictable or unreliable are considered to be
risky. This risk either causes imperfect ®nancial
systems to be shunned or investors to be compensated
for the risk of using the ®nancial system by earning
higher expected returns.
The heart of many modern ®nancial systems is tech-
nology. It is technology that drives markets. It is tech-
nology that allows for the trade of goods, services, and
intangibles, such as ®nancial paper, across vast dis-
tances and between two parties that may not even
know one another, let alone be able to communicate
with each other. Probably technology's greatest con-
tribution to the modern world is the fast and wide-
spread dissemination of news, knowledge, data, and
other information. Though in the past, news, knowl-
edge, data, and information were dicult to transfer
over vast distances, communications satellites, the
creation of global information enterprises, and the
dawning of the commercialised internet have moder-
ated the eect of cultural and physical distances.
The rule of law is another manmade intangible.
Like ®nance, the law is a `science' that is expressed in
terms of the systems, institutions, and devices that
represent legal interests. Predictability and stability
are hallmarks of the law. Without these attributes,
the rule of law would not exist. Chaos would reign.
In many ways, the law is more far-reaching, and
permeates more aspects of life than ®nancial systems
or the technology that drives many ®nancial markets
and institutions. The law governs the duties and obli-
gations of both. Without the law, many ®nancial and
technological innovations would not exist or be as
widely spread as they are today.
Common attributes of ®nancial systems, technol-
ogy, and the law are that they all assume a state of sta-
bility in order to operate as desired, they are all scale
sensitive, and they are not designed to withstand the
chaotic eects of terrorism. It is the second point that
likely requires a close examination at this point.
Scale sensitivity refers to the fact that these systems
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Responding to Terrorism and Achieving Stability in the Global Financial System
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