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Bin Laden, Terrorism, and the Economy

How will the death of Bin Laden affect the economy? I don't think it will have much immediate impact on the economy, but there are risks going forward. The main economic worry I have is that a terrorist attack will destabilize energy markets causing disruptive spikes in energy prices. I am at the Milken Institute Global Conference, and one of the panel discussions I attended was on "Global Risk." Much of the initial discussion among the experts on the panel was about how terrorism organizations typically react to a loss of leadership. For those who are interested, here's a video of the panel:

  • Wesley Clark, Army General (ret.) and former Supreme Allied Commander, NATO; Senior Fellow, UCLA Burkle Center for International Relations
  • Sir Richard Dearlove, Master of Pembroke College, Cambridge; former Chief, British Secret Intelligence Service (MI6)
  • Roger Kubarych, National Intelligence Officer for Economic Issues, National Intelligence Council
  • Jami Miscik, President and Vice Chairman, Kissinger Associates Inc.; former Deputy Director for Intelligence, CIA
Moderator: The typical response to the loss of a leader is to first make an effort to demonstrate that the organization remains effective. Because of this tendency, in the short-run there is an increase in the odds of another attack of some sort, and hence there is an elevated threat of an economic disruption (one panelist said the short-run could be as long as two years, but others had a much shorter time frame in mind). I am not enough of an expert on terrorism to assign a numerical probability to the short-run threat, but I got the impression from the discussion that the likelihood of an event large enough or significant enough to, say, create a huge spike in oil prices is far, far from certain. But it should not be ruled out by any means.

In the longer run, the picture changes. As various lieutenants and other powers begin to vie for leadership, splits and factions develop within the organization, and the resulting divisions substantially undermine organizational effectiveness. In some cases, the organization dissolves altogether. Thus, while we can expect an elevated threat in the short-run and the potential for energy price instability, the longer run outlook is much better and will hopefully result in more stable energy prices.

None of this is certain -- far from it. The assessment of this type of risk is based upon information that people do their very best to keep hidden. This makes the risks difficult to quantify. But according to the panel, the pattern of heightened risk in the short-run followed by declining risk in the long-run is the most common outcome and hence the most likely.

Do financial markets agree with the panelists? If participants in financial markets believe there is a chance of a large economic disruption, it will show up in asset prices. For now, however, asset price movements -- or rather the lack of movement -- show that financial markets do not believe there is much of a chance of an effective response. That could change with information indicating the threat than believed now, or with a successful attack. But for the sake of far more than asset prices and the economy -- the injuries and lives that would be lost are a much, much more important concern -- let's hope that those betting against an attack are correct.

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