Trundling a suitcase and a computer bag in piercing cold, I head into an office building on 55th Street in New York. I am immediately stopped by an array of security turnstiles and watchful guards. One calls to confirm that I am actually scheduled to visit a particular person in a particular office on a particular floor. Then he copies my driver's license and hands me a sticker/pass. They allow me to pass through the turnstiles into a monotone gray space.
Welcome to post-Sept. 11 New York. If this were a movie, it would definitely be in the paranoid sci-fi genre, something like "THX 1138" or "Brazil." But it isn't.
Nor am I visiting the United Nations, the New York Federal Reserve or virtually any firm on Wall Street. They've all been drum-tight for decades.
No, I am visiting a literary agent in an obscure and slightly decrepit Manhattan office building. If the federal government rated buildings by probability of terrorist attack the way Amazon.com ranks best-selling books, this building would be hopelessly far down the list.
Having just spent five days in the disaster that is Florida real estate, it makes me wonder: Is it possible that the Sept. 11, 2001, terrorist attacks were the root cause of declining home values? Is it possible that subprime loans and speculative building/buying were no more than tools, the equivalent of hijacked airliners?
If so, the eventual economic cost of those attacks may run in the trillions of dollars. It may also help us find the unity to gird our country against the biggest threat since World War II. Here's the case:
We were in the second year of a brutal three-year stock market decline when radical Islamic terrorists destroyed the World Trade Center. Even so, borrowed money wasn't dirt cheap. The federal funds rate, down from nearly 6% during the Internet boom years, was 3.65% in August 2001.
It fell to 1.75% within weeks of the terrorist attacks. Policymakers struggled to keep the economy from coming to a standstill.
The federal funds rate continued to drop, hitting a low of 0.98% in December 2003. That was more than two years after the attacks. We were well into a powerful stock market recovery. The federal funds rate stayed around 1% long enough to set off a boom in low-cost mortgages and in home prices.
Home buyers discovered that very ordinary paychecks could now buy extraordinary homes. People with cash to deposit learned their money earned virtually nothing.
Interest rates on home mortgages dropped fast enough that the National Association of Realtors' housing affordability index showed that almost anyone could buy a house somewhere in America, even if they couldn't do it in Santa Barbara, Calif., Palm Beach, Fla., or Manhattan. As a practical matter, borrowed money was virtually free.
Small wonder that home prices soared. According to the Office of Federal Housing Enterprise Oversight, the national index of home values rose 46.9% in the five years ending Sept. 30, 2007. That's an annualized appreciation rate of 8% -- enough to make us all think owning a home was way better than the stock market or actually working for a living. Buying and owning a home was literally a cheap thrill.
During the same period, the Consumer Price Index rose only 2.9% annualized.
We could, of course, blame the Federal Reserve for keeping interest rates too low for too long. We could also blame Wall Street. Or mortgage lenders and their brokers. And we could blame the borrowers for being foolish. We certainly can't take any pride in the greed-driven decisions that fueled the problem.
But one big fact remains: None of this misery would have happened if Sept. 11 hadn't happened first.
Is there a bottom line here?
I think there is. As opponents, the terrorists have played us painfully well. They bleed us internally with financial upheaval. They bleed us externally with the cost of oil and military expenditures. Our leaders -- political and business -- have underestimated both our vulnerability and the strategic smarts of our opponents.
Questions about personal finance and investments may be e-mailed to firstname.lastname@example.org. Questions of general interest may be answered in future columns. More columns by Scott Burns can be found here and here.
Published Feb. 13, 2008