Economist Terrorism Caused the Financial Crisis?!

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If this is your first time visiting the blog, from the title of this post you likely think I am some crazy conspiracy theorist. Far from it, this site focuses on long term, with an emphasis on a rational and sound investing approach.

If you are a returning visitor, you might think I lost my mind, or am trying to use a sensational sounding headline to get attention, the second reason might be closer to the truth, but I am shocked how little this story has been covered in the media, and I had to opine on it.

According to an article posted several days ago in Washington Times, “Evidence outlined in a Pentagon contractor report suggests that financial subversion carried out by unknown parties, such as terrorists or hostile nations, contributed to the 2008 economic crash by covertly using vulnerabilities in the U.S. financial system.”

According to the article, “Suspects include financial enemies in Middle Eastern states, Islamic terrorists, hostile members of the Chinese military, or government and organized crime groups in Russia, Venezuela or Iran.”

The article stated that “financial terrorism may have cost the global economy as much as $50 trillion.”

The most frightening part of the article was the supposed three phase attack. The first attack may have caused the spike in oil prices from 2007 to mid-2008. The second phase was a “bear raid” on Bear Sterns, and Lehman Brothers. The third phase is unclear to me from the article. It sounds like phase three was really the effect of phases one and two, which caused the US Government to take on “massive public debt as the government was the only party who could access capital markets in late 2008 and early 2009”. According to then Secretary Treasury Herny Paulson, Russia tried to collaborate with China on a plan to dump massive amounts mortgage backed securities. This would cause massive losses to the Fed, which was buying up massive amounts of the MBSs as the securitization markets collapsed.

First off whoever caused this attack is dumb, because unless it was Iran or terrorists, the other countries nearly collapsed as a result of the crisis. The article speculates that China is most likely the culprit.

China did lose in the short term with their stock market being crushed, and their economy fell off a cliff. However, in the long run it would pay off if China were able to shrug off the effects of the economic crisis. Since it would seriously weaken the US economically and military, China would benefit especially with its expansionist intentions in South East Asia. Although, china holds over a trillion dollars of US debt, they could suffer a loss in the value of US government treasuries. However, the US would collapse if no one was willing to buy our debt.

If China was the culprit, it is indeterminate if the country made a big mistake with its attack. China is now battling the inflationary effects that its massive stimulus plan caused. The stimulus plan was launched to counteract the slowdown due to the financial crisis. However, it looks increasingly likely that the Chinese Government caused a massive housing and credit bubble on the scale that the America experienced from 03-07.

Regardless of the attacker, this article really shakes my confidence in markets. While, it is clear there are many factors behind the financial crisis due both to Government, and private sector actions; if economic terrorism played any role in the crisis it should be of concern to all investors.

While, high frequency trading has, and does cause large players to manipulate the market, it is on the scale of a few pennies a trade. In addition, it mostly affects traders and not long term investors. While, I oppose HFT, economic terrorism is much more frieghtening. It is scary to think that stock prices could be crushed due to deliberate manipulation by outside enemies (no not Goldman Sachs for all the Goldman conspiracy theorists out there).

It is vital that the Government deal with threats posed by cyber terrorism. As the article itself notes, we spend hundreds of billions on maintaining a massive armed forces, but very little on protecting our vital security computers.

If a tiny country like Venezuela with only a few million dollars, can wipe out $50 trillion of wealth, which weakens our economic and military why are we spending hundreds of billions of dollars on defense for?

It is imperative that all citizens spread the word, and urge Congress to investigate the vulnerabilities to our financial system. Congress must provide any funding needed to protect against these possible attacks.


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