What do terrorist plots mean for markets?

Franz Fanon, the 20th century revolutionary, said that the aim of terrorism is to terrify. It follows that terrorists can be defeated if we refuse to be terrified. Anything that enhances our fears effectively hands them victory.

So five years after the 9/11 attacks on New York and Washington, are we winning the War on Terror?

Last month saw flight cancellations, 10-hour delays and general chaos at UK airports. MI5 and the police believed that a group of British-based terrorists were planning to smuggle liquid explosives on to an aircraft.

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The media got into a frenzy about fanatics murdering without limit for the impossible dream of an imperial caliphate.

The plan, apparently, was to detonate these hidden bombs above cities in the US, committing mass murder on an "unimaginable scale". The government's Joint Terrorist Analysis Centre declared the threat to be "imminent" - the highest level of alert. Yet on the day that this news story broke, August 10, the financial market's reaction was remarkably relaxed.

How do terror scares afffect markets?

Stocks and shares showed none of the knee-jerk volatility that the pundits might have expected. If the markets had been taken in by the fear and horror generated by politicians and the media, we would have seen massive inflows into the traditional safe havens of government bonds and gold. We should have suffered a run on the pound, too.

In fact, bond prices around the world actually fell, while gold was noticeably lower and sterling's losses were limited. The only predictable reaction was that airline stocks were marked down.

Why were the markets so cool in the face of a terror threat that rivalled September 11 in its audacity? How do you explain this apparent complacency when the US and UK authorities have declared that risks are now at their highest possible level?

Recent history tells us that the markets have become resilient to terrorist violence. The US equity market regained all its losses within a month of September 11, before returning to the downward path it had taken when the DotCom Bubble burst 18 months earlier. New York stocks gained 9% in the month following the Bali bombings, and were 3% higher one month after the 7/7 outrages in London.

So callous as it may sound, it's plain fact that today's risk-friendly markets view any dip following such attacks as a buying opportunity. And in the massed judgment of investors and traders, the events of August 10 this year adding nothing to the risks already priced in.

Are governments and the media overstating the threat?

But is the sang froid of the markets misplaced, or are Western government and media overstating the risks we face? In the context of world population and global capital stock, terrorism does little damage. The official death toll for the 9/11 attacks is put at 2,819. The next year, 202 people were murdered in Bali.

In 2004 fatalities in the Madrid train bombings were 173, while in 2005 a total of 167 people were killed in outrages in Bali, Sham-el-Sheik and London. So the likelihood that any one of us will become a victim is microscopic. Compare these figures with the 40,000 people killed on America's roads in 2005.

I'm not denying the horror suffered by those involved, nor their families. But the total number of people - worldwide - who died from international terrorism last year was only a few hundred. And in reality, the real burden of terrorism now comes about as the result of hasty, ill-considered, and overwrought reaction from Western governments. But this wasn't always the case.

The changing response to terror

In 1988, a bomb planted in a piece of checked luggage caused a Pan Am jet to crash into Lockerbie, Scotland, killing 270 people. The terrorist, unlike his luggage, was not on the flight. Since then security measures have prevented anything being checked in without the owner boarding the aircraft. We are now familiar with the questions "Did you pack your bags yourselves? Has the luggage been with you at all times?'

In the following 18 years hundreds of billions of pieces of luggage have been transported on planes and none have exploded to down aircraft. In this instance security had been tightened without undue alarm to airline passengers.

But the state's reaction to terrorism has changed, led by the response of our politicians. Contrast the studied bravery of our leaders two decades ago with the politics of fear exploited by George W. Bush and Tony Blair.

In 1981 John Hinckley fired six shots from a distance of 10 feet at President Reagan. One bullet lodged in the 70-year old's left lung. Afterwards, the President quipped that he "forgot to duck". Three years later the IRA attempted to murder the British Cabinet with a bomb in a Brighton Hotel. Prime Minister Thatcher left the matter to the police and calmly asked Marks and Spencer to replace her lost clothes so that the Conservative Party conference could continue.

And now? George Bush was evacuated from the White House in the face of a "dense incoming cloud". Downing Street and Scotland Yard have trumpeted panic about ricin, smallpox and dirty bombs. Yet they have never told the public that stabilising and transporting chemical and biological agents, let alone radioactive devices, is near impossible to carry out.

There is no denying the shock of seeing the second plane crash into the World Trade Centre on that bright September morning in New York. It demanded a focused and dedicated response. But if the West democracies are to actually defeat terrorism, rather than pander to it, part of our reaction to such crimes should include an effort by politicians, officials and the media to inform the public - reasonably, realistically and calmly - about the true risk posed by these fanatics, instead of playing into their hands by frightening us.

The lone voice of reason 5 years ago this week was Rudolf Guliani, the mayor of New York. He told his citizens to disregard "these murderers" and get back to business. But Washington D.C. ignored his advice.

Instead, the message broadcast to the US nation and the world was, as one Homeland Security official put it: "Be scared. Be very, very scared - but go on with your lives."

A false sense of insecurity?

This scare-mongering amid the War on Terror has led many people to develop what Leif Wenar at Sheffield University labels "a false sense of insecurity". It certainly helps to justify the enormous sums of money now spent fighting a war we cannot win against an enemy we cannot shoot.

The US Department of Homeland Security, set up in the aftermath of 9/11, now has $42.7bn funds available for spending in the fiscal year 2007. Before 2001, the UK Treasury spent less than £1bn a year combating terrorism. In the aftermath of last year's London bomb attacks, the budget was raised to over £2bn for 2007-08.

And of course, these funds do not include the burgeoning cost of the wider War on Terror in Afghanistan and Iraq, either in terms of cash or soldiers' lives lost.

The huge sums of our money spent protecting us from today's unspecified terrorist threats might be better spent equipping our troops overseas. They could help implement effective policing at the grass roots level here in Britain, too. Indeed, as police manpower is directed to counter-terrorism measures, resources to combat far more 'imminent' crimes are depleted. (Britain is currently the most burgled nation in Europe. In 2004, 3.3% of Britons were burgled compared to an EU average of 1.7%.)

In short, the terrorists behind 9/11 have won an important victory. They have led Britain and America to redirect resources away from urgent and sensible programmes and restricted our ability to go about our business in peace. The unasked question is, how much we are willing to pay for a small reduction in probabilities that are already extremely low?

Terrorism: the price of fear

Bush and Blair are obsessed by the notion of "absolute security". It forces us to live in a perpetual state of emergency, and thus the War on Terror is a form of 'total war' in which every citizen is a foot soldier - and every pound or dollar spent needs no justification and receives no scrutiny. But as a weapon, terror thrives on media exaggeration and political overreaction. It is 1% bang and 99% publicity. Fighting it successfully implies inverting these responses. Downplay the threat, minimise publicity, and maintain business as usual. Why don't our leaders do this?

Well, one of the side-effects of 9/11 was President Bush's approval rating in America. In September 2001 he received the greatest boost for any president in history. It would have been unnatural of him not to notice. Karl Rove, his chief political advisor, saw the "war" against terrorism as central to Bush's re-election campaign in 2004.

Tony Blair's approval rating also surged after the 7/7 outrages in London last year. Some of this may have been due to his association with London's successful Olympic bid a day earlier. But the public has been treated to relentless scare-mongering about the terrorist threat, and politicians think they will lose votes if they appear insensitive to tragedy, or fail to play up the danger of future attacks.

So could it be that we are in a state of high alert because it wins votes rather than saves lives? Many more lives would be saved if the UK government raised the minimum driving age to 21, but it would be politically inexpedient to tout such a measure. The statistics, however, are very persuasive. In 2003, some 24% of convictions for death by dangerous driving were of drivers aged 20 or younger, despite this age group representing only 2% of car licence holders. And the problem is getting worse. Young driver deaths in 2004 amounted to 151, up from 113 in 2000. The number of teenagers killed in car accidents per 100,000 driving licences rose to 19.2.

The chances of being killed on a non-stop airline flight, meanwhile, stand at around one in 13 million. Yet a recent poll suggested that 15% of Britons were less likely to fly as a result of last month's alleged plot. That may or may not come to pass. But we find it difficult to avoid the conclusion that politicians and the media exaggerate the risk of terrorist outrages because it makes for good headlines - and good headlines make for increased budgets.

The financial markets meanwhile assess risk every day of the week. Their reaction on August 10 looks entirely appropriate.

By Brian Durrant for The Fleet Street Letter.