Applying History in Real Time

A Tale of Two Crises

In: Journal of Applied History
Author: Niall Ferguson1,2
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  • 1 Stanford UniversityHoover Institution, USA, Stanford, CA
  • | 2 Harvard Universitythe Belfer Center for Science and International Affairs, USA, Cambridge, MA
Open Access


Policymakers generally have at least some historical assumptions, even if they have not been trained as historians. Often, these assumptions play a critical part in decision-making, especially in times of crisis. This article compares the reactions of George W. Bush’s administration to two epoch-making events: the 9/11 terrorist attacks of 2001 and the “9/15” bankruptcy of Lehman Brothers in 2008. I argue that historical analogies played a key role in the debates between officials about how to respond to the two crises. However, the two sets of decision-makers inhabited different conceptual worlds. Those concerned with national security in 2001 thought differently about risk from those concerned with financial stability in 2008. This meant that they applied history to the crises they confronted with differing degrees of success.


Policymakers generally have at least some historical assumptions, even if they have not been trained as historians. Often, these assumptions play a critical part in decision-making, especially in times of crisis. This article compares the reactions of George W. Bush’s administration to two epoch-making events: the 9/11 terrorist attacks of 2001 and the “9/15” bankruptcy of Lehman Brothers in 2008. I argue that historical analogies played a key role in the debates between officials about how to respond to the two crises. However, the two sets of decision-makers inhabited different conceptual worlds. Those concerned with national security in 2001 thought differently about risk from those concerned with financial stability in 2008. This meant that they applied history to the crises they confronted with differing degrees of success.

1 Introduction

It is nearly half a century since James Joll gave his inaugural lecture as Stevenson Professor at the London School of Economics, entitled “1914: The Unspoken Assumptions.”1 In it, Joll argued that one could not understand the outbreak of World War I purely in terms of the stated calculations of the key actors, as recorded in the diplomatic documents of the time. Of equal if not more importance were the “unspoken assumptions” they made, because it was these that predisposed so many of the decision-makers to exaggerate the benefits and understate the costs of going to war.

This article is not so much about “unspoken assumptions,” in Joll’s sense, as about semi-articulated explanatory frameworks, and it deals not with the First World War, but with two much more recent and somewhat smaller, though still very consequential, crises: one military, the other financial.2 The first was the terrorist attacks on New York and Washington in September 2001. The second was the financial crisis that had its most dramatic expression in the bankruptcy of the investment bank Lehman Brothers almost exactly seven years later. To put it very simply, this article is about the different ways we think about security, singular, and securities, plural. Its hypothesis is that we approach problems of national security and economic stability in radically different ways.

Having spent much of the last few years writing books about financial history and diplomatic history, I have been struck by the fundamental differences in conceptual frameworks in the two realms of finance and foreign policy. I should like to suggest that practitioners in each field might learn something from studying the mode of thinking of their counterparts in the other, and vice versa. There are dangers to confining good minds in intellectual and institutional silos, notably “group think” and what the Germans call “subject idiocy.” In each silo, history plays a role in frameworks of risk management and crisis response. It may be desirable to make that role more formal and explicit in both.

2 Theories of Risk Management

How, broadly speaking, do theories of risk management differ between the realms of national security and financial stability?

Asset managers have long been equipped with theories that make explicit that the core object of risk management is the return on a portfolio and that the possibility of high returns must be weighed against the risks of any given strategy. High returns with high volatility are not necessarily preferable to modest returns with low volatility. A portfolio is rebalanced on a daily, even hourly basis, on the basis of a relentless flow of news. Relatively few, if any, people who work on national security think in those terms. Rather, they are trained to think of big decisions, often binary in character, and a hierarchy of decision-making, at the top of which sits a president, prime minister or prince, with whom Harry Truman’s famous buck stops.

On the other hand, there is no doubt that systematic scenario-planning is much rarer in the financial world than in the political world. When Shell introduced the practice of scenario-planning in the early 1970s, it was regarded as highly innovative. There are still many businesses that do not take this approach. By contrast, it was second nature to any specialist in Cold War security to think in terms of scenarios. Indeed, the practice of systematic, formalized war gaming can be traced even further back, to the early nineteenth-century Prussian army, and continues to be a large part of what military planners and policy planners do.

How are we to explain some of these differences? The best answer is historical. The history of financial risk management is a fundamentally different one from the history of national security strategy. The evolution of modern portfolio theory took one direction after the term was introduced by Harry Markowitz in 1952. In more or less the same timeframe, the evolution of deterrence theory went another way, as thinkers such as Bernard Brodie, Henry Kissinger and Thomas Schelling grappled with the strategic dilemmas of the nuclear age. Whereas portfolio theory postulated a multi-variable universe in which downside risk could be reduced by diversification and various hedging devices, deterrence theory was to a significant degree an offshoot of game theory. There were essentially two players in the Cold War game, which resembled an extreme version of the prisoners’ dilemma, with the worst outcome being the total destruction of the world, the intermediate outcome being cooperation (détente, as it came to be known), and the best outcome being the submission of the other side without the firing of a single missile (the eventual outcome). Anyone involved in the diplomacy of the Cold War had to contemplate and attach a probability to all three of these scenarios. By contrast, investors could not easily hedge against the worst-case scenario of the Cold War. There are no options that can be exercised in the event of the end of the world. Financial risk managers were therefore best advised to do their jobs as if the end of the world would not happen.

Even if there is some better explanation for the divergence than that, there is no denying the contrast between the conceptual framework taught to students of finance today and that taught to students of international relations. The tools of financial risk management include futures contracts, call and put options, as well as interest rate swaps, currency swaps and credit-default swaps. Wide use is made of measures such as the Sharpe Ratio—the average return earned in excess of the risk-free rate per unit of volatility or total risk—or (more controversially) Value at Risk. Students are taught to understand that not all distributions of risk are normal; there can be—indeed, often are—“fat tails.” In other words, there are more extreme events in the “tails” of a distribution than in the familiar bell curve where events such as car accidents or hurricanes are clustered around an average. By contrast, I am not aware of any course on international relations that encourages students to think of national security as a portfolio of national assets, and foreign policy as a set of strategies designed to maximize risk-adjusted returns, with hedges designed to minimize “downside risk.” Moreover, it is a distinctive feature of the way the United States educates its elites that relatively few people are well versed in both financial risk management and national security strategy. At Harvard, despite my best efforts over twelve years, history concentrators could graduate without having studied a single foreign policy or financial crisis. And masters of public policy degrees could be awarded to people almost entirely exempt from historical instruction.

This is not to suggest that one approach to risk management is superior to the other. On the contrary, recent experience casts grave doubt on both conceptual frameworks. Prior to 2008, highly formalized approaches to financial risk management led to an excessive reliance on mathematical models that proved disastrously fallible. Contemporary approaches to national security strategy erred in the opposite direction: lacking in a formal framework for risk measurement, they created opportunities for reckless and ultimately very costly decisions based on “gut” instinct, ideology, or poorly calibrated Realpolitik.

What both approaches missed—and continue to miss—was any systematic attempt to learn from history, and a deeper appreciation of the implications of uncertainty (as opposed to calculable risk) for decision-making.

3 Two Crises Compared

In two dramatic crises inside ten years, the American public was confronted by disasters for which the federal government seemed singularly ill-prepared: the terrorist attacks of September 11, 2001, and the financial crisis that erupted almost exactly seven years later, with the failure of Lehman Brothers on September 15, 2008. It is not my intention to play Monday morning quarterback and to argue (as others have) that the Central Intelligence Agency should have foreseen that al Qaeda was planning a major operation before 9/11, or that the Federal Reserve should have understood that Richard Fuld was driving Lehman Brothers towards a cliff before 9/15. The more interesting question, in my view, is how well the relevant agencies coped with these crises immediately after they had happened and, in particular, how well the decision-makers were served by their own conceptual frameworks.

Let me make clear that I appreciate how unlike one another these two crises were. There was an immense difference between coordinated acts of violence intended to kill defenseless people in their thousands and uncoordinated acts of financial incompetence that were intended merely to enrich a comparable number of people. The terrorist attacks of 9/11 immediately commanded the attention of the president and the most senior members of his administration. The National Security Council existed to coordinate the actions of the various departments and agencies concerned. The financial crisis, by contrast, was not immediately seen as a problem for the White House; there was a conspicuous lack of any coordinating body, although in practice the Federal Reserve’s Open Markets Committee (FOMC) played the leading role.

The public response was different, too. The electorate rallied around President Bush in the aftermath of 9/11, giving him a mandate for more or less any measure that satisfied the popular appetite for retaliation. By the fall of 2008, by contrast, Bush was a lame duck, his wars deeply unpopular, and his approval ratings sank even further in the face of financial panic and looming economic hardship.

Most commentators today would be inclined to argue that the later crisis was handled better than the first. This may be true in the sense that, although the economic recovery was—to most economic forecasters—surprisingly slow in coming, the international financial system appears to be in better shape today than the Islamic world, and particularly those countries where the United States sent troops after 9/11. The two crises nevertheless had certain common features. First, both crises were not “black swans,” in the sense of wholly unforeseen shocks. The Bush administration had certainly been warned of the terrorist threat posed by al Qaeda and, as is well known, the 9/11 attacks were not the first attempt to damage the World Trade Center in New York. The financial crisis was not a bolt from the blue, but an escalating process that can be traced back to early 2007, when the first financial ramifications of defaults on sub-prime mortgages made themselves felt. Bear Stearns had already come to grief in March 2008. In essence, both crises arose because the responsible agencies underestimated the scale of the threat posed by, respectively, an individual terrorist attack and the bankruptcy of a single investment bank.

Second, in each case, after disaster struck, the administration unhesitatingly saw the importance of acting in concert with U.S. allies. In that sense, both crises were, from the outset, international. Third, and most important for our purposes, 9/11 and 9/15 required government agencies to react swiftly and creatively. The strategic response had to be improvised, because no plan existed for the overthrow of the Taliban regime in Afghanistan, just as no plan existed for the countering the generalized run on financial institutions triggered by the Lehman bankruptcy.

Finally, because of the enormous uncertainties they confronted, decision-makers had little choice but to rely heavily on their own conceptual frameworks. In both cases, historical precedents were cited to bolster arguments, but never in a very systematic way.

4 Applying History to the 9/11 Attacks

Even on the same day as the 9/11 attacks on New York and Washington, DC, President George W. Bush and his most senior officials ruled out relying on missile strikes to retaliate against the suspected perpetrators. In that respect, they defined their intended course of action in contradistinction to measures taken by previous administrations. As Bush recalled in his memoir, “Our response would not be a pinprick cruise missile strike … [W]e would do more than put ‘a million-dollar missile on a five-dollar tent.’ ”3 Another early decision—which Bush took after consulting only his national security advisor, Condoleezza Rice—was that the administration would “make no distinction between those who planned these acts and those who harbor them,” in the words of the president’s address to the nation on the night of September 11.4 Also on the same day as the attacks, the first suggestion was made—by Secretary of Defense Donald Rumsfeld—that “the U.S. response should consider a wide range of options and possibilities.” Rumsfeld said his instinct was to hit Saddam Hussein at the same time—“not only Bin Ladin [sic].”5 This was part of a tendency to regard the crisis as, in the president’s words, a “great opportunity” for more than mere retaliation against al Qaeda and their Taliban protectors:6

Secretary Powell said the United States had to make it clear to Pakistan, Afghanistan, and the Arab states that the time to act was now. He said we would need to build a coalition. The President noted that the attacks provided a great opportunity to engage Russia and China. Secretary Rumsfeld urged the President and the principals to think broadly about who might have harbored the attackers, including Iraq, Afghanistan, Libya, Sudan, and Iran.7 Director of Central Intelligence George Tenet said the United States had a “60-country problem.”8

At one level, this discussion was eminently justifiable. Islamic terrorist networks already extended far beyond Afghanistan. Any attempt to deal with al Qaeda would require at least some assistance from neighboring countries, in particular Pakistan. Nor was it unreasonable for the president to ask Richard Clarke to “See if Saddam did this,” at a time (September 12) when much was still unclear about who was behind al Qaeda.9 In any case, Bush’s decision three days later was quite clearly to prioritize a swift move against Afghanistan, including “boots on the ground.”10 No one who has studied the available documents can fail to be impressed by the president’s good judgment on a range of decisions that were anything but self-evident.11

Bush even understood better than his own intelligence chiefs that an effective counter-terrorism strategy would need to be probabilistic: “We’re going to have to make some bets about what’s likely,” he told Tenet, meaning that not all conceivable targets of further terrorist attacks could possibly be protected.12 Had the administration confined itself to the destruction of al Qaeda and its proven supporters, Bush’s presidency might today be admired. Few contemporaries, including members of his own administration, foresaw that the Taliban regime would be so swiftly toppled. The U.S.-led military operation began on September 24; by November 13 the Taliban had fled Kabul.13

Yet the eagerness of elements within the Defense Department to instrumentalize the 9/11 crisis in order to justify an invasion of Iraq was surely questionable, even if the idea was initially put on the back burner.14 It is far from clear from where Paul Wolfowitz got his “far more than” 10 per cent probability that Saddam Hussein was behind the 9/11 attack.15 It is all too clear that from an early stage the “focus on WMD” was intended to find a justification for Saddam’s overthrow. Also problematic was the way rival government agencies sought to exploit the crisis for bureaucratic advantage, a familiar Beltway pathology that seldom results in optimal strategic decisions.

Did decision-makers in September 2001 seek to apply history? They did, but only fitfully. The Rubicon came up once.16 According to their memoirs, both Bush and Rice thought often of Lincoln and the Civil War. In the president’s words: “The clash between freedom and tyranny, [Lincoln] said, was ‘an issue which can only be tried by war, and decided by victory.’ The war on terror would be the same.”17 World War II was the more common point of reference. “The Pearl Harbor of the 21st century took place today,” the president noted in his diary, late on the night of the attacks.18 To his credit, Bush resolved early on that Muslim Americans would not suffer the discrimination directed towards Japanese Americans in the 1940s.19 The Cold War, too, was frequently invoked. Bush likened the creation of the Department of Homeland Security to Truman’s merging of the Navy and War Departments to form the Department of Defense.20

Remembering moments of superpower tension in the 1960s and 1970s, Rice lost no time in informing the Russians that the U.S. was raising the defense readiness condition to DEFCON 3, lest Moscow draw the wrong inference.21 As a scholar of European security in the Cold War era, she was profoundly moved when America’s NATO allies voted an Article V resolution in the wake of 9/11, while at the same time being reminded of the challenges posed by transformations in military technology after 1945.22 Subsequent National Security Strategy was, in a sense, therefore partly inspired by Paul Nitze’s seminal NSC-68.23 Rumsfeld offered different insights from that era. He recalled that “after the terrorist massacre of Marines in Beirut [in October 1983], American support … for action against the terrorists waned quickly. ‘One week from now,’ [he] remarked to [Dick] Myers [chairman of the Joint Chiefs of Staff], ‘the willingness to act will be half of what it is now.’ ”24

Inevitably, Vietnam was sometimes mentioned—this explains Rumsfeld’s prohibition on “pauses” in military action25—but generally to bolster the assumption that relatively few troops would need to be committed in Afghanistan, and not for very long. Bush, according to Rice, had “read many histories of Vietnam, and he did not want to be Lyndon Johnson, picking targets from the basement of the White House.”26 Rumsfeld’s enthusiasm for enlisting the Northern Alliance against the Taliban was based on the “lesson” that “the Vietnamization strategy … to push America’s South Vietnamese allies to do more for themselves, would have been far more effective, perhaps decisive, if it had been implemented from the outset of the war.”27 All concerned were well aware that others—not only the Soviet Union in the 1980s but also the British Empire in the 1840s—had found Afghanistan an exceptionally dangerous country for a foreign army, but again these precedents were cited to justify the “light footprint” and the short duration of the planned intervention.28 Those who had been involved in the 1990 Gulf War also drew parallels, though they were more struck by the differences than by the resemblances. (Bush unconsciously echoed his father in his first statement after the attacks, when he said, “Terrorism against our nation will not stand.”)29 The same applied to the Clinton administration’s Balkan interventions. “We’re going to wish this was the Balkans,” commented Rice presciently during the weekend of talks at Camp David on September 14 and 15.30

Yet the president was more inclined to stress the unprecedented nature of the challenge he faced. This was, he told White House counselor Karen Hughes, “no kind of enemy that we are used to.”31 “This is a new world,” he said on September 13. “We need new options,” Rumsfeld agreed. “This is a new mission.”32 “This is a completely different kind of war,” Bush told Hughes on September 23.33 This was also Vice President Cheney’s view. The strategy of going after not just the terrorists but the sponsors of terrorism was “a fundamentally new policy” against “a new kind of enemy.” “We understood,” Cheney wrote of the discussions amongst the principals at Camp David on September 14, “that this would be a long war. There would be no easy, quick victory followed by an enemy surrender. I thought it probable that this was a conflict in which our nation would be engaged for the rest of my lifetime.”34 Even Colin Powell occasionally used messianic rhetoric: “The world has changed: it is time to change the world,” was the last of his talking points on September 13.35 This kind of thinking surely encouraged the president—and his speech-writers—in the direction of a rhetorical overreach that was pregnant with future danger. “Our war on terror begins with al Qaeda, but it does not end there,” the president declared before a joint session of Congress on September 20. “It will not end until every terrorist group of global reach has been found, stopped, and defeated.”36 When this pledge mutated into the explicit threat of preemptive action against an alleged “axis of evil”—Iraq, Iran and North Korea—the die was cast. By April 2002, if not earlier, the president had taken the fateful decision to invade Iraq.37

5 Applying History to the 2008 Financial Crisis

To read the documents produced by the financial crisis of 2008 is to enter a parallel universe—to encounter conversations so different in their language and conceptual framework that it is difficult to believe the events belong to the history of the same administration that had weathered the storm of 9/11. There were, in fact, important connections between the policy of monetary easing with which the Federal Reserve sought to offset the financial and economic impact of the 9/11 attacks and the subsequent real estate bubble that inflated in the mid 2000s. Other factors, however, were just as important, notably the lax enforcement of regulations governing “subprime” mortgage lending, the financial engineering that turned questionable loans into “collateralized debt obligations,” and the enormous influx of Chinese and other savings into the U.S. economy, funding an unprecedentedly large current account deficit. The crisis-triggering point of failure turned out to be the extraordinarily small capital bases of the banks of the Western world relative to the size of their balance sheets.38

An important difference between 2001 and 2008 was that the failure of Lehman Brothers was essentially willed by the U.S. government. (Only cranks believe this to be true of the 9/11 attacks.) That the bank was in difficulties was widely known before September; indeed, to have thought that it was not, after the events of the spring of 2008, would have been bizarre, as Lehman was in some respects just a large version of Bear Stearns, roughly twice the size. The Federal Reserve Bank of New York and the Treasury were aware of the potential bankruptcy of Lehman as early as September 8.

There is no need here to describe in detail the events of the subsequent week;39 suffice to say that the rationales offered subsequently for allowing Lehman to go bust differed markedly from those offered at the time. Later, Fed Chairman Ben Bernanke argued that there was a legal obstacle—under section 13(3) of the Federal Reserve Act—to lending to Lehman as much as he believed was necessary ($ 12 billion). At the time, however, the argument was the practical one—a matter of judgment, not law—that “investors and counterparties had had time to take precautionary measures.”40 Tim Geithner of the New York Fed declined a request from Lehman management to turn their firm into a bank holding company, in order to make it eligible for Fed assistance. It may be that Treasury Secretary Henry Paulson believed he could bluff the “heads of family” (the CEO s of the big commercial banks) into bailing out Lehman as the hedge fund Long-Term Capital Management had been bailed out in 1998. If so, he did not succeed. Most people—certainly most senior people at Lehman—assumed the fate of Bear Stearns provided a precedent for government intervention. They failed to see that exactly the opposite was true. For political reasons, and to placate the god of moral hazard, the fate of Bear of Stearns necessitated a worse fate for Lehman. As Geithner and Paulson explained, there was “no political will in Washington for a bailout” of Lehman.41

That officials at the Treasury and the Fed underestimated the scale of the disaster—even if they were right that it was an unavoidable one—is surely beyond doubt. Apart from anything else, their later inconsistent treatment of Morgan Stanley and Goldman Sachs (which were granted bank holding-company status to give them access to Fed support) gave the lie to the argument that, legally, the Fed had no alternative but to let Lehman fail. It was not just that this was “the largest, most complex, multi-faceted and far-reaching bankruptcy case ever filed in the United States.”42 More importantly, because Lehman was a highly central node in the international financial network, its bankruptcy precipitated a cascade of financial panic not just in the United States but around the world.

My concern here is with the way one of the key government institutions involved in this decision-making process—namely the Federal Reserve’s Open Markets Committee (FOMC)—reacted to the unfolding disaster. Unlike for the National Security Council or the president’s “war cabinet” in 2001, transcripts of the FOMC’s meetings and conference calls have been made public, so we can follow with more precision the evolving reactions of the committee’s members. A number of resemblances to the aftermath of 9/11 suggest themselves. First, international considerations were very near the top of the agenda in the days following the Lehman failure. Bernanke was quick to understand the overseas impact of the bank’s collapse and hastened to secure authorization for large swap lines to ensure that the major developed world central banks had all the dollar liquidity they needed.43 Secondly, the committee moved swiftly, seeing that the failure of Lehman implied danger not only for its competitors, Morgan Stanley and Goldman, but also for money market funds—hence the speed with which the primary dealer credit facility (PDCF) was broadened to allow types of collateral that just days before had been refused when Lehman offered it.44 Thirdly, the majority of members understood that open-ended commitments would be more effective than ones with arbitrary caps.45 As William Dudley (then manager of the open market account) put it, “I think the important thing here—and what we’re going for—is credibility. In a crisis you need enough force—more force than the market thinks is necessary to solve the problem.”46 This was a financial version of President Bush’s reasoning in the immediate aftermath of 9/11.

Yet the committee was undoubtedly hampered by the inertia of the Fed’s own forecasting models. “I don’t think we’ve seen a significant change in the basic outlook,” reported Fed chief economist David J. Stockton to the FOMC on September 16, “and certainly the story behind our forecast is … that we’re still expecting a very gradual pickup in GDP growth over the next year.” Events would make a mockery of this and similar statements.47 Bernanke grasped that the U.S. economy was already in recession, but Stockton’s sanguine forecast helped persuade a majority of committee members to oppose a rate cut, as if there were still reason to worry about near-term inflation. Only a few people in the room appreciated at this early stage the true nature of the Fed’s position.48 Bernanke candidly admitted that he felt “decidedly confused and very muddled” about the ad hoc way in which decisions were being made.49

With the Fed’s most recent data lagging the rapidly deepening crisis, much depended on the historical knowledge of members of the FOMC. This appears to have been variable. At 63, Gary Stern, chief executive of the Federal Reserve Bank of Minneapolis, was among the oldest people in the room. On September 16 he called it “the most severe financial crisis, certainly, that I have seen in my career.” (38-year-old Kevin Warsh later joked that it was “the toughest economic period I can remember in his lifetime [laughter].”) A complete list of the historical analogies initially offered by FOMC members extends from March 2003 (the eve of the Iraq invasion) back to the plague of the 14th century (because, in the words of Richard Fisher of the Dallas Fed, “the monks in that period, who dominated society, reverted to the old orthodoxy learned from the Greeks … they did not learn what the nuns learned, which is what you learn from practice.”)50

Surprisingly, the first mention of the Great Depression did not come until October 7, and it came from Jeffrey Lacker of the Richmond Fed, who suggested they “reflect on whether what we’re seeing is genuine fundamental uncertainty about counterparties and whether our lending is the equivalent of pushing on a string, to use another metaphor from the Great Depression.” “Quoting Keynes, I see Jeff,” was Bernanke’s sole comment.51 It was not until October 29 that Bernanke himself, after suggesting they were now facing the worst recession since the war, offered the following sober judgment:

There has been some comparison of this to the Japanese situation. I’m beginning to wonder if that might not be a good outcome. The advantage of the Japanese was, first of all, that they were isolated. The rest of the world was doing okay, and they were able to draw strength from their exports and the rest of the global economy. Although they had very slow growth, they never really had a deep recession or big increases in unemployment. I think we are looking at perhaps a much sharper episode, and our challenge will be to make sure that it doesn’t persist longer.

I do think that one lesson of both Japan and the 1930s as well as other experiences is that passivity is not a good answer.52

More often than not, however, the early post-Lehman discussions at the FOMC were about economic models rather than historical precedents. Only slowly did committee members become dismissive of this approach. When Bernanke sought to sum up the position on October 29, it was to history, not to a model, that he appealed:

History suggests that, whenever a financial crisis becomes sufficiently severe, ultimately the only solution is a fiscal solution, and we will have a fiscal solution … but I just note that, in all of these fiscal dynamics, there is a political economy overlay. You have to get to the point that it is not only the right policy to induce fiscal support but also that it is politically possible.53

By mid-December, Dudley went so far as to suggest “that we could have default rates greater than those of the Great Depression.”54 This was a remarkable turning point, and not only because the central bankers were acknowledging the limits of their own power. The economists were acknowledging the limits of their own discipline.

After 9/11, President Bush had a keen sense that he was leading the country into new territory. In effect, the Federal Reserve was doing the same after 9/15, as the international financial system and the U.S. economy showed increasing signs of being in freefall. So numerous were the policy innovations under discussion that Richard Fisher of the Dallas Fed worried that they might be “at risk of being perceived as migrating from the patron saints of Milton Friedman and John Taylor to a new patron saint—Rube Goldberg. [Laughter]”55

Yet the crucial argument that persuaded even the most skeptical members of the FOMC to support these innovations was an historical one: that the alternative might be to re-run the Great Depression. Two points are striking in this connection. The first is how little use Chairman Bernanke made of his expertise in the financial history of the 1930s. The second is the decisive role played by the one man at the table with a background that combined international politics and economics. On October 29, in response to those opposed to 50 basis points cut in the Fed funds rate, New York Fed chairman Timothy Geithner argued passionately for action:

I don’t see a good case for monetary policy gradualism in the current context. The risks are too great. If we’re too tentative, the damage to the financial system and to the real economy could be much greater and much harder to correct. If we end up doing too much, we can always adjust. That’s an easier problem to solve. It just requires will. With global financial markets placing progressively more weight on a very severe global recession, the “keep our powder dry” and “reserve our remaining ammunition” arguments don’t seem that compelling to me. We don’t have much ammunition left in the fed funds rate anyway … I think this basic risk-management choice really involves three dimensions of judgment. One is about the relative probability of alternative outcomes. The second is about the relative consequences of or the damage caused by those alternative scenarios. Importantly, it also involves a judgment about the ease of correcting, adjusting, or mitigating the consequences of being wrong.56

By the end of 2008 most members of the committee had been persuaded that any policy capable of averting a second Great Depression should be tried, even if there were insufficient fiscal stimulus being provided by Congress and even if massive expansion of the Fed balance sheet might ultimately lead to higher than desirable inflation.

6 Conclusion

Am I arguing that the security studies specialists should introduce into their conceptual framework ideas like Value at Risk, the theory of option pricing, fat tails, black swans and the like? No. Conversely, do I want bankers and financial regulators to familiarize themselves with deterrence theory? No. Rather, the argument I want to make is that, after comparing methods, both schools of risk management need to learn more systematically from history.

Academics do well to show humility when they criticize those who have to take decisions at the highest level of government. If the hardest decision you have ever made was in a tenure case, then you can scarcely imagine how difficult it was to decide on the overthrow of the Taliban—or that of Lehman Brothers. The point of this article is not to judge, with the great benefit of hindsight, the decisions that were made in September 2001 and September 2008. Rather, it is to assess the decision-making discussions as they happened and on the basis of the knowledge that the participants had at their disposal.

My conclusions are modest ones. Those who determined U.S. policy in the wake of the great disasters of 9/11 and 9/15 were over-reliant on conceptual frameworks that did not give a formal role to history. In both cases, analogies were thrown around in a somewhat casual way. 9/11 was Pearl Harbor. Al Qaeda were “Islamo-fascists.” Saddam Hussein was Hitler. Baghdad in 2003 would be Paris in 1944. When President Bush lost patience with the difficulties of establishing democracy in Iraq, his questions epitomized the problem: “Where’s the leader? Where’s George Washington? Where’s Thomas Jefferson? Where’s John Adams, for crying out loud?”57 There was a similar, scatter-gun quality to the historical analogies discussed by the FOMC in 2008. A more systematic assessment of relevant analogies, in the spirit of Ernest May and Richard Neustadt, would have been beneficial.58 The case for applied history is an unpretentious one. If history is, as former Defense Secretary Ash Carter once remarked, “the language that is spoken” in the corridors of power—not economics, not political science—then it is surely desirable for those who inhabit those corridors to speak it fluently: in other words, to be aware of the pitfalls as well as the power of arguing on the basis of historical analogies.59

Secondly, what Henry Kissinger long ago called “the problem of conjecture”—the impossibility of having certainty about the consequences of either action or inaction—was insufficiently appreciated in 2001. The argument for treating the 9/11 attacks as an “opportunity” for a large-scale geopolitical reordering was not subjected to sufficient scrutiny and too quickly became the basis for a policy that misunderstood the problem of conjecture. Preemption, as Kissinger understood, is a hazardous thing. Even if the Bush administration had been correct, and Saddam Hussein had assisted al Qaeda materially and had possessed weapons of mass destruction, would voters in the future be grateful that they did not have to experience whatever scenario was averted by his deposition? The adverse consequences of the U.S. invasion (extending beyond the costs to the United States in lives and treasure, to include the disproportionate benefits to Iran of chaos next door) were always bound to loom larger than those of a hypothetical future in which Saddam acquired WMD. By contrast, the decision makers at the Federal Reserve came to appreciate relatively swiftly that not to do everything in their power to avert a second Depression would have been more hazardous than to do everything. This was partly because Geithner—not coincidentally a Kissinger protégé—so ably made the case for action. Whatever risks Ben Bernanke and his colleagues ran after the failure of Lehman—whatever unforeseen costs their innovations may turn out to have incurred—most economists would now agree now that they were probably worth it. However, this is mainly because we can better imagine a hypothetical future in which the monetary policy mistakes of the 1930s were repeated.

“Risk management” is in many ways a misleading term, for the most difficult challenge for policy makers in both finance and foreign policy is to cope not with risk but with uncertainty—with dangers to which probabilities cannot be attached. To my mind, it will not be enough in the future merely to break down the walls that currently separate the people in the securities analysis silo from those in the national security silo. We need to introduce in both fields a more rigorous notion of applied history, and a recognition that the value of history lies precisely in teaching risk managers of all kinds to interrogate explicitly their unspoken assumptions.


James Joll, 1914: The Unspoken Assumptions (London: Weidenfeld & Nicolson, 1968).


This article is based on a lecture delivered by the author at the Institute for Advanced Study, Princeton, October 10, 2018.


George W. Bush, Decision Points (New York: Crown, 2010), p. 135.


Bob Woodward, Bush at War, Kindle ed., (New York: Simon & Schuster, 2002), KL 537–544. See also Bush, Decision Points, 137.


National Commission on Terrorist Attacks, The 9/11 Commission Report: Final Report of the National Commission on Terrorist Attacks Upon the United States, Kindle ed. (New York: W.W. Norton & Company, 2011), KL 8522–8526.


Woodward, Bush at War, KL 551–579.


9/11 Commission, KL 8401–8412.


Woodward, Bush at War, KL 580–583.


9/11 Commission, KL 8509–8513.


Woodward, Bush at War, KL 1492–1507.


9/11 Commission, KL 8474–8490, 8567–8576.


Woodward, Bush at War, KL 1889–1894.


9/11 Commission, KL 8592–8611.


Woodward, Bush at War, KL 804–809, 962–965, 1299–1312, 1325, 1411–1414; 9/11 Commission Report, KL 8527–8546. See also James P. Pfiffner, “President George W. Bush and His War Cabinet.” Paper prepared for presentation at the conference on “The Presidency, Congress, and the War on Terrorism,” University of Florida, February 7, 2003.


9/11 Commission, KL 8514–8521, 8546–8558.


Condoleezza Rice, No Higher Honor: A Memoir of My Years in Washington (New York: Crown, 2011), 78 f.


Bush, Decision Points, 140.


Woodward, Bush at War, KL 630–631; Bush, Decision Points, 137, 150.


Bush, Decision Points, 141, 155.


Ibid., 156.


Rice, No Higher Honor, 74 f.


Ibid., 78, 110 f.


Ibid., No Higher Honor, 153.


Donald Rumsfeld, Known and Unknown: A Memoir (New York: Penguin, 2011), 342 f.


NSA, Rumsfeld working paper, “Thoughts on the ‘Campaign’ Against Terrorism,” October 2, 2001.


Rice, No Higher Honor, 96.


Rumsfeld, Known and Unknown, 373.


Woodward, Bush at War, KL 872–874; Rice, No Higher Honor, 84 f.


Bush, Decision Points, 128.


Woodward, Bush at War, KL 1251–1258, 1275–1279, 1287–1293.


Ibid., KL 697–701.


Ibid., KL 996, 1005–1006.


Ibid., KL 1815–1816. See also Bush, Decision Points, 154; Rice, No Higher Honor, 88.


Richard B. Cheney, In My Time: A Personal and Political Memoir (New York: Threshold Editions, 2011), 331–332, 363.


NSA, Powell, “Talking Points,” Sept. 13, 2001.


9/11 Commission, KL 8578–8592.


Pfiffner, “Bush War Cabinet.”


For a detailed account see Niall Ferguson, The Ascent of Money: A Financial History of the World, 2nd ed. (New York: Penguin Press, 2018), 325–336. See also Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World (New York: Penguin Press, 2018).


Financial Crisis Inquiry Commission [FCIC], The Financial Crisis Inquiry Report, Authorized Edition: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, Kindle ed. (New York: Public Affairs 2011).


FCIC, KL 8524–8528, 8531–8556, 8571–8575.


Scott Freidheim, “Lehman Insider: Why the Bank Could and Should Have Been Saved.” Financial Times, September 5, 2018.


Harvey R. Miller, “Examining the Causes of the Current Financial and Economic Crisis of the United States and of the Collapse of Lehman Brothers.” Testimony before the Financial Crisis Inquiry Commission, September 1, 2010, 12.

43 FOMC meeting transcript, Sept. 16, 2015, 3.


Ibid., 5.


Ibid., 17.




Ibid., 20.


Ibid., 51.


Ibid., 74–75.


FOMC meeting transcript, Dec 14, 2008, 85.


Ibid., 29.


FOMC meeting transcript, Oct. 28–29, 2008, 118.


Ibid., 150–151.


FOMC meeting transcript, Dec. 15–16, 2008, 12.


Ibid., 83.


Ibid., 97.


Bush to Andy Card, quoted in Bob Woodward, State of Denial: Bush at War, part III (New York, Simon & Schuster), 447.


Richard E. Neustadt and Ernest R. May, Thinking in Time: The Uses of History for Decision Makers (New York: Freedom Press, 1986).


Ash Carter, Remarks at the Applied History Network Meeting, Harvard Kennedy School, May 3, 2019.

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