Comments and Discussion (Earning from History? Financial Markets and the Approach of World Wars‪)‬

COMMENT BY BARRY EICHENGREEN In this paper Niall Ferguson presents us with an interesting paradox. Despite the fact that the United States has been fighting an expensive war on terror in Iraq, Afghanistan, and other countries, and despite an increased awareness since 9/11 of the possibility of another catastrophic attack on a major U.S. city, U.S. asset markets delivered healthy returns in the five years following the attacks on the World Trade Center and the Pentagon. There are three possible explanations for the Ferguson paradox. First, it could be that the kind of catastrophic event that provides the motivation for the paper is actually a low-probability event and is accurately perceived as such. To be sure, the author cites an estimate by Matthew Bunn putting the odds of a nuclear terrorist attack over the next ten years at 29 percent. These odds are obtained as the product of the probability that terrorist groups will attempt to secure the components of a nuclear weapon in a given year times the probability that they will succeed times the probability that they will devise a workable nuclear device times the probability that they will successfully detonate it in a major population center; the resulting probability is then multiplied by the posited number of terrorist groups and years. But the numerical values assigned to these parameters are arbitrary. The exercise is data free. The limits of calibration as a guide to policy will be familiar to the readers of this journal. And whatever one thinks about the value of calibration exercises in macroeconomics, we probably know more about how to calibrate the intertemporal elasticity of substitution than about the probability that a terrorist group will be able to assemble a workable nuclear device out of its components.