Beware of Cyberterrorism

Sugato Chakravarty

The greatest threat to global good may not be an obvious one. Because trillions of dollars move across the world every day, an attack on the world’s banking system could strike a blow mightier than even an atomic bomb, says Sugato Chakravarty, professor and head of the Department of Consumer Sciences and Retailing, who specializes in the areas of banking, investments and the microstructure of global financial markets. Among other things, it would freeze global credit, which, as evidenced by the recent freeze in the housing market, can stun world economies.

In 2001, Osama bin Laden lashed out at U.S. capitalism by targeting the financial heart of the country. Ten years later, the American economy is still feeling the effects, from wars to new homeland security measures. The specter of terrorism also adds a layer of risk to the speculative and risky nature of investments, according to Chakravarty.

“Trading in stock markets becomes more costly because of the added risk that manifests itself through the bid-ask spread,” he says of the difference between the price we pay to buy a security and the price we receive to sell the same security at any given point in time. “The spread becomes wider as the uncertainty in the markets increases. An important driver of wide spreads is liquidity, or the ability to quickly convert an asset to cash. When our national security alert level increases, investors go into a defensive stance, and liquidity, the lubricant that greases financial markets, dries up.”

The result for individual investors is a more defensive approach to the market, he says. “This may mean fewer transactions and a more conservative approach to investing, including leaving money in one’s savings account where only minimal interest is earned. Over time, this cautious approach slows down the economy because money no longer circulates through the global economy.”

In May, the Obama administration took action to counter threats to financial systems when it announced plans to improve the nation’s cybersecurity. The legislative proposal calls for private companies that manage the nation’s “critical infrastructure” to submit detailed plans showing how they can defend themselves against cyber attack.

Find Us on Facebook