As the Dow and S&P reach new highs the contrarian in me urges caution. The slacker in me needs little urging, so there is not much chance of my toe dipping any deeper into the market at present. This could change if a correction offers a special opportunity. (October is the most likely month for one of those – nobody knows why.) A correction is coming sometime, of course: a full-blown crash too, whether it happens this year, next, or a decade down the pike. They are always coming. They are a feature of any financial system and cannot be prevented, try as we might. Changing the mix of laws and rules means only that it will be triggered in some new and completely unexpected way.
This was the conclusion of Princeton economists Carmen Reinhart and Kenneth Rogoff in their 2009 book This Time is Different: Eight Centuries of Financial Folly which examined financial crises over the past 800 years. Their book was one of the earliest expert examinations of the 2006-2008 crisis and is still one of the best. Though they do say that regulatory policies can affect the speed and effectiveness with which we pick up the pieces afterwards, they emphasize that it is misguided to think crashes can be somehow outlawed: "a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be." Financial collapses happen in advanced economies, in emerging ones, in free market economies, in command economies, and in mixed ones. Every country has had them. They are "equal opportunity crises."
We even have records of ancient Roman crashes – on one occasion complete with a financial bailout. Like the 2008 crash that started in the US, the Roman crisis of 33 AD began with a decline in real estate values. Landowners soon were underwater with their mortgages, which were held mostly by members of the Senatorial class. Tacitus tells us “many were utterly ruined. The destruction of private wealth precipitated the fall of rank and reputation, till at last the emperor interposed his aid by distributing throughout the banks a hundred million sesterces.” The emperor was Tiberius who was a tyrannical old pervert, but also a budget hawk who had filled up the Roman treasury, thereby putting him in a position to help. The recovery was slow, but naturally Tiberius took credit for it. How much the bailout helped is, like that of 2008, a matter of debate. Skeptics might point to a similar earlier crisis also provoked by real estate price declines in 49 BC precipitated by uncertainty regarding Julius Caesar’s march on Rome. Julius was in no position to bail out anyone; the civil war had first call on cash. The Senate enacted some regulatory interventions such as a cap of 12% on interest and a law against hoarding of cash, but, since the crash already had happened, they had little effect. Finances recovered anyway in about the same time frame as under Tiberius.
It is not surprising that in all ages financiers tend to be unpopular, whether working for themselves, banks, brokerages, or quasi-governmental agencies such as the IMF. Even in good times they seem to average folks to profit unseemly well, and in bad they don’t seem to suffer enough. Yet, like them or not, the role they play is critical and always has been. In his book Money Changes Everything: How Finance Made Civilization Possible, William Goetzmann argues that we owe the birth of urban civilization to their doings.
Urban civilization with written records began some 5000 years ago in Sumeria. Early contracts among traders and their financiers were clay balls with tokens inside representing sheep, cattle, linen, and whatever other goods were to be traded. Later, symbols derived from the shapes of these tokens were simply inscribed on clay tablets: commercial contracts were the first writing. They required basic mathematical ability and good accounting. The development of math and writing had profound consequences beyond just business. Very quickly the financial instruments with which we are still familiar developed: short term deposits, long term loans, compound interest, mortgages, limited partnerships, insurance, equity investments, paper profits (clay, actually), and more. By chance the records of a number of financiers have survived. Dumuzi-gamil in the city of Ur for example was a banker who took deposits and invested in a wide range of instruments including mortgages, shipping, and bakeries. He collected on short term loans at interest rates of up to 20% per month.
|Real Estate Contract|
There was political risk, of course, as there still is today. In 1788 BC the local king of Ur named Rim-Sin in a populist move declared all debts void. This wiped out Dumuzi-gamil and other financiers. While no doubt this was popular it is also the last we hear of Ur as a commercial and military center. Commerce (and the taxes for armies it generated) moved to Lagash.
Goetzmann makes a good case that money made civilization. Whether or not that was a bad move is debated by anthropologists. The answer may depend on whether one is a creditor or debtor.
Money Makes the World Go 'Round