Monday, December 15, 2008

PostHeaderIcon Past as Prologue

Years ago in college, I wrote an economics paper about a financial crisis that threatened to plunge the world economy into a deep depression.

The elements will seem familiar to us today: webs of high risk loans backed by webs of highly leveraged real-estate collateral, political turmoil in the Middle East, an indifferent government forced to intervene... you get the picture.

The setting? Rome. ca 33 AD.

The Middle East (Judea) was in turmoil because of a certain political rabble-rouser that was going around telling people to be nice to each other. (He was eventually imprisoned and killed by religous fundamentalists.)

That year, an unexpected hurricane sunk several grain ships travelling back from Alexandria to Ostia. That loss triggered calls on the loans for the merchants. Their insurers were unable to make full restitution without calling in more loan markers.

Money lending in the Roman context was a family enterprise -- the landed aristocracy would lend each other money as part of political patronage, with the family estates as collateral. They would spread these loans out as far as possible, creating a web of interlocking financial dependencies that while supposedly "spreading the risk", in reality created a house of cards that would collapse of its own complexity.

Once one of the loans was called -- it triggered a financial meltdown... and in those days, if you lost your estates, you also were likely to lose your freedom (as well as your family's).

Well, eventually, the entire Roman order was threatened and the emperor had to intervene and back the loans with the Privy Purse -- somewhat unprecedented, but then again, so was the Roman Empire.

All of which goes to show that the latest economic crisis is merely the latest in a long line of "been-there-done-that" events. It's just that we (as a society and economy) have little long-term memory when in comes down to it -- about every third generation gets in a bind by first ignoring history, second unravelling as "unnecessary" any regulations or systems put in place to prevent problems, and third discovering that they are ill-equipped to deal with the vagaries of the real-world.


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