33 AD: There's Nothing New Under the Sun

Wed, Feb 13, 2019 - 4:00pm

“What has been will be again, what has been done will be done again; there is nothing new under the sun.”
Ecclesiastes 1:9

The year 33 AD was marked by two disturbances throughout the Roman empire. The first was the crucifixion of Jesus Christ who was tried before Pontius Pilot and then crucified to give rise to a new world religion. The other monumental event was the great financial panic of the same year that shook the Roman empire to its core. My concern here is of the latter event and its lessons for today’s financial system.

Like all great financial crises and panics, there were events preceding the financial calamity that went unnoticed until they erupted into a contagion that shook the very foundations of the financial system.

Our story begins in 31 AD with the arrest and execution of Lucius Aelius Sejanus, a former prefect of the Praetorian Guard, then consul of Rome and confident of the emperor Tiberius. Sejanus was well connected with the financial elite in Rome and the banking houses along the Via Sacra—the Wall Street of its day. Sejanus was involved in a plot to become emperor and Tiberius’s successor. Unfortunately for Sejanus the plot was discovered by the emperor which lead not only to his arrest and execution but that of his followers and supporters as well.

The political intrigue of 31 AD set the stage for the economic meltdown that followed. Sejanus’ followers were hunted down, tried, executed and their lands confiscated becoming the property of the Roman Treasury.

This led to a series of events leading to a collapse in real estate prices, a contraction of the money supply and a severe recession throughout the empire.

Agriculture and land were by far the most important sector of the Roman economy next to trade. The value of land and the cost of lending it soon became the epicenter of the crisis that followed. The practice of usury had long plagued Rome, resulting in high interest rates and harsh enforcement of contractual terms. Julius Caesar attempted to remedy the problem by passing a law requiring that creditors had to invest a certain portion of their capital in Italian land in order to lend at interest. The law fell into disuse over the following years after Caesar’s death but remained on the books, forgotten until it was revived in 33 AD.

In an attempt to support the Italian agricultural interest then in decline (a habit of governments throughout the centuries and to our present day) with confiscation of Sejanus and his followers, the Senate with the assent of the emperor Tiberius ordered one third of every senator’s fortune be invested in lands within Italy in an attempt to prop up falling prices. Failure to comply invited prosecution, penalties, even death. Senators were given 18 months to comply with the new law. Time elapsed and in 33 AD panic developed as the rich senators scrambled to find capital to buy land. They began to call in all private loans and deposits with their bankers.

The Arch of Titus on the Via Sacra-- the Wall Street of ancient Rome. Digital image courtesy of the Getty's Open Content Program

What followed was a credit crisis. Creditors called in their loans in order to buy land and comply with the new laws. A glut of land sales led to sale at auction at depressed prices. Instead of inflating asset values, a deflationary force fell upon the empire. Those who were convicted of violating the law saw their property seized, resulting in substantial amounts of coin flowing into the imperial Treasury, taking money out of circulation and contracting the money supply.

To make matters worse as so often happens in times of financial panic, the Roman Senate doubled down on its resolution and passed a law requiring creditors to invest two-thirds of their capital in Italian land and that all debtors pay back the amount of their loans. This was a massive deleveraging of the economy, an ancient version of the savings and loan crisis in the U.S. during late 80s and early 90s resulting in the failure of 1,043 out of the 3,234 savings and loan associations between 1986-1995.

The resolution, as so many well-meaning laws do, had the opposite effect. Creditors began demanding that all loans be paid back in their entirety. This only further accelerated the crisis as debtors began to sell off their lands in order to raise funds for repayment of their outstanding debt. This flooded property onto the market at depressed prices. Instead of propping up prices the legislation drove prices down further and contracted the money supply. With a scarcity of credit those who did manage to secure it turned to money-lenders who charged exorbitant interest rates.

While there were good intentions, the Senate resolution ended up turning a smoldering flame into a full-fledged crisis. The Senate resolution was intended to prop up land values but instead led to forced sales that brought more land onto the market, further depressing prices. Like all deflationary periods, creditors who did have capital held on to it figuring that land prices would continue to fall further with better deals at hand. The new legislation resulted in collapsed land prices and tight, unavailable credit that drove up interest rates.

The crisis spread beyond the Via Sacra and throughout the empire. Like today, money and banking were connected throughout the Roman world. The firm of Seuthes and Son, of Alexandria (in present day Egypt), faced difficulties when three richly laden treasure ships vanished in a Red Sea storm. The loss resulted in a drop in the value of ostrich feathers and ivory associated with the firms’ ventures in the Ethiopian caravan trade.

This started a string of events throughout the banking industry. Not long after the difficulties of Seuthes and Son, the banking house of Malchus & Company, located in Tyre (in present day Lebanon), with factories in Antioch and Ephesus became bankrupt as a result of a strike initiated by Phoenician workmen and the embezzlements of a trusted manager. It was also discovered that the banking house of Quintus Maximus & Lucius Vibo had large loans outstanding to both banking houses of Seuthes and Malchus. As rumors spread throughout the financial system, depositors feared for their money and began a run on the banks as distrust spread among investors. This was no different than the collapse of Lehman Brothers that led to a domino of falling investment firms from AIG to Merrill Lynch in 2008.

The interconnectedness of loans between banking houses, like 2008, spread throughout the empire. On the Via Sacra even larger banking firms found themselves in trouble. The banking house of the Brothers Pettius was also involved with Maximus and Vibo. The firm was considered to be of high quality as they were well capitalized. Unfortunately for the Brothers Pettius, their other securities were loans placed with the noblemen of Belgae in North Gaul, (parts of present day France, Belgium, Germany and Italy) the emerging markets of its day. An outbreak of hostilities forced the government to decree a temporary suspension of processes for debt. This left the house of Pettius with inadequate resources. Maximus and Vibo were the first to close their doors followed by the brothers Petti.

The closure of these banking firms gave rise to a panic among the citizens as rumors floated to who was next due to the interconnected credits between firms. Many more banks were affected.

The folks at GaveKal Research are fond of using the dynamite fishing analogy: a big explosion kills all marine life within a certain radius. Initially the small fish rise to the surface. The bigger fish take longer to appear. It is only later that the dead whale rises to top. The dead whale in this case was the banking house of Balbus & Ollius. The triggering event was one of the richest men in Rome, Publius Spinther, a wealthy nobleman who notified his bankers at Balbus & Ollius that he wished to withdraw $30,000,000 sesterces he had on deposit with the bank in order to meet his land investment requirements. The bank was unable to return his deposit and two days later closed their doors.

The bankruptcy of Balbus & Ollius, like Lehman Brothers centuries later, triggered a run on the major banking houses and spread throughout the empire. After Balbus & Olius closed their doors, a few days later the Corinthian bank of Leucippus became insolvent. It didn’t stop there as rumors swirled saying that a strong banking house in Carthage was on the verge of closing along with two banks in Lyons and others in Byzantium. The surviving banks along the Via Sacra announced they must have timely notice before paying their depositors. One bank after another closed in succession. Legal interest rates were set at zero by anyone flush with cash and ready to lend it. The praetor’s court was filled with throngs of creditors demanding the auctioning of debtors assets from homes, slaves, warehouse stock, furniture, jewelry, or anything of value that could be sold and liquidated. Valuable items were sold for a mere trifle triggered by the panic leaving many men of fortune reduced to beggary.

Portrait of Roman Emperor Tiberius. Digital image courtesy of the Getty's Open Content Program

The financial panic engulfed most of the empire, threatening to bring to a halt all commerce and industry. The Roman forum and Senate were surrounded by rich and poor alike, a mix of all classes of society looking for hope, resolution and an end to the financial nightmare.

The praetor Gracchus who headed the bankruptcy court was at his wits end trying to resolve impoverished debtors and desperate creditors alike. Out of frustration with no resolution at hand, Gracchus dispatched in haste a messenger to the emperor Tiberius, ensconced in his villa at Capri, somewhat oblivious to the crowds and the financial panic. For four days the crowds and banking houses along the Via Sacra held their breath. Finally, the messenger arrived. The emperor Tiberius solved the problem. The solution was the first instance of quantitative easing. For that we turn to the historian Cornelius Tacitus who wrote the book The Annals: The Reigns of Tiberius, Claudius, and Nero from which the following is excerpted:

“The destruction of the family fortune began to hurl down rank and reputation, but then Tiberius brought aid by distributing a hundred million sesterces among the banks, and by also providing opportunities for interest free loans over a three year period if the borrower gave the people security in land for double the amount borrowed. Credit was restored by these measures, and gradually private lenders were also found.”

To solve the crisis Tiberius created large amounts of loans for bankers at a zero percent interest rate against good collateral. Rates were kept at zero percent for three years. In our most recent crisis, rates were kept at zero percent for seven years. Following a similar pattern to the Roman emperor, the U.S. Federal Reserved and the European Central Bank (ECB) kept interest rates at zero, expanded their balance sheets through quantitative easing (QE) in an effort to recapitalize the banking system and to get the credit systems operating again.

There are general similarities between the crisis of 33 AD, 2008, and 2012 in Europe. Tiberius used the Roman Treasury to inject capital into a financial system on the verge of bankruptcy. It was no different in 2008 with the introduction of TARP (troubled asset relief program) with the purpose of providing liquidity at a time like 33 AD, when there was inherent difficulty in the pricing of assets whether it was mortgages or Italian land for purposes of collateralization. Tiberius stabilized the financial system as did our central bank emperors like Ben Bernanke and QE or Mario Draghi’s famous pledge to do “whatever it takes” to stabilize the European debt crisis. The governments in the U.S. and in Europe curbed the panic of the day by stepping in and backstopping the financial system with government bailouts and guarantees.

Albeit, today’s financial system is much more sophisticated and complicated. But the principals remain the same. Both periods in history were turbulent and it took several attempts before the politicians caught on to the gravity of the situation and proposed solutions that arrested the crisis and restored confidence.

The crisis of 2007-2009 is behind us and a new one may lie directly in front of us. A problem with easy money is that it leads to higher levels of risk taking. It also creates speculation whether it’s hedge funds using leverage to turn nickels into dollars or if it’s the general public chasing yields in bond funds or ETFs where risk is high, liquidity is low and the general public is ignorant and unaware of what they own.

Like ancient Rome, our financial world is interconnected. What happens elsewhere can boomerang back here. Whether it be Italian debt (here come the Romans again), emerging market debt, or our own U.S. corporate debt, our financial systems are linked through securitization, the dispersion of debt and an international payment system.

The last crisis has come and gone, and the next crisis may be in its formative stages. Central are starting to think how the next one will unfold and what the appropriate response will be. Recently the regional Fed bank of San Francisco offered us some clues. A possible solution is actual negative interest rates not just zero rates. The argument being that negative rates may have allowed inflation to rise much faster toward the Fed’s two percent inflation target as seen in the FRBSF Economic letter from February 2019. The new study makes the case that setting a negative rate of 0.25 percent would have been the best rate to speed the economic recovery, pushing savers out of safe haven cash to either spend money or invest rather than suffer the consequences of cash remaining idle and unproductive.

This approach has not been used before but at least our bankers are now thinking of possible solutions ahead of time. Unlike 2008, the Fed funds rate is at 2.5 percent, a far cry from the five percent rate preceding the last crisis. Their balance sheets are loaded with trillions of dollars of government debt and mortgages. How will they pay for the reliquification of the financial system and government fiscal policy used to stimulate the economy?

Once again, we can turn to Tiberius and the Romans. After the panic subsided, historian and author Tacitus tells us in his book book The Annals: The Reigns of Tiberius, Claudius, and Nero that the emperor went after his enemies and those who didn’t conform to the senatorial decree. Those who failed to comply were tried, executed and their property confiscated for the good of the state. The following is excerpted from The Annals:

“…the richest man in the Spanish provinces, Sextus Marius, was denounced for having incestuous relations with his daughter, and he was thrown down from the Tarpeian Rock. And to leave no doubt that it was really the extent of the man’s wealth that had brought about his downfall, Tiberius set aside his gold and silver mines for himself, although they were state confiscations.”

It is no surprise as the next presidential election cycle begins we hear calls for raising marginal tax rates to 70 percent, raising the estate tax, an additional two to three percent tax on wealth, trillion dollar carbon taxes and a raise of payroll taxes by an additional 2.5 percent, with no limits as to taxation of salaries.

The last crisis has ended. The next one may be in its formative stages. The government and Treasury will need money and the Treasury will need to be replenished. History marches forward but the problems remain the same: debt and credit. There is nothing new under the sun.

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