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Monday, December 1, 2008

Gnome-o-gram: Mortgage Bailout, Roman Style

There is but scant innovation in human folly. Every generation convinces itself that it's living in a “new era”, where “all the rules have changed”, and consequently stumbles into the same potholes which swallowed countless ancestors. Knowing some history (rare today) and paying serious attention to its lessons (rare in any age) is an excellent way to avoid all-too-predictable calamities. Take the current woes in the credit markets, triggered in part by government meddling in the mortgage market. Certainly, this must be an unforeseen consequence of our twenty-first century fibre-optic globally connected financial system, with computer-modeled financial derivatives, risk management strategies, and all the rest of the hooey cooked up by all those bright fellows on Wall Street—how could they have possibly anticipated the mess they were getting us into?

Well, by reading Tacitus, for one thing. In Book VI of The Annals, Tacitus describes how runaway mortgage lending, combined with government meddling with interest rates and loan terms resulted in a credit crunch and an eventual collapse in real estate prices. All of this happened in A.D. 32 during the reign of the Roman Emperor Tiberius.

Meanwhile a powerful host of accusers fell with sudden fury on the class which systematically increased its wealth by usury in defiance of a law passed by Caesar the Dictator defining the terms of lending money and of holding estates in Italy, a law long obsolete because the public good is sacrificed to private interest. The curse of usury was indeed of old standing in Rome and a most frequent cause of sedition and discord, and it was therefore repressed even in the early days of a less corrupt morality. First, the Twelve Tables prohibited any one from exacting more than 10 per cent., when, previously, the rate had depended on the caprice of the wealthy. Subsequently, by a bill brought in by the tribunes, interest was reduced to half that amount, and finally compound interest was wholly forbidden. A check too was put by several enactments of the people on evasions which, though continually put down, still, through strange artifices, reappeared. On this occasion, however, Gracchus, the praetor, to whose jurisdiction the inquiry had fallen, felt himself compelled by the number of persons endangered to refer the matter to the Senate. In their dismay the senators, not one of whom was free from similar guilt, threw themselves on the emperor's indulgence. He yielded, and a year and six months were granted, within which every one was to settle his private accounts conformably to the requirements of the law.

Hence followed a scarcity of money, a great shock being given to all credit, the current coin too, in consequence of the conviction of so many persons and the sale of their property, being locked up in the imperial treasury or the public exchequer. To meet this, the Senate had directed that every creditor should have two-thirds his capital secured on estates in Italy. Creditors however were suing for payment in full, and it was not respectable for persons when sued to break faith. So, at first, there were clamorous meetings and importunate entreaties; then noisy applications to the praetor's court. And the very device intended as a remedy, the sale and purchase of estates, proved the contrary, as the usurers had hoarded up all their money for buying land. The facilities for selling were followed by a fall of prices, and the deeper a man was in debt, the more reluctantly did he part with his property, and 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, and allowing freedom to borrow without interest for three years, provided the borrower gave security to the State in land to double the amount. Credit was thus restored, and gradually private lenders were found. The purchase too of estates was not carried out according to the letter of the Senate's decree, rigour at the outset, as usual with such matters, becoming negligence in the end.

Translated from the Latin by Alfred John Church and William Jackson Brodribb.

Note that even “evasions” and “strange artifices” (credit default swaps, anybody?) played their part when this whole sordid mess blew up more than twenty centuries ago, and also that the form of the “bailout”—injecting liquidity into the banking system—employed by Emperor Tiberius was precisely the same as that cobbled together by the geniuses in charge of things today.

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