Wednesday, 26 November 2008

The Other Crisis

When the economic storm had hit us, 10 weeks ago, we were all looking for parallels from the past. Are there similarities with the burst of the bubble, in 2001. This is really different here, we said. But there are general lessons, no? And we listed those. 

Then things turned worse, the storm became a crisis. We started to revisit, first the 1997-98 Asian / Russian / Brazilian crisis. "How different was that! This time it is going to, rather than coming from the emerging markets." We lingered around this thought for a couple of days. 

However, as the term 'bleak' started to become an insufficient adjective, we were increasing turning to the previous meltdowns. The lessons from 1992, and then 1988, and even 1981 suddenly looked very relevant. Then, we went even further back in time. The prospect of a worldwide economic contraction coupled with expensive commodities were always a brill cue for plunging into the oil price shocks of the 1970's.

As the previously unthinkable kept happening, the bad news did not stop flowing in, it was no more denial any more. The comparison must be with the 'biggest shock ever'. And thus, Great Depression historians suddenly see their business prospering (one of them even became Obama's top economic advisor). 

But why stop at the 20th century? Why not the 16th century's Spanish gold inflation? Or how about the Greeks, or the Romans? 

A friend of mine, Philip Kay will speak on the financial meltdown in the Republican Rome. This Friday, in Oxford. Rome 88 BC. The abstract of the talk, coming directly from Philip is as follows:

"In 66 B.C. the Roman orator, Cicero, delivered a speech, the De Imperio Cnaei Pompeii, in which he argued that Pompey the Great should be given the military command against Mithradates VI, king of Pontus, a kingdom on the Black Sea coast of modern Turkey. In the speech he reminds his audience of the disasters which befell them 22 years earlier in 88 B.C. when the same Mithradates invaded the Roman province of Asia (situated on the western coast of what is now modern Turkey). According to Cicero, this invasion caused the loss of so much Roman money that credit was destroyed at Rome itself. He says:

'For then, when very many people lost large fortunes in Asia, we know that there was a collapse of credit at Rome, because repayments were interrupted. It is indeed impossible for many individuals in a single state to lose their property and fortunes without involving still greater numbers in their ruin. Defend the Republic from this danger; and believe me when I tell you –what you see for yourselves—that this system of monies (pecuniae), which operates at Rome in the Forum, is bound up in, and is linked with, those Asian monies (pecuniae Asiaticae); the loss of the one inevitably undermines the other and causes its collapse.'

This passage is remarkable in its contemporary tone. Substitute US sub-prime for 'the Asian monies' and the UK banking system for 'the system of monies which operates in the Roman Forum' and it could have been written about the current credit crisis.

I will argue this Friday that, in second century and early first century B.C. Rome, increased inflows of bullion combined with an expansion in the availability of credit to produce a massive growth in Rome's money supply. This increase in the supply and availability of money in turn resulted both in a major increase in Roman economic activity and, eventually, in the credit crisis which Cicero describes."

If you are hooked, here is Philip's exact title and address: 
Philip Kay will speak on: 'Financial Meltdown in Republican Rome'
Time: Friday, 28 November at 5.00 p.m.
Place: The Stelios Ioannou School for Research in Classical and Byzantine Studies
66 St Giles, Oxford OX1 3LU, +44 (0)1865 288391
(Philip Kay is a Supernumerary Fellow of Wolfson College, Oxford)


  1. There's also a credit crisis in Chapter 47:13-25 of Genesis. The Egyptians spent all their money on corn. They ran out of money. Joseph hoarded the money, and didn't inject cash back into the economy causing a massive deflationary spiral. In exchange for food, the Egyptians traded their land, their livestock, and 20% of their future harvest in perpetuity.

  2. It sounds to me that the crisis you refer to might be more about a major risk event ox exogenous origin (drought induced famine) accompanied by a government official (Joseph) cornering the market, and then using the new position for further consolidating political power.

    Thus it is not really due to a mismanagement of internal systemic risk, the main feature of our current crisis.

    However, your example highlights the fact that we still have not realised who would benefit from the current crisis most, and whether anybody would be in a the position of consolidating a new global setup when coming out of it.

    Any guidance on that?

  3. That is not quite correct, Tamas. There was a failure of cushioning the shock coming from the drought, no? And thus there was a some government risk management involved. You are right, though, that we do not know how the shock then spread in the Egyptian economy, and possibly further amplified on the way.

  4. Just to give a small punch to the other side as well: I don't think corn was known in Egypt for an other few thousand years.

  5. Point well taken.

    However, we still do not know the implications for who might turn out to be the global winner in the current crisis.