The markets of today are the same as markets not just hundreds of years ago, but thousands of years ago. This is possible because human nature has not changed. The technology is different, but human nature is the same.
The basic mechanisms of financial markets — regarding things like credit and lending, speculation, government intervention, and even quantitative easing — are also ancient. The first known instance of quantitative easing (QE) is ancient, too.
We explained this week how an all-consuming Supreme Court battle threatens to delay vital fiscal support, both before the election and after. The market is also beginning to process its fear of a “chaos” outcome, which has even greater potential to jam up the fiscal pipes completely.
This is frightening because the U.S. economy is still in dire need of help, and everyone knows it.
- “Seven in 10 Americans (70%) say they would support the government sending an additional economic impact payment,” a new poll from Gallup and Franklin Templeton reported this month.
- “Fed Pleads Anew for Stimulus, and Markets Start to Give Up Hope,” reads a Sept. 23 Bloomberg headline. “The power of fiscal policy is really unequaled by anything else,” said Federal Reserve Chairman Jerome Powell to lawmakers on Tuesday.
- “Top CEOs call for ‘major’ coronavirus stimulus to keep economy from backsliding,” the Washington Post reports. The CEOs cited include the heads of Apple, JPMorgan Chase, and Chevron, all of whom expect turbulent conditions through 2022.
At a certain point, monetary policy reaches a point of maximum effectiveness.
Beyond that point, if the outlook is still dire, fiscal help — direct from the government — is required to bridge the gap. This reality can be severely problematic if Congress can’t get its act together.
In the fourth quarter of 2008, the stock market went through a severe period of extended turbulence, in part, because Congress couldn’t agree whether to fund the Troubled Asset Relief Program (TARP).
Between the month-end close for August 2008 and the one for February 2009, the S&P 500 fell more than 40%. Congressional dithering contributed to much of that.
We now appear to be revisiting a jammed-up-Congress scenario not just because of Supreme Court issues, but rising concern over post-election-day issues. The newest fear point for markets is the possibility that, in the midst of ballot chaos, state legislatures could cut short the sorting process and assign their electors by force.
This would lead to a flood of court challenges and legal maneuvers, which would completely paralyze the halls of Congress.
But getting back to the first known instance of Quantitative Easing, it is important to remember that, while all of this chaos may feel new, it isn’t new to history.
In fact, with much of what is going on today, we’re reminded of the Roman Financial Crisis of 33 A.D.
What happened in 33 A.D., almost two full millennia ago, demonstrates all the mechanics of a modern financial crisis, with a knock-down, drag-out political crisis thrown into the mix, too.
Adding to the irony, the Roman version even involved a backstabbing Senate — and finished out with three years of zero-interest-rate policy, by way of a kind of QE bailout for the One Percent.
It really is the same game!
To give a shortened rundown of what happened:
Tiberius, the second Roman emperor, was an accomplished Roman general who more or less hated politics. Because the intrigue of Rome revolted him, Tiberius banished himself to the island of Capri, while still retaining emperor status.
With Tiberius physically removed from Rome, the stage was set for a power grab. Sejanus, the head of the Praetorian Guard, decided he could amass power for himself.
With enough intrigue to fill a Netflix show — including murders and betrayals — Sejanus established himself at the center of power in Rome, bolstered by a web of relationships in the Roman Senate.
Tiberius, physically removed in Capri, played it cool for a while, but then decided to politically ambush Sejanus. In a scene reminiscent of the movie Goodfellas, Sejanus thought he was heading to a coronation of sorts, but instead wound up imprisoned and executed.
With Sejanus executed and rebranded as a traitor, the desire arose to punish the followers and enablers of Sejanus among the Roman elites. This was accomplished by dusting off an old law, one that had been on the books for decades but that had long fallen out of use.
Nearly 70 years prior, Julius Caesar had passed a law requiring that active money lenders (creditors) keep a certain percentage of their capital invested in Italian land. The idea was to make sure that creditors had strong ties to Rome (through land ownership), with the land also functioning as a kind of de facto bank collateral.
Fast forward to 33 A.D., and many of Sejanus’ wealthy allies were engaged in speculative lending without meeting the particulars of the land ownership requirement (which everyone had more or less forgotten about).
The Roman Senate also wanted to re-implement the land ownership requirement because Romans were spending too much on imports, and too much gold and silver was flowing out of Rome.
By forcing creditors to put some of their capital back into Roman land, this would, in theory, calm down overly speculative markets and help keep more gold and silver at home. So the reimplementation of Caesar’s creditor land law wasn’t just a revenge play, it was a kind of ad hoc monetary policy.
When the land-owning law was brought back on the books, a great many Roman elites were sued in the courts on the charge of lending without sufficient land ownership.
The courts were quickly overwhelmed by all these lawsuits — it appeared that hundreds of Roman senators were in violation — forcing Tiberius to implement an 18-month grace period for creditors to get their land-ownership affairs in order.
This led to a deflationary credit crisis, which was more or less a market structure event. It worked like this:
- Creditors called in most of their loans, if not all of their land, in order to free up money to buy Italian land, to come into compliance with the re-enacted law.
- Debtors, who had their loans suddenly called in, were forced to sell their land, in order to free up money to pay off the loans.
- Land sales by debtors created a glut in the Roman real estate market. Lots of land for sale.
- Creditors, meanwhile, had an 18-month grace period, and could see that the price of land was falling. So they stepped back from the market and held off on land purchases.
- Land prices then collapsed due to unmatched debtor sales — and because land ownership was the linchpin of the Roman state, this led to a deflationary economic bust.
So there is intrigue in the halls of power, and a shift in government policy directly impacts asset values, and from there, the “market structure” of the series of events that followed led to economic collapse.
Sound familiar? The exact same thing happens in modern times.
So how did the Roman financial crisis end? Fortunately for Rome, Tiberius was rich, and the Roman Treasury had plenty of cash in its coffers.
And so, in order to solve the crisis, Tiberius gave 100 million sestertii — a gargantuan sum of money in those days — to a special class of Roman banks.
The banks then lent that money to Roman elites at zero interest, on a three-year term, against land-based collateral representing twice the loan value.
To put it another way, Rome had a liquidity crisis, and Tiberius solved the crisis with a combination of fiscal support and quantitative easing (via zero-interest-rate monetary policy).
Because the land price collapse was market-structure driven — it was caused by a lack of liquidity, not an actual downturn in the Roman economy — Tiberius was able to solve the liquidity problem with de facto quantitative easing, taking credit risks onto his own balance sheet (which was also the government’s balance sheet).
Fast forward nearly 2,000 years, and the game looks much the same.
The scary part about the U.S. government’s inability to act, at this dark juncture in 2020, is the way it resembles both 2008 (in terms of the gap between the TARP proposal and congressional funding) and the Roman Financial Crisis of 33 A.D. (with the markets waiting for Uncle Sam, a modern day Tiberius, to pony up another round of liquidity assistance).
Financial history can be bizarre and fascinating and strange. In times like these, when government policy dominates market outcomes, knowledge of financial history can also be the difference between surviving and thriving in markets and getting crushed.
