I don’t remember many jokes and this is one of the few I do. It goes like this. Why do robbers steal from banks? Coz that’s where the money is! Boom, boom!
To the people queuing outside branches of Northern Rock in England eager to get at their money this last week, it was no joke. Pictures of nervous savers made front-page news in the British press and on TV on both sides of the Atlantic (1). Commentators noted that nothing like it had been seen since the days of the Weimar Republic. In the seven days following the onset of panic on Wednesday September 12, an estimated £4 billion had been withdrawn by savers while the bank’s shares had collapsed 80% from its high at the start of the year (2).
I am a saver myself with Northern Rock having a tracker online account. While the Java applet that has to run to allow access to the account online can be flakey depending on the computer I use, overall it has not been a problem. Last Friday night, however, that all changed. Only after dozens of attempts to log in, and that late into the night, did I finally manage – with great relief – to transfer money to my checking account in readiness to pay contractors for work they had done. It was deeply worrying not to be able to get access to my cash. I refrained, however, from closing the account outright, especially after hearing the Chancellor of the Exchequer guarantee savers’ funds.
Northern Rock plc was formed from the de-mutualisation of the member-owned building society of same name. The bank was formed in 1965 from the merger of Northern Counties Permanent Building Society (established in 1850) and Rock Building Society (established in 1865) (3). Like credit unions in the US, building societies in the UK are considered 'safe as houses'. How it came to becoming the subject of a bank run – and the role of the Bank of England and Financial Services Authority played in it – will be the subject of study for years to come (4). Writing in the Financial Times, Gillian Tett commented
Banks used to be considered the dominant pillars of the financial world, since they provided credit to companies and individuals and retained the risk that these loans would turn sour. That meant that if a company defaulted, banks were left on the hook. As a result of this vulnerability, regulators required banks to hold large reserves of spare capital and pools of liquid assets to ensure they could cope with sudden credit shocks. However, this decade has brought a move to what bankers describe as an "originate and distribute" model – meaning that although banks still tend to make (or "originate") loans, these are increasingly sold (or "distributed") to other capital market investors rather than retained on the banks’ books. Since they have been selling on these loans, regulators have assumed that the banks would be less vulnerable if loans turned bad. Thus they have been willing to let the banks hold smaller cushions of capital relative to the volume of loans they create. (5)
So, while the financial winds were fair (holders of sub-prime mortgages paid their lenders, banks lent money to each other), all was well. Once they turned (sub-prime mortgage holders defaulted, banks ceased to lend money to each other), the financial ship could quickly run aground.
In researching the subject for this blog, I was struck by the way in which professionals in the work of banking and finance were apparently taken by surprise by the events and how seemingly unable they were to overcome skepticism of the ordinary passbook holding saver. When fear replaces confidence, the banking system can quickly fail. Indeed, former Federal Alan Greenspan, promoting his new book The Age of Turbulence this week, in an interview with The Daily Telegraph said
I don’t think we forecasters have been factoring in innate human nature at the level we should and can. We all know that economics is the study of people behaving. But we started off as Adam Smith did – we assume all rational behaviour. The issue isn’t whether it’s rational or irrational, but whether it’s forecastable. And innate human nature is forecastable: we repeat the same thing time and time again. [Yet] we cannot learn. You can go through a period of fear and things come out alright in the end, and you do it 10 times and you’d think on the 11th time you wouldn’t worry. But you worry. There’s no way of altering the pattern. And if that is the case, we have a model structure to forecast, which we likely can do. (6)
So to be a good forecaster does it pay to be a worrier too? Maybe so. Of course, in divining the future, forecasters often look backwards into history and extrapolate the trend line forwards, such as using a Monte Carlo analysis. Readers of this blog will know that my angle is to find parallels in our Roman past. My surprise was to find the ancient world grappling with similar issues.
While the Roman world was not as industrial or technologically advanced as our own, however, it had a sophisticated economy based on agriculture, small-scale manufacturing and international trade. Scholars continue to debate whether it was the equivalent of a modern day third world country or better, but Peter Temin , the eminent economist, has ventured to say that the financial institutions for arranging loans in the Roman Empire were superior to France’s in the 18th century (7).
Peter Temin, Elisha Gray II Professor of Economics at MIT, and author of Lessons from the Great Depression, documents that sophisticated financial intermediaries – bankers (argentarii) and brokers (proxenetae) – pooled funds effectively across the Roman economy. These intermediaries pooled funds from individuals, private banks, merchants and temples with endowments, which they lent at interest for all manner of purposes. Surviving records of loan contracts, other written accounts and lawsuits, attest to lending practices, bank branching, loan transfers and lending activities of temple endowments and local governments (8).
Whereas we are accustomed today to using paper and electronic money, minted coins "constituted the only organized system of monetary instruments", writes Jean Andreau and Janet Lloyd in the introduction to their landmark tome Banking and Business in the Roman World. "That does not mean", add the authors,
that the Romans only paid in cash, nor that they were always forced to move about with quantities of coins. (Andreau, 1999)
(As a collector of Roman coins, I can attest to how inconvenient it would have been to carry a bunch of brass sestertii or silver denarii around).
Interest rates were paid on most banked deposits (though apparently not all) and charged on loans and cash advances. Roman sources make many references that interest rates were typically below 12 percent (1 percent per month – imagine your credit card company charging you an APR at that rate!) and variable; but could also go above 12 percent. It is also reported that prohibitions against higher rates were evaded in the late Republic by transferring the loans to foreigners who were not subject to rate restrictions. (Evading regulations by going "offshore" is nothing new, apparently).
Bankers were not averse to risk. Indeed, every time a Roman merchant ship set off from port, there was a risk the ship and its cargo might return empty – or not at all. They also understood that rewards that could flow from taking calculated risks. To set out the obligations of both lender and borrower and to agree procedures for disputes, loan contracts were signed. The so-called Muziris Papyrus appears to have been drawn up between merchants and bankers based in Alexandria, Egypt and the outpost trading in pepper, spices and beryl in Muchiri (Muziris), India (9). For example, the supplementary agreement spells out what happens if the borrower does not pay off his loan "on the date for repayment specified in the loan agreements at Muziris".
Finance markets have their ups and downs, and the Romans even had their own version of the Asian financial crisis of the 1990s. Marcus Tullius Cicero, the famous orator and advocate, commented on the credit crunch occurring in his own times:
For, coinciding with the loss by many people of large fortunes in Asia, we know that there was a collapse of credit at Rome owing to suspension of payment. 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. Do you defend the common-wealth from this danger; and believe me when I tell you – what you see for yourselves – that this system of credit and finance which operates at Rome, in the Forum, is bound up in, and depends on capital invested in Asia; the loss of the one inevitably undermines the other and causes its collapse. (Pro lege Manilia (aka De imperio Cn. Pompeii) 14-19).
Words the CEO of Northern Rock and the head of the Bank of England might care to reflect on and learn from.
Just don’t bank on it.
References
Alan Greenspan, The Age of Turbulence: Adventures in a New World, Penguin Press, 2007
Jean Andreau, Janet Lloyd, Banking and Business in the Roman World, Cambridge University Press, 1999
- "Vultures ready for Magpies' sponsor Northern Rock" by Philip Aldrick, The Daily Telegraph, September 18, 2007 (see http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/18/ccbanks118.xml)
- "Northern Rock shares fall again", September 19, 2007 (see http://news.bbc.co.uk/1/hi/business/7002128.stm)
- http://en.wikipedia.org/wiki/Northern_Rock
- "Ten lessons we can learn from the Rock that rolled downhill" by Jeff Randall, The Daily Telegraph, September 19, 2007 (see http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/19/ccjeff119.xml)
- "Regulators rethink bank rules" by Gillian Tett, Financial Times, September 19 2007 (see http://www.ft.com/cms/s/0/ba2f6e16-66d4-11dc-a218-0000779fd2ac.html )
- Interview with Former Federal Reserve Chairman Alan Greenspan by Edmund Conway, Economics Editor of The Daily Telegraph in his offices in Washington DC, September 17, 2007 (see transcript at http://www.telegraph.co.uk/money/main.jhtml?xml=/money/exclusions/hubpages/greenspan/greenspanTHISONELIVE.xml )
- Peter Temin, Financial Intermediation in the Early Roman Empire, in The Journal of Economic History (2004), 64: 705-733, Cambridge University Press (see http://www-histecon.kings.cam.ac.uk/docs/temin.pdf )
- Ulrike Malmendier, Law and Finance "at the Origin" Prepared for the Journal of Economic Literature (see http://emlab.berkeley.edu/users/webfac/cromer/e211_sp07/malmendier.pdf )
- L. Casson, New Light on Maritime Loans: P. Vindob G 40822, Zeitschrift für Papyrologie und Epigraphik 84 (1990) 195–206 (see http://www.uni-koeln.de/phil-fak/ifa/zpe/downloads/1990/084pdf/084195.pdf ). The site of Muziris appears to have been located along India’s southwest coast in the modern day state of Kerala (see http://news.bbc.co.uk/1/hi/world/south_asia/4970452.stm)
