Since today marks the end of a catastrophic calendar year in the financial markets, these snippets of etymology I ran across recently seem particularly appropriate, in a gallows-humor way.

On the origins of the term “money,” from the Latin monetas, meaning “warning:”

The Romans kept their coinage in the temple of Juno on the Capitoline Hill, putting the money under the protection of the goddess. Ever wonder why so many banks look like Greco-Roman temples? That’s why. “In God(dess) We Trust!”

Before she became the guardian of the Imperial Treasury, one of her original functions was to warn the Romans of impending danger; she was known as Juno Moneta, or Juno-Who-Gives-Warning. So her role as protector of the money supply and protector of the city were conflated, leading to the modern English word “money” for all forms of currency.

On the origins of the term “securities:”

 

The Latin words se and cura combine to form this word, meaning literally, “without care.”

This conjures up MAD magazine’s Alfred E. Neuman, whose slogan seems to have been taken up by our securities regulators.

The Catastrophe Haiku Challenge of December 11th brought many delights, not least of which was the realization that this blog has at least five readers (still counting myself) instead of the three I estimated. Huzzah!

Not only did the Challenge produce some fine entries (see the Comments section below the December 11th entry) but it introduced me to some kindred spirits, including one Tony Alfidi–a finance professional based in San Francisco–who has been blogging his own financial haiku (and limericks!) for some time. Check out his witty prose (and verse) stylings at alfidicapitalblog.blogspot.com.

Here are two of my favorites from his oeuvre, reproduced here with his gracious permission:

The Haiku of Finance for 12/18/08

Closing out short calls
Cash went to money heaven
Be careful next time

The Haiku of Finance for 12/18/08 (inspired by Bernard Madoff)

Smiling, lying guy
Trusted by rich investors
“Made off” with their cash

I find it strangely comforting to think of my life savings at peace in “money heaven.” I hope it’s next to “pet heaven,” so that the dollar bills can frolic with the souls of my late lamented hamster, Sunshine, and a passel of goldfish that have passed through my life.

Watching the financial mayhem unfold over the past weeks has been uncannily reminiscent of the early 1980s, when the AIDS virus was first discovered on American shores. The impact of the crisis has been startlingly similar to that of the deadly disease whose contagion changed the world forever just a generation ago. As in the early days of AIDS, the sources of the current crisis are poorly understood but its fatal effects are all too evident–a toxic combination that has spread fear around the world. We’re witnessing a kind of global infection among our social and economic institutions, and may need to start thinking like epidemiologists—the scientists who fight the spread of AIDS and other diseases—in order to stem our losses.

Epidemiology, a word with Greek roots, literally means “the study of what is upon the people.” Typically, it means the processes by which infections spread through populations. But there are a number of reasons to think that an epidemiological model is appropriate to our current socio-economic crisis, and can help us make sense of “what is upon the people” now.

What can we learn by taking an epidemiological approach to the market meltdown? Three things, all of which were applicable to the AIDS crisis, too. The point is not to drum up sympathy for financial firms, which would seem to deserve little of our compassion, and certainly far less than victims of disease. Rather, these observations highlight the social processes through which we respond to spreading crises, and how those processes can make a bad situation worse.

1) Failing to act on signs of danger allows a problem to become an epidemic.

The panic spread by the AIDS virus was driven in large part by its terrifying unknowns: though its fatal effects quickly became apparent, it took almost 25 years to track down its origins to chimpanzees in southern Cameroon. Turns out that AIDS has been present in humans–who hunted and ate the chimps—since at least 1930, but it took 50 years to mature into a global epidemic.

Just as AIDS appeared in the 1980s, as if out of the blue, the collapse of the global economy has seemed similarly unexpected to many investors. After all, only a little over one year ago—in October 2007—the Dow Jones Industrial Average ended several trading days above the 14,000 mark. Who could have predicted that the index would plummet by almost 50% in 12 months, and that we’d be contemplating the bankruptcy of such institutions as General Motors?

In fact, some of the most distressing news about the current crisis is that people in the financial industry did see this crisis coming years ago, but nothing was done to stop it. Instead, that knowledge became the basis for unimaginable profits. Last spring, John Paulson (no relation to Treasury Secretary Hank) topped the list of world’s highest-paid hedge fund managers, earning $3.7 billion for 2007 after directing his firm to short-sell America’s sub-prime mortgage markets. And Paulson was no lonely prophet, crying out in the wilderness; he had lots of company. In 2006, at the same time Paulson was warning his fund’s investors about the imminent collapse of the mortgage market, brokers on the NYSE were predicting that GM would go bankrupt by 2009. Other hedge funds, like the UK’s GLG were busy making piles of cash on the basis of such predictions: so much so that the top three executives in the fund split a $1 billion paycheck for 2007.

Over the next year or two, we can expect to learn that the “sudden” collapse of the world economic system was in fact an open secret in the financial industry, and probably elsewhere. Given the close connections between Wall Street and Washington (it should help that our Treasury Secretary used to run Goldman Sachs, right?), this begs the same question that haunted America during the AIDS epidemic: what were our elected representatives and regulators doing when there was still time to prevent, or at least mitigate, the damage?

2) Putting ideology above pragmatism only makes the crisis worse.

If you were alive during the early days of the AIDS epidemic, you may recall that once the disease was identified, it was thought to be limited to gay men and IV drug users. Unfortunately, the ideology of the time turned that into a rationale for complacency: in the eyes of some who had the power to make a difference, the plague was a just consequence of high-risk behavior by a sub-set of the population who didn’t deserve help.

We all know how well that worked: just ask anyone who had a blood transfusion during that period. While then-President Ronald Reagan dithered, refusing to allow public service announcements to even mention safer sex practices that might have limited the spread of the disease, HIV infection rates exploded, reaching millions of people worldwide who had never had gay sex nor used drugs. Oops.

Reagan’s heirs have now had the opportunity to show how that “ideology first” strategy plays out when the economy gets sick. So, in the name of a theory—free market capitalism—Republicans let Lehman Brothers, mired as it was in toxic sub-prime mortgage debt, go bankrupt instead of arranging the kind of bailout or buyout that AIG enjoyed. For about five minutes, this looked like a win for the non-wealthy majority whose taxes pay for the bailouts, and a rare show of congruence between talk and action on the part of the political right. Two cheers for the Lehman liquidation!

The third cheer was silenced by the realization that as Lehman went down, it would take the rest of the market with it—including parts that had no direct exposure to the sub-prime crisis and were thought to be safe as houses (pun bleakly intended). The Reserve Primary fund, which had made the kind of ordinary short-term business loans known as “commercial paper” to the venerable Lehman Brothers, became the first public money market fund in history to “break the buck:” that is, since it would never get repayment on its loans to Lehman, the Reserve fund’s share price dipped below $1. Because money market mutual funds are supposed to be as secure as savings accounts, this one event caused the entire credit system to hit the breaks, hard. Since it appeared the anything could happen, and nothing was safe, banks wouldn’t even make short-term loans to each other, to say nothing of businesses and individuals. And that’s how the DJIA lost another couple thousand points. Oops.<

3) As the contagion spreads, it destroys the trust needed to fight it.

Our current economic crisis could be explained with haiku-like simplicity, as follows:

· no trust means no credit—nobody can get a loan

· no credit means no capital to make payroll or build things

· no capital means no capitalism

Congress may have approved a $700 billion bailout package, but since the banks who got the money are hoarding it instead of lending it out as intended, we accomplished nothing besides adding a zero to the national debt.

How could this happen? Part of the problem was undoubtedly that the bailout came with no strings attached and no oversight—a political move which will live in infamy. Perhaps more importantly, the bailout didn’t directly address the trust problem: there was nothing in the deal to either assure banks that the risks of making loans had returned to an acceptable level, or to force them to lend despite heightened chances of default.

Moreover, banks realized, as did many others, that by allowing Lehman to go bankrupt, the US government had given the remaining firms in the financial industry a really good reason to lie about the true extent of their exposure to the sub-prime crisis. Following the Lehman liquidation, there was an undignified scramble to make firms look financially healthier than they really were, distancing themselves as much as possible from bailouts and forced mergers. They may have fooled Congress, but not the banks.

And thus we find ourselves re-learning one of history’s most important lessons about plagues: trust is among the first casualties. Fear of each other erodes the very cooperation we most need to contain the crisis. Thus, when banks stopped lending to each other, as well as to the mortgage and commercial paper markets, they deepened the crisis in much the same way as institutions and individuals did when faced with the spread of AIDS in the early 1980s. As the virus spread, and became associated with gay men and IV drug users, those groups became literally untouchable—including by the doctors and nurses whose care they desperately needed. And when it became clear that the disease was not limited to “high-risk” groups, even hospitals turned away the infected until the practice was halted by a series of court decisions and new legislation.

Now that we find ourselves facing the economic equivalent of AIDS, we are making the same mistakes our forebears made in the face of those earlier contagions. Even those who aren’t directly harmed by the sub-prime crisis are infected with fear. What can we do differently this time? Unfortunately, the time for early action has passed. That leaves us with pragmatism and cooperation, two of the great virtues traditionally attributed to Americans. Let’s live up to our reputation and reject the ideologies and isolation that have only made things worse.

For all three regular readers of this blog (and yes, I’m counting myself), I’ve decided to revive my Olde Tyme classroom haiku tradition. I used to offer this for extra credit to my students in the big “Organizational Sociology” and “Money and Society” lecture courses I taught at Brown University. I can no longer offer extra credit as an incentive for participation, but I hope my esteem will be a decent substitute.

To get things started, I offer my own modest entry, which attempts to boil the current economic crisis into 17 syllables:

No credit–no loans.

No loans means no capital.

No capitalism.

In my ongoing quest to document the under-examined world of populist economic sociology, I submit for your inspection this surrealist gem, snapped in Milan, 26 May 2007 on the wall of an alleyway.

I hasten to include the date because if the image were more recent, I would have taken it for a witty visual metaphor for the sub-prime mortgage crisis: the one-eyed pyramid representing the US government, via Fannie Mae and Freddie Mac, reeling in borrowers with the promise of easy money, only to “get them on the hook” for debts they couldn’t service.

Then again, that seems to be the modus operandi of the US government in relation to other countries, as well. The record of American presidents offering cash-for-compliance to foreign governments goes way back: for an account straight from the horse’s mouth, as it were, click here; for an anecdotal account of the practices (a bit thin on supporting evidence, in my view, but nonetheless an entertaining read) click here. The practice of withholding cash to punish non-compliance with the US agenda has an equally long history, Cuba being one of the most glaring examples.

So perhaps this graffito simply reflects the way US power is experienced overseas: as a kind of “fishing expedition” to see what other countries can be made to do in return for cash. It’s worth noting, however, that according to the OECD, Italy actually deploys a larger percentage of its GNI overseas than the US (source document):

These data could be interpreted in a number of ways in relation to the graffito. Perhaps Italians see a significant qualitative difference in the way their country uses foreign economic aid, in contrast to the US strategy. Or maybe the sheer volume of money the US has to distribute overseas (in absolute terms, rather than as a percentage of GDP) leads to the perception that we can lure other nations as easily as a skillful fly fisherman working a stocked pond.

But then, what are we to make of the angelic wings on the one-eyed pyramid? Do they suggest benignity or ubiquity?

What do you think?

I also wonder why the best graffiti I’ve seen anywhere in the world–both in terms of aesthetic value and socio-economic commentary–come from Italy. I’ve seen graffiti everywhere in my travels around Europe, Asia and the Americas, but the Italians produce by far the most intellectually sophisticated and visually appealing images (see my “Socialist Snail” post below for another example). I wonder if it has something to do with Italy’s strong Communist Party affiliations, and the excellence that current and former Communist countries have exhibited in producing propaganda…a more formal medium than graffiti, to be sure, but one with similar persuasive objectives. I’ll try to find some photos from my personal collection of Chinese, Russian and Cuba propaganda posters to illustrate my theory…watch this space!