Global Financial Crisis & Its Implications for Shariah

Prof. Dr. Ahamed Kameel Mydin Meera

Global Crisis

Started from Subprime Mortgage Crisis mid 2007

Money meltdown From burst of housing bubble

Main Characteristics of Present Monetary System

Fiat Money Fractional Reserve Requirement Interest-based

The Creation of the Mammoth Housing Bubble

Excess dollar liquidity is churned into a housing bubble through the subprime mortgage Sell High-Risk Subprime Mortgage

Insurance Firms
AIG, etc.

Insure Subprime Mortgage default using credit default swap

Mortgage Lenders
Freddy Mac, Fannie Mae, etc.

Investment Banks
Goldman Sachs, Lehman Brothers, etc.

People
Sell Subprime Mortgage as safe, high-return investments to financial institutions and individuals

Subprime Mortgage given To High-Risk Individuals

Insurance and Other Financial Institutions

Nature of Fiat Money

Creation bubbles

(inflation)

Continuous Growth of Money = Debt

Destruction - meltdown

America has a total debt of $53 trillion and the highest debt ratio in history $175,154 per man, woman and child or $700,616 per family of four

Source: http://mwhodges.home.att.net/

Destruction of Money
Contributes to Recession

Destruction of Money
Efficient Economy Money as medium of exchange

Barter Economy

Recession

The need for liquidity injection Financial institutions the bailouts

Real economy e.g. GM, Chrysler, Ford

IMF: World economy expected to recover slightly OURS: World likely to remain in recession . or even into depression
Exceptions: India, China,

Still Recession, or Depression? Why?

World overloaded with fiat debt

with compounded interest System unsustainable

Major Economies in Kondratieff Winter

Kondratieff cycle - capitalist economies

displayed long wave cycles of boom and bust ranging between 50-60 years in duration Last Kondratieff cycle ended, around 1949, we have seen beneficial inflation 1949-1966; stagflation 1966-1982; beneficial deflation 1982-2000; and we are now in the (winter) deflation cycle, which should lead to depression.

Major economies in liquidity trap

Price level rise, interest rate tends to fall Liquidity trap

Individuals and businesses are highly indebted Interest rate cuts do not stimulate economy

Nature of Financial Assets

Just Claims Form a web of double-entry accounting records So are banks and financial institutions worldwide

Nature of Financial Assets

When one financial institution collapses, it affect another and yet another in a domino fashion.

DESTRUCTION OF MONEY
takes place

Domino Effect
Crisis has spread to Europe Japan, Hong Kong & Singapore too Dubai Europe sovereign defaults Greece, Ireland, Spain, Portugal etc. Malaysia and other developing nations?

Domino Effect
Loans, bonds and sukuk denominated in dollars are highly vulnerable

Will the $700b bailout work?

Crisis started from real economy Need to give clean-slates to both sides - financial sector and the real sector One-sided bailout tantamount to a humongous theft.
Bailout may give a false sense of market recovery Thing to watch is the real economy the employment data

Expected Effects
A world recession (Not a normal recession)
A depression? High unemployment rates worldwide

Serious inflation hyperinflation beginning with assets priced in dollars commodities like grains etc. Global chaos and conflicts
- Greenspans Age of Turbulence ?

Likely wars

Effects on Gold
Negative correlation with dollar index Proven inflation hedge Asset of choice in chaotic, war and times of turbulence Proven money, store of value Re-emergence of the Shariah money?

Gold price is likely to increase considerably in 2010 due to dollar vulnerability

Failure of Current Monetary System

Greenspan admitted in testimony to a congressional committee on 23 October 2008, that there had been a flaw in his governing ideology.

I had been going for 40 years with considerable evidence that it was working very well. The whole intellectual edifice, however, collapsed in the summer of last year Alan Greenspan
Financial Times, 24 October 2008, p1.

Effects on Shariah
Collapsing monetary system and the ensuing economic and political chaos Search for new monetary alternatives Vulnerability of Islamic banks Attempt towards global central bank with single global currency SDR? Legal-tender law Internal & External threats

Effects on Shariah The success of Islamic monetary system lies in using commodities as measure of value

The Needed Solution

Debt write-offs - partial or full - for all. Make credit available to all - just like other public goods
It should be interest-free since it only requires the recording of accounting entries.

Gessells free-money concept - e.g. WIR Bank, Switzerland

The Needed Solution

Global money based on commodities, particularly gold
Allows neither the creation of money, at the stroke of the pen, nor the destruction of money

Bretton Woods II etc. Regional Complementary Currencies Effectively a fixed-exchange-rate regime

The Needed Solution

Fiscal Stimuli
Large infrastructure projects roads, railroads, bridges, dams, hydroelectric and nuclear power stations etc. Transcontinental roads and railroads

Wealth and land redistribution where necessary

Wassalam
www.ahamedkameel.org