Tuesday, October 07, 2008

The American Stock Market Crash

The following is the translation of an article in Arabic.

The US President George Bush yesterday 19th September, 2008 announced the need to act immediately to face the challenge posed by the financial crisis that has gripped the United States. He indicated that a plan was on the anvil for government intervention in order to salvage the markets and that this plan envisages enormous funds and also added that this involves certain risks. The president called upon the Americans to have faith in the economy. He said in his address from the White House that this is a crucial time to address the crisis and act to save the economy of the nation from big dangers. He further added that this collapse of the US financial markets was a crucial and decisive time.

Bush's speech indicates the graveness of the crisis gripping his country and that the US is on the verge of a collapse. This is indeed a grim situation. He announced his bailout plan today 20th September, 2008 and presented it to the US Congress for its approval. This according to them involves pumping huge amount of money in the range of 500 to 800 billion US dollars to be borne by the American tax-payers since this money is to be extracted form the budget. This will only exacerbate the budget deficit which has been in the red for the last two years. The US Federal Reserve, which is America's central bank, has already pumped in US $ 85 billion to salvage the giant US insurance company known by it's initials, the A.I.G in exchange for a 79.90% share in the group's equity being acquired by the state. This means extending state control over private sector whenever a need arises or simply nationalisation, and this is contrary to the free market capitalist system which envisages a policy of laissez faire and does not allow state intervention in the private sector or individual ownership. The capitalists argue that such crisis heal themselves and advocate leaving the crisis issue to take care of itself because their view is that this system has in-built mechanisms to cure itself.

The obvious inference from this state intervention by the world's largest capitalist nation belies the claim of the die-hard capitalists' views as well as this intervention conclusively demonstrates the corruption of their system. The Al-Jazeerah TV channel today carried a statement by Mahathir Mohammed, the former Malaysian prime minister who commented on the US state intervention in the crisis and remarked: "when the financial crisis struck us eleven years back, they asked us not to intervene, rather leave the crisis to cure by itself!" this former Malaysian prime minister ruefully regrets the deceit of the capitalist nations to himself, his country and his region when the tragic crisis overwhelmed the Asian stock markets in 1997 including the Malaysian bourse and spelled the doom of what was then called as the 'Asian Tigers'.
In the span of a short time recently, about a dozen mighty enterprises have collapsed including the Lehman Brothers which failed to find a buyer and announced bankruptcy on 15th September, 2008. The Lehman Brothers was the fourth largest US banks with assets of about 800 billion US dollars. Its bankruptcy was sharpened by the fact that its shares prices that had traded at US $ 67.73 per share fell 92% on the day. On the same day, Merrill Lynch was on the verge of declaring bankruptcy, but the Bank of America stepped in on time, bought it up and took over its reigns. But even this could not sustain Merrill Lynch and its shares fell by 36%. In fact all the giant American companies are susceptible and tethering on the verge. This leaves two other US investment giants, Morgan Stanley and Goldman Sachs, they are also vulnerable and their shares have plummeted by 25 and 14% respectively. Apparently, George Bush's plan envisages salvaging these two banks specifically since their collapse would perhaps amount to a decisive blow to the world's largest capitalist nation which boasts of the robustness and resilience of its economy, advancement and welfare of its people and touts these as achievements of the free liberal capitalist system!

Even before this date, the state has maintained control over two of its real estate investment giants, i.e. Freddie Mak and Fannie Mae whose combined losses reached 1.20 trillion US dollars and expected to reach 2.00 trillion US dollars. It is known that their latest crisis began in mid 2007 and the US Federal Reserve along with the European central banks together pumped in hundreds of billions of dollars to sustain these two companies, but in vain.

The crisis started during the real estate boom of 2001 and 2006. These two companies started to sell houses to all and sundry irrespective of their 'credit history' and unmindful of whether their credit history was weak. They sold homes at a 'teaser' interest rate of 7% for the first year which rose to 9.50% two years later. This resulted in doubling of the monthly installments payable by the buyer who had purchased the house and naturally he was unable to pay his loan installments. Now under the capitalist real estate laws, the buyer is not allowed to sell his property before repaying the loan which has by now doubled. Under this law, even if the debtor has sufficient funds to pay for the loan amount, he is not allowed to pay. On the contrary he is bound to pay the installments including the interest for the entire loan period! If for instance his loan was for a period of ten years, he is expected to wait for this period and continue to pay the monthly installments including the interest which results in doubling the loan amount. Thus for every one thousand dollar loan amount, he ends up paying 350 dollars extra. Hence the debtors were unable to repay their installments and the number of such defaulters reached millions, even 3 million according to some estimates. Bush had previously proposed to freeze interest rates for a period of five years in order to enable the defaulters to pay their installments. In the meantime, the number of houses up for sale increased with no buyers for them and the real estate prices plummeted sharply. The number of such houses for sale increased by 75% in 2006 and yet one could not find a buyer. All these factors compounded the problem for these two and other real estate firms like the Lehman Brothers who had ventured into this market.
Usually the companies collapse due to their share prices falling down sharply because of various reasons. We have seen these and other related reasons in the real estate companies crash as well. In addition perhaps there were certain other reasons; political & economic, even ethical like pilfering by the managements and false profit reporting. False profits are reported in order to issue new shares in the markets and bring in additional funding to the company coffers. Later on when the false-profit reports are exposed, the share prices fall flat as happened with American companies in the past.

Thus in addition to loan transactions and corrupt real estate laws, the system of capitalist equity share companies are based on invalid foundation with painful consequences for the people whose money is evaporated in the stock markets. The share prices fell in the stock markets across all sectors and not just in the real estate business alone. It was announced that the industrial average called the Dow Jones and the technology sector called the NASDAQ as well as the broader index, the Standard & Poor's fell by over 4% until this day. This indicates that the crisis is deeper and far more grave perhaps encompasses all sectors. The state therefore felt that the intervention was inevitable and hundreds of billions of dollars needed to be sacrificed at the cost of the people in order to salvage the ailing economy. All this will adversely affect the Gross Domestic Production or the Growth rate in the United States because when companies declare bankruptcy, the production too falls resulting in lesser employment opportunities, higher unemployment rate and the inevitable economic slowdown. Thus the US registered a growth rate of just 1.90% this year before the crisis manifested, while during the same period, China recorded over 9.00% growth for the last financial year. The Gross Domestic Production is regarded as the sum total of goods and services during a given period of time. The production factors recognized by them are the land, labour, capital and management. They consider the increase in capital, technology advancement, and improving the education standard as the main factors for economic growth. This clearly means that the United States has become the old sick woman and not merely the sick man.

The entire world is searing in this heat, the International Monetary Fund (IMF) commenting on this crisis declared that commodity prices will continue to rise and economic growth world wide will fall this year between 3.70 to 3.90%.
The stock markets across Europe, Asia and the Gulf may be affected by this crisis and incur enormous losses including losses suffered due purchase of shares of American real estate companies. It has been announced that the Gulf markets losses have reached 17% while the Saudi stock alone has lost 36% and the Dubai stock markets 32%. All these are the pitfalls of capitalism and globalisation since the United States encumbers the entire world with its own problems and when it collapses the entire world follows its doom. Shouldn't the world disengage itself from this imbroglio! It is for this reason that the German Chancellor Merkel has attacked America and Britain and charged them with being responsible for the mess. It was Germany which had proposed monitoring regulations for stock markets at the last G8 summit and the US and UK had opposed the German proposal. Her statement reflects the German outrage especially over America and the extent of German and European losses due to the American factors. The European banks had earlier announced freezing of their funds in the US real estate markets after suffering mounting losses. The British Chancellor of Exchequer Alistair Darling has told the 'Guardian' that Britain is facing arguably the worst economic downturn in 60 years (the worst since the World War II) which will be more profound and long-lasting than people had expected.

It is abundantly clear from all this that the capitalist system apart from being a false system and its public limited companies as well as their equity system being based on a patently false premise, its financial transactions and miserable lending terms are oppressive to the people. It is amply clear that it is a system living on borrowed time and is on the verge of collapse. It also demonstrates that the doomsday for this system has arrived, this is a glad tiding from Allah (swt) for the believers that victory is round the corner and finally the justice and fairness of Islam shall prevail over the world after capitalists had had their pockets filled unjustly by oppressing the people and were not satiated yet!

20th Ramadan, 1429 A.H
20th September, 2008 C.E


Imad-ud-din Saqib said...

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Nour said...

Assalaamu Alaykum,

The following statement which appears in the article is not accurate. "Now under the capitalist real estate laws, the buyer is not allowed to sell his property before repaying the loan which has by now doubled." Now unless I haven't understood what's being said properly, in fact, the buyer is allowed to sell his property before the loan is repayed. The loan just gets transferred to the next person and a new mortgage agreement starts.

The statements following it about not being allowed to repay even if the borrower has the funds are correct although some institutions do allow the buyer/borrower to repay before the loan period but with heavy fines.

JazakumAllah Khair
wassalaamu alaykum

Islamic Revival said...

Assalam wa alaikum

The section you are referring to is talking about the sub prime mortgages and therefore is accurate as they have more conditions than normal mortgages.