By Mustaq Koya, Idialogue Magazine (Australia) January 2009 Edition
The devastating ripple effect of the American Subprime Mortgage crisis is seen across the world. Meltdowns of the global financial sector, bailout packages for large corporations, corporate collapses, desperate economic stimulus packages, warnings of looming recessions in major developed economies followed by job cuts, and much worse, horrors of a depression have all been envisioned. More than a mere global Financial crisis, we are witnessing the epic saga of a global Economic crisis.
Cause and Effects
What kick started the whole conundrum was the mortgage defaults in the US Subprime Mortgage sector. In the years leading up to 2007, when the crisis began to unfold, major home mortgage sponsors in the US, Freddie Mac and Fannie Mae had a total combined outstanding loans of up to USD$5.1 trillion. The loans were given to almost anyone that rocked up to the lenders and wanted to buy a house, despite their ability to service the debt. The loans were supposedly backed by the houses they were funding and the risk of not meeting repayments (credit default risks) was underwritten by insurance companies like AIG. Add to this the complexities of hedging activities to manage risks in a global market with banks and financial institutions from all countries involved, and you have a world wide web of back to back to back series of sophisticated arrangements.
As the US housing bubble burst, borrowers began to default on their mortgages.
At first fears of a financial crisis were played down. US Federal Reserve Chief Ben Bernanke speaking to the board of the Federal Reserve of Chicago said:
"Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited." (17 May 2007)
However, as big banks like Meryll Lynch started questioning hedged funds of large brokers like Bear Stearns, who had made a couple of bail outs in June 2007, within a span of 2 months the picture was bleak.
Ben Bernanke had to admit that losses in the "fast-unravelling subprime lending market could top $100 billion" (19 July 2007)
At this point the ordinary mind would have to but wonder:
1) Given such a technologically and financially advanced country the USA boasts to be, why wasn’t the crisis detected earlier? Or was it? For after all on September 10, 2003, U.S. Congressman Ron Paul gave a speech to Congress in which he predicted that the high-leveraging and tolerance of poor credit by the GSE would lead to a bailout, and he introduced a bill to abolish these policies, which was rejected.
2) Is it a house of cards upon which such an advanced capitalist economy is built where things move from comfort to bleak in such a short span of time?
As compelling a question 1) is, it is beyond the scope of this article.
By September 2008 Freddie Mac and Fannie Mae were in need of $50Billion and this saw the US government intervening with corporate rescue packages - a laughable situation for capitalism which, on their boastful principle of self corrective market mechanisms of supply and demand, promotes “no government intervention” policies. It is the breakaway of USA from this notion that led French President Nicolas Sarkozy to declare "Laissez-faire is finished. The all-powerful market that always knows best is finished".
There have been various reasons attributed to the current financial crisis and recklessness on the part of both borrowers and lenders has surfaced in the ensuing blame game.
However what's apparent from all this is the combination of both factors and the hands off approach of the Governments of these countries. Government policies under capitalism are shaped around the notion that resources are scarce and the demand for them is unlimited thus economic policy should correct that imbalance through any measure, fiscal or monetary, by shifting the resources into the hands of the producers of goods and services. These producers are the few in society who are wealthy (“fat casts”) and able to acquire the necessary capital to produce and supply goods and services for society and therefore are considered as the major contributors to GDP and economic growth. Given the scarce resource theory, the approach for economic growth under capitalism is to focus on consumption instead of production. It is perceived that the demand generated from consumption encourages production activity somewhere in the world, where multinational corporations operate. A neat fit under the globalisation ethos.
The Macroeconomics of it
From the macroeconomic angle, growth is generally measured with reference to yearly movement in GDP and the most common approach to measuring and understanding GDP is the expenditure method:
GDP = consumption + gross investment + government spending + (exports - imports), or,
GDP = C + I + G + (X-M)
The C & G in developed capitalist economies is promulgated through debt and aid/ economic stimulus packages.
Such societies revolve around the notion of liquidity (money supply) in any form as being the primary impetus to consumption. Hence the 4 Ms of money supply under capitalism is focused not on the circulation of notes and coins in the economy. Rather the most prominent form of money used in capitalism is credit money. The November 2008 statistics on money circulation in USA shows that credit money is over USD 6 trillion whereas notes and coins only amount to a little over USD 800 billion (six times more debt is possible than what’s available in currency). Thus a capitalist economy thrives on debt as the basis for trade and all economic activity. Add to this EFTPOS and Internet Banking direct debit type transactions and the need for notes and coins in the form of currency is even further reduced. Thus in an economy where the supply of money is primarily in the form of debt, from which usurious profits are derived, nothing but a house of cards scenario is inevitable. No sooner one defaults, and the opportunity for usurious profits are affected, the supply of credit of tightens and the ripple effect is like a whole house of cards crashing down.
In a consumption based economy, liquidity (money supply) becomes fundamental and the control mechanism for that is usury. Thus the “benchmark” interest rates are set by the Reserve Banks of each capitalist Government. When economic activity through consumption is desired, interest rates are wound down to encourage borrowing and flow of credit money and when inflation occurs, interest rates are wound up to restrict the supply of credit money. Thus if the economy is perceived to be in growth mode, then debt in the society is encouraged until people find themselves up to their eye-balls in debt.
This was quite clearly highlighted in a October 2008 Sixty Minute documentary called ‘Generation Debt’ in which Peter Overton revealed that Australians aged between 18 and 28 years have racked up a total debt of $60 Billion. When asked, one particular 21 year old Amanda noted that she only had 5 cents in her wallet, yet that day she had spent $1,500 – all on the credit card of course. This shows the attitude of the average person toward consumption and the use of credit money to finance that consumption.
By September 2008, the consumption-reliant US economy had spiralled out of control. The high prices of assets, including the value of homes, were an artificial escalation that best resembles a Virtual Economy and finally fell below the amount of debt owed on those assets. The results? - mortgage defaults, foreclosures, further reduction in house prices, tightening of credits by banks, reduction in money supply, reduction in consumption, fall in economic growth, recession.
The Microeconomics of it
From the microeconomics perspective, the theory that resources are scarce leads the focus of investors to a constant monopoly situation as the best environment to operate in. Companies move away from optimum production domestically and the exploitation of resources in foreign lands, particular where currency, capital and labour costs provide cost effective business cases, becomes the objective. Their focus for generating growth becomes the stock market and executives of these companies spend much time and effort in strategising schemes that would aid Shareholder Value Added (SVA) and Price/ Earnings Ratio reporting in the market that would result in increased share prices. Their benefit from this increased share prices is not from any equity injection because the companies themselves do not sell the shares. What is traded on the share market are the “issued shares” of the company which are already in the hands of shareholders in the market. The trading in shares happens therefore between those shareholders. However the increased share prices reflect a good ‘carrying value’ of the equity of these companies making for a healthy balance sheet, though it may not be a real or long lasting carrying value. This increased equity is what is sought by the executives of the companies because it provides them with a borrowing capacity which banks and financial institutions rely upon to justify their lending. Thus credit money impetus from the microeconomics angle is also prevalent in a capitalist society. However once market conditions change (e.g due to lack of confidence) and share prices start to plummet so too will the value of the equity in the companies, leading to huge write-offs in the balance sheets of these businesses which affects the “retained earnings” of these companies and therefore their ability to pay dividends on the shares. This cycle further causes the dumping of shares until eventually shareholders are left standing unsecured by any assets of the company holding worthless shares. When banks and financiers move in to stake their claims, we witness corporate collapses like those of HIH, OneTel, Enron; the house of cards scenario playing out again.
Therefore from both the macroeconomics and microeconomics perspective, credit money (debt) is a primary source of liquidity (money supply) giving rise to the usurious industry which thrives upon interest based lending activities, at the peak of which default risk is ignored. In such a case when the base slides it is inevitable the entire system will come crashing down.
These are some key theoretical ‘issues’ with capitalist economic philosophy and its usurious industries.
A Value System in Need?
Yet the greatest kick in the gut for capitalism is its very ideological basis. Capitalism, with secularism as its pillar of thoughts, offers, or supposedly does, 4 types of freedom which form the bases of its value system. These, in light of economics and trade, are as follows:
Freedom of belief – under which the contemplation of one’s existence is limited to his immediate surroundings and the existence of a Creator to whom belongs all that is in the earth and the heavens is not even a point of contemplation. Thus one is master of his own self, having no accountability to anyone. Transactions considered abominable under divinely inspired systems, usury being the most prominent one, are accepted as yet another tool for one’s own economic benefit.
Freedom personal – giving the value of ‘ends justify the means’ leads one to profiteering, slave labouring and exploitation at any cost; corporations are given their own 'separate legal entity' status and are thereby able to create Virtual Economies, lobby governments and shield individuals against any legal action. Bribery and corruption is rife (e.g The Australian Wheat Board Scandal)
Freedom of speech – which no values no bounds and blurs the line between lies and truth; thus deceptive advertising, misinformation of products and/ or a company’s financial performance, deceptive contracts with lock in clauses in fine print, all form part of the immoral norms of conducting business. The 'blame game' becomes rife when things go pear shaped - e.g The Australian Wheat Board Scandal, HIH, OneTel.
Freedom of ownership – promoting the notion that the monopoly situation is ideal, maintaining the scarcity myth and expending all at any cost to achieve what is considered rare is optimum success, even if it means being up to your eye balls in debt; government policy pushes consumption; hoarding is rampant.
These, perceived freedoms instil in the capitalist society values of hedonism which governs actions en masse. These values form the foundation of all of the capitalist societies’ systems, be they the Economic System, Judicial, Social, Educational or the Ruling system. With such values the desire is to be at the top and thrive off others' dependency on you to satisfy their basic needs. With these values your ethos becomes 'feed the man fish' instead of teaching him 'how to fish'.
Thus the matter is not, and should not be, about addressing a corrupt Economic System per se.
The Islamic Alternative
What is needed is a comprehensive new ideology with its own value system; one that views human beings as human beings and not as a means to profit; one that recognises human beings' needs and addresses those needs and not as an avenue for economic growth; one that distributes wealth and resources on a fair and just basis, not based on market forces; one that views human beings as living, breathing, beings and not as a hammer or sickle or other factor of production. And what other ideology is there to provide these values than one that is divine in origin; the Islamic Aqeedah with a unique value system. This unique value system is highlighted in many of the divine text and lives of the Muslims. We recall that during a great time of hunger, when a sahaba was in possession of some meat he sent that dish to his neighbour whom he considered to be more needy, and in turn that sahaba passed that dish to the next, and this generosity, selflessness, care and respect for human life continued on until the dish returned to the original sahaba. This is the essence of the sacrosanct values that the Islamic Ideology provides; uniquely incomprehensible to the profit minded capitalist.
With such a value system the Economic System of Islam would show the world, as it has in the past:
- That the notion that resources are scarce is a misnomer that leads to hoarding, an act strictly forbidden under Islam
- That the Islamic State is duty-bound to provide food, shelter and clothing – therefore basic needs are fulfilled and there won’t be a competition in society to pursue profiteering and exploit humans on their basic needs
- The unique notion that ownership of key economic resources are collectively owned by the public, with the Islamic State as the custodian and companies that mine or exploit these resources are restricted through strictly governed Public Private Partnerships to produce the necessary energy, water and mineral needs for the public
- Debt is frowned upon and will not be a business avenue; banks will play the key role of safe guarding the Ummah’s deposits and the Gold and Silver which would be the basis of the Muslims’ currency, and not as a usury based financial institution
- With a 1.5 billion population the issue will not be to imperialise on profits through foreign investment schemes and cross border usury based funding, rather the Islamic countries, forming the great belt of wilayat will actively aid the productivity of the Islamic State.
These are some key points from the macro-economics angle.
From the micro-economics angle
- The “No Hoarding” rule means no monopoly and encouragement of perfectly competitive markets, giving anyone the opportunity to conduct trade; the absence of Intellectual Property restrictions further opens up the market for trade
- In such a market scenario demand is constantly elastic removing inflationary pressures and therefore liquidity is not a problem
- Usury is haram and therefore outlawed; thus 1) there is no impetus to generate an industry from providing credit 2) even if credit terms were used for trade, they would be specifically to aid genuine consumption and not to exploit someone’s needy situation nor to breed hedonism; leading to genuine production and growth and not a fictitious overstatement of the size of a company or the economy at large
- liquidity pressures are further alleviated from the unique view that to forgive debt is a great reward from Allah(swt)
Once again at the heart of these economic policies is the Ideology, the Islamic Aqeedah. The comprehensive view of human existence connecting this life and the next means that accountability is an inherent factor, without any basis for a false notion of freedom.
The Islamic Aqeedah does put people before profits. Companies are not afforded the recognition of a separate legal entity and therefore their owners are individually liable for all debts of a company. As such the survival of the company at the expense of people’s livelihoods is not the objective under Islam’s economic system. Whereas under capitalism, companies are quick to slash jobs to maintain profits at desired levels and keep their shares at a desired price on the market, the Islamic Aqeedah uniquely respecting the notion of brotherhood leads owners of businesses to compromise profit margins in order to sustain employment and safeguard the needs of their employees – who happen to be their Muslim brothers – so that their livelihood and that of their families are not compromised.
With its unique value system, this Islam waits to be shone to the rest of the world once again as a way of life that will resolve more than just the Global Financial Crisis.
 "Fannie and Freddie by Rep. Ron Paul" www. house.gov. Retrieved on 2003-09-10.
 M1 is currency, M2, M3, M4 primarily refers to credit money
 Refer Dr Al Malkawi’s essay for detailed explanation on Virtual Economies – www.khilafah.com