Global Financial Crisis Global Financial Crisis

&&

Its Implications for Shari’ahIts Implications for Shari’ah

Prof. Dr. Ahamed Kameel Mydin MeeraProf. Dr. Ahamed Kameel Mydin Meera

Global CrisisGlobal Crisis

Started from Subprime Started from Subprime Mortgage CrisisMortgage Crisis

mid 2007mid 2007

Money Money meltdownmeltdownFrom From burstburst of housing of housing bubblebubble

Main Characteristics of Present Main Characteristics of Present Monetary SystemMonetary System

Fiat MoneyFiat Money Fractional Reserve Fractional Reserve RequirementRequirement Interest-basedInterest-based

Investment BanksGoldman Sachs,

Lehman Brothers, etc.

Insurance FirmsAIG, etc.

Mortgage LendersFreddy Mac, Fannie Mae,

etc.

Subprime Mortgage givenTo High-Risk Individuals

Sell High-RiskSubprime Mortgage

Insure Subprime Mortgage default using credit default swap

Insurance and Other FinancialInstitutions

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

The Creation of the MammothThe Creation of the MammothHousing BubbleHousing Bubble

People

Excess dollar liquidity is churned into a housing bubble through the subprime mortgage

Nature of Fiat MoneyNature of Fiat Money

CreationCreation – bubbles – bubbles (inflation)(inflation)Continuous Growth of Continuous Growth of MoneyMoney = = DebtDebt

DestructionDestruction - meltdown - 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 MoneyDestruction of MoneyContributes to RecessionContributes to Recession

Efficient EconomyEfficient EconomyMoney as medium of Money as medium of

exchangeexchange

Destruction of Money

Barter EconomyBarter Economy RecessionRecession

The need for liquidity injectionThe need for liquidity injection• Financial institutions – the bailoutsFinancial institutions – the bailouts• Real economy – e.g. GM, Chrysler, FordReal economy – e.g. GM, Chrysler, Ford

IMF: World economy expected to recover slightly

OUR’S:World likely to remain in recession …. or even into depression

Exceptions: India, China,

Still Recession, or Depression? Still Recession, or Depression? Why?Why?

• World overloaded with fiat debt World overloaded with fiat debt with compounded interestwith compounded interest

• System System unsustainableunsustainable

Major Economies in Kondratieff Major Economies in Kondratieff WinterWinter

• Kondratieff cycle - capitalist Kondratieff cycle - capitalist economies displayed long wave cycles economies displayed long wave cycles of boom and bust ranging between 50-of boom and bust ranging between 50-60 years in duration60 years in duration

• Last Kondratieff cycle ended, around Last Kondratieff cycle ended, around 1949, we have seen beneficial inflation 1949, we have seen beneficial inflation 1949-1966; stagflation 1966-1982; 1949-1966; stagflation 1966-1982; beneficial deflation 1982-2000; and we beneficial deflation 1982-2000; and we are now in the (winter) deflation cycle, are now in the (winter) deflation cycle, which should lead to depression.which should lead to depression.

Major economies Major economies in liquidity trapin liquidity trap

• Price level rise, interest rate Price level rise, interest rate tends to falltends to fall

• Liquidity trapLiquidity trap• Individuals and businesses are Individuals and businesses are

highly indebtedhighly indebted• Interest rate cuts do not Interest rate cuts do not

stimulate economystimulate economy

Nature of Financial AssetsNature of Financial Assets

• Just ClaimsJust Claims• Form a web of double-Form a web of double-

entry accounting recordsentry accounting records• So are banks and financial So are banks and financial

institutions worldwideinstitutions worldwide

Nature of Financial AssetsNature of Financial Assets

When one financial institution When one financial institution collapses, it affect another and yet collapses, it affect another and yet

another in a domino fashion.another in a domino fashion.

DESTRUCTION OF MONEYDESTRUCTION OF MONEY takes placetakes place

Domino EffectDomino Effect• Crisis has spread to Crisis has spread to

EuropeEurope• Japan, Hong Kong & Japan, Hong Kong &

Singapore tooSingapore too• DubaiDubai• Europe sovereign defaults Europe sovereign defaults

- Greece, Ireland, Spain, - Greece, Ireland, Spain, Portugal etc.Portugal etc.

• Malaysia and other Malaysia and other developing nations?developing nations?

Domino EffectDomino Effect

• Loans, bonds and sukuk Loans, bonds and sukuk denominated in dollars denominated in dollars are highly vulnerableare highly vulnerable

Will the $700b bailout work?Will the $700b bailout work?

• Crisis started from real Crisis started from real economyeconomy

• Need to give ‘clean-slates’ Need to give ‘clean-slates’ to both sides - financial to both sides - financial sector and the real sectorsector and the real sector

• One-sided bailout One-sided bailout tantamount to a tantamount to a humongous theft.humongous theft.Bailout may give a Bailout may give a false sense of market recoveryfalse sense of market recovery

Thing to watch is the Thing to watch is the real economyreal economy – – the employment datathe employment data

Expected EffectsExpected Effects

• A world A world recessionrecession (Not a normal recession)(Not a normal recession)• A depression?A depression?• High unemployment rates worldwideHigh unemployment rates worldwide

• Serious Serious inflationinflation – hyperinflation – hyperinflation• beginning with assets priced in dollarsbeginning with assets priced in dollars• commodities like grains etc.commodities like grains etc.

• Global Global chaoschaos and conflicts and conflicts - Greenspan’s - Greenspan’s Age of TurbulenceAge of Turbulence ? ?

• Likely Likely warswars

Effects on GoldEffects on Gold• Negative correlation with dollar Negative correlation with dollar

indexindex• Proven inflation hedgeProven inflation hedge• Asset of choice in chaotic, war Asset of choice in chaotic, war

and times of turbulenceand times of turbulence• Proven money, store of valueProven money, store of value

Re-emergence of the Shari’ah Re-emergence of the Shari’ah money?money?

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

Failure of Current Monetary SystemFailure of Current Monetary System

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

““I had been going for 40 years with considerable I had been going for 40 years with considerable evidence that it was working very well. evidence that it was working very well. The whole intellectual edificeThe whole intellectual edifice, however, , however, collapsedcollapsed in the summer of last year” in the summer of last year”

Alan GreenspanAlan GreenspanFinancial Times, 24 October 2008, p1.

Effects on Shari’ahEffects on Shari’ah

• Collapsing monetary system and the Collapsing monetary system and the ensuing economic and political chaosensuing economic and political chaos

• Search for new monetary Search for new monetary alternativesalternatives

• Vulnerability of Islamic banksVulnerability of Islamic banks• Attempt towards global central bank Attempt towards global central bank

with single global currency – SDR?with single global currency – SDR?• Legal-tender lawLegal-tender law• Internal & External threatsInternal & External threats

Effects on Shari’ahEffects on Shari’ah

The success of Islamic The success of Islamic monetary system lies in monetary system lies in using commodities as using commodities as

measure of valuemeasure of value

The Needed SolutionThe Needed Solution• Debt write-offs - partial or full - Debt write-offs - partial or full -

for all.for all.• Make credit available to all - just Make credit available to all - just

like other public goodslike other public goods• It should be interest-free since it only It should be interest-free since it only

requires the recording of accounting requires the recording of accounting entries.entries.

• Gessell’s free-money concept - Gessell’s free-money concept - e.g. WIR Bank, Switzerlande.g. WIR Bank, Switzerland

The Needed SolutionThe Needed Solution• Global money based on Global money based on

commodities, particularly goldcommodities, particularly gold• Allows neither the creation of money, Allows neither the creation of money,

at the stroke of the pen, nor the at the stroke of the pen, nor the destruction of moneydestruction of money

• Bretton Woods II etc. Bretton Woods II etc. • Regional Complementary Regional Complementary

CurrenciesCurrencies• Effectively a fixed-exchange-rate Effectively a fixed-exchange-rate

regimeregime

The Needed SolutionThe Needed Solution

• Fiscal StimuliFiscal Stimuli• Large infrastructure projects –roads, railroads, Large infrastructure projects –roads, railroads,

bridges, dams, hydroelectric and nuclear power bridges, dams, hydroelectric and nuclear power stations etc.stations etc.

• Transcontinental roads and railroadsTranscontinental roads and railroads

• Wealth and land Wealth and land redistribution where redistribution where necessarynecessary

WassalamWassalamwww.ahamedkameel.orgwww.ahamedkameel.org