The collapse of the Soviet Union in
1990 was heralded as a landmark event in history; it was considered the
wholesale rejection of a way of life and end of Communism. The post - WW2 world
was dominated by the competition between the Capitalist free market led by the
US and state intervention led by the Soviet Union. Francis Fukuyama considered
one of the most important living public intellectuals considered the
development of ideas to have ended in his ‘end of history' thesis as there was
no meaningful debate left between Marxism and the market.
The Global credit crunch more than a
year on shows no sign of slowing down and has now reached boiling point due to
the number of banks that continue to collapse. Comparisons continue to be made
with the great depression of the 1930's, as many of the conditions present in
the current crisis were also present on the eve of the great depression.
Prior to the collapse of many of Wall street’s
titans in September 2008 various thinkers and free market ideologues continued
to argue just as their free market ancestors did in the 1930's and
against mounting evidence to the contrary, that time and nature would restore
prosperity if governments refrained from manipulating the economy. Western
governments have been forced to throw their Capitalist free market blueprint
out of the window and intervene in the economy like never before. Over $5
trillion in total market capitalisation has been wiped out since October 2007,
with over a trillion of this accounted for by the unraveling of Wall Street's
financial titans.
This crisis is much more than a
financial crisis, this has now been accepted by free market ideologues that
played down the prospects of a recession and labeled those who did as
doomsayers, talking themselves into a recession. Such
thinkers are now in hiding with very few economists prepared to remind the
world of Capitalisms principled argument, as the Economist reminded us all: "excess and
calamity are part of the package of Western finance. And still it is worth
it." With consumer deposits, savings and jobs all at stake this crisis has
well and truly brought into question the suitability of the free market and as
one geopolitical expert put it: "as the details
of the present crisis reveal, there are huge ideological fault lines making for
chaos and a potential meltdown of the Laissez Faire financial system."
There are three reasons why the credit
crunch crisis occurred:
1. The financial industry created complex
financial contracts like derivatives that would securitize and make money from
all forms of risk, this included exotic instruments such as credit default
swaps and subprime loans. Banks continued to sell debt to customers with little
ability to repay them, August 2007 was the point when such debt reached
bursting point.
2. The speculative frenzy that gripped
both the American market as well as Europe in the purchase of real estate which
continued to send real estate prices to astronomical levels.
3. Greed played a direct role in the
crisis as it led to predatory lending to people that had little means to make
repayments. It also led to credit ratings agencies to rate investments less
risky than they really were.
The events of September 2008 have for
most brought to the forefront the potential demise of Capitalism as we know it
and a discussion on potential alternatives. Like all previous crises any debate
on alternatives is usually reduced to one of
Socialist government intervention or to tinkering with regulation and
transparency rules, there a number of reasons why the global credit crunch
crisis represents a much deeper crisis at the heart of capitalism which was
outlined by world renowned speculator George Soro's: ‘what we are going through is
the crisis of the gigantic circulatory system of a global capitalist system
that is...coming apart at the seams.'
1. The periodic crash and crises as well
as the boom and bust phenomena capitalism continues to historically descend
into whether it is in Dutch tulips, the South sea bubble, the technology bubble
as well as the dot.com crash and now the sub-prime crisis are fundamentally
down to the aims Capitalism attempts to achieve with the economy. Perpetual
economic growth (increasing GDP) will always lead to the development of a
bubble in the economy as some section of the economy will always be needed to
stimulate the remainder of the economy to ensure the economy keeps growing. The
current crisis has at its heart the bubble in the housing market, the recession
of 2001 across the Western world was due to the bursting of the dot.com bubble.
The cyclical recession free market ideologues continue justify is something
which proves the failure of Capitalism to maintain stability and is in no way
due to seasonal trends.
2. The greed shown by speculators is not something
isolated that has occurred for the first time in Capitalist history, it is
something that forms the cornerstone of Capitalist belief and thought. The
founding fathers of Capitalism concluded that if all consumers in society
followed and acted upon their self-interests and greed then the right goods
would get to the right people in a free market, it would lead to innovation as
society competed to make items better and cheaper. Economists since then have
continued to argue that greed goes hand in hand with the free market as it is
necessary for consumers to pursue their greed for wealth to distribute around
the economy. This has led to the current situation where hedge fund managers
and company CEO's have earned bonuses in the millions to the detriment of wider
society. Greed is from the Capitalists belief; legislation and regulation in no
way can curtail actions built upon values which are the foundations of the
Capitalist belief.
3. The market has been sold to the world as
the best method for sellers and buyers to conduct transactions and the most
efficient way to distribute wealth around an economy. For years both the IMF
and World Bank forced open economies in effect using the stick to ensure
government intervention was completely removed from the economy. Academic
textbooks in schools and colleges argued free markets mean competition will do
away with companies that make any product inefficiently and it was the best way
for all to partake in the wealth generation process as any individual with an
innovation can meet any demand in the economy. The free market apparently got
the right goods to the right people. In reality however the market works much
differently, with little regulation sub-prime mortgages were created as well as
derivatives. Short selling is a direct result of the free markets removal of
regulation which resulted in speculative betting on the collapse of companies.
The free market in the US which was for long America's symbol of success has in
affect brought the nation to its knees, this was outlined by John Gray former London Schools of
Economics political philosopher: ‘the American free-market creed has self-destructed
while countries that retained overall control of markets have been vindicated.
In a change as far-reaching in its implications as the fall of the Soviet
Union, an entire model of government and the economy has collapsed.'
The Alternative: Islam
The current financial crisis has
seriously eroded confidence the Western world had in the suitability of the
free market. However the Western world when looking at alternatives only see
remnants of Socialism or some state intervention in economy as feasible and
workable systems. It is also this reason that allows free market ideologues to
continue citing more regulation, transparency i.e. more capitalism with some
tinkering as solutions. This crisis represents an opportunity for all Muslims
to present the Islamic alternative. It is important to show Islamic economics
as much more then Islamic finance and Banking. This is exactly what Adnan Ahmed
Yousif, CEO of the Bahraini-based Albaraka Banking Group and chair of the Union
of Arab Banks outlined in an interview with the Middle East's Asharq Al-Awsat
when asked about the global financial crisis: ‘The success of Islamic
banking will lead to serious consideration of Islamic economics, which
continues to realize numerous achievements, as a viable alternative to the
current global economic system which continues to be hit by these crises.'
With this in mind the following points should be borne in mind and when
presenting Islam:-
1. The Islamic economy follows a
philosophy which is very different to Capitalism, as a result the end
objectives both economies attempt to achieve, widely differ and thus it would
be invalid to measure one against the other as they both have different
foundations and aims. Islam has detailed laws on the distribution of wealth and
this is its ultimate aim with the economy - to ensure wealth circulates around
the economy so all can share in the wealth that is generated.
2. Because all economic systems aim to
address the same issues, there are many peripheral similarities between Islam
and the free market. At a doctrinal level however Islam and Capitalism are two
distinct systems. The Islamic economic system is fundamentally about people and
their needs, this is the fundamental principal the Islamic economy is built
around. In a narration from the Prophet Muhammad (saw) it was said that: "The son of Adam has no better right
than that he would have a house wherein he may live and a piece of cloth
whereby he may hide his nakedness and a piece of bread and some water."
(Tirmidhi). The Islamic economy is geared towards fulfilling the basic needs of
its citizens and these in origin were defined as food, clothing and
accommodation. This forms the basis of the Economic system of Islam, all
policies and rules are geared towards achieving such ends. Islam focuses on the
needs of the people which the hadith outlined and not merely increasing Gross
Domestic Product (GDP).
3. Islam does not view the human as an
economic unit and then look to find the most economically viable solution thus
viewing all problems, whether from marriage to pensions to drugs to education,
from the angle of the economic effect and cost. Neither does Islam view the
human the way the Communists did which is that people are simply matter, just
one aspect of nature, nothing more. Islam views the human as being composed of
organic needs as well as instincts, all of which requires answers on how to
satisfy them. So Islam organised these instincts and needs in a way that
ensures the satisfaction of them all, such as the need to eat and the need to
reproduce and others. However, this organisation is not arranged in Islam by
satisfying some of them at the expense of the others, nor by suppressing some of
them, setting others loose, or setting all of them loose. Instead, Islam has
co-ordinate the satisfaction of all of them in a way to ensure comfort,
preventing conflicts and a lapse to a primitive level through the anarchism of
instincts.
4.
Through its own economic system, Islam laid down rules for the
means to acquire wealth and commodities, how they can be utilised and their
manner of disposal. It certainly did not make freedom of ownership the basis of
the economic system or even the socialist principal of ‘from each according to
his ability, to each according to his needs'. It did not define the basic
problem as ‘unlimited wants, limited resources'. Islam views the resources to
be ample enough to completely satisfy the basic needs of all. Therefore,
amongst a host of other detailed rules, one will find the Shari'ah aims to
secure the satisfaction of all basic needs (food, clothing and housing)
completely for every citizen of the Khilafah State.
5.
In order to facilitate the acquisition
of goods and services Islam put forward rules related to the manner of
possessing wealth without any complications. Islam defined the legal means of
ownership, and it defined the contracts through which possession can take
place. This left humanity free to develop the styles and means by which they
earn, as Islam did not interfere in the production of wealth.
6. The Islamic economic system has
extensive rules for ownership and disposal of citizen's wealth and assets.
Beyond this Islam recognises a sphere of the economy as the economic science
i.e. through study and research a solution can be derived. Hence how to develop
and economy or to industrialise, where the factories and the supply
lines should be, how the steel and iron mills should be constructed fall under
this category, however what is produced and how it is distributed falls under
the ‘system' for which Islam has extensive rules.
7. The Islamic economy is based upon
wealth generation where participants partake in investment, employment and
trade in the real economy. Islam does not have a dual economy where the real economy operates
alongside a financial sector. The Islamic economy focuses all participants on
the real economy, through employment, company profits, utilisation of land
(agriculture) and manufacturing, wealth is generated in only one sector. This
brings the huge benefit of wealth only circulating in one sector - the real
economy, where all can participate. Derivatives would be withdrawn as this type
of contract is not trade in real goods; rather it is betting on the price
movements of a commodity and one must possess what they sell in Islam.
8.
The Islamic system does not recognise
the financial markets in their current form. One is able to purchase shares and
transfer them without actually partaking in the running of the underlying
company that the shares are meant to represent. In Islam ownership is a direct
role in a company and not just a share certificate which in effect the stock
market allows to be traded and re-traded. It is this ability to not have a
direct role in a company that allows excessive speculation.
9. The Islamic economic system does not recognise the financial markets in their
current form and has made the Western style Public Limited company (joint stock
(share)) companies haraam for a number of reasons. Fundamentally this
type of contract contradicts the Islamic rules for contracts. The company in
the West represents a particular type of contract - the ‘Solitary Will,' this
is where an individual agrees to the written constitution of a company by
purchasing its shares with no formal offer from anyone. This has come to be
termed as the Individual Will whereby shares could be exchanged very quickly
without the need for two people to continuously sit down and have a formal
offer and acceptance. An example of this is the take-over bid of the world's
richest football club, Manchester United FC by Malcolm Glazier in 2005. He
imposed his will on the company (i.e. he brought shares) and even though other
shareholders were against such an action it was a legal form of acquiring ownership
even though there was only one person in the contract. Most contracts involve
two parties where one party offers terms and the other accepts, however under
corporate law in the West setting up a business is a contract of ‘solitary
will.' It is not a contract between two or more people; rather it is an
agreement that stipulates that all parties agree to it when they subscribe for
shares in the company. So an individual joins himself to the conditions of a
company - through purchasing their shares. This means to become a partner one
does not need approval from the existing owners - this contradicts Islam.
10. Islam's
monetary policy is centered around a legal tender based upon the Gold and
Silver standard and not one based upon interest rates to regulate inflation and
the economy. In Islam when it comes to exchanging a commodity with a specific
monetary unit, Islam has guided Muslims to the monetary unit by which the
exchange is to take place. It has restricted the Khilafah to a specific type of
money, which is gold and silver. The Islamic evidences have designated gold
and silver as the primary measuring unit for prices and labour. This is
understood from the actions of Muhammad (saw) when he collected Zakat, levied taxes
and imposed fines, all were measured according to gold and silver. This means
the notes and coins circulating in the economy would all be backed by gold and
silver. This will no longer make possible the free printing of currency as the
Khilafah would need to increase the actual holdings of gold and silver. This
has a unique effect on Inflation which free market economies have been unable
to contain.
11. Islam
contains inflation by changing the role of banks. Currently banks practice
fractional reserve banking whereby they create credit, borrow money from the
financial markets and lend to depositors. This creates a big problem in the
economy as very little equity can be used as collateral to borrow large sums of
money which creates a bubble waiting to burst. Islam strips the ability of
banks to create money and transfers this to the central treasury - Bait
ul-mal. Money creation will be the sole role of the state.
12. The
role of banks in Islam will be to collect the nation's deposits and to also act
as a central pool whereby money can be collected and invested in the economy,
with the returns being distributed amongst investors. The banks would only be
able to invest what they have in deposits and cannot create money as this is
the role of the central treasury - bait ul mal. As interest (Riba) is haraam
the main function of banks will become the pooling of wealth which can then be
invested across the economy aiding wealth distribution and economic growth.
13. The
Islamic economy is stripped of ‘interest' as this is something Islam has
categorically forbidden in the Qur'an. Holding wealth in a bank account will no
longer accrue interest and any unused wealth for a year is liable for taxation.
In this way such wealth is only productive if invested or spent, and this can
only take place in the real economy. The removal of interest in the economy
will act as a multiplier affect circulating wealth around the economy.
14. Islam
does not have a concept of income tax; value added tax, excise duties, nor
national insurance contributions. Rather Islam puts the emphasis of taxation on wealth rather than income. Take the
average salary in the UK of £24,000. At current tax rates the tax burden
alongside National Insurance contributions falls at 33%. This alongside
indirect taxation (that is taxation on spending rather than income) as well as
council tax, road tax and so forth mean that the real tax burden falls at
closer to the 40-50% mark. This means that the average person in UK is
losing between £10,000-12,000. So at higher wage levels, the monetary amounts
lost towards taxation is much greater.
15. In
Islam, although simplified, the wealth tax falls at 2.5%. This means that
within one year, on average one can save at least £10,000. Therefore two
or three people could easily enter into a business contract such as Mudharabah
(An Islamic company where one provides the Capital and the second partner works
with it) to supply some of the demand in the economy for consumer or
manufactured goods thereby creating more employment in the economy. With no
concept of interest rates and hoarding forbidden in Islam wealth will circulate
quickly ensuring the public can purchase what they specifically need, creating
employment and giving all more and more disposable income.
16. Islam
considers poverty as one matter for humans in any country
and in any generation. Poverty in the view of Islam is the non-satisfaction of
the basic needs in a complete way. Islam defined these basic needs as three
things, which are food, clothing and accommodation. This is seen from the
following evidences:
"The duty of feeding and clothing
nursing of mothers in a seemly manner is upon the father of the child."
[Al-Baqarah: 233]
"Lodge them where you dwell, according to your
wealth." [At-Talaq: 6]
Specifically
Islam made the financial support (Nafaqah) compulsory from the revenues
of the Bait ul-Mal and from Zakah. From a Macroeconomic perspective the
removal of interest, the financial markets and direct taxation allows wealth to
freely circulate around the economy so all citizens can partake in the wealth
generation process.
17. Islam
has ordained the state to play a direct role in the economy and does not leave
things completely to the market. Islam lays out three types of property; state,
public and private. It designated any utility regarded as indispensable for the
community, such that its absence would require people to search far and wide
for it, as public property. It would then be publicly owned and the revenue
generates would be administered for the benefit of all citizens. This is
derived from the hadith of the Prophet (saw): "Muslims are partners in three things: in water, pastures and
fire." Although the hadith mentioned just three things
we can utilise qiyas (analogy) and extend the evidence to cover all
instances of indispensable community utilities. Thus water sources, forests of
firewood, pastures for livestock and the like are all public utilities as well
as the mosques, state schools, hospitals, oil fields, electricity plants,
motorways, rivers, seas, lakes, public canals, gulfs, straits, dams etc. Islam
would allow ownership if it were not indispensable for the community. This
solution will have a unique effect, as it will ensure all will receive the
basic requirements to live and not be at the will of monopolies or high prices.
Conclusion
The rejected $700-billion and all
subsequent buyout of banks' bad mortgaged-backed securities is not a strategy
but mainly a desperate effort to shore up confidence in the system, to prevent
the erosion of trust in the banks and other financial institutions and
preventing a massive bank run such as the one that triggered the Great
Depression of 1929. Having created the conditions that produced history's
biggest bubble, America's political leaders appear unable to grasp the
magnitude of the dangers they are facing. As the rejection of the original
bailout package showed they are mired in their rancorous squabbling among
themselves.
What has been very clear from the
contradictory moves of allowing Lehman Brothers to collapse while taking over
AIG, and engineering Bank of America's takeover of Merrill Lynch - there's no
strategy to deal with the crisis, just tactical responses.
Islam offers the Western world its last
salvation from descending into complete chaos as the Western world's deposits
continue to shrink through further collapses and the last remaining strategy
the Western world has left - the printing of more money.
Or,
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