Global Financial Crisis

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• Global Financial Crisis
• Its Implications for Shariah
• Prof. Dr. Ahamed Kameel Mydin Meera

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Global Crisis Started from Subprime Mortgage
Crisis mid 2007 Money meltdown From burst of
housing bubble
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• Main Characteristics of Present Monetary System
• Fiat Money
• Fractional Reserve Requirement
• Interest-based

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Insurance Firms AIG, etc.
The Creation of the Mammoth Housing Bubble
Excess dollar liquidity is churned into a housing
bubble through the subprime mortgage
Insure Subprime Mortgage default using credit
default swap
Sell High-Risk Subprime Mortgage
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
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Nature of Fiat Money Creation bubbles
(inflation) Continuous Growth of Money
Debt Destruction - meltdown
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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/
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Destruction of Money Contributes to Recession
Destruction of Money
Efficient Economy Money as medium of exchange
Recession
Barter Economy

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

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IMF World economy expected to recover
slightly OURS World likely to remain in
recession . or even into depression Exceptions
India, China,
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• Still Recession, or Depression? Why?
• World overloaded with fiat debt with compounded
  interest
• System unsustainable

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• 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.

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• 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

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Nature of Financial Assets

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

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Nature of Financial Assets
When one financial institution collapses, it
affect another and yet another in a domino
fashion. DESTRUCTION OF MONEY takes place
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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?

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Domino Effect

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

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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
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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

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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?

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

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Effects on Shariah

• The success of Islamic monetary system lies in
  using commodities as measure of value

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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

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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

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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

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Thank You
Wassalam www.ahamedkameel.org