Global Financial Crisis & Its Implications for Shari’ah Prof. Dr. Ahamed Kameel Mydin Meera

1. Global Financial Crisis & Its Implications for Shari’ah Prof. Dr. Ahamed Kameel Mydin Meera

2. Global Crisis Started from Subprime Mortgage Crisis mid 2007 Money meltdown From burst of housing bubble

3. Main Characteristics of Present Monetary System Fiat Money Fractional Reserve Requirement Interest-based

4. 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

5. Nature of Fiat Money Creation – bubbles (inflation) Continuous Growth of Money = Debt Destruction - meltdown

6. 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/

7. 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

8. IMF: World economy expected to recover slightly OUR’S: World likely to remain in recession …. or even into depression Exceptions: India, China,

9. Still Recession, or Depression? Why? • World overloaded with fiat debt with compounded interest • System unsustainable

10. 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.

11. 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

12. Nature of Financial Assets • Just Claims • Form a web of double-entry accounting records • So are banks and financial institutions worldwide

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

14. 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?

15. Domino Effect • Loans, bonds and sukuk denominated in dollars are highly vulnerable

16. 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

17. 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 • - Greenspan’s Age of Turbulence ? • Likely wars

18. 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 Shari’ah money?

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

20. 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.

21. Effects on Shari’ah • 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

22. Effects on Shari’ah • The success of Islamic monetary system lies in using commodities as measure of value

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

24. 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

25. 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

26. Thank You Wassalam www.ahamedkameel.org