“Allow me to issue a nation’s currency and I care not who makes its laws” Rothschild
In my previous post I wrote about Biblical capitalism but noted that the church never developed a clear set of financial rules. Islam however, claiming as it does to offer a ‘whole of society’ alternative, has in the last few decades become much more engaged.
A couple of thousand years after the Hebrew prophets did their thing Mohamed appropriated the Old Testament for his own purposes and expanded on a number of financial themes. However it wasn’t until the 1970’s that Islamic economic scholars began to develop a hard set of financial rules which became the Islamic banking sector. That sector continues to flourish. There are several keys to this flourishing.
1. Islamic banks don’t deal in derivative instruments so were relatively fire-walled from the GFC.
2. They are culturally more risk averse – excessive risk taking being seen as immoral.
3. They deal in actual property. An Islamic bank will not lend at interest so you can buy a car. However they will buy the car and re-sell it to you at a higher price to be paid by fixed instalments over an agreed period.
4. ‘Interest’ is paid through fixed instalment contracts so there is no variable rate of interest. There are pro’s and con’s to this arrangement but it does create stability.
5. Islamic banks tend to be better capitalised.
The extent to which Islamic banks are fundamentally different from conventional banking remains controversial (see for example: https://openknowledge.worldbank.org/bitstream/handle/10986/3929/WPS5446.pdf?sequence=1). They key differences appear to be a focus on real assets, greater capitalisation, stable ‘interest’ payments, and an aversion to dealing in derivatives. One doesn’t have to be a Koranic scholar to realise that this makes sense if you want to generate real economic activity rather than speculative gains. Islamic banks still only hold one per cent of global financial assets but they are experiencing double digit growth rather than seeking public bailouts.
Ironically a good deal of fiscal conservatism was legislated by the Western Powers after the Second World War. Keynes recommended fire-walling different parts of the economy so that if one part went down it wouldn’t bring down the economy as a whole. This basic approach to finance led to a raft of regulation which has been steadily dismantled since the 1980’s with predictable, and predicted, results.
An alternative approach?
What would the world look like if the global financial system was run on principles inherent in Biblical/Islamic capitalism? Or if religious terminology freaks you out, what if we returned to common sense?
With few exceptions only real goods or services would be traded, and those agreements could not themselves be traded. In other words:
· there would be no currency speculation. Goods and services could be traded in different currencies and those currencies exchanged, but currency itself could not be bought, exchanged or traded
· all interest rates would essentially be fixed
· all lending would be backed by hard assets
· there would be no bond market beyond the initial purchase of a bond
· there would be no futures market beyond the initial futures contract
· there would be no market in packaged financial products
· communities would generate their own credit based solely on the tangible wealth of that community
Would the world really be worse off?
Admittedly there would be some inefficiencies and inconveniences for some people.
Especially these people: (http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425)
Oh, and these people: (http://www.rollingstone.com/politics/news/the-last-mystery-of-the-financial-crisis-20130619?link=mostpopular4)
Speculators couldn’t make a living solely out of speculation. Economic activity would slow and economic growth might take a downward turn in some areas. This would be extremely irritating for a lot of people. There would be a lot of bleating about ‘freedom’ and ‘development’.
On the other hand the GFC is pretty inconvenient too. So was the crash of 1929 which, as I mentioned in my previous post, led to the Second World War in
Europe. In this
context we might let history be our guide and consider for example how many
Germans died of starvation before, during and after WWII.
Let’s mention the war
WWII ended the
Empire, devastated much of Eurasia, brought
ascendancy, led in time to the creation of a multitude of independent states
and associated conflicts, and ushered in the Cold War. These are not trivial
issues, and if the GFC of 1929 led to war, we have to ask ourselves, could it
happen again? America
Frankly the Nazis had a point – not about Jews or invading the world, or bumping off anyone they didn’t happen to like – but about banking. Why should German people starve because of excessive risk taking by American banks and the wealthiest one per cent? No one else was prepared to stand up to the banks, tell the international community to get stuffed and re-vitalise the economy. Hitler did; and found jobs for a generation of disenfranchised and unemployed young men. There are many reasons why Hitler had a fanatical following but one of them is because there was no demonstrable alternative. OK so the Nazi’s were an aberration, but poverty always leads to war, internal or external. What alternatives do we have in our day? I don’t profess to have the answer but history and the Bible surely give us some clues, and we had better find an answer fast – nature abhors a vacuum and our current state of non-leadership is, well, vacuous.
Another war? In the 1920’s talk of another war was considered absurd and people (including Churchill) who warned of the coming catastrophe were considered unhinged, war mongers, or communists. Nevertheless the war happened and we were not prepared. The powers of State and corporate surveillance, propaganda and repression, are so much more sophisticated now – it would be much harder for extremist movements to succeed…but there are countries with little to lose.
has over 200 million Muslims who cannot take a massive cut in living standards
and feed themselves. If we learn nothing else from the last great depression it
is that when people are starving, war and political violence surely follow. That's why financial regulation matters - because its the powerful undercurrents of international finance, not the political froth on top, that really directs where we go. Indonesia
Next post: Why Environmentalists Should Care About the Military – and why
is vulnerable. Australia
Tag line: Islamic banking, Biblical capitalism, GFC, Global Financial crisis, alternative economics, Keynes, financial regulation, Rothschild.