Nafeez Ahmed puts the credit crunch into the context of other global crises and sets out an alternative view Muslims could offer the world.

In the summer of 2008, the Bank for International Settlements (BIS) warned of the danger of another Great Depression rivaling the economic crash of the 1930s. This danger was instigated by the US sub-prime mortgage crisis, whereby American banks grew increasingly willing to grant mortgages to consumers who were less able to repay what they borrowed.

In turn, those bad debts were repackaged in the form of financial instruments, certified as secure by financial institutions, to be sold on for huge profits. These sales occurred not only in the US, but globally. Hence, other firms insured these transactions for large fees, even though they lacked the assets to do so.

Increasing volumes of bad debt were repackaged and re-sold on the basis of which new credit flooded worldwide markets. As noted by Nassim Nicholas Taleb, Professor at New York University’s Polytechnic Institute, banks routinely certified such transactions as reliable and risk-free using quantitative models which, in reality, simply concealed the actual risk and its potential consequences.

In the past decade consumers spending more as they accessed more credit and banks reaping higher profits both contributed to virtual growth. This was based not on a real surplus derived from increases in productivity which is real growth, but rather from a monetary system based on credit and debt. That is, on the ability to continually borrow (and effectively create out of nothing) cash that in real terms that did not yet exist, except as the expectation of repayments on loans.

A big problem here is interest. As all money is created through governments borrowing from private banks on interest (at a charge), this means that repayments of the debt are larger than the original amount borrowed. Hence, more money needs to be created (e.g. borrowed) to meet these repayments. This vicious cycle generates the exponential growth of debt. These private banks accelerated their profits by adopting increasingly corrupt lending practices such as giving out sub-prime mortgages.

The debt monster

Thus, the housing markets were only the underbelly of a much larger beast.  So-called “structured financial” products served as mechanisms to generate massive profits for elite investors by deepening levels of debt. According to the BIS, by late 2008 total derivatives trades exceeded one quadrillion dollars, that is, 1,000 trillion dollars. This is an insane quantity that has no relation to the real economy – the total GDP of all the countries in the world is only about 60 trillion dollars. It is a quantity generated by the creation of money out of nothing as credit – that is as debt-money requiring repayment on interest.

Worse, not even in the leading financial institutions really understood exactly how this situation had come about. As of 2004, for instance, 90 per cent of financial transactions in the US were not properly recorded. This was, in effect, a giant, globalized casino through which financiers generated stupendous profits out of thin air, all on the basis of massive debts that inherently could never actually be repaid.

This ‘house of cards’ was therefore uniquely vulnerable to collapse. The housing crisis was the trigger, threatening to unravel the entire structure.

Tackling the “triple crunch”

Ultimately, the global financial crisis of 2008 signifies the deep-seated structural failures of our conventional socio-economic, ethical and political models. But the ‘credit crunch’ is only one face of global crisis. We also face two other major ‘crunches’ this century; (a) oil and energy depletion, with evidence that world oil production already peaked in 2006, and (b) global warming, with evidence that current fossil fuel emissions will lead to permanent effects on the Earth’s ecosystems.

The mantra that ‘there is no alternative’ is indefensible: neoliberal capitalism encourages forms of consumerism and corporate empowerment that are together destroying the Earth’s ecosystems and depleting our energy resources. The unprecedented convergence of global economic, ecological and energy crises threatens the viability of industrial civilization, and proves the need for urgent social structural reforms. Such reforms will have to deal with the following four features of the current global system:

  1. Global inequalities in ownership of productive resources: Currently around 5% of the population owns the world’s productive resources. The rest of the population are forced into various forms of wage labour or servitude to survive. This requires new thinking on how to increase   access to, and ownership of, productive resources on the part of the majority of the world population, while maintaining private property and open markets.
  2. The ideal of unlimited growth: As Nobel Prize-winning economist Amartya Sen argues, economic development should be directed not at unlimited growth for its own sake, but at sustainable growth specifically for the purpose of catering for the needs of the majority of people. Neoliberal capitalism has led to a minority of people benefiting from growth with poverty and inequality increasing globally.
  3. Fractional reserve banking and the New Capital Accord (2000): The world monetary system is based on fractional reserve banking – that is, the creation of money from nothing, simply by entering numbers into a computer, as credit charged at interest (usury); and the ability of banks to create credit or debt-money up to 12 times what  is held in reserve. The New Capital Accord brokered by the BIS effectively allowed banks to obtain unlimited   leverage – the ability to create debt-money at any multiple whatsoever. This has served to subjugate the population to an unrepayable debt that is the basis of huge profits for an elite, at the taxpayer’s expense.
  4. Materialist fundamentalism: Underlying neoliberal capitalism are philosophical assumptions about life and human nature that reduce the world to nothing more than a collection of physical, disconnected, atomistic, self-interested and thus inherently conflicting units. In this  reductionist world view, there is no room for objective ethical values because such values cannot be readily identified as material objects. Yet clearly these ideological assumptions of capitalism are false as they’re not working. Rather, we see that the manifestation of materialism is leading to massive destruction of life, rather than prosperity for all.

Civilisational renewal?

The urgent need for a global alternative is therefore not up for debate.  As Muslims, we have access to a unique repository of resources about social justice, the human relationship to nature, and sustainable economics in the form of the  wisdom of the Qur’an, the traditions of the Prophet (pbuh) and the exemplification of both these in the teachings of the Ahlul Bayt (as). Former LSE economist Loretta Napoleoni, author of Rogue Economics (2008), argues that Islamic  financial concepts could save the global economy from  crisis. More than ever, global crises represent a sign that we are nearing the reappearance of Imam Mahdi (ATF). The time to offer the world a meaningful alternative is now.

Nafeez Ahmed is executive director of the Institute for Policy Research & Development (www.iprd.org.uk), a research institute for transdisciplinary security studies.

———————————————————–

Glossary of technical terms

  • Consumerism – the equation of personal happiness with the purchase of material possessions, often linked with unlimited consumption.
  • Credit - a contractual agreement in which a borrower receives something of value now and agrees to repay the lender later at an agreed rate over an agreed time.
  • Derivatives – contracts that gamble on the future prices of assets, thus deriving their value from primary assets, such as currency, commodities, stocks, and bonds.
  • GDP – Gross Domestic Product: The total market value of all final goods and services produced in a country in a given year.
  • Neoliberal capitalism – a form of capitalism that theoretically opposes state intervention in the economy, advocating complete privatisation of resources, deregulation of financial markets and elimination of restrictions on trade.
  • Sub-prime mortgage – where banks provide loans to borrowers deemed ‘subprime’, defined so due to a heightened risk of default as shown for example through a bad credit history.