The Collapse of Global Capitalism: What Can We Learn from the Global Financial Crisis?

The Collapse of Global Capitalism: What Can We Learn from the Global Financial Crisis? The Financial Crisis 5 years on By Jamal Harwood

(Slide 2) Introduction It is now 5 years since the greatest crisis since 1929 has hit the world economy. But unlike the crisis of 1929, the recovery has been very slow and painful with growth rates now significantly lower 5 years after the depression. Of course the degree of media control and “presentation” of the situation is much more developed compared to the 20’s and 30’s so most of the world is unaware of the dangerous situation we are in. What is not hidden is the dire poverty engulfing more than a third of the world, or the growing chasm between the wealthiest 1 percent and the rest of the world, or the continuing control of vital resources which the largest nations monopolise. What is most striking is that the ills which caused the crisis, the catastrophic excesses and unbridled corruption are still there. Little has changed. Despite widespread debate the conditions which caused the crisis remain, and in fact are leading to another crash. Nothing is solved. Apathy; whether from regulators, politicians or the general public is appalling. Today I wish to refresh our minds of what happened in the last 10 years leading up to this crisis, what has happened in the 5 years since the crisis hit in 2008, why we are still in crisis and Islamic solutions to this ongoing crisis. (Slide 3) Casues of the crisis in 2008 The key elements of the crisis were the unprecedented run up in debt which led to a US housing bubble, and subsequently a completely over the top, out of control financial sector which used cheap credit to gamble – at times 100 times leveraged – to generate obscene winnings and then inevitably losses which were beyond comprehension. Faced with the option of the whole financial system going down together with many businesses and the public along with it, governments took the unprecedented decision to bail out the worst perpetrators of the crimes. Furthermore this has been built exclusively upon the back of fiat – paper money. Money which has relentlessly and corruptly been created from nothing, which debauches the currency, introducing the persistent evil of inflation and falling living standards. The cruelest of taxes which the poorest pay. (4) Casuse for pessimism: search for alternatives? • Growth has not returned and is being over stated • Joblessness is growing and is being under stated • Inflation is growing fast and is being under stated • Swingeing cuts to social and public services • Risk still at record levels – derivatives little or no control over it. As if there was never a problem here • Corruption in financial circles endemic and not being tackled – relatively small fines are levied against companies rather than imprisonment of officers • Growing indebtedness – governments, business, individuals • Inflating investment assets – stock and bond markets (5) I believe there are 3 inherent crises in Capitalism which must be addressed for there to be change: • Clear weaknesses in the Rule of law and its application • A Growth/Profit obsession at all costs which is out of control • Corruption/Manipulation which is now at the heart of ruling And each is growing upon another feeding a further circle of decline… (6) These crises are either being ignored or the powers that be are happy to game the system further for their benefit. Consequently the division between the wealthy and poor is getting wider and wider. The world's 100 richest people earned $240 billion in 2012 – enough money to end extreme poverty worldwide four times over. “The richest 1 percent has increased its income by 60 percent in the last 20 years with the financial crisis accelerating rather than slowing the process,” while the income of the top 0.01 percent has seen even greater growth, according to Oxfam. (7) Some examples of the problem with the Rule of Law Banking laws in the west have always been generous to the banks, but they took a disastrous turn in 1998 when the Glass Steagall act was repealed. The result was to open up banks to combine investment and retail banking functions and an explosion in speculative trading, much of which was in the name of the newly emboldened larger banker comglomerates. Western economies have long before given up on controlling the evils of interest (although it is perverse that Central Banks have adopted close to zero percent interest rate policies to try and stimulate profitability and recovery). But the open allowance of interest and leveraged trading meant enormous risks being taken on by these banks. Leverage of 2 or 3 times is risky enough, yet 30 to 100 times their balance sheet assets? Prior to the crisis many large banks simply took on too much risk. (8) Growth/Profit Obsession Faced with growing pressures to continue growing and generate even greater profits the gambling culture ballooned. Not only required to meet the impossible needs of growing interest payments, the shareholder demands and bonus culture of large banks demanded ever greater forms of gambling in derivatives markets. The notional value of derivative financial instruments is now estimated at $1.2 quadrillion – that is, one thousand two hundred trillion dollars. This amounts to 17 times the Gross World Product, which is the value of all the goods and services produced per year by every man, woman and child on the planet: $72 trillion. Derivatives are valued at six times the total accumulated wealth of the world, including all global stock markets, insurance funds, and family wealth: $200 trillion. The great bulk of known derivative deals are held by banks that are considered too big to be allowed to fail, with the top four banks accounting for more than 90 percent of the exposure: J.P. Morgan Chase, Citibank, Bank of America, and Goldman Sachs. [1] Through large scale these banks can move markets and “Gamble” to generate greater profits. But with the twist that the Federal Reserve and other Central Banks will back up their losses via taxpayer money – The Troubled Asset Relief programme of $700 billion was only the first of many taxpayer bailouts of the banks. With more than 2 thirds of this derivatives mountain invested in interest rate bets even a relatively modest increase in interest rates will have disastrous consequences for these banks and the world economy. Concentration in the banking market is also a problem. The big banks are bigger than ever. The Wall Street Journal reported that the top 4 US banks hold $214 trillion in derivatives. ‘Too Big to Fail’ banks are pushing the little guys out of existence. The WSJ reported that more than 10,000 banks collapsed in the last 20 years. (9) With concentration comes opportunities to control the markets. These banks have become “the market”. They thrive on their ability to move markets small amounts and via enormous leverage reap high profits. They also have been implicated in illegal market manipulations in the: • Libor fixing scam (several banks) • Drug money laundering (HSBC) • Foreign Exchange market • Mortgage bonds • Precious metals manipulation – (JPMorgan, Bullion banks) In each case either insignificant fines were applied to the perpetrators of the crimes with no senior officers of the banks prosecuted or no action at all was taken against the banks. (10) Corrupt relationships in Government When the Federal Reserve is a private owned company for which the major banks are the key shareholders we should not be surprised that the Federal Reserve and indeed the other major central banks act in the interests of the banks first and foremost. The major banks provide the key officers to the governments and central banks. At the time of the Lehman crisis, the records show that Goldman chief Lloyd Blankfeld was on the phone with Paul Geithner (Treasury Secretary), and a former Goldman employee, no fewer than 18 times in one 24-hour period. Geithner came to the Street’s aid almost overnight... with $700 billion... plus federal guarantees worth, according to the former Inspector General of the TARP (troubled asset relief program) program, of $21 trillion. One of the greatest threats to future economic stability is the continued quantitative easing (QE) which prints money and places it into the hands of the key banks for investment. Manipulation of interest rates down to enable banks to recover. QE including buying $40 billion per month of mortgage backed securities is not about recovery but about helping insolvent banks recover. It is the banks which were over-extended with their inflated mortgage products yet the public is funding their bailout. It is no longer a free market. Department of the Treasury has a stabilization fund “…to provide an orderly system of exchange rates, the Secretary… with the approval of the President, may deal in gold, foreign exchange, and other instruments of credit and securities”. [2] When Western governments and their proxies step in to control markets this runs counter to all of the principles of the free market that we are led to believe are sacrosanct in Capitalism. The situation has gone far beyond merely helping banks. The market and reporting distortions are now so commonplace that it has almost become unremarkable in the mainstream media. Before moving onto the Islamic solutions to this crisis I’d like to quickly talk you through several slides highlighting the signposts of this crisis and how it has most certainly not gone away. (11) Derivatives market is as large as ever with 2008/9 in which there was a near meltdown in the whole financial markets seen as merely a blip. There is no good reason for a Casino of this size other than to pander to the profit motives of the banking system. (12) (13) The media tells us we have a slow but sustainable recover since 2008, but when we adjust it for rates of inflation based on the way inflation used to be calculated before governments started to game the system, the recovery is non-existent. (14) Despite words to the contrary government control of markets and the inherent volatility inherent within Capitalist markets mean that there is no improvement in generating business cycle stability. Boom and bust is here to stay. (15) Governments continue to overspend regardless of the consequences to attract and appease voters. This coupled with continued depression in real markets mean that budget deficits are soaring. (16) The US leads the world in developing debt. This is only the tip of the iceberg. Unfunded commitments including medicare, medicade, government pensions and other other schemes will exacerbate the problem for the US. (17) For an economy that is supposed to be in recovery this is not normal. Since 2008, the main central banks of the world have printed $9 trillion. On top of that, the US federal debt has increased by almost $8 trillion during that same time period. If we had a temporary crisis in 2008, then money printing should have stopped. But is hasn’t. And the printing is continuing at the same rate since 2010. Since 2010, the biggest central banks have printed $5 trillion, and US debt has increased by another $5 trillion. (18) But the problem is not only a US problem. Japan is probably the worst in this market and future generations will suffer in paying back debt they did not benefit from. The net effect of this growth is accelerated use of resources and their transfer to banking cartels in the service of this debt. (19) The Capitalist world is addicted to debt. The 8% compound annual growth rate for the past 30 years is required to feed the need for growth, which is needed to pay interest on debt and repay earlier debt obligations. Yet the slight correction of 2008/9 was so severe it nearly brought the whole market down. (20) The solution to everything is to continue more money printing. This has no relationship to what the real economies are doing. The fractional reserve based monetary system imposes an imperative on the expansion of the M1 money supply so that debt service is possible on the current loans in circulation. In this monetary system, all money is loaned into existence and therefore all money exists as debt. Therefore the monetary base needs to constantly grow along with the underlying growth in goods and services so as to avoid rampant monetary inflation when the money supply outstrips the growth in goods and services, and to meet interest payments. (21) The more money printed the greater likelihood it will get out of control. We are on a trajectory which is parabolic. When will it end? How will it end? (22) The cost of out of control debt is consistent and high inflation. The key event on this chart is the establishment of the Federal Reserve bank in 1913 which works for the banks. (23) After numerous changes to the way it is calculated real inflation is really much higher than that reported. In the US current figures are closer to 10% per annum rather than 2 or 3%. Just keep track of food and energy costs and you will see a clearer understanding of inflation. (24) Many of the figures are “managed” real growth is also much lower than reported. Even so the downward trend in this chart is clear and shows the failure of the system. (25) Manipulation of unemployment figures is probably the worst. In the US they remove people from the lists of those looking for work when they become long term unemployed and many new jobs are part-time. (26) In the US numbers relying on food stamps is steadily increasing despite claims that unemployment rate is down. A strong indication that all is not right with their numbers. (27) Massive quantitative easing is benefiting the stock market. The money is flowing to banks and they are keeping bond and stock markets afloat. It is not about helping the general public. (28) Increased money and productivity is not trickling down to real wages. So if there was recovery one would expect wage earners to participate in the improvements. Or is this general oppression? (29) Wages are not keeping pace with inflation over the past 30 years. (30) The only age group in the US which is increasing employment is the over 55’s. One normally expects recovery to be employment led, but the West is facing lost generations with the young particularly badly hit. (31) ISLAMIC SOLUTIONS TO THE CRISIS Islam is a comprehensive way of life covering all aspects of behaviour. Within this vast array of guidance I would like to highlight a few key elements which the world is crying out for and relate specifically to the financial crisis. (32) Political Stability It seems strange that within the Muslim world anyone could speak of political stability as a benefit. Where is it you could ask? But if you look at our history and in particular base your thinking on the Sunnah of the Prophet (saw) and the Quran you will notice many key matters. Whilst political parties are essential in Islam, they are for accountability and Dawah purposes only. They are not for ruling like the Republican, Democratic, Conservative, etc parties. This is a critical matter as ruling is distinctive from party loyalties. It also cuts away the dangers of patronage, political lobbying for profit and means true independence from the many business interests which dominate Capitalist. Consider also the damage done to an economy by the lame duck president or prime minister that is merely waiting for the next election to renew their position. Perhaps the greatest damage of the Democratic Capitalist system is the continuous re-election cycles which mean that politicians are constantly trying to implement popular and expensive vote winning policies rather than what is essential for the economy. A balanced budget is a necessity in Islam and our economy is geared towards circulation of wealth and a much smaller government size. The Caliph will appoint the key economic and administrative positions and is not limited by party or business affiliations. (33) Non Interest Economy Islam forbids all usurious (interest) based transactions. “Whereas Allah has permitted trade but forbidden usury (interest)” [TMQ Al-Baqarah 2:275] The provision of interest across most financial transactions acts as a form of taxation, it is an additional cost and consequently is a drag on profitability, investment and growth. Rather than equity/partnership based investment the interest/debt model popular in western economies has meant that banks and finance providers can not only create money from nothing (fractional reserve banking) but can charge interest (expense). Furthermore via collateral lending, lenders can guarantee virtually risk free returns via the requirement for valued assets to be put up as collateral against non payment of principal and interest. In desperate attempts to get economies moving, governments have been steadily reducing interest rates to nearly zero but only for their financial institutions. Interestingly banks charge what they like with impunity. With the opportunity to make enormous margins, the system gives the banks carte-blanche to win from this situation. Imagine the positive impact of reducing all sovereign debt interest rates to zero, far better for Greece, Portugal, etc. to pay zero percent and repay their loans rather than plead for reductions in rates or to simply default. Why should society tolerate these “middlemen” that constantly steal from the public with little regard for the usurious rates they charge and with relatively little risk. How much better would we be now if the bailouts were making all mortgages at zero percent rather than the zero rate money and hundreds of billions of tax paid loans given to bankers. Investors depending on interest rate returns including pension funds are now being stung by the low interest policies of governments. If the whole system was based upon equity/partnership returns rather than interest as advocated by Islam, then the consistency of investment approach would provide greater certainty and stability based on business profitability rather than variable interest rate returns. (34) Gold/Silver based currency How absurd that governments can get away with the paper fiat money standard and all the misery it causes. Large budget deficit and no one prepared to loan to you? Not a problem, your government will just print more paper money. Financial sleight of hand. The US 17 trillion $ debt (6 trillion of which has arisen since 2008) highlights an out of control government, with little regard to the wealth of all that use the dollar. In the Islamic State the currency is fully administered and managed by the State treasury (Beit al Mal). The state is obliged to back 100% any issued currency notes (with physical gold and silver) – no fractional banking is tolerated by Shariah and gold/silver reserves are fully open to public audit. As a consequence fractional reserve banking is not allowed within the state and no growth of money (open market money creation) via banking groups or the state is tolerated. Money is treated as a medium of exchange and consequently is not a monetary tool for banking interests. With monetary supply dependent upon wealth within the state, currency induced inflation is minimal and cannot reach levels seen during the 1970’s for example when the US took the world unilaterally away from the gold standard in 1971. Historically the level of inflation and deflation under the gold standard was low and within a 2% variation (not more than 2% inflation or deflation). A new report on the arguments for a return to the gold standard [Gold Standard: The Future for a Stable Global Currency] is available for free download from: http://www.hizb.org.uk/solutions/gold-standard-the-future-for-a-stable-global-currency (35) No hoarding of wealth “And those who hoard gold and silver and do not spend them in the Path of Allah then announce to them a painful torment” [TMQ 9:34] With interest based economies and the associated bust and boom cycle, this means wealth is alternately readily available for investment in times of growth and withdrawn from investment in recessionary times. With little or no disincentive from taking wealth out of circulation, banks, large corporations, and wealthy individuals will hold onto wealth and perpetuate the dis-investment cycle. Contraction in business, fewer jobs and further declines in government taxes results. A consistent environment for growth in the economy requires a consistent flow of wealth into the economy for investment. The interest based banking system is dominated by banks which provide liquidity when it suits them and withdraw capital when deleveraging as in the current cycle. When felt not to be profitable banks will not lend money and this forms obstacles to the circulation of wealth and a return to growth in the economy. (36) Taxation policy The plethora of taxes imposed on the public today under Capitalism is a great oppression. Islam has a simplified system which is predominantly based on wealth as opposed to income tax. By focusing upon accumulated wealth which is not invested (Zakat at 2.5% per annum), taxes on the productive capacity of the land (Kharaj) and head taxes (Jizya) for those who can afford them, the State is encouraging work/enterprise and investment and discouraging the withdrawal of wealth from circulation, exactly the conditions which banker dominated western economies are suffering most from. Inevitably the consequence is a smaller footprint for the state which coincides with the general perception that governments in the western world have taken on too much responsibility and are stifling recovery with ever higher taxes. Taxes which fall unevenly on the poorer via income and consumption taxes. Islam maintains a wealth and productive capacity of the land based taxation system which encourages full investment and a rapid circulation of wealth. (37) Gambling is prohibited The Derivative or virtual economy has led to massive volatility in financial markets, and this has spilled over into the real economy. Much of the need for many of the financial products that act as insurance to the volatility of the current economic approach is negated as the same degree of uncertainty does not exist with the Islamic economy. Gambling and derivative contracts add nothing to the economy but heightened counterparty risk. As winning and losing bets are between respective parties it is often felt that the economic impact is neutral, however the counterparty risk of a bank failure, and an attendant domino collapse was highlighted at the time of the collapse of Lehman brothers in 2008. The taking on of risk equal to more than 17 times the size of the world economy owes more to a drive to earn greater fees and earnings rather than a reduction in risk. One commentator likened the market to a 40 pound flea on the back of a 4 pound dog, with the dog now dying. Islam does not allow government bailouts of finance companies, short selling of financial assets, trade of gold and silver on futures exchanges (only spot trading for immediate delivery), sale of assets which are not owned, and a whole host of gambling contracts which are interest, insurance (CDS), and futures oriented. The ramifications in terms of instability and a drain on the public purse have already been witnessed and can only worsen. As long as these fundamentally corrupt practices which add nothing to the economy continue, and no legislation is brought to ban them, the public will suffer to the benefit of the banks. (38) Land reform The Quran stresses: “In order that it does not make a circuit between the wealthy” [TMQ Hashr 59:7] The aggregation of vast land tracts into the hands of a few has led to widespread poverty amongst the masses. In the US, 15% of the population now depends upon food stamps for basic food needs. Land ownership in one of the largest and most fertile countries in the world is but a dream for most, as it sadly is in most of the Muslim world, as Islamic law is not currently applied. Shariah law in this regard is very dynamic and enables widespread ownership amongst the many. If land is not utilised for a period of 3 years, it reverts to the State and will be re-allocated to those that will use it. Any member of the public can claim dead or unused lands, and leasing of lands by those that cannot utilise it directly is forbidden. This coupled with strict restrictions against any form of price fixing translates into dynamic land utilisation and far wider participation in the core wealth of the land. (39) Distinctive regulatory environment and true Financial Reform The UK reform called the “Vickers report” gives the banking sector 8 years to implement a few relatively minor changes including a degree of separation between investment and retail banking. It is shocking in its sheer underwhelming lack of recognition of the failings in the sector of recent years. The unbridled money creation, ballooning of derivatives, widespread excessive gambling and topped by Government bailouts with public money can be summed up in the fact that no one was arrested or charged, and no significant change of tack has been taken. It’s as if nothing happened in 2008. Regulation in Islam aims to foster a safe and productive environment where wealth that is generated can be more equitably distributed than the current Capitalist economy. It is not a means of creating entry barriers for small business or allowing favours to be granted by the political structure in response to lobbying and other underhand means as witnessed so often today. One may argue that the goals of regulation, namely to curtail open trade, are inherently in conflict with the goals of traders who are profit seekers and as such they will always have a limited ability to achieve their desired aims. In Islam, as wealth procurement is not the ultimate aim in life, as is earning the pleasure of Allah, such frictions have no reality as both the wealth and the means to obtain it lie firmly under the domain of the individuals desire to adhere to the Shariah rules which manifest this goal in life. (40) Social Welfare Forty eight percent of Americans now receive some form of government welfare payment. In the UK a third of the overall annual state budget (£200 billion) is consumed by welfare payments. Although this indicates a serious indictment of capitalist society and its enormous divisions between the wealthy and poor, at the heart of the problem is the relentless drive towards individualism we’ve witnessed in recent decades. The radical difference with Islam is that the primary responsibility for welfare falls to the mature males in the family, then the wider family (parents, mature children, siblings) before only finally when these avenues are not available, will the State step in to meet the basic needs (food, shelter, clothing) of the disadvantaged. The State supplements this obligation of a final backstop with the provision of basic education and healthcare. Concluding Comments The financial crisis of 2008 was a warning shot which sadly has not been heeded by academics, politicians and thinkers in the West. Much of what happened then is still in place and likely to occur again, only on a greater scale. We face an unprecedented opportunity to show the world workable solutions from Islam which can cure the ills we are facing. But we must be realistic in our approach. This means we must work for comprehensive change, Islam can only be applied comprehensively and not in a piecemeal manner. As the Quran warns: “And so judge between them by that which Allah has revealed and follow not their vain desires, but beware of them lest they turn you away from even just some part of that which Allah has revealed to you” [Quran 5:49] Many are now talking of the benefits of a gold standard, but gold/silver will not work in an interest based economy, nor in a society where derivative contracts distort all notions of ownership and value. You are witnessing one of the great munkars (evil) of history. Yet so many are sitting idly by. The Prophet (saw) warned: On the authority of Abu Saeed al-Khudri (may Allah be pleased with him) who said: I heard the Messenger of Allah say, “Whoever of you sees an evil must then change it with his hand. If he is not able to do so, then [he must change it ] with his tongue. And if he is not able to do so, then [he must change it] with his heart. And that is the slightest [effect of] faith.” (Recorded in Muslim) We need you to work for this change. Work with us. =================== Disampaikan pada Jakarta International Conference of Muslim Intellectuals (JICMI) Jamal D. Harwood adalah Analis Ekonomi yang memiliki pengalaman selama 25 tahun bekerja di sektor keuangan (JP Morgan dan Credit Suisse) dan sebagai konsultan manajemen. Saat ini beliau mengajar mengenai Keuangan (program MBA) di University of Wales, Inggris. Beliau telah banyak berbicara mengenai isu-isu ekonomi, hubungan internasional, politik dan Islam. Beliau pernah menjadi pembicara di Oxford Union pada tahun 2007 dan konferensi tentang krisis keuangan internasional di Khartoum, Sudan pada tahun 2009 dan di Beirut, Lebanon pada akhir tahun yang sama. Beliau telah terlibat dalam diskusi publik dan dialog dengan mantan Kanselir Norman Lamont, Jaksa Agung Inggris Dominic Greive MP, Jim O’Neill (Direktur Goldman Sachs Asset Management), Peter Rodman (mantan Asisten Menteri Pertahanan Inggris), Matt Frei (sebelumnya bekerja di BBC dan saat ini bekerja di Channel 4 News), David Smith (Editor Ekonomi dari The Sunday Times) dan kolumnis AS Jonah Goldberg. Tulisan beliau telah dimuat di majalah Time dan sering menjadi komentator mengenai krisis keuangan global di berbagai media Inggris. Beliau juga sering berbicara mengenai harga minyak dan masalah energi serta tampil dalam acara tetap di Islam Channel dan Press TV Inggris. ===================================== Jakarta International Conference of Muslim Intellectuals (JICMI) Convention Hall of SMESCO UKM. Ahad, 15 Desember 2013 Live Streaming di www.hizbut-tahrir.or.id Live report di: Facebook: https://www.facebook.com/Htiinfokom Twitter: https://twitter.com/hizbuttahrirID