Latest from GIFC

Saturday, 4 October 2008

Billions wiped off the worlds financial markets as US financial system disintegrates

"Capitalism’s ability to continually plunge into crisis raises the spectre that the free economy works only with the leg-up provided by the state"

Free market ideologues have been rather quiet for nearly a year now as their project is in tatters. Since the 1980’s the world was continually forced to liberalise their economies, privatise everything that could be and allow foreign capital to freely move around the globe. The project came to be known as ‘globalisation,’ and any whiff of state intervention in the economy was quickly silenced – Latin America even witnessed regime change.

The Capitalist bubble burst in spectacular fashion in the summer of 2007 when a large number of loans were defaulted upon in the US by people who were even given a sub standard definition – sub-prime. The defaulting of loans is a common practice in all mortgage markets across the world, most banks even have a bad debt account which is used to off-set any defaults. However the sub-prime crisis was different, it was different because of a new innovation in the financial industry called securitisation. This is where loan and mortgage repayments are sliced and diced and repackaged and then sold as a new product. This new innovation put highly risky loans alongside less risky loans (such as US treasury bonds) and was then sold like any other product, hence trade in debt became like any other product.

This new innovation attracted the worlds investment banks, drove up the price of real estate across the Western world and indebted the US to the tune of $12 trillion. One by one the Worlds retail banks, investment banks, housing authorities, Iceland and Northern Rock of the UK began falling into trouble as most of their loans were being defaulted upon. To shore up the huge losses they incurred the worlds speculators moved into the last remaining items that could be speculated upon – oil and food. The price of oil is on the verge of hitting $150 whilst the price of wheat and rice has doubled in less then a year.

State intervention

Whilst the IMF, World Bank and the World Trade Organisation have forced the worlds poor to completely liberalise their economies, removing all state support in the economy in the form of subsidies and tariffs, it is these very policies the West is pursuing to shore up their economies.

The British government nationalised Northern Rock when it was on the verge of collapse, whilst US investment house Bear Stearns was essentially bailed out by a combination of money from Merrill Lynch and the US Federal Reserve. Some economists have continued to hold, against mounting evidence to the contrary, that time and nature would restore prosperity if governments refrained from manipulating the economy. However policy makers all across the Western world who enforce such a policy on African nations reeling from the hike of food prices have actually done the complete opposite in order to starve of a recession – which is the ultimate taboo in Capitalism.

Fannie mae and Freddie Mac

The bail out of the two mortgage financers, who otherwise would have collapsed actually highlights how deep the problem is, the two firms own and guarantee half of all US home loans - $6 trillion. Their collapse would have meant the immediate writing off of half the US economy, and the effect on real estate, consumer spending, construction would have been catastrophic. It is for these reason the US government is pumping more and more money into the finance houses, even proposing the swap of bad debt for government bonds, this is seen by many as the best of the worst options.

Disaster Capitalism

Although there are many aspects to the credit crunch crisis, there is one fundamental problem with Capitalism that will always cause disaster. The ideal Capitalism aims to achieve in society is that of economic growth, this is that the economy should grow more then the previous year and still even more the prior years. The growth is measured in the form of GDP which actually measures in prices the amount the economy produces. Liberal economies then implement a whole host of polices to fuel this cycle be that debt, longer working hours, outsourcing or even tax breaks to companies. All aspects of the US economy are today geared towards this. It is for this very reason the US economy has the world’s largest service sector where retail spending, entertainment and pornography drive the whole economy.

When society has spent beyond its means it is inevitable such crisis will occur as spending and consumption is what drives the economy to continually produce, whatever the affect on society.

All though the US generated nearly $14 trillion in 2007, the national debt – this is money the central and federal governments owe to the US public and the world through the bonds they have sold stands at $9.7 trillion. US citizenry have a huge appetite for imports and real estate as a result consumer debt stands at $11.4 trillion. The debts of US companies amount to $18.4 trillion. This makes the US indebted to the tune of just under $40 trillion – nearly 75% of what the world produces. It is a principal of Capitalism that there is never too much of anything: never too much growth, never too much speculation, never too high a salary, never too many flights, never too many cars, never too much trade and never too much Oil. What Capitalism has created is speculation, recklessness, greed, arrogance and over-indulgence. This is why every boom is followed by a bust and will continue to do so.

(Global Issues)

Alfalah Consulting - Kuala Lumpur:
Consultant/Speaker/Motivator : 
Islamic Investment Malaysia:

No comments:

Upcoming Events on Islamic Finance, Wealth Management, Business, Management, Motivational Alfalah Consulting, KL-Malaysia:


Register Online . Register Today

Islamic Financial Planning & Wealth Management by Ahmad Sanusi Husain