[GJM] GlobalVision2000 and Press TV. Paper on Islamic research.
Rodney Shakespeare
rodney.shakespeare1 at btinternet.com
Wed Dec 12 13:17:35 MST 2007
Dear All,
1.Moeen Yaseen of GlobalVision2000 organised a meeting in London at which I spoke (Is There a Global Financial Crash Happening?)
The meeting is having interesting consequences. One of them is an hour long interview/discussion between Moeen and I and Yvonne Ridley for Press TV. Press TV is a new Iranian government tv station hoping to challenge al-jazeera. The program is being recorded next Monday, 17th December and we are told it will be broadcast on the Press TV channel via 10+ different satellite systems world wide at these times:-
Wednesday 19th 14.05
Thursday 20th 02.05
Friday 21st 00.05
Monday 24th 04.05
However you will also be able to see the program on the internet. The website is:http://www.presstv.com. To watch it when being broadcast go to the "watch it " icon on the top of the page at the times stated. In order to see the archive go to "programs" on the left handside.
2. Moeen asks that my meeting notes be sent to the GJM and the opportunity is also being taken to post a paper I have done on Strategy for Future Research in Islamic Economics.
Because it may take Mary a while to formally post the notes and the paper (and they are relevant to the Press TV broadcast) I am first enclosing them below.. In both notes and paper there should be a diagram at the end but it has not come out properly. To see it, please visit any main page at www.binaryeconomics.net.
Season's Wishes
Rodney Shakespeare.
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Global Vision Forum / Political Consultancy / Economics / The Modern Universal Paradigm
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The Modern Universal Paradigm
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Post: #11The Modern Universal Paradigm
STRATEGY FOR FUTURE RESEARCH IN ISLAMIC ECONOMICS ─ A MODERN LOAN SUPPLY GENUINELY FREE FROM INTEREST
Rodney Shakespeare
ABSTRACT
Islamic Economics has generally failed to address the subject of a modern loan supply genuinely free from Riba/interest. Yet Islam abhors Riba/interest and the possibilities inherent in interest-free loans are immense. One reason for the failure is that administrative cost, which is necessary, is often confused with interest which is not. Furthermore there is inadequate recognition that nowadays money is created out of nothing by the banking system and is not directed at the needs of the real economy. Consequently Muslims are generally unaware of the beneficial possibilities which arise when a national bank creates interest-free loans to be administered by the banking system on market principles (including the taking of collateral). The loans halve or more the usual cost for micro-finance; public capital projects; environmental capital projects; small businesses and farms; medium and large corporations (if wider ownership is thereby facilitated); and student loans. By using such loans Islam could lead the world.
1. INTRODUCTION
Islamic Economics has generally not discussed the subject of a modern loan supply genuinely free from Riba/interest. This is surprising because the subject stimulates consideration of many fundamental matters including:-
inflation
the origin of money supply
the necessity, or otherwise, for Riba/interest
the uses to which today’s money supply is put
the efficiency and justice of those uses
It is the more surprising because Islam as a whole has deep concerns about inflation, Riba, the need for a real economy, and social and economic justice. Thus attention is undoubtedly being given to Islamic Banking which has recently expanded at a truly remarkable rate. Yet that attention generally focuses on the appearance of the elimination of interest rather than perhaps the reality (Siddiqi, 2006); does not examine in depth the causes of inflation; ignores the true origin of the money supply; and is not too much concerned with the uses to which a loan is put as long as, prima facie, it can be repaid.
Gold, however, is undoubtedly being discussed in the context of the nature of the currency and the origin of the money supply (Meera, 2006). Yet that discussion can have a very limited scope as when gold is canvassed with the main emphasis on gold as a non-fiat, non-inflationary currency rather than a currency free from Riba − for some of the authors gold itself is paramount. Similarly, gold may indeed be highly desirable as being anti-inflationary and part of the Islamic heritage but, in today’s circumstances, discussion of gold should not ignore the big issues of our time. These issues include social and economic justice and how to raise the vast sums of money for the big capital projects needed to fight global warming and the impending environmental crisis. The truth is ─ gold by itself is far from being enough.
All in all a huge subject − a new modern economics using a loan supply genuinely free from interest − is waiting to be researched and developed for the benefit of the world. However, an understanding of possibility and new associated practical mechanisms will not happen until the suffocating fog, dank murk and miasma of mainstream neoclassical economics (now almost universally prevailing throughout the world) are removed. Until that fog, murk and miasma have been blown away things will never be seen and understood in a truer, more positive light; indeed, without a fresh, clearing wind, no fundamentally new thinking and efficacious new policy for the modern world will be possible.
In order to help create that wind the next section outlines some of the weaknesses, particularly the false assumptions, of mainstream neoclassical economics.
2. THE FALSE ASSUMPTIONS OF MAINSTREAM NEOCLASSICAL ECONOMICS
Mainstream neoclassical economics is a comprehensive paradigm or view of reality in which the parts ultimately relate to the whole. The parts, therefore, have to be understood in their relationship to the other parts and in all cases the underlying assumptions must be examined.
Unfortunately, neoclassical economics is largely based on false assumptions so that the whole paradigm amounts to falsity on a cosmic scale (Shakespeare, 2007). Some of the assumptions ─ which neoclassical economics has no intention of investigating, let alone changing ─ are briefly set out below.
Neoclassical economics falsely assumes:─
i) Inevitable scarcity. It is true that material matters must be practised with good husbandry but that is a separate matter from the prevailing assumption that there can never be a reasonable standard of living for all people. It is only when the falsity of the scarcity assumption is recognised that economics as a study will wake up to its own responsibility for poverty in the world.
ii) The concept of homo economicus. This view of human nature is negative, narrow and restricted seeing humans as entirely self-centred. While it prevails selfishness will prevail and that has significantly negative consequences in a world in which, for example, huge environmental issues are coming to the fore.
iii) Ethics is irrelevant to economics. This assumption comes about because neoclassical economics views the paid economy as being the same as society. But this completely ignores, for example, the incalculable productive value of people such as carers who selflessly serve others in myriad ways including nurturing the next generation.
iv) Financial savings are necessary before investment can be made. It is claimed that financial savings need to be made before there can be investment. Yet this is not true and is completely out of touch with modern reality. Nowadays money is created out of nothing by the banking system (see section 5 below) and so there is no need for financial savings before investment can be made. Of course, there are important issues as to whether or not a particular investment will pay for itself; whether or not there is sufficient collateral; and what are the purposes for which the investment is made, but insufficiency of money is not in itself a valid argument. Since money is nowadays created out of nothing the key issues should be whether an investment will pay for itself; whether it is truly part of the productive economy, and whether it develops and spreads productive capacity.
v) Physical savings are necessary before investment can be made. The conventional assumption is that there must be physical savings before investment is made. That is indeed true of seeds, for example, but it is not generally true in modern conditions where physical shortage generally only results in a rise in price rather than a complete denial of opportunity not least because, if the price is too high, alternatives may be available. There can be a shortage of human skills, for example, but the solution is to pay more or provide more training. The true restriction on investment in practice is, as with financial resources, whether the investment can pay for itself. A further restriction should be whether the investment develops and spreads productive capacity.
vi) Doctrine of the time value of money. Associated with the claim that financial savings are necessary before investment can be made is the outdated doctrine of the time value of money. This says that Riba/interest is the payment for obtaining and spending money now rather than having to wait and then, through saving, spend the money later (Marshall, 1890). Behind the doctrine is the claim that lenders are sacrificing themselves in some way by giving up the advantage of possession of the lent money in order to accommodate the borrower. All of which is at least defensible if existing money is being lent. But what is the situation − as is the case today − when the lent money is created out of nothing by the banking system? When that is the case, there is no waiting and no sacrifice and the case for interest collapses.
Muslims should beware of outdated concepts such as the time value of money and conventional savings doctrine which are generally presented to the populace as unchallengeable slogans and everlasting truths. In reality, of course, they are cynical deceptions designed to maintain the malignant grip of money-lenders and other undesirable features of finance capitalism such as rich-poor division and economic colonialism.
Capital, although productive, is inferior to labour in the physical productive process. This assumption about the physical creation of wealth suits left-wing economics (which likes to think that humans do all the physical work of production) and also suits right-wing economics (which likes to hide the true value of productive capital assets) but it is a false view of physical reality which undervalues the contribution of capital instruments in the physical processes of production. This false view ─ upheld by an intellectual conspiracy between left and right ─ has huge consequences including the belief that it does not matter who owns the productive capital assets when it most certainly does matter (Ashford & Shakespeare, 1999).
The ‘free market’ is free, fair and efficient. The ‘free market’ is not free; it is unfree – for example, most people are in practice denied the ownership of productive capital. Nor is it fair or efficient. Thus 55% of the world’s population live on under $3 per day; 25,000 people die each day from the effects of dirty water; and, even in the USA, one fifth of the citizens live on under $7 per day (Shanley, 2004). Moreover, while claiming that the present system is just and fair neoclassical economics asserts that morality is not part of economics. Thus there is a contradiction between the claim to just outcomes and the claim not to be concerned with morality. The truth is that every economics (and neoclassical economics is no exception) has a morality, or an immorality, at its core.
Conventional endogenous loans are the secret of the alleged success of the ‘free market’. Conventional endogenous money consists of interest-bearing loans, emanating from the banking system, which loans, in practice, are not generally directed at the development and spreading of productive capacity. Rather they are directed at consumer credit, derivatives, existing asset prices, the casinos of the currency exchanges and the like.
Moreover, conventional endogenous loans bear interest which is financially, economically and socially profoundly debilitating. Interest can be viewed simply as an unnecessary ‘tax’, and a very large one, whose receipts go only to a small percentage of the population and to foreigners. Overall, the cost of interest causes 80% of the population to pay out much more than they receive; 10% are in balance; and the last 10% receive very much more than they pay out. Internationally, of course, the effects of compound interest are such that whole societies are trapped into an ever-increasing debt which they can never repay, and the attempt to repay in practice results in their economic resources being ripped off to outsiders (Kennedy, 1995). In fact, it is hard to see any justification for the imposition of interest since the original principal is created out of nothing and interest generally has hugely deleterious effects on the economy and society as a whole. The effects of interest are complex but in Aachen, Germany, interest on capital is 12% of the cost of rubbish collection; 38% of the cost of drinking water; 47% of the cost of sewage; and up to 77% of the cost of public housing. Indeed, it has been estimated that an amazing 50% of the price of all goods and services relates to borrowing costs (principal and interest). (Kennedy, 1995; El-Diwany, 2003).
And it should here be noted that, unfortunately, present Islamic Finance and Banking is unavoidably a part of the overall system. Islamic Finance and Banking certainly endeavours to avoid the appearance of interest by using various legal and administrative devices, but it cannot avoid the fact that at the heart of the present system is the creation of interest-bearing money by the banks (Siddiqi, 2006).
Thus it is undoubtedly true that conventional endogenous loans are central to the present ‘free market’ but it is also true that they are central to, and the major reason for, the ‘free market’s’ inefficiencies, faults and immorality.
3. THE NEGATIVE ATTITUDES OF ECONOMICS DEPARTMENTS IN THE UNIVERSITIES
It is bad enough that neoclassical economics is based on false assumptions but the falsity is compounded by the negative, hidebound and hubristic atmosphere in most university departments of economics which prevents any evolution of new thought. Thus, firstly, the lecturers have an egregious belief in their intellectual superiority and are vindictive towards those who would dare to differ in any way. When some twenty seven Cambridge (UK) PhD candidates wished to think anew they dared not publish their names (see the history of the Post-Autistic Economics movement).
Secondly, the departments generally deny a valid existence to alternative economic theories. It is not just a question of thinking something is wrong but of denying it any valid independent existence. At the heart of the matter is the conventional claim that mainstream economics is a ‘science’ (when, very patently, it is not).
Thirdly, the departments neglect, probably deliberately neglect, economic history. This neglect ultimately stems from seeing the concept of an efficient, just and perfected ‘free market’ economy as essentially a mathematical mechanism always reverting to equilibrium. With such a concept economic history appears to be of little relevance and, besides, it is inconvenient to remember such episodes as the Great Depression of the 1930s and to ask why they happened. However, the neglect of economic history becomes even more serious when, as at the time of writing this paper, circumstances are indicating that some sort of major global financial catastrophe is in the offing. History gives lessons and, alas, they are not being learnt.
Fourthly, the departments are suffused with the arrogant assumption that the ‘free market’ is not only efficient and just in practice but also is that manifestation of Perfection for which humans strive. Yes, there are imperfections at present, say the mainstream economists, but they are minor and capable of correction. The claimed evidence for the efficacy of the doctrine they preach is, of course, the collapse of communism in 1989. History has Ended (Fukyama, 1989), they think, and thus a smug inertia prevails.
4. REASONS FOR THE ISLAMIC FAILURE TO FOCUS ON A MODERN LOAN SUPPLY GENUINELY FREE FROM INTEREST
The main reasons why Islamic economics has not extensively focussed on a genuinely interest-free loan supply are as follows:─
a) Training in Western universities
It is undoubtedly the case that most Islamic economists have done some, if not all, of their training in the economics departments of Western universities which are generally dominated by mainstream neoclassical economics. Moreover, most non-Western universities are similarly dominated. The result is inevitable ─ a supine acquiescence in, even imitation of, neoclassical economics rather than a desire to develop a new independent economics responding to the needs of the modern world.
b) Misunderstanding as to the nature of Riba
It is not for the author of this paper to involve himself in what are strictly Islamic matters of interpretation of Quranic injunction and the like. It is, however, legitimate for him to comment on misunderstandings about Riba made by Muslims (which misunderstandings are equally, even more, prevalent with non-Muslims).
The essence of the matter is that what is usually called ‘interest’ is not a homogenous thing but rather something consisting of several distinct components. This is of great consequence when some of the components are necessary and some are not. Unfortunately the university departments make little effort to spell out the distinctions let alone examine whether or not interest is necessary. Indeed, the departments and the banking industry as a whole prefer deliberately to obfuscate or, at the very least, refuse to elucidate.
Thus people do not generally understand that interest as it is generally charged today is firstly, the payment for work done i.e. the payment for the cost of administration. Such cost becomes due as work is done. Secondly, however, there is the imposition of Riba/interest which is a recurring charge, usually compounded, which becomes regularly due entirely independently of whether or not any work has been done. Thus administration cost and interest are two totally different things (Gafoor, 2004).
Consequently the result of the obfuscation and the refusal to elucidate is that people believe ─ and, on the face of things, reasonably believe ─ that interest as a whole is what is charged for what is necessary (administration cost) when, in truth, a large proportion of what is charged (the interest) is not necessary.
The effect of the present imposition of interest is that a major deceit is being perpetrated and this can be easily understood by considering lending when made to governments. With such loans, 99% of the administration is done by the governments concerned yet governments of all sorts, right the way round the world, are conned into believing that the huge interest rates they are charged for borrowing are in some way legitimate and necessary. They are not.
Furthermore, in making the recognition that interest is not necessary, Muslims will easily come to a further recognition ─ that, if interest is eliminated, the cost of capital projects can be halved or more. This is because interest, particularly when compounded, adds hugely to the cost of a project. Indeed, in many cases, due to the accrual of interest, the money owed becomes incapable of ever being repaid. That is the basic mechanism which has caused the National Debt of most countries to rise to astronomical levels.
c) Misunderstanding of Say’s Theorem (Law)
Stemming from the false belief that today there is a true free market comes the false belief that Say’s Theorem (Law) has been implemented in practice. But that is not so − producers and consumers are not the same people as the theorem requires. It is interesting to observe that Jean-Baptiste Say himself, writing in 1803, noted that Adam Smith had got things wrong in respect of “Say’s Law”. Muslims and non-Muslims alike are under the misapprehension that the Theorem is implemented today but nothing could be further from the truth (Ashford & Shakespeare, 1999).
d) Misunderstanding of purposes of loans
In common with non-Muslims, Muslims misunderstand the purposes of loans in a true free market economy. Having been taught that repayment is everything (and that is not in itself unreasonable) they then assume that any loan capable of repayment is necessarily good and serving of free market purposes. But that is to ignore what has happened particularly over recent decades when, with an irresponsible greed prevailing, money has been created and lent for virtually any purpose other than that of the purposes of the true free market economy.
Misunderstanding as to the creation of money
There is great misunderstanding as to the origin of the money supply. Most of the new money supply is created by the banking system which then adds interest (Brown, 2007). This matter is dealt with more substantially in the section below.
5. NOWADAYS THE BANKING SYSTEM CREATES MONEY OUT OF NOTHING
Nowadays money is created out of nothing and the process takes place primarily in commercial banks. The Federal Reserve Bank of Chicago states:‑
“The actual process of money creation takes place primarily in banks.” (Federal Reserve Bank of Chicago, 1992).
Contrary to popular belief and continual propaganda, banks do not lend their own money nor do they lend money which has been deposited with them. Instead, lent money is new money which is created out of nothing and, on repayment, is cancelled.
In the UK, for example, 95% or more of new money is created out of nothing by the banking system which does it very simply ─ by pressing computer buttons (the other 5% or less is created by the government). Indeed, all around the world today, money is created out of nothing by the banking system which creates most of the money as loans to which a demand for interest (beyond justifiable administration and any other essential charges) is attached.
Sir Josiah Stamp, director of the UK Bank of England 1928−1941, stated in regard to banking:‑
“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented.” (Stamp, 1927)
Sir Reginald McKenna, UK Chancellor of the Exchequer 1915−16 and chairman of the Midland Bank for twenty four years, was blunt:‑
“I am afraid the ordinary citizen will not like to be told that the banks can, and do, create and destroy money. The amount of money in existence varies only with the action of the banks in increasing or decreasing deposits and bank purchases. We know how this is effected. Every loan, overdraft or bank purchase creates a deposit, and every repayment of a loan, overdraft or bank sale destroys a deposit.” (McKenna, 1928).
The method of creating money out of nothing was neatly summarised by Graham Towers, Governor of the Central Bank of Canada 1934−1954, who said:‑
“Each and every time a bank makes a loan, new bank credit is created ─ new deposits ─ brand new money.” (Canadian Government Committee on Banking and Commerce, 1939)
Speaking of money, he also said that:‑
“The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all.”
All of which might not matter too much if the newly created money was always used for the purposes of the real economy in such as way so as to encompass social and economic justice and to eliminate inflation. But it is not so used. In reality the present banking system puts the newly created money into rising asset prices, derivatives (which may yet cause a collapse of the world’s financial system) and consumer credit.
Furthermore, because the system creates sufficient money for the repayment of the principal of a loan but not sufficient for the repayment of the interest as well, there is a continual need to create more interest-bearing money which continual creation is the major cause of inflation.
“Contrary to popular belief, creeping inflation is not caused by the government irresponsibly printing dollars. It is caused by banks expanding the money supply with loans.” (Brown, 2007)
6. NATIONAL BANK-ISSUED INTEREST-FREE LOANS
There is no reason why a national bank cannot create money to be lent interest-free as long as the money is responsibly administered, effectively collateralised, directed solely at productive capacity (e.g., a small business, a bridge or hospital), serves the purposes of social and economic justice, is repaid, and then cancelled. This money would bear genuine administration cost, but not interest ─ administration cost is necessary, interest is not.
Therefore a government, using its national bank and the banking system and generally insisting on market and private property principles, can ensure that all of the supply of new interest-free money to an economy can go towards the development and spreading of new productive capacity.
The mechanism for the loans is simple. The national bank creates the money and lends it interest-free via the banking system which administers the loans. An approved organisation could receive and administer the loans and an example is the Bangladesh Grameen Bank which would receive the interest-free loans and on-lend them thereby in practice roughly halving the costs to the borrowers (who would still have to pay administration and training costs).
It is therefore possible to comprehend a supply of interest-free loans emanating from a national bank (or from the Islamic ummah or even from zakah) which is then administered by the banking system for the purposes of implementing Say’s Theorem and forwarding social and economic justice. The loans would be repaid to the commercial banks which then repay the national bank which cancels the loan. In this way the money, which has fulfilled its creative purposes, is cancelled out of existence leaving behind the productive and environmental capacity in physical existence. At the same time, gradually, with ups and downs, the commercial banking system would become increasingly restricted in its present capacity to create money out of nothing by a requirement that it deposit an increasing percentage of reserves (eventually 100%) with the national bank. Islamic commercial banks would continue with, for example, profit and loss sharing and mark-up financing (Ismail & Ahmad, 2004).
Because no riba/interest is involved the general result is a halving (even one third or a quarter) of the cost of new productive capacity; a wider distribution of productive and consuming power; a much greater efficiency; and a much greater social and economic justice. Just as importantly, debt is reduced; national debt is reduced; and national independence is increased.
Thus national bank-issued interest-free loans can combine efficiency with social and economic justice. The loans (administered by the private banking system) are directly related to the real economy, made repayable and, when repaid, are cancelled thus ensuring that productive assets always back a society’s currency. The cancellation of the money on its repayment ensures that there can be no inflation because a productive asset has been created and the money used to bring it into existence is eliminated.
7. SPECIFIC USES OF NATIONAL BANK-ISSUED INTEREST-FREE LOANS
Specific uses of the loans are as follows:−
a) Micro-finance, small businesses and farms
Interest-free micro-finance can result in halving the cost to the borrower. Repayment for training and administration cost is necessary but interest, as an additional burden, is not. The Grameen Bank and similar organisations should have a supply of interest-free money. Small businesses and farms in general should also have interest-free loans (and collateral would be taken as at present).
b) Widespread capital ownership
The loans can also be used to spread productive capital ownership to everybody in society − certainly in the case of the large mature corporations, there is no reason why capital ownership cannot be spread more widely (Ashford & Shakespeare, 1999). The basic principle is that corporations may have interest-free loans as long as they make use of the trust mechanisms of binary economics to spread ownership widely. Collateral is taken.
Wide ownership ─ on the principles, and using the mechanisms, of binary economics ─ uses interest-free money to enable any person in the population, over time on market principles, to have a basket of shares paying out their true, full earnings. In practice it means that not only employees but people not in formal employment (e.g., women carers and children) may have an income because they have been connected to what truly creates wealth ─ productive capital assets. Moreover, the result is a Say’s Theorem balance of producers and consumers being the same people.
c) Public capital.
The cost of public capital projects can be halved, even quartered. Bridges, hospitals, roads, sewage and water works are vital. It is ridiculous to use interest-bearing money for such projects as happens at present. Society’s projects should be built as economically as possible so that more projects may be built. Repayment would be as at present except that, there being no interest, the overall cost would be greatly diminished to one half, even one quarter, of the usual cost.
Interest-free loans for public capital projects have been used by the Channel Island of Guernsey over the years. Guernsey has minimal national debt. Malaysia is believed to be experimenting with such loans and, of late, has achieved some remarkable feats of construction. Over the period 1939 − 1974 (a prosperous period) Canada used the loans and, today, many Canadian municipalities are demanding their use again to upgrade poor infrastructure. In the USA, 3,400 governmental bodies (local boards, towns, cities etc) and six State governments support the idea of interest-free money for infrastructure ─ a Bill reached Congress but was defeated by powerful vested interests. After 1935 New Zealand used such loans ─ for hydropower schemes, railways, state housing etc. ─ and had a remarkably prosperous period
d) Student loans
Well qualified students are essential for any modern society. All natural talent must be brought forward and that can only be done by removing unnecessary financial obstacles. Therefore interest-free loans for students should be made available.
e) Environmental capital projects
Large-scale environmental capital projects must come into being if the world as a whole is to be saved. In particular it is essential to promote technology for the clean and renewable generation of electricity. At present, using interest-bearing loans, a lot of clean electricity generation is not financially viable. With interest-free loans, however, it would become viable. Thus we could have, for example, clean electricity through tidal barrages, dams, windmills, wave machines, solar electricity, and geothermal power stations.
Moreover, there are many alternative technologies which hold promise and interest-free funding should be made available for their development. The future of the world depends upon bringing into being new technologies for the clean (no carbon dioxide) generation of electricity and only interest-free loans can do that.
7. ADDRESSING TWO RAPIDLY APPROACHING CRISES
There are two rapidly approaching crises −in the global environment and in the global financial system. Both will be catastrophic for the world and so both must be immediately addressed.
a) The global environmental crisis
The use of interest-free loans for environmental capital projects has been considered but the implications of national bank-issued interest-free loans go far wider than the provision of capital projects.
The loans enable the spreading of productive (and the associated consuming) capacity so that all individuals in the population − including babies, carers and those not normally in conventional employment − have at least some form of secure, independent income. The income starts small and grows larger over time (Kurland, Brohawn & Greaney, 2004). The consequent feelings of material security are essential if there is to be any hope of changing people’s attitudes towards excessive consumption (Ashford & Shakespeare, 1999). This is because today virtually everyone has either had a scarring experience of poverty or has a perception or fear that they might fall into poverty. In short, people feel insecure and that is one of the main factors in explaining greed. Feelings of insecurity − and the associated aggressive consuming attitudes − will only disappear if all people have material security and, at the same time, all people in some degree earn in exactly the same way as do others (i.e. at least part of their individual income should come through capital ownership). Only then will there be hope of people voluntarily minimising their greed.
Greed is also caused by the present financial system which creates sufficient money for the principal of interest-bearing loans to be repaid but does not create sufficient money with which to repay the interest. The result is that more interest-bearing money has to be created (with more inflation and more people going into debt) and more frenetic activity in the endeavour to try to make repayment (El-Diwany, 2003). Worse, the system favours the short term destruction of natural wealth rather than its long term maintenance.
It is also the case that populations stabilise when there is a reasonable standard of living, good education and health, and at least some status for women. The loans are capable of providing these things and are essential if the present growth of the world’s population is to be moderated (Shakespeare, 2007).
b) The global financial crisis
Unless the role of interest in the financial system is substantially diminished, not only is the environment at risk but so also is the stability of the world financial system. Today there has been the reckless creation of money out of nothing which money then has to bear interest and is not directed at the spreading and development of productive capacity. The result is a global financial system in which debt is rife, greed is rampant, and common sense has flown out of the window. It is a complete delusion to blame the present financial troubles on sub-prime lending in the USA. The crisis is a hundred times more fundamental than that. It is now too late to stop the impending global financial crisis but research into the benefits of national bank-issued interest-free loans can provide the new way forward by truly freeing markets; by avoiding booms and slumps; by ensuring a structural social and economic justice; by developing and spreading productive capacity; by directly linking the money supply with the real economy; by greatly lessening Riba; by greatly lessening debt; and by increasing national sovereignty and mitigating economic colonialism. Other consequences of the loans are a deepening of democracy, an addressing of the impending environmental crisis and policy to unite inhabitants who have different linguistic, religious, geographical and ethnic backgrounds.
Islamic Economics should take a strategic view and immediately forward research into this hugely important subject thereby giving a lead to a world sorely in need of such a lead.
A gradual rise to 100% banking reserves requirement stops the banking system from creating money out of nothing
Interest-free loans for productive purposes then come from
OR
and are lent to approved institutions
which may charge for administration cost but may NOT add interest
as they lend for
thereby halving or more the cost
Binary Economics spreads ownership
References
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(1986, 1991), Democracy and Economic Power – Extending the ESOP Revolution through Binary Economics, University Press of America.
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Shakespeare, Rodney & Challen, Peter (2002), Seven Steps to Justice.
Shanley, William. Poverty in America: American Dream Now a Nightmare for Millions? One in Five Lives on Less than $7 per day Global Research, April 23, 2007 www.globalresearch.ca
Siddiqi, M. Nejatullah. Shariah, Economics and the Progress of Islamic Finance: The Role of Shariah Experts, Seventh Harvard Forum on Islamic Finance, “Integrating Islamic Finance into the Mainstream”, Harvard University, April, 2006.
Stamp, Josiah (1927), speech at University of Texas.
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MOVING TOWARDS THE UNIVERSAL PARADIGM SHIFT FOR THE 21ST CENTURY
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Post: #12The Modern Universal Paradigm
Transcript of speech given on December 5 2007 at the GCC on
IS THERE A GLOBAL FINANCIAL CRASH HAPPENING ? WHAT IS THE ANSWER?
Professor Rodney Shakespeare
Bismillah al-Rahman al-Rahim
Chair,
I should like to thank you and Global Vision 2000 for inviting Canon Peter Challen and I to speak tonight and, in particular, to thank the Gulf Cultural Club, its officers, members and guests, for being hosts.
Sir, for about ten years something big and nasty has been looming nearer and nearer. And as it gets nearer it is seen to have two nasty aspects, not one.
Firstly, there is the impending crisis of the global financial system and, secondly, the crisis of the global environment.
The two crises, however, are different. The financial crisis will have nasty consequences but afterwards life, however injured, will still go on but the global environmental crisis is of a totally different nature – when it happens, and it is rapidly getting nearer, life will be injured and then will end…….
Are the two crises connected? Oh yes.
And is there a solution to either crisis or both? Well, there could be.
The financial crisis
However, we cannot talk about solution until the causes of the present financial crisis are understood and we are told it’s to do with sub-prime mortgages – lending too much to people too poor to be able to repay.
Yet if they cannot repay, why did anybody ever think that the money could be lent in the first place? After all, lenders do not have to lend to those who cannot pay. So why did they lend?
And why is it that people right the way round the world are being caught by this sub-prime lending matter? Narvik in Norway is on the Arctic Circle. It has just lost around £10,000,000 (ten million pounds) and may soon lose much more. As mid-winter approaches, there will be no daylight in Narvik and it will all be gloom. Several other places in Norway – Memnes, Hattfjelldal and Rana -- are in the same predicament and essentially are bankrupt.
And in Germany the predicament is on a bigger scale with several regional banks being hit. These losses in Norway and Germany have something to do with America’s biggest bank – Citigroup and Citibank – yet Citigroup and Citibank itself is being hit and here you are talking not millions but billions of dollars. Indeed, Citigroup has been discovered to have over $80 billion of incredibly complex things off its balance sheet in secretive Cayman Islands institutions. Some of these things are called Structured Investment Vehicles or SIVs. Others are CBSs CDOs and RMBSs. More sensible people call them potential bombs waiting to explode.
And it’s not just Citigroup. Many of the famous USA institutions – Bear Stearns, Merrill Lynch -- are being hit and hit in strange ways. An American law case involves the Deutsche Bank wanting to foreclose on fourteen houses but the Bank did not have the original mortgage documents to show in court.
A year ago, this would not have mattered. For the first six years of this century, credit was generally expanding -- anybody could borrow and Adjustable Rate Mortgages were called ARMS to make them sound friendly.
Then, the lenders sold the mortgages on to Wall Street firms which, using computers, bundled them up and turned them into tradable securities, backed by complex mathematical models. These securities were then rated by companies such as Fitch and Moody’s – for fees – and sold on to people who didn’t know what was in them. In this way, billions of dollars worth of SIVs were sold on to others without the original mortgage documents.
And now Deutsche Bank has found itself up against Judge Boyko who, referring to the absence of mortgage documents, said:-
“The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.”
Some say that the Deutshche Bank case alone could bring down the system.
And the same sort of thing has been going on commercially with lenders pouring cash into commercial real estate like malls and factory buildings and the securities being sold on in various forms of derivative. Giving their approval and, of course, taking the fees, were the rating agencies -- Moody's, or Fitch – which plastered triple-A ratings all over the billions of dollars' worth of securities and derivatives that have now turned largely into toxic waste.
And not only home debt and commercial debt, but credit card debt, car debt student loans were all being bundled up into riskier and riskier bundles and sold on to the unsuspecting. And nobody really knows the total of the debt -- a Bank of England economist (Charles Bean) is saying that only a relatively small fraction of the losses have been reported to date.
But even if the losses are around $400,000,000,000 as is thought at Goldman Sachs, they would still trigger a two trillion dollar withdrawal of bank lending which would have horrible consequences.
Something big is happening and it is not just a liquidity crunch or credit crunch. Rather it is becoming a solvency crisis in which the banks’ capital base becomes overwhelmed by the scale of the losses – some say a trillion or more -- so that they can no longer lend at all. A big recession, even a collapse is in prospect and the situation has alarming parallels to 1929.
Money is created out of nothing
So what are the fundamental causes of this situation? Firstly, we have to start with the basic nature of the modern banking system which does not lend the money of its depositors – does not lend the money that is deposited – but instead lends money that is newly created money created out of nothing. All the main authors and experts say so – here is a quotation:-
“The actual process of money creation takes place primarily in banks.” (Federal Reserve Bank of Chicago)
The method of creating money out of nothing was neatly summarised by Graham Towers, ex-Governor of the Central Bank of Canada who said:‑
“Each and every time a bank makes a loan, new bank credit is created ─ new deposits ─ brand new money.”
Speaking of money, he also said that:‑
“The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all.”
What is more, Peter Challen and I succeeded in getting an admission from the Governor of the Bank of England that that is indeed the case. in the UK for example, 97% of the new money supply is created by the banking system and 3% or less by the government. It is less than 3% in the USA.
“Now, wait a minute,” you might say, “money is not created out of nothing. I’m a taxpayer and around £24,000,000,000 (twenty four billion pounds) of taxpayers’ money has just been lent by the Bank of England to Northern Rock.”
Well, that is not true. Statements about tax payers’ money being lent are lying propaganda or, if you want to be charitable, inaccurate statements made by the ignorant. Tim Congdon, writing in the Financial Times, explains the matter thus:-
"The explanation is that the Bank of England can create money "by a stroke of the pen". Parliament has made it the UK's only issuer of legal-tender notes, and it can expand the note issue or credit a balance convertible into notes at virtually nil cost.
Because of these special powers, the Bank does not need to borrow in the Interbank market at a positive interest rate."
In other words the Bank of England has just created twenty four billion pounds at the stroke of a pen, or rather, the pressing of a computer button – just as the banking system does all the time.
So the truth is that all that freshly minted money for Northern Rock did not derive from the “tax-payer” at all: it is simply computer-generated credit that any Central Bank may create at any time to oil the wheels of commerce, but conventionally will only do so as cash. In summary, the UK tax payer need lose NOTHING in the event of a default by Northern Rock.
Interest is then added
To the money which it creates out of nothing the banking system adds interest. And in doing so it creates a problem because the banks never, ever tell anybody that, in reality interest consists of two separate components.
administration cost which is fairly payable for work done when it has been fairly done
interest which is entirely separate and is simply a tax, a tax which compounds over time and locks on independently of administration cost and with its exponential growth puts individuals, corporations and yes, whole countries into never-ending debt. In the UK the interest alone on the National Debt is around £9 per week for every individual person.
The money is then NOT directed at the development and spreading of productive capacity
And what does the banking system do with the money which it creates out of nothing and adds interest to? Well, nowadays, it puts it firstly into houses – any house, caravan or shack owned by any person no matter how poor.
At which point it is necessary to understand that banking practice has greatly changed of late. As a result of the abolition of the Glass-Steagall Act in 1999 in the USA and similar legislation around the world, banks are no longer confined to banking – they may go into any financial activity.
Moreover, the previous practice of asking banks to keep cash reserves with the national banks has greatly diminished. Today the requirement for reserves has been largely eliminated. Indeed, the only restriction on lending for a house is interest and, even that restriction – the interest rate – becomes ineffective when there is so much money sloshing around that housing prices are continually rising and so borrowers can be assured that they will be able to sell their house or shack for more that they have borrowed.
More and more loans are created and debt increased.
However please remember that sufficient money is created out of nothing by the banking system for the principal of a loan but money is NOT created to pay for the interest. That has consequences including the need to create more and more money. You may wonder why, right around the world, there is a creeping inflation and the answer is that it is the imposition of interest which necessitates the creation of more and more interesting-bearing money. That requires a need for more and more people to go into debt and, at the same time, it creates a creeping inflation. Increased debt and increased inflation go hand in hand. American author, Ellen Brown, puts it succinctly:-
“Contrary to popular belief, creeping inflation is not caused by the government irresponsibly printing dollars. It is caused by banks expanding the money supply with loans.” (Brown, 2007)
Increased debt
Unfortunately, the overall debt and inflation then gets accentuated by government policy e.g. of the United States which is essentially now printing money to fund its excessive spending. Each American on average has government debt equivalent debt of about $175,000 or £85,000. The US national debt grows at $1 million per minute. It’s now just over $9 trillion. And then there is also the personal debt, mortgage debt plus the debt of towns, corporations etc. Inevitably the dollar is declining with consequences for everybody e.g. if the dollar declines then Boeing will likely beat the European Airbus in the sale of billions of pounds worth or aeroplanes.
Confidence collapses
So what happens when -- as is happening now – doubts creep in and confidence weakens? What happens when all those off-balance sheet vehicles are being given exposure and found to be worth perhaps a quarter or a fifth of what they were once worth? What happens when credit is being withdrawn so that it will soon become a battle between two monsters -- deflation and inflation – whose struggles will knock over everybody else. What happens when everything starts to go into reverse as is happening now? What happens when the arsonists – this is a French description – have set fire to everything?
Well, Gregory Peters, Head of Credit Strategy at Morgan Stanley, says that there is “there’s a greater than 50% probability that the financial system will come to a grinding halt because of losses from mortgages”. And that’s just from the mortgage losses, let alone the huge amount of other debt.
Or, instead of a halt, there could be a huge recession, or a huge inflation – or both. My guess is deflation followed by stag-flation.
The underlying causes of the financial crisis
And all this is happening because money is created out of nothing, interest as opposed to administration cost is added, and the money is not directed into the development and spreading of productive capacity as it should be. Moreover, this process is backed by a lot of false doctrine including the doctrine of the time value of money – but if money is created out of nothing then money has no time value.
On top of the false system and the false doctrine there then sit the Three Evils -- of Greed, Hubris and the Ineffable Belief that the present free market is free, fair and efficient when it is anything but free, fair and efficient. Of the Three Evils the worst is the Ineffable Belief -- the belief which, thinking that history had come to an end in 1989 with the victory over communism and all has been perfected, ignores the disaster now in the making.
There is a fourth Evil – the belief, bolstered by lying propaganda, that countries, if they wish to borrow money, have to borrow from the banking system or from abroad. African countries alone send $100 million in interest charges EVERY DAY to mostly American and British banks, the capital having been already paid several times over.
Those countries are NOT told that they could create the money for themselves, spend it, take it back and cancel it – all without any interest. Instead they are told that they must pay interest, compound interest, and when they can’t, in come the vultures to take ownership of the country’s assets and the like.
The environmental crisis
Well, what of the environmental crisis? It has many aspects. For example, you can hardly expect poor people to agree to stay in poverty so that their consumption can remain muted. If you want to lessen consumption you have, paradoxically, to start by giving a fair deal to the poor. But 55% of the world’s population today live on under $3 per day. And did you know that, even in the USA, one fifth of the population live on under $7 per day? And, in the USA, more than one in ten people go hungry each day? And, even if they manage to get food stamps, the stamps are only worth fifty pence per meal. That’s the USA for you!
And in the world 25,000 people die each day from the effects of dirty water. Right the way round the world water and sewage systems are being sold off and poor people are having to pay more, much more, for their water assuming they have any piped access at all.
Where the impending environmental crisis is concerned, I’m afraid that I bring you bad news – there is NO solution possible within existing thinking, within existing practice, and within the existing paradigm. Conventional mainstream neoclassical economics and the politics based on it cannot solve the poverty; cannot create the circumstances in which consumption is reduced; cannot provide the huge sums – the billions of dollars needed for evermore for huge environmental capital projects as recently requested by Ban Ki-Moon the United Nations Secretary-General and his team; cannot break the power of Big Oil to allow the development of new alternative technologies; and cannot create what is profoundly necessary to get everybody to co-operate -- social and economic justice.
However a new Modern Universal Paradigm is developing and it can solve the problems and, before showing you a diagram, I would like to give an illustration of the practical power of the new Universal Paradigm as it can be applied in everyday circumstances.
My example is Iraq. Yes, oil, but an arrogance – Ineffable Belief in the virtues of the ‘free market’ – also lay behind the invasion of Iraq.
And now we come to it -- a thoroughly nasty aspect of the free market in Iraq was the Bremer Orders. How many people have heard of the Bremer Orders? B R E M E R Orders.
Do a Google – Paul Bremer was the first American administrator of Iraq who issued one hundred Orders and most of them – Order 39 in particular -- were about ripping off ownership to outsiders of virtually all Iraqi assets. The idea was to get the Iraqis to sell off everything cheaply for a few dollars, everything except the oil which was to be used to repay the huge debt Iraq would be loaded with.
The rage against the USA and the UK has several elements but a big one is the sell-out, the complete sell out of the Iraqi people and the attempt to rip off all their assets.
And what would new Universal Paradigm thinking have done? Why, it would have announced that Iraqi oil is for the Iraqis and ensured that ALL individual Iraqi citizens would immediately have a single non-transferable life-time share in the ownership of the oil and, in particular, of its income with the dividends payable immediately the oil was flowing. That would have given everybody, everybody, a strong financial interest in the stability and success of their own country. Iraq’s debt should also have been declared as odious and cancelled and the measures taken which you can now see in the following diagram.
A gradual rise to 100% banking reserves requirement stops the banking system from creating money out of nothing
Interest-free loans for productive purposes then come from
OR
and are lent to approved institutions
which may charge for administration cost but may NOT add interest
as they lend for
thereby halving or more the cost
Binary Economics spreads ownership
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MOVING TOWARDS THE UNIVERSAL PARADIGM SHIFT FOR THE 21ST CENTURY
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