TFF Associates & Themes Blog

By Johan Galtung

Johan Galtung

Protestant Liechtenstein recently held a conference on making banking shariah compatible, to attract capital from Muslim countries. And no doubt also because the big survivors of the 2008 crisis were China and Muslim countries; China because the focus is not only growth but lifting the bottom up – increasing domestic demand and less dependence on trade in 1991-2004 – Muslim countries because of Islamic banking.

A common Western misunderstanding is that Islam forbids interest; what is forbidden are relations that are only monetary; they should be economic, social, more human, in a broad sense. Just to make money available against interest is out. Purely financial deals selling and buying financial objects–derivatives at any level–for commissions are also out. Banks and other companies have to be in it together.

There is more to it. A bank has to be trustworthy, not at the brink of collapse. A leading Islamic banker in Malaysia said that his capital was 60% debt–deposits, 20% securities, 20% liquidity; he felt confident that he could survive future crises with that portfolio and the solidity of “being in it together”. Calculations for the big banks in the USA indicate operating 95% on debt and 5% on liquidity: highly vulnerable to going down, with depositors in the wake.

As Timothy Geithner points out in his book Stress Test: Reflections on Financial Crises: Crises will reappear and the “too big to fail” banks have to be bailed out. If the government is too indebted, the tax-payers have to pay; if the rich pay less and less, the middle and lower classes have to pay more and more making them even less capable of boosting the economy.

And that put the Western world in an age-old dilemma; around 1500 it solved in favor of monetary relations, with interest and commissions; now up for agonizing reconsideration. Economics has to be rewritten, from the focus on money to a focus on the needs of humans and nature; politicians have to be guided by other shibboleths than economic growth.

The crisis is deep for the Judeo-Christian West. LEAP/E2020 4 Nov 2014 quotes the International Monetary Fund’s annual report saying that the future belongs to the BRICS countries (Brazil, Russia, India, China, South Africa) and that the Western economic power declines more quickly than estimated, which by the way says more about the IMF.

The Russia-China axis is crucial, with the gas-oil deal of the century and the work towards a common financial system and currency to break Western financial hegemony. APEC (Asia-Pacific Economic Cooperation) leaders met in Beijing on 10-11/November addressing economic reforms and development (Asia Development Bank: $8 trillion needed for infrastructure investment by 2020 – guess which country has that kind of money?).

51 South African companies marketed their products in China in October 2014. Dilma Roussef won recent elections in Brazil and can continue BRICS politics. The Russia-Ukraine-EU gas deal defused that crisis for some time. Sanctions, such as possible exclusion of Russia from SWIFT (Society for Worldwide Interbank Financial Telecommunication), are still on, forcing Russia even closer to BRICS.

The signs from Japan seem to indicate that an asset bubble may burst: too much household debt. In Norway the oil economy investment may be coming to an end, oil workers dismissed, traditional Norwegian “julebord” (culinary celebrations before Xmas) canceled, the “oil fund has weakest return since 2013 on European losses” (Malaysian Reserve, 30 Oct 2014).

Incidentally, Malaysia, also strong on oil, used the income to get poverty down to below 4%, invested in health and education and some diversification – not enough – but Norway has very little to fall back upon except a vulnerable oil fund. And the Spanish approach, to include prostitution and drugs in GDP-Gross Domestic Product (El Mundo, 12 Jun 2014) may make more nominal economic growth – but may also lead to a closer scrutiny of GDP – there are other very dubious components.

Why the 2008 crisis? What is the theory? Paul Krugman in “Why Weren’t Alarm Bells Ringing?” (The New York Review of Books, Oct 23 2014), builds on Martin Wolf The Shifts and the Shocks, (London: Penguin 2014), who in turn based much on the economist Hyman Minsky.

They all agree that conventional theory, the danger of a run on the banks to withdraw deposits, is much too narrow. Geithner based his work on creating trust in the banks by announcing that they passed his stress test. Today the biggest do not.

Minsky says that the ups and downs of capitalism lead to excessive debt in periods of economic stability – with deflation – and then to the inevitable “Minsky point” when financial bubbles burst. The sum of household, non-financial and financial business debt was 50% of GDP in 1952 and 250% in 2008; more than 100 of the 250 financial business debt.

They all try to reduce the debt by making others pay theirs – a power game – and in the present system banks can force indebted house-owners out on the streets, but the US government will not force indebted bankers into the prisons.

Wolf has many proposals, including system-wide deposit insurance, 3-4% inflation to share the costs. But Krugman warns that “the gods themselves contend in vain against stupidity”; in 2008. And next time.

“The bourgeoisie has left remaining no other nexus between man and man than naked self-interest, than callous ‘cash payment’“ – Marx and Engels wrote in 1848 in the Communist Manifesto. And they added: “It has drowned the most heavenly ecstasies of religious fervor, of chivalrous enthusiasm – in the icy water of egoistical calculation“.

This is very similar to the much older ideas behind Islamic banking.

Let us put it this way: Capitalism has two major contradictions: class, capital vs labor, with increasing inequality; finance vs real economy, with increasing finance economy dominance. The indicator for the former is Occupy’s buying power of the top 1% relative to the 99%; for the latter the ratio between the two rates of growth. Somewhere there is the totally “out of sync” tipping point: collapse, crisis.

The alternatives? Cooperatives sharing benefits and risks, not companies with labor-buyers and labor-sellers getting “jobs”. And criminalization of purely monetary relations, guided by Islamic banking.

Originally published here.