Fixing the crisis of capitalism

RESPECTFULLY, your ANALYSIS (page 7, The Brunei Times, Sept 21,2008) carries those related articles on the current deep, widespread debacles of several established big US financial institutions, which has spread to the real economy in US, UK and Europe. The economic and human miseries could be dire and widespread.

These debacles have prompted endless analyses, opinions and debates which were/have been made/offered by those "too clever-after-an event-experts".

The Economist (UK) (August 30-September 5, 2008) even went to the extent to "authoritatively" state that the US "laisse-faire (free wheelings and dealings) is seductive. Congress, which has feasted on the lobbying largesse of Fannie(Mae) and Freddie(Mac) for decades has a vested interest in the status quo. Executives reap the profits (read: greed), but the tax payers bear the losses. That is capitalism at its worst."

The debacles have turned into panic. This has caused the US administration to have "advised" other governments of the world to bail out their affected, sick financial institutions to prevent the scourge from sinking its millions of financial-economic victims worldwide. (This has rightly angered Tun Dr Mahathir who was the Malaysian Prime Minister during the Asian financial melt down in 1997-98. He commented so strongly on this blatant US & IMF hypocrisy and double standard ("do what I told you to do, don't do what I do") when they strongly opposed Malaysia for having pegged RM to the US$, and certain Asian countries had to bail out their own banks.) (The Brunei Times, Sept 20, 2008).

This "capitalism at its worst" has unbridled convenience of creating "virtual money/wealth" through the widespread system of "virtual money" that begets more and more "virtual money" without having to go through the conventional process of production of real goods (eg cars, food, medicines) and services (eg education, medical, transportation) which require factories and labour for their production.

These real factors of production derived salaries and wages, rentals and other forms of real monetary/cash payments.

For highlights of this corrosive process please also refer to "Monetary Issues- The State Mufti Fatwas (Brunei Darussalam)", the publication of which in 2000 was sponsored by the then Islamic Bank of Brunei.

Symbolically, this process of creation of virtual money/virtual wealth (Picture 1 - M =Virtual Money/Virtual Wealth).

If unchecked in time this circular creation of virtual money/virtual wealth is bound to inflate into bigger and bigger financial bubbles, as has happened and which began to crack almost exactly a year today and finally, eventually have burst. This has happened when the creation of high risk SUB-PRIME MORTGAGES imploded in March 2008 in the US and quickly spread to the UK, causing a massive collapse of prices of real estate properties and financing there; and now has spread to the real economy of these countries, for example:

- The price of oil has fallen from US$147.50 ($221) per barrel (July 2008) to US$70/per barrel (16-10-2008).

- UK has estimated that its unemployment figures will reach 2 million by Dec 2008.

- In Egypt, a man had committed suicide (16-10-08) when his shares had been wiping out. The shares were bought with his sweat and tears income from working in Kuwait.

- Most of Iceland's major banks have sunk. Russia has promised to financially help Iceland.

Now, this financial implosive is bound to get worse when defaults on principals plus interests have gotten critical because unpaid interests keep on mounting on unpaid interests, unpaid interests keep on cumulating upon more unpaid interests. That is a repeat of the process of M->M-> M-> (Picture 2). (In Islamic banking/financial-economic principle and system this is HARAM. This will be elaborated below.)

In April 2000, a similar inflation of virtual monetary/virtual wealth worldwide collapsed after the feverish speculative sales and purchases of "unborn" virtual digital dot.com companies' shares exploded, causing more than US$200 billion in losses. In Islamic banking/finance and economics, it is strictly prohibited to "sell" fish which is still in the sea because it is unethical/unreligious to "sell" or "promise" "unreal" item (fish) which is still in the sea, uncaught since it is subject to the final Disposition of Allah SWT. Man proposes, God Disposes. Don't count your chickens before they hatch.

The systemic and pathological problem of US banking/financial system and practice has been spawn by the ingenuity, the creativity of those financial wizards who keep on creating, inventing exotic, complex, mathematically opaque financial instruments or papers such as "junk bonds", "hedge funds", "sub-prime mortgages" and the like.

But all these are underlined by private greed and unbridled selling and buying process, to create virtual money in order to secure actual, real profits for those "inventors" of certificates of deposits, zero coupons, and their practitioners. Alan Greenspan (the former Chairman of US Federal Reserve Board) regarded this situation as the natural growth of free, dynamic CAPITALISM markets. Creating complex, sophisticated, dynamic financial instruments excludes an aura of sharp intelligence, expertise, respectability, high class, and therefore "trust them with your real money". It is yet unknown, how much those rich countries' sovereign wealth funds got entangled in those financial instruments and institutions.

Yang Dimuliakan Pehin Orang Kaya Lela Raja Dato Seri Laila Jasa Haji Awang Abdul Rahman bin Haji Abdul Karim was formerly Permanent Secretary of the Ministry of Finance and the Ministry of Defence. He was the First Managing Director of BIA (1983-1992), First Chairman of Taib (1991-1993), Chairman of IBB (1986-1993), and reappointed Chairman of Islamic Bank of Brunei (IBB) on 1998-2001, First MD of Islamic Investment Fund of Badan Tanmiah, Baitulmaal (1995-2001). The views expressed by Pehin Dato Rahman Karim are his own and do not necessarily reflect those of The Brunei Times.

The Brunei Times