Real Solutions for a Sobering Time, The Promise of Islamic Economics
by Dr. Robert D. Crane
This is indeed a sobering time, but not sobering enough. The economic problems that have dominated the headlines the past few weeks are not new. More than a decade ago, the world’s richest man, Warren Buffet, and one of the richest, George Soros, warned that the fundamental basis of the current system of money and credit was like a nuclear bomb waiting to explode.
Half a century ago, when I specialized as a student at Harvard Law School on legal problems of international investment, the very nature of money in Western finance as a commodity rather than merely as a medium of exchange convinced me that the World Bank and International Monetary Fund were set up to fail both financially and as political instruments, because by their very nature they could serve only to promote the further concentration of wealth both within and among nations.
Twenty-five years later, as Chairman of the Financial Markets Committee of President Reagan’s Presidential Task Force on Economic Justice in 1985, following the lead of the new breed of paradigm shapers, Louis Kelso and Norman Kurland, I supported fundamental measures to perfect the existing institutions because it was clear that the sobering times of today would eventually come and that the superficial steps now being taken by Washington and Wall Street would not be sufficient to permanently fix and avoid the financial and economic crises of the past few months in ways that would make a difference for Main Street.
The financial sector of our economy may be saved temporarily at an enormous cost, so great that we will have to set priorities by deferring our global power ambitions in order to pay for domestic programs designed to secure entitlement programs for health, education, and social security. The financial sector of our economy, until it started to dissolve this year, amounted to a third of the total, consisting in artificial wealth that did not exist, namely, the buying and selling of credit based on the creation of money at as much as a 30 to 1 leveraging - i.e., the capital requirement for banks, hedge funds, insurance derivatives, and short sales to create money backed only by debt rather than by value in the bank’s real productive assets.
The rest of our economy, namely, the production and consumption of goods and services, is still strong, despite the stock market’s reflection of fear that it is not. As President Roosevelt famously said on March 4, 1933, ‘‘The only thing we have to fear is fear itself.’’ This, in fact, is an optimistic exaggeration.
Today’s one-day drop of October 15th almost equaled the big one of a week ago, and seems to show more of the dynamics that produced the greatest one-week percentage drop in the Dow Jones’ 112 year history, namely, 18 percent, ending a few days ago on October 10, 2008. This is two percentage points worse than the second worst ending on July 22, 1933, and five points worse than the crash of November 9, 1929, which was only 13.5 percent. We can perhaps take invidious comfort in the fact, however, that last week Japan’s Nikkei lost 24 percent and that both Germany’s Dax and Britain’s FTSE lost more than 21 percent. Furthermore, the four-year decline of the early 30’s wiped out 90 percent of the Dow, whereas we have lost a little less than half since the high point above 14,000 a year ago.
We have yet to see how much the real goods market will respond to promises of stricter regulation of the financial markets; to the shift of 250 billion of the 700 billion bailout intended initially for financials to partially nationalize the 5,000 banks in America - assuming that many of the 4991 smaller banks will agree to sell ownership; to federal insurance for these smaller banks in order to free up credit for America’s thousands of productive enterprises; and to a number of relatively peripheral add-ons. The big-nine banks have simply been ordered to sell stock to the government in order to get federal largesse, on the assumption that the smaller banks will follow suit. This assumption may be more dreamland stuff, since the smaller banks did not speculate in junk derivatives and see no reason why they should be penalized for the drying up of credit caused by the big banks’ decision not to serve as commercial banks and instead to indulge in speculative investment in order to create artificial profits from a giant ponzi scheme. The Fed merely assumes that competition will force the smaller banks to knuckle under.
Eventually, we will get back to stability and growth, but nowhere do I see any evidence that the experts have even considered the essential recommendations that we originally intended to make for Reagan’s Presidential Task Force on Economic Justice. Our recommendations, spelled out in entire books available at http://www.cesj.org but dropped early on in the Task Force as too ambitious at that time, called for adoption of the real bills doctrine, whereby money would be created only in return for real value, that is, for investment in productive enterprises, in accordance with Article 13 of the legislation that created the Federal Reserve system as a private bank in 1913 but was never used. We also proposed a two-tier system of money and credit, so that interest-free money would be made available through pure credit for those enterprises owned by the employees and by members of community investment corporations, so that consumer power would always match production and thereby avoid the boom or bust nature of the existing financial system.
These two primary pillars in the pursuit of economic democracy would also make possible the real political democracy that would follow the broadening of capital ownership even as a universal human right. Instituting the real bills doctrine, which is the core of Islamic economics, and introducing pure credit without the burden of interest based on past savings, which is a logical corollary, constitute the only real changes that can make a permanent difference in the world economy and, in turn, in the Fourth World War against Terrorism.
We have been waiting now for a quarter century for the collapse that has been inevitable, because we figured that only in a crisis of unprecedented proportions would real change even be considered. Theoretically the Republicans should be the first to adopt the fundamental restructuring of the institutions of money and credit initially recommended by President Reagan’s pioneering task force, which was created by an act of Congress to close the wealth gap when we could not get past the elite interest groups in the White House, who opposed our slogan, ‘‘Own or Be Owned.’’
The Republicans should be more temperamentally disposed to understand that the underlying error in Keynesian economics taught in almost all graduate schools in America is the fantasy that wealth is produced primarily by labor, which is the core of Communist economics and has been since the Great Crash of the early 1930s. My father, who taught economics at Harvard University during the ‘‘Crash,’’ tried to persuade his students not to become Communists. He called himself a Republican Socialist, an oxymoron that now fits perhaps a whole new generation of Republicans. He always advocated ‘‘normative economics’’ based on justice, but not until his old age would he even consider the teachings of ‘‘binary economics’‘, according to which real wealth, as much as 90 percent, in a capital intensive economy is created not by labor, as postulated by Karl Marx, but by capital, namely, the machines, infrastructure, and management expertise that produce the wealth.
Unfortunately, but perhaps predictably, neither of the major American political parties have called for real change in either domestic or foreign policy, perhaps because politicians have learned never to get out in front on anything that might be controversial and subject to ridicule by the opposing party. This is why the current political scene is so ridiculous. Perhaps the transition team of whichever party wins the presidential election three weeks from now will feel free to consider real change as the only way to assure that it will remain competitive for the election of 2012.