Example of the Harmful Effect of an Interest-Based Economy (United States)

“In order to better understand the harms done to an economy from having an interest based system, a few observations are worthwhile here. A U.S. economist and then coordinator of the Center for Economic and Policy Research, Dean Baker, in 2001, had this to say:

“(1) Nobel Laureate Milton Friedman and U.. Federal Reserve Board Chairman Alan Greenspan have been the economies preaching the gospel of monetary policies to run our economies for the benefits of the ‘few and privileged.’ In particular, they have been hailing the institution of the stock market as representative of our well-being and as a consequence, they have been selling the gospel of changing the central banks to prop up the stock market. They further observe that: We need to change our financial institutions for the better and we must break down this obsession with the stock market performance as a proxy of our own well-being. At its peak in the first quarter of 2001, the ra o of the price of all corporate equi es to a er tax corporate profits was over 31 to

1. This is more than twice the historic average of less than 15 to 1. This bubble implied more than $9 trillion in illusory wealth compared to a situa on in which price-to-earnings ratios were near their historic levels.  It is not possible for the stock market to consistently rise more rapidly than the growth rate of corporate profits… Stock holdings are heavily concentrated among the nation’s richest families. The richest one percent own nearly 50 percent of stock shares and the richest 10 percent own more than 80 percent of individually held shares. In brief, 1 percent of popula on own 50 percent of everything. When the Federal Reserve Board makes a decision to prop up the market, it is making a decision to transfer wealth from the rest of the nation to a minority of rich people. The value of individual stock holdings cons tutes, in effect, claims against the nation’s wealth. The greater the value of these holdings, the larger the portion of the nation’s wealth is controlled by those who have stock holdings…Tens of millions of families are paying more for homes or rent because the stock market has given a small segment of the population more money to bid up home prices…”

Over the past decade alone, there have been countless self-explanatory examples to support the validity of my view in relation to the evils of an interest-based economic system; most notably perhaps, the cost of unemployment in developed economies such as Germany and Japan. At the time of writing, the sub-prime crisis in the U.S. housing market is spreading to other sectors and threatening the very foundations of the capitalist system. On September 20, 2008, the Associated Press reported the following:

“The Bush administration asked Congress on Saturday for the power to buy $700 billion in toxic assets clogging the financial system and threatening the economy as negotiations began on the largest bailout since the Great Depression. The rescue plan would give Washington broad authority to purchase bad mortgage-related assets from U.S. financial institutions for the next two years. It does not specify which institutions qualify or what, if anything, the government would get in return for the unprecedented infusion … We’re going to work with Congress to get a bill done quickly,’ President Bush said at the White House. Without discussing specifics he said, “There is a big package because it was a big problem.”

The Wall Street Journal (online) reported the crisis this way:

“The latest trouble spot is an area called credit-default swaps, which are private contracts that let firms trade bets on whether a borrower is going to default. When a default occurs, one party pays off the other. The value of the swaps rises and falls as the market reassesses the risk that a company won’t be able to honor its obligations. Firms use these instruments both as insurance – to hedge their exposures to risk – and to wager on the health of other companies. There are now credit-default swaps on more than $62 trillion in debt, up from about $144 billion a decade ago.”

With stock markets plunging and banks across the globe having to rely on government guarantees for their continued existence, there is increasing evidence that the bubble of virtual wealth has finally burst and many people are pointing to these as symptoms of the collapse of capitalism.”

Source: Prof. Iraj Toutounchian, Thoughts from Iraj Toutounchian’s Islamic Money & Banking: Narrated by Camille Paldi. Republished with permission.