There are two central precepts of Islamic finance: absolute prohibition on charging interest on financial transactions, and high moral standards on the part of lenders and borrowers. Interestingly, the best economic rationale for a zero-interest-rate system is provided in John Maynard Keynes’s The General Theory"
“Provisions against usury are amongst the most ancient economic practices of which we have record….In a world, therefore, which no one reckoned to be safe, it was almost inevitable that the rate of interest, unless it was curbed by every instrument at the disposal of society, would rise too high to permit of an adequate inducement to invest.”
Keynes suggested that only a very low or zero interest rate could ensure continuous full employment and distributional equity. Keynes’s endorsement of such a policy does not necessarily make it right, but his analysis does suggest that it should be regarded as a serious proposition.Read it at Project syndicate
Importantly, although interest is prohibited under Islamic finance, profit is not; the latter is derived from various arrangements that combine finance and enterprise. In essence, this is a profit-sharing and risk-sharing system that is based entirely on equity finance.
The Challenge of Islamic Finance
by Andrew Sheng, Ajit Singh
11 comments:
Michael Hudson's paper makes an interesting point related to this...
The ideal developed by Saint-Simon and his followers in 19th-century France was for banks to take their returns as a share of profits, not as fixed debt payments. The idea was for financial returns to rise and fall in keeping with the ability of borrowers to pay, and that new stock issues would be used to fund new tangible investment."(p. 6)
http://ineteconomics.org/sites/inet.civicactions.net/files/hudson-michael-berlin-paper.pdf
Lot of good stuff in Hudson's paper. He also notes that 80% of bank lending is against real estate. Makes me think that if the govt started offering direct federal mortgages (in the same it now offers direct student loans), the interest income would flow to Tsy instead of banks, now THAT would pay for a big tax cut.
beowulf: "Makes me think that if the govt started offering direct federal mortgages (in the same it now offers direct student loans), the interest income would flow to Tsy instead of banks, now THAT would pay for a big tax cut."
My suggestion, too. There should be a fixed interest rate that remains constant and a sufficient down payment to show earnestness, and the means to repay. There could also be a mechanism to deal with the unforeseen, like the crisis.
A lot of the problems that have resulted from the crisis are due to the government protecting the credit system, i.e., the creditors. This has led to everyone else having to take the hit, no matter how innocent they were. Moreover, it's led to a monetary policy designed to prop up assets values, so the banks retain some semblance of solvency. In other words, it's been a disaster and it could have been avoid with a well-crafted and administered govt mortgage program.
The point of securitization of mortgages as MBS was suppose to spread the risk. Instead it increased systemic risk drastically. The way to blunt the risk is to let the govt bear it, which is what happens in the end anyway, after the banks have taken their cut with no fear of a clawback or cram down. If govt is going to bear the risk ultimately, why not take just on the risk directly and take the interest.
" He also notes that 80% of bank lending is against real estate."
Just about the rest of it is vehicles.
Lots of product supplied and sales competition for vehicles so they cant get "appraisers" to jack up the prices for vehicles.
Property, and perhaps more specifically "zoned" property though, is of limited supply and this is where the ever increasing and often corrupt appraisals and then rent seeking can come in.
Building materials are subject to shortages and (monopolist set) petroleum prices; which can at least temporarily cause the cost of the improvements to go up.
But one way or another you can see that it is the govt either directly or through their partners the banks, that "ratifies" the price increases in the property market.
Resp,
"The point of securitization of mortgages as MBS was suppose to spread the risk."
Tom I think what took them (banks) down was just the markdown of the inventory that they had not securitized or sold off to the GSEs yet... the 'shadow banks' ie Ameriquest, Countrywide, Thornburg, Ditech (Remember all of the 'Ditech' commercials!! Ha!) they all went poof right away. What a mess...
This is a good reason for the MMT proposal for the banks to have to hold the mortgages and not securitize...
Resp.
Right,Matt, but that securitization blew things up all over the world in the laps of unsuspecting investors, and the banks were forced to take some of it back, which they duly dumped on the GSEs or the Fed picked it up.
"the banks were forced to take some of it back, which they duly dumped on the GSEs or the Fed picked it up."
That's the thing, the govt is already so involved in the mortgage market that its hard to argue that straight up nationalization is worse than what we have now-- socialized losses and privatized profits.
"That's the thing, the govt is already so involved in the mortgage market that its hard to argue that straight up nationalization is worse than what we have now-- socialized losses and privatized profits."
This is a set-up. The "dot-connection" will know no bounds. Remember, MMR is "apolitical" so they can say whatever they want because they support gay marriage, everyone else exists to push an agenda. Sarah Palin would blush.
Wait, I forgot:
:O)
Which is apparently the apolitical emoticon of the internet.
There are plenty of options, but there is no scarcity of 'morons' or lack of willingness to go that way to reduce the importance & size of banks.
Take in mind that reducing banking size would have an HUGE impact on equity & corporate debt markets too, prices and demand would deflate a lot as the deleverage & size decrease process goes.
An other option to reduce the size of banking RIGHT NOW (where people has the power to do so) is increase the volume of exchange an demand of government paper sense: both in bills/coins and in treasury securities for big ammounts.
If people uses more bills and deposit them on entities with low or no-leverage statues that would force governments to print more and debt in private sector would accommodate to lower levels, to avoid the problem of inflation eroding savings government would be forced to issue more inflation linked securities, and preferably short-term paper. So the 'new banks' for the savers would be investment funds which would be fully invested on government inflation-linked short term securities, and with fiduciary responsibilities and unable to issue credit that would seriously limit capacity to over-leverage and avoid asset price bubbles (more in line with 'optimal' ratios like the ones Dirk Bezemer talks about in his INET paper).
This would also encourage liquidity preference and exchange of goods & services indirectly, and would reduce undesirable inflation as the level of debt is reduced in aggregate for private sector and specially households. Also would encourage free market competition: no more bailouts, venture capital and in some cases vulture funds would take the place to finance risky stuff (plus government via investment programs and joint partnerships with private sector), there is simply no need for big banks to have such a role in the economy right now, where developed economies are entering a phase where not only growth is doubtful, but probably most of it is undesirable (except the one propelled by technological breakthroughs). Everybody wins: savers, indebted households, entrepreneurs; only rent-seekers lose (banks and credit entities, and most of the real estate speculators who depend not on selecting good investments, but on rising prices).
Is this practical? Only if there was a move towards that from the people, but this is just as everything else.
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