The Wealth of Nations - Dr. Mahathir

An interesting blog post by Dr. Mahathir Mohamad, the former prime minister of Malaysia.   

 

1. Adam Smith wrote about the above title a long time ago (1757). He talked about invisible hands which were instrumental in growing the wealth of nations.

2. In the latest financial crisis in the United States the invisible hands certainly played a big role. It took the form of abuses of the banking, monetary and financial system.

3. Pushed out of the international market place by the cheaper and better manufactured goods of the East Asian countries the West turned towards the financial system in order to enrich themselves. The opportunities for abuses were abundant.

4. They discovered that banks could create money out of thin air; without Government control (free market) any amount of loans of non-existent money could be given by the banks; the sale of commodities need not involve the commodities at all. It is the same with selling shares and currencies; having physical possession is not necessary. Sell and buy imaginary shares and make tons of profit.

5. Their fertile brain soon gave birth to hedge funds, short selling, leveraged purchases, junk bonds, currency trade, free markets etc etc.

6. All these systems promised great wealth to speculators and manipulators without the need to produce or possess anything. Better still they need not employ substantial number of workers who may make demands and threaten business with industrial action.

7. A good example is the trade in commodities. Without possession of the physical commodity, a speculator may sell huge quantities of it. The effect of this dumping is to depress the price of the commodity. When the price reached a low level the sellers would buy the commodity to deliver to the buyers that they had sold to earlier at a higher price. Thus without ever touching or seeing, much less possessing the commodity, the manipulators would make handsome profits. They call this short selling and the public is persuaded that this is fair trade.

8. Individuals cannot do this. The amount of money involved is too big. So funds were set up and managed by smart people.

9. The fate of the real producers is not the concern of these fund managers. As the price of the commodity become depressed the producer countries and their people would suffer.

10. If the producer country bought the non-existent commodity from the speculators at the low prices for future delivery, and if at the delivery date the speculators could not deliver the commodity, they would be forced to buy the physical commodity at prices higher than they had sold. They would lose money. This is as it should be. But no. Their market controllers would save them by declaring that they need not honour their contracts.

11. This was what happened when tin prices were depressed through the short selling of non-existent tin by the speculators. In desperation Malaysia bought the tin knowing that the sellers had no physical tin, whereas Malaysia had. When the delivery date arrived the sellers would be forced to buy physical tin from Malaysia at Malaysian prices in order to deliver. The price of the physical (real) tin would of course be higher. The sellers would lose money having to purchase at the higher prices in order to deliver to the buyers (Malaysia) at the lower prices.

12. When the short sellers faced this threat of losing a lot of money from their short selling price depressing activities, the London Metal Exchange which controlled the market ruled that the sellers need not honour their contract to deliver physical tin, allegedly because the purchasers were trying to corner the market.

13. Clearly the players in the financial market are protected. They can make tons of money selling non-existent commodities but they need not deliver if they have no physical commodities.

14. And so the financial market expanded until it became much bigger than the real market. The trade in currencies for example is twenty times bigger than total world trade. Hedge funds, through mysterious investments pay as much as 30% to their investors. Pyramid schemes gave huge returns and banks calculate their earnings on the amount of money they lent out, whether the borrowers were able to pay or not.

15. There were numerous schemes which gave huge profits to the investors, far more than investments in the production of goods and services.

16. With these financial schemes the wealth of these developed countries and their rich investors appeared to grow at a high rate every year and the people appeared to have the capacity to buy unlimited amounts of imported goods. These countries were apparently the locomotives of growth for the whole world.

17. Then the balloons bursts. The sub-prime borrowers, millions of them were unable to pay the housing loans they had taken. Neither could they borrow from other banks to repay their debts. The banks became saddled with huge non-performing loans and were headed for bankruptcy. Like a house of cards, the whole financial market collapsed. The crisis that followed is common knowledge now.

18. The wealth of the West, acquired through the financial market is not real wealth. Their Per Capita and GDP figure are not based on reality. Their money also has a bloated value, guaranteed by no reserves or gold. (Their money is truly fiat money).

19. Their Governments were forced to bail out their banks and companies with trillions of dollars. It can be said that their Presidents and Prime Ministers are all responsible for the trillions of dollars lost by their countries.

20. I am waiting for a good unemployed journalist to investigate and write a book on these leaders who presided over the trillion-dollar losses by their countries.


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Thanks to CHEDET.CC

Islamic Banking in India: The invisible hurdles!

It is interesting to see how a news item is portrayed diffirently, sometimes with a twist, in the media.

Mufti Abdul Kadir Barkatullah, an Islamic scholar and Shariah Advisor to several banks and financial institutions in Britain, is on a 30 days visit to India meeting individuals and groups and visiting institutions with an aim to pave the path for Islamic Banking in India. While talking to the media persons in Kochi, he said that comprehensive changes are needed in the Indian banking laws in order to implement interest-free economic system.

This is the news. But, see how it is reported in the media!

TwoCircles.net, a news website run by Muslims reported is as,
"Interest-free system: Comprehensive change needed in Indian banking laws – Mufti Abdul Qader Barkatulla"

However, the same news appeared in The Hindu as,
Expert says Islamic banking is not practicable in India

The former post sounds optimistic, seems to reflect the actual message of the scholar, while the latter one pessimistically concludes that Islamic Banking is not practicable in India. And they didn't hesitate to add that this is what the 'Expert says..'.

Unfortunately, 'The Hindu' which boasts itself as the 'India's National Newspaper', has a wider reach than the Internet based TwoCircles.net. I just wonder, Are we Indians getting the messages correct?

Mufti Abdul Kadir has identified three main blockades in the way to the introduction of Islamic Banking system in India: "First is the mindset of resistance to change. The financial world and banks are the last ones to change themselves in response to the needs of the society. Second hurdle is bureaucracy. Bureaucracy is overburdened with current regulatory task, and they don’t want to learn new things. Third is the political bickering. The government and the opposition will use Islamic Banking as a football. So they don’t want to bring this issue in the public and introduce legislative changes to allow Islamic Banking."

One more, not so visible, hurdle is the media portrayals such as this, which imposes their distorted perceptions on the general public.

The French dilemma!

French president Sarkozy seems to be in a dilemma!

With more than five million Muslims, France is home to Western Europe's largest Islamic community. However, the concept of secularism is more important for France than being adaptive to multicultures. The separation of church and state is jealously guarded by everyone. The Nation has an unapologetic approach towards its religious minorities. Residents who belongs to minority groups must adapt to French culture, not the other way round.

The President himself caused a stir recently with his remarks on 'burka', the dress code for Muslim women. He expressed his strong distaste for the Islamic veil, calling it not a sign of religion but a sign of subservience. "It will not be welcome on French soil," he declared.

So far so good! But, then comes the lure of Islamic finance!

Islamic finance represents one of the more interesting niche markets, and it is growing rapidly too. It is so attractive and so irresistible, especially during the global recession. French officials fret that Paris is missing out on its share, particularly to London, whose multicultural approach gives an open-arms welcome to Islamic investors.

To catch up the bandwagon, the French have decided to accommodate the shariah requirements of Islamic finance to the extent of making changes to their economic and legal framework. While talking to a group of Gulf investors last year, the Finance Minister Christine Lagarde has pledged to take steps "to make (Islamic banking) activities as welcome in Paris as they are in London and elsewhere." For her, it is a matter of keeping Paris a competitive financial centre. The French financiers also welcome this move. Considering the 5 million or so Muslim population in the country, it is estimated that France could take upto 10% of the global market by 2020. Not bad!

An amendment was introduced on a draft bill on the financing of small firms that gives legal rights to holders of sukuks, or Islamic bonds, “to conform with the ethical principles of Muslim law or sharia.” However, the constitutional council, France’s highest court, didn't agree to this amendment, albeit on technical grounds. Officials are now trying to incorporate the legal changes into a new draft bill, and are confident that they will get them through this time.

These governmental efforts to accommodate Sharia have prompted a political backlash. For the Socialists it was nothing less than “the introduction of sharia into French law!”. Some traditionalist members of Nicolas Sarkozy’s party were also seems to be upset. For the opponents the idea of incorporating sharia, even if only technically, is a breach of France’s secular principles.

So, Secular values or Economic interest? Which path will France take?

An alternative view is also presented by some analysts. For them, these two paths are not opposing each other; 'the fact that the interest free loans stem from the sharia doesn't mean that accepting them is equating to incorporating the sharia law in the french one' they claim. To reinforce their view they quote Christmas which is typically a christian celebration and yet it is accepted as a bank holiday in secular France. It doesn't mean that Christian calendar prevails over the secular one.

Therefore, the question is whether France want to maintain its image as a rigid guardian of secularism or be accommodative yet secular. Which one will prevail?