This powerpoint presentation has been making the email rounds on Wall Street. I have some commentary about it, the fiscal crisis, and some relevance to Islamic banking at City of Brass at Beliefnet.com.
Defending the liberal tradition in history, science, and philosophy.
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Here is an average starter home in a country ruled by Sharia law
This is the average starter home in a country that will always remain Sharia free (because of our wonderful constitution)
And if you think this downturn is spectacular, wait till you see Dubai after their bubble bursts. An entire state based on the idea that people would always need diamond encrusted Mercedes…
After the depression, Savings and Loans were created to fund home mortgages. They took deposits, payed interest, and loaned the money out to people to buy homes. The problem was they were borrowing money from depositors short term (passbook or 1-2 year CDs) and loaning it out on 30 year fixed rate mortgages. When interest rates went sky high in the early 1980s, S&Ls were paying 10% interest on deposits and getting 4-5% interest on the mortgages. Obviously that does not work. (Congress then made the mess worse by deregulating S&Ls to allow them to make commercial real estate loans, which caused the S&Ls to lose even more money).
The lesson bankers took away from the S&L collapse was if you are going to make 30 fixed rate loans, you need to borrow the money long term too. Long term bond buyers understand interest rate risks when they buy bonds (or they should). They came up with this system of issuing long term bonds based on pools of home mortgages so that they were borrowing long to loan the money long and avoid the interest rate flucuation problem that killed all the S&Ls.
The problem with this system is that the people making the loans and the people who ended up owning the bonds were totally separated. The people deciding whether a person should get a loan no longer needed to worry whether the person could pay the loan back. They only needed to worry if they could make the paper work look good enough that someone would buy the loan and they would get their fee. The natural forces of the free market caused the competing loan companies to slowly lower their lending standards lower and lower. As long as housing prices kept going up, people could always sell their house and there were very few defaults, but when the prices started to fall, the housing bubble burst, and almost all of these bad loans that should never have been made went into default.
The idea of borrowing money long to loan long is a sound idea, but there needs to be a way to bring accountability to the people issuing loans.
Nit to pick: While I’ve heard before that S&Ls came about as part of the New Deal era, Savings and Loans have actually been around since the early 1800s, over a century before the Great Depression. It may be that the government did things to promote that industry and it may have expanded because of it, I don’t know. I am pretty sure they’ve been around a lot longer than that, though.
Not sure about Credit Unions.
Mary, I am not really clear on the relevance of your point to my post. Sharia doubleplusungood? or something more subtle?
Mary, I am not really clear on the relevance of your point to my post
My point is that Islamic banking, based on Sharia law, does not work in theory or in practice.
Aziz,
That, in a nutshell, is why the entire conservative argument that the market is all-knowing and all-wise is fundamentally nonsensical.
And it is that nonsensical sentence that made me immediately stop reading your linked post and hit the back button. I’m guessing that you know this, but just in case, in all of your fair minded online debates where you always claim to give benefit of the doubt, it must have at some point been argued to you that in fact, the belief is that markets, far from being all-knowing and all-wise, are just generally more knowing and more wise than government bureaucrats.Â
Even the absolute Libertarians don’t make the argument that markets are perfect, just that they are better than the alternative.
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