| Some things are definitely meant not to be, like | | | | together with the State would guard against |
| the Prophet Mohammed teaching capitalism to the | | | | tendencies of concentration of wealth and power, |
| West. | | | | and would take suitable steps to maintain the |
| One great confusion in the otherwise already | | | | equilibrium of wealth for the sake of the public |
| greatly confused societies of Islam is the | | | | interest, welfare and fraternal living. |
| combination and interaction of spiritual and | | | | To have the State telling central banks what to |
| temporal powers. Unlike the West where Church | | | | do brings us all the way back to the times of |
| and State are separate, independent and each | | | | Leon Trotsky and the Bolshevik Revolution. In its |
| sovereign, Islam unites State and Religion together | | | | early times, in fact, and prior to the break-up with |
| with less than auspicious results. Because State | | | | Stalin, Leon Trotsky advocated a 'permanent |
| and Religion are one and only, for centuries | | | | Leninist revolution' in which the State would |
| Muslims have developed ways to integrate | | | | control all aspects of life including, of course, the |
| religious beliefs with the external economic realities | | | | economy. The State would dictate production and |
| of the nations they lived in. This has had varying | | | | supply and direct monetary quotas to be used by |
| degrees of compatibility with the empires and | | | | the citizenry to purchase the available inputs. |
| customs they encountered. For example, | | | | During the First and, most notably, the Second |
| commerce has adapted to "al-urf", the custom. | | | | World War approximately fifty-million Christians |
| But to adapt merchantism is one thing, to build a | | | | perished fighting over the truthfulness, fairness |
| national financial structure with which to supervise | | | | and applicability of this idea. And whereas in fact |
| and monitor all economic aspects of a country is | | | | the death of all those many people could not |
| quite another. The West has done it, sure ... after | | | | solve the mystery, it ultimately was the peaceful |
| two-thousand years of history, trial and errors. | | | | collapse of the former Union Of The Soviet |
| How can Islam even remotely hope to do it in | | | | Socialist Republics that revealed the ephemeral |
| twenty years. | | | | nature of the State-controlled economy. |
| Since the mid 80's Muslim bankers and religious | | | | Additionally, as Islamic countries may or may not |
| leaders have tried to develop ways to integrate | | | | have noticed, the United States is the single |
| Islamic Law on usage of money with modern | | | | biggest importer of Islam's number one product - |
| concepts of ethical investing. By carbon-copying | | | | oil (not explosives, like I am sure some bad |
| western financial systems and adapting them to | | | | mouth out there is muttering out aloud) - and the |
| the religious tenets of the Qu'ran, the idea was to | | | | single largest payer of Petrodollars, the lifeline of |
| reinvent the wheel. But the result is a hybrid of | | | | economic longevity for many Islamic nations. I am |
| Capitalism mixed with Socialism and sprinkled with | | | | willing to bet that it would be somewhat |
| a heavy dose of politicism so characteristic of | | | | problematic, to say the least, to convince the |
| Islamic leaders - a kind of Frankenstein with a | | | | Americans - especially the Bush Administration - |
| wicked soul, so to speak. Unfortunately this notion | | | | that a centralized economic system based upon a |
| of Islamic economics and finance bound by | | | | Trotskyst Bolshevik-style, Marxist - Leninist |
| religious tenets is a dysfunction of economic | | | | State-run model is the best alternative and most |
| realities and an inhibition on the development of | | | | viable option to capitalism available anywhere in |
| the regions of the world where Islam is most | | | | the Universe. Not even Vladimir Putin, the current |
| influential, and where traditional Islamic Law | | | | president of the Russian Federation and former |
| remains a factor in the Middle East ongoing | | | | KGB officer and FSB boss, talks about |
| economic disappointments. The weakness of the | | | | State-centralized economy anymore. This new |
| region's private economic sectors and its human | | | | idea sounds too much like a very old one or, to |
| capital deficiency stand among the lasting | | | | use one of America's favorite expressions, |
| consequences of the application of traditional | | | | 'different day, same s..t'. |
| Islamic Law to commerce and finance. | | | | The second problem created by the 'zero interest' |
| The pivotal point upon which this entire Islamic | | | | society is that the fundamental characteristic of |
| financial system is based, is that it operates on | | | | charging interest, i.e. charging a premium, on the |
| the basis of 'zero interest' in accordance with | | | | principal amount of a loan for the time value of |
| Qu'ran teachings. Because the Qur'an spoke | | | | the loaned money, is not truly eliminated in Islamic |
| against usury in the context of early Muslim | | | | banking. Rather, the interest is merely hidden and |
| society, it generally entails trying to remove or | | | | re-labeled. A fact this, all and by itself, which goes |
| redefine interest rates from financial institutions. In | | | | against Qu'ran teachings in the matter of not |
| doing so, Islamic economists hope to produce a | | | | deceiving your fellow Muslims. |
| more 'Islamic society'. The new Islamic economic | | | | Usually, time value of money is compensated to |
| theory postulates that in Islam, much like the | | | | the lender by the lender charging the borrower |
| West, central banks would be the sole issuer of | | | | interest on the principal amount of the loan. In the |
| credit and money and this for very telling reasons: | | | | case of Islamic banking, the lost time value is |
| Islamic central banks should be moved by public | | | | compensated by charging a mark-up on the |
| interest and their very existence should be | | | | product that the client might be seeking to |
| considered a social prerogative, so that the power | | | | purchase by way of a loan. The ownership of the |
| to create money should be vested in them | | | | product, whether a real capital asset or personal |
| exclusively. In a 'zero interest' society, of course, | | | | property, remains in the name of the bank until |
| manipulation of interest rates cannot exist. | | | | the principal loan including the mark-up has been |
| Therefore the tool of Islamic monetary policy is | | | | paid. In the case of a business loan, instead of |
| to be found in the expansion and shrinkage of | | | | charging interest over the time that the principal |
| base money supply, which would be allotted by | | | | amount is loaned out, an Islamic bank will demand |
| central banks to individual banks to be | | | | a certain percentage of the borrower's business |
| administered. It is further postulated as obvious, | | | | profits for an indefinite period of time. |
| that the larger the money supply, the more | | | | Furthermore, under a conventional interest-based |
| productivity it generates and the more spending it | | | | loan it is possible to 'call' the loan if the interest |
| spurs. This idea, for now, does not seem to have | | | | rate drops and the borrower discovers that he |
| worked well. | | | | can find cheaper financing. However, there is no |
| Clearly, the first problem - and perhaps the | | | | way to call a loan issued by an Islamic bank. Thus, |
| biggest - arises in trying to model the Islamic | | | | while the borrower from an Islamic bank is |
| system to the West, where fluctuations in cost | | | | protected against interest rate increases, the |
| of lending are paramount to monetary policies | | | | borrower cannot benefit from interest rate drops. |
| enacted pretty much everywhere. Monetary | | | | All this, coupled by less than efficient social |
| policies, as it is widely known, are technically | | | | structures and political systems in many Islamic |
| demand-side macroeconomic policies that work by | | | | states, contributes to the existence of |
| stimulating or discouraging spending on goods and | | | | quasi-feudal living standards for the vast majority |
| services. Economy-wide recessions and booms | | | | of Muslim individuals and businessmen alike. |
| reflect fluctuations in aggregate demand rather | | | | Ironically, in the few areas where this new Islamic |
| than in the economy's productive capacity. Above | | | | economic reality has been and is now being tried |
| all monetary policy is not a supply-side instrument. | | | | and tested, rather than finding the much coveted |
| Central banks have no handle on productivity and | | | | equilibrium the 'Islamic initiative', as it has come to |
| real economic growth. Under Islam, banks would | | | | be known, seems to have exacerbated the |
| be in competition with one another, but they | | | | polarization of wealth. |
| would be coordinated in effect via a central bank | | | | Certainly it does not appear that Allah can be |
| under the patronage of an Islamic State dedicated | | | | either proud of or happy, at least for the time |
| to the people. The essence of this idea is that the | | | | being, for the financial under-achievements of Her |
| State determines the policy of the central bank. | | | | devout followers. |
| Furthermore, under Islam the central bank | | | | |