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The Financial Meltdown in One Snapshot

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After my previous article on the financial meltdown, after doing tons of more research (well not really), and using all my finance knowledge I have acquired (hey, the new bailout chief is a 35-year old Wharton 2002 alumni, so I can’t be that far behind), I have narrowed down the financial meltdown analysis to the picture below.  I don’t think anything else describes it better, and that is supported by the sum of my finance knowledge. As the financial boys used to say, leverage baby!

Well, leverage is all good, until you pull that one card out from the bottom. And then we have what we have today, with governments all over the world trying to plug a card here and a card there back into the house of cards. I suspect they will get the wobbly structure standing again sooner or later. Until the next time when someone else pulls a different card out.

house-of-cards.jpg

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Alhamdulillah, we're at over 850 supporters. Help us get to 900 supporters this month. All it takes is a small gift from a reader like you to keep us going, for just $2 / month.

The Prophet (SAW) has taught us the best of deeds are those that done consistently, even if they are small. Click here to support MuslimMatters with a monthly donation of $2 per month. Set it and collect blessings from Allah (swt) for the khayr you're supporting without thinking about it.

Abu Reem is one of the founders of MuslimMatters, Inc. His identity is shaped by his religion (Islam), place of birth (Pakistan), and nationality (American). By education, he is a ChemE, topped off with an MBA from Wharton. He has been involved with Texas Dawah, Clear Lake Islamic Center and MSA. His interests include politics, cricket, and media interactions. Career-wise, Abu Reem is in management in the oil & gas industry (but one who still appreciates the "green revolution").

13 Comments

13 Comments

  1. iMuslim

    October 7, 2008 at 1:15 PM

    The saddest part is how this crisis still affects those who are innocent of all this mess… I imagine charitable donations will diminish, even though the need will increase.

  2. MR

    October 7, 2008 at 1:42 PM

    There are also winners too. The winners are those who stayed away interest and anystocks. Alhamdulillah!

  3. ibnabeeomar

    October 7, 2008 at 2:10 PM

    desi business owners had it right all along. forget the bank and cram your cash filled envelopes under your mattress

  4. Pasha

    October 7, 2008 at 2:12 PM

    desi business is the best get a buncha guys together and invest…MUSHARAKA all the way baby

  5. Hassan

    October 7, 2008 at 2:32 PM

    Right, but what if the cash under mattress is worthless in a while (inflation)

  6. AnonyMouse

    October 7, 2008 at 2:41 PM

    Then do what our mothers and grandmothers did for the longest while: buy up some heavy-duty 24k gold jewelry, and hide THAT under the mattress!

  7. Amad

    October 7, 2008 at 3:14 PM

    Oh, and please try to stumble this… its a hot topic and will get some attention.

  8. Hassan

    October 7, 2008 at 3:33 PM

    Yes, gold, land, livestock is best thing to have or invest in. Yesterday I was at Postal store mailing something, and a lady talking on cell phone walked in. I did not catch what she was saying on the phone, but when she talked to cashier, she told him, I need these documents to reach as soon as possible, I have already lost 30,000 dollars in stocks, and I do not want to loose anything further, and this is crazy etc.

    This economy was bound to collapse. they can not run it without any meaningful productivity, it was just money on top of money strategy.

  9. MR

    October 7, 2008 at 4:17 PM

    The best investment is investing in the Barakah Bank which gives you the Akhirah Plan with no loopholes or hidden messages. It’s all explained in the Qu’an guide along with the Sunnah Reference handbook.

  10. Amad

    October 7, 2008 at 5:39 PM

    MR, seems u r going birjas (shaykh) on us!

  11. Ahmad AlFarsi

    October 9, 2008 at 8:54 AM

    I found this article on CNN to be quite interesting. Basically, in explaining how people can “recession proof” their families, Orman explains how the current financial crisis (resulting from our entire economy living on the principle of credit and getting now what you can’t afford) will most likely dry up the entire credit system of our credit-based economy… possibly resulting in, perhaps after a necessary recovery period, the US economy converting into a CASH economy, instead of a credit economy.

    http://www.cnn.com/2008/LIVING/wayoflife/10/01/o.recession.proof.family/index.html?iref=mpstoryview

    I am not sure how probable the scenario she describes is, but wouldn’t it be amazing if the US economy does actually convert into a cash economy (i.e. corporations and people using what they have now, instead of borrowing every last cent they want to use)? It would, if nothing else, put the US economy in much greater alignment with Islamic economic principles, and perhaps even allow for the development of a banking system that is legitimate according to the shari’ah (perhaps a far-stretch in this country, but a cash economy would allow the infrastructure for enterprising Muslims to take advantage of).

    Thing is, I’m not even sure if there are any shari’ah compliant banking systems ANYWHERE in the world at all today? As I understand, most of the so-called Islamic banks in the middle-east just play word games and re-name the riba as something else (like profit, etc.). But, I haven’t done any exhaustive search or anything, so perhaps there is an Islamic banking system somwhere, that I don’t know of.

    BTW, I was just thinking the other day, if all Muslim persons and Muslim owned corporations were to abide by the Shari’ah in their financial transactions and business dealings, I think the riba-based systems in Muslim majority countries would quickly collapse. Someone once was trying to tell me that a purely non-riba based Islaimc bank simply cannot survive in the wordwide credit-based economy… my thoughts were on the flip-side of his statement… I was thinking: You know, Islam did not come to simply reform the beliefs and behavior of individuals, it came to rectify the entire society. It may be true that an inidividual purely Islamic bank may not fare too well in a riba-based economy… but imagine if the society truly decided to follow the shari’ah and implement Islam in their lives fully, and people and corporations refused to deal with interest or unIslamic business transactions (and refused to simply change the name of riba to something else to fool themselves into thinking that they were following the shariah)…. then what would happen? IT WOULD BE THE RIBA-BASED BANKS AND CREDIT-BASED ECONOMY that would not be able to survive, and Islam would purify the entire society of the filth of riba. May Allah make that a reality. Ameen.

    What I feel is truly worth reflecting on in the midst of this financial crisis the US economy finds itself in, is the following: According to Islam, a loan is supposed to be a non-profit transaction and an act of charity. This is the response the scholars give when asked by people as to why the lender cannot charge interest just to cancel the effect of inflation… the response is that the lender is engaging in a non-profit act and an act of charity, and in lending money to someone else, he should not view his act as a business transaction, but rather, since he is doing a benevolent act in lending, he will assume the loss due to inflation when his money is returned. After all, I remember Sh. Isam saying that according to a hadeeth, the reward for lending money is half of that of sadaqah (according to Sh. Islam, that means if you lend someone in need $2000, without riba and following Islamic principles, you get the same reward as giving away $1000 in sadaqah)

    Question: How does the US banking system view loans? As a non-profit, charitable act? NO WAY! Read the recent news articles. What is the word that all of them use for the all the mortgages that these banks have? They call them ASSETS! i.e. in our modern-day economy, loans, mortgages, etc are all viewed as money-making assets (the polar opposite of the Islamic concept of lending). But indeed, Allah has shown them their foolishness, if only they would reflect…

  12. Mushowish

    October 9, 2008 at 7:18 PM

    salaams,

    The financial crisis is a sad thing, as others have said, innocent people being effected by the greedy actions of a few. In some (slightly saddistic) way I am glad that Lehmann Brother became insolvent. As hopefully to some extent these bankers will learn that they cannot take such risks in the search of more and more profit, as before this I feel they felt they would always get bailed out if things went too wrong, and they were right (look at Northern Rock, Fanny Mae, Freddie Mac, AIG who were all bailed out at the taxpayers expense).

    In terms of charitable donations, the figures will be hit drastically i think. Was speaking with the imam of my local mosque, after 27th night(where they raised moeny for aid projects across the world as there were so many more people there), and he was saying how they raised only 1/3 of what he had raised in previous years. That just shows even in Ramadan, possibly on layatul qadr, the effect of the credit crunch had seriously effected peoples willingness/ability to give sadaqa.

    Ma’ Salaama

    Mushowish

    p.s My first real post happens to be on Islamic finance, so have a look.

  13. Faiza

    October 21, 2008 at 2:59 AM

    Assalamu alaikum wrb!

    Nice picture and thanks for the article, brother Ahmad. It is indeed true that the current economic/financial system is totally built upon a bundle of lies. I recollect what Allah swt says in the Quran about riba: that it will destroy the Barakah!! Allahu Akbar!

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