Root Causes of the

Financial Crisis

Sami Al-Suwailem
IRTI, IDB
Thul Qeida 1429 – November 2008
The Global Financial Crisis
Worst in 100 years
Capital Markets lost $20+ trillions this year
Financial institutions lost $2.8 trillions
Main St. just starting to feel the pain
Root Cause
Excessive leverage
Mountains of debt and financial commitments
Inherent tendency towards excessive debt
Inverted Pyramid

Debt

wealth
Unsustainable System
Debt accumulates faster than wealth
Debt burden becomes unbearable
Minor shocks make the system crash
Crashes needed to “clean up” the system
Financial fragility
Then debts start accumulate again faster than wealth
Recurrent crashes
Very costly system
Sources of Danger
Riba
Gharar
Figures
Debt is growing at an average growth annual rate:
35%, for GDP 20%, M2 17%
Debt-GDP ratio grew from 1.2 to 2.2
Debt-M2 ratio grew from 2.2 to 4.2
Unsustainable system
Gharar
Zero-sum games that create no wealth
How it can destroy wealth?
Side bets magnify losses
Derivatives: $600+ trillions
Credit default swaps: $55 trillions
How CDS contributed to the crisis
Conclusion
Roots of evil: riba & maysir
Both allow mountains of commitments and debt to
accumulate beyond existing wealth
Unsustainable system
Islamic economics build a stable system with
bounded cycles
Debt in the US
3 5,0 0 0

3 0 ,0 0 0

2 5,0 0 0

2 0 ,0 0 0

15 , 0 0 0

10 , 0 0 0

5,0 0 0

0
19 7 6 19 8 0 19 8 5 19 9 0 19 9 5 2000 2005 2007

M2 GDP Total debt

Riba
Separates debt creation from wealth creation
Debt grows faster than wealth
Debt services become unbearable
Pressure on wealth base accumulates
Crash is needed to restore balance