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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
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