There’s nothing that delights Bwog more than to show off the extensive vocabulary we’ve accumulated in our years sitting through Gulati lectures. And by that, we mean Art History lectures and Creative Writing seminars. But one of our newest (and bestest) staff members, Econ Enthusiast and Vocabulary Purveyor Extraordinaire Jed Bush, hopped over to the Islamic Banking lecture at the World Leaders Forum, and translated a few of the biggest words for us.
Greed, for lack of a better, uh… cliché, is good. That’s how it’s understood, at least, in the world of Western finance.
So as Dr. Ahmad Mohamed Ali Al-Madani spoke on the benefits Islamic Banking can bring to western markets, the recent financial crisis was at the forefront of the discussion. Jeffery Sachs handled the introductions for Dr. Al-Madani, briefly discussing their partnership in efforts to combat global poverty through the Millennium Villages and Drylands Iniative programs.
Al-Madani has been front and center at the Islamic Development Bank, having been its president for all but two years of its existence, since 1975. The Bank has 56 member nations, with a combined 1.5 billion people encompassing nearly 20% of the world’s population, and retains a AAA credit rating with the main rating agencies. Yet despite the impressive resume, Al-Madani’s proposals were surprisingly rudimentary and underdeveloped when it came to their application in the western world of finance.
When Al-Madani took to the podium, he began by discussing some alarming facts regarding the 2008 financial crisis. It singlehandedly wiped out “30% of the world’s gross output,” he said, creating rising unemployment rates around the globe and bringing growth to a halt in most corners of the world. Most troubling about the financial crisis is that, as funds are being diverted towards kick-starting economic growth in domestic markets, many funds devoted to fighting poverty have been the first to be slashed—undermining years of work and further increasing the suffering of the poor and disadvantaged. However, he then abrubtly veered from discussing humanitarian efforts and dived into the issue of debt in western markets. Because that’s what really matters.
Despite the many factors that led to the financial collapse in 2008, Al-Madani wanted to focus on what he perceived to be the main one—inadequate market discipline and poor risk-sharing within the western banking system. One key difference between Islamic finance and Western finance is that under Islamic principles, debt cannot be allowed to grow on its own without being backed by real GDP growth. Another way increased fiscal responsibility could be implemented in the system is through what Sachs called “Limited Purpose banking,” which would treat banks more like mutual funds, forcing them to always bank on solid deposits. This would give bankers a vested interest in responsible lending, while inverting the debt pyramid and hopefully mitigating speculation within the market and trading of debt as a commodity.
The ideas seemed to resonate with the audience as a whole, but when the floor opened up for questions, the majority of questioners seemed concerned with a more pressing issue: how will these principles of risk-sharing and market discipline be implemented?
Al-Madani skirted around the issue of risk-sharing, and his main suggestion was merely to enact more regulations at the upcoming G20 meeting. When asked how long such reforms would take to be implemented in the rebuilding of the financial system, Al-Madani was, once again, skittish.
The biggest obstacle, both Al-Madani and Sachs acknowledged, would be Wall Street fighting reform and regulation at every turn. After all, under the current system, if a CEO gambles and wins, he wins a fat paycheck and a bonus; if the gamble goes bad, then the shareholders lose out, and the CEO exits the company via golden parachute. No matter who loses, they win.
So, while Al-Madani is certainly well-versed in the merits of Islamic banking, it seemed that many of the ideas being thrown around weren’t exactly new or groundbreaking. If anything, Al-Madani’s inability to provide any incentive towards fiscal responsibility revealed deep systemic problems within the Western banking system. Most economists have understood the necessity for more responsible lending, and certainly Al-Madani’s idea of risk sharing could be one way to get there—but so long as greed is good for the CEOs (and bad for everyone else), Al-Madani’s proposals may be preaching to deaf ears.
Artistic recreation of Jed’s time hopping via Wikimedia Commons.