The Stupid Economic System

Panic and turmoil gripped the world’s financial markets in August as the US housing market bubble burst. The crisis threatens a worldwide economic depression, bringing to a halt more than a decade of increasing prosperity and employment for Western economies. The last decade has seen billions pour into real estate in both the US and Europe, which has resulted in the US housing sector reaching a staggering $10 trillion in value. Whilst in the UK the housing sector, is worth over £1 trillion. Global investment banks, hedge funds, pension houses and even high street banks have poured money into the housing sector in the hope of hansom returns. The crisis gripping the world was caused due to defaults on US home loans that have caused a credit crunch which is reverberating around the world as billions of dollars are being written off as liabilities. Stock markets on both sides of the Atlantic have continued to swing wildly from hour to hour. This money which found its way into the US housing sector was in origin only for speculative purposes. In the hope that the price of housing would rise further higher in the hope large profits can be made. Investment banks developed innovative products to further their profits by creating the Sub Prime mortgage industry, Put simply, it is loans to people who have patchy credit histories or cannot prove their incomes. It involves lending money to people usually on low incomes and who are unable to receive mainstream mortgages. The whole sub prime industry is built upon giving loans to people who are unable in most cases to actually pay them back. On top of this most international banks borrowed the money they poured into the housing sectors in Europe and America.What was witnessed on the world’s financial markets in August was something some pessimistic observers have previously mentioned but their voices were drowned out due to the Euphoria of incredible gains made as housing prices continued to rise further and further.

Then money spent by employees on goods is an expense to them and income to companies. Hoarding money and leaving it in an account to accumulate interest would in fact take it out of circulation. This would lead to a fall in spending, which would reduce production and result in the complete halting of the economy. With so much circulation of wealth it is possible the economy could overheat. Overheating is the term given to the reality where too much money is chasing too few goods leading to inflation. This only occurs due to the government printing more money to aid wealth circulation. Islam completely avoids such a reality as its currency is backed by gold. This means the government is not free to print money at will. This situation ensures the supply of money never outstrips production. The key reason to why prices can rise in such a manner is because goods are left completely to the market forces to decide what should be produced and at what level. In Islam key items such as utilities which are indispensable for the economy are public property and not owned by the private sector.