Chapter 31: An Islamic perspective on the global financial crisis and its aftermath
In the words of Niall Ferguson (2009), first there was the ‘sub-prime surprise’, and then there was the ‘credit crunch’, which became the ‘global financial crisis’. Now, according to the managing director of the IMF, we are in the ‘great recession’. While the full story of the precise steps in this transition is probably still to be told, it continues to surprise how the condition in one segment of the US residential mortgage market could have translated into what Ben Bernanke, chairman of the Board of Governors of the Federal Reserve System, called ‘the worst financial crisis in global history, including the Great Depression’ (Mollenkamp, 2011), and his predecessor, Alan Greenspan, described in similar words as ‘the most virulent global financial crisis ever’ (Wessel, 2010), plunging economies into recession, and creating levels of unemployment not seen for decades. Chaos theory seemed to have come of age. Conventional explanations of the global financial crisis point to a number of inter-related factors. First, at the ‘macro’ level, global payments imbalances, due either to a ‘global savings glut’ or to monetary policy in the final years of the Greenspan Fed (which produced the fastest growth of dollar liquidity and the lowest real federal funds rate in 30 years), created a hothouse atmosphere in which excessive lending on real estate flourished (Iley and Lewis, 2007). Second, there was financial regulation that went missing and allowed (and even encouraged) the lending to take place.
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