World faced many financial and economical crisis .but now world face a very great and serious crisis. It is the worst since the time of the Great Depression in 1929, all countries lost billions in this crisis big and multinational companies bankrupt million of employs lost their jobs. This crisis show how the capitalist system is very fragile and how all countries correlated with U.S economy
All governments of the world are taking several actions and apply many policies to prevent their economies from collapse. Promising results appeared in the end of 2009
But many people think it's not the end of the crisis .because all those promising results is a result to governmental support. I think it is true because market didn't recover itself and governments can't support economy all the time. This support exhausts countries especially poor and developing countries. Investors lost confidence in financial system.
There are a lot of assets evaluated with high value and it's not true and there are many securities don't have real assets. All governments can't cover this gap.
World need to use anther financial system to get back investors confidence and perform international financial system. I think Islamic financial system is a good solution because Islamic financial system prevent speculate, interest and evaluate assets and profits according to real transactions and real assets. Islamic financial system saves private property and the interests of society
Financial crisis is shortage in liquidity and Capital. All economic sectors affected by this shortage in liquidity because it needs liquidity to keep working. This shortage put U.S economy in recession. This shortage is result of failing million of creditors in U.S to pay their obligations of loans and interest so many investment banks and subprime mortgage companies fail to cover short term obligations. That blow up collateral bonds Bubble in stock market and show how is it very risky and very inflated.
Any American citizen has a dream to won his house. Since 2000, American government encourages all Subprime mortgage companies to finance Mortgage loans with low restrictions and with low interest rate. Many people get mortgage loans even they has low credit score or bad credit history.
Some web sites in US provide special service to any one has not a job and want to get mortgage loans .this services is give this persona an official document to approve that he is work with this company as contractor . This services cost is 50$ .there is more advanced services telephone number and secretary to answer any call for this person.
Easy and cheap loans makes millions of people buy houses using mortgage loans .that make great demand on housing sector.
This loaned get by very Trap contract called Adjustable Rate Mortgages
According to great demand from US people to buy Houses and get mortgage loans easily .Housing prices increased hardly from year 2000 tell 2004. Housing sector and construction became the best place for investment and great profit.
According to great jump in housing pricing .people ask for more mortgage loans even they had already loan they want increase this loan according to new houses value that evaluated by new prices. Subprime mortgage companies didn't stop provide loans.
All experts said this increase will continue or prices will stay as it is and all player in the market believe that and no one try to say what will happen if housing prices decrease?
Subprime mortgage companies
Changing in interest rate make many creditors fail to pay their obligation for so Subprime mortgage companies start get back hoses and try to sell it again but number of houses was vey grate that make housing demand decrease and houses prices fail down
Subprime mortgage companies need liquidity to cover their obligations so they start buy Subprime loans in stock market by issuing collateral bond this technique called Securitization.
This bond evaluated greater that real value. Subprime mortgage companies issued more bond based on its portfolio that content Subprime bonds this technique called Derivatives.
Now we can notes that Subprime mortgage companies use bad and inflated assets to get liquidity to cover its obligation in the sort time with high cost.
And now it's appear that constructing sector became main lender to market invest banks classify its bounds according to risk depend on how of many creditors can't pay "AAA","AA"..., and attract insurance company to insure Subprime bound.
Investors and banks interested in buying Subprime bounds or its options to gain a lot of profit and the confidence in Subprime mortgage companies
But every day number of creditors that can't pay became greater than the day before
Subprime mortgage crisis
Subprime mortgage companies can't cover short term obligations many Subprime mortgage companies bankrupted. Millions of families lost their houses
Housing price fail down. Real estate value decreased
This crisis happened according to Subprime mortgage crisis when creditors and Subprime mortgage companies can't pay those loans and obligations. Banks try to borrow from each other but all face same problem. Banks can't find liquidity to continue working so many banks bankrupted
Stock market crisis
According to the Subprime mortgage crisis and Credit crisis stock market lost more than 60%. Subprime mortgage ponds and its option was a bubble in stock market. Financial collateral pond .evaluated with very high value and based on bad loans. Derivative and options make it growth.
Investors in stock market need liquidity. According to need liquidity and panic all investors start buy
If we order Events we can notes that U.S falling like dominoes .but the greater notes is the smaller player (borrower) in the game who is the main reason for this collapse
- Provide cheap loans with low restrictions and can't pay
- Subprime mortgage companies try to keep Subprime mortgage loans value
- Securitization Subprime mortgage loans
- Using Derivatives and options to Inflated assets
- Banks lost liquidity and can't lend each other
- Shortage in liquidity and freezing in economy
- Investors in stock market need liquidity so they buy that make stock market decreased
You can see the initiator to this bubble is the borrower how takes Subprime loan .and when he stops pay all this architecture was collapse
It's clear now how this financial system is fragile
- Focus on the real economy and production not financial products
- Concentration of loans and credit and directed towards the real economic
- Change currency transaction of the dollar to basket of currencies
- push more money in markets and banks
- Development of a global scheme is based on the concerted international effort.
- Creating tough new rules governing global trade in financial markets, speculation and put under the microscope
- Nationalization parts of banks that going to bankrupt
Obama and healthcare law
Obama can get congress acceptance for healthcare. It good low and it has many social benefits for American society.
I think its good step to solve financial crisis in US and it's my rezones.
- This low will increase US Government expenditure.
- That means more liquidity in market.
- It will help all economy activity to continue.
- This low will help American citizens in medical costs
- That mean American citizens can save more money.
- This low gives direct financial support to American citizens.
- American citizens was borrowers Subprime loan
And we see before that borrower how takes Subprime loan is the initiator and the trigger So when this borrower can start paying his obligations again all cycle will work too But this scenario need more enhancement Subprime loan contract have to changed with anther fair contract We have to make exception for student loans .like delay loans for students
Islamic Financial System Solution
It's clear now how U.S financial system fail to mange market transactions. And we watched before collapse Russian system. Capitalist system and socialist system frustrated investors. Investors lost confidence and they are panic .it's not good sign for investment. We can note that there is a big conflict between Islamic system and socialist system because socialist system doesn't save private ownership property. Capitalist system use interest to control investment that means government control investment in market. Islamic system does not use interest. Islamic system use participation system that share profits and risks between producer and financier, this system represent a real view to real production and real investment in market. Islamic system prevents derivative, options, short sell and margin. We remember it was the amplifier of crisis
Islamic Financial system is the best solution to mange market transaction and investment and get investors confidence.
It's my reasons:
- Islamic Financial system save private ownership
- Islamic Financial system based on real production and real estate
- Islamic Financial system prevent using interest ,we have to remember that U.S decrees interest to 1% when U.S tried to solve financial crisis
- Islamic Financial system use participation , participation share profits and risks between producer and Financier
- Islamic Financial system prevent derivative ,options ,short sell and margin ,all this tools amplified stock market with fake value
- Islamic Financial system provide Participate rental system for Subprime mortgage companies
World face a great financial crisis. Crisis threats investment in all countries. U.S export production to emerging and development countries. U.S focuses all investments in financial sector. U.S market developer created new technique to generate more money.
Top management in investment banks and Subprime mortgage tricked U.S and investors with fake financial statement to show high growth. Securitization subprime ponds create financial assets with very high value, derivatives and options amplified bond bubble. Using Adjustable Rate Mortgages contract tricked U.S citizens. Market shows good signs at end of year 2009 but it's fake because it is result for all government efforts and support .Financial markets didn't recover itself tell now.
The great Losses is lost investor confidence in financial system .finally Islamic financial system is the best way to mange financial transactions.
- How Did We Get Here? The Story of the Credit Crisis, By Dr. Faten Sabry and Dr. Chudozie Okongwu, 19 February 2009
- The Subprime and Credit Crisis, Morris Goldstein, Peterson Institute2008