Islamic Finance and the New Financial System: An Ethical Approach to Preventing Future Financial Crises

Chapter 4Solutions Create More Problems

Look back at past financial crises and a pattern starts to emerge. The pattern of boom and bust is one of the characteristics of our financial system. In the United States, some experts like to blame the Federal Reserve for the increasing number and severity of financial crises, citing the birth of the Fed in 1913 as the date when our financial systems began experiencing more turbulence. This, however, is not true. There were financial crises before the Fed was born, and depressions back then were quite common. Other experts take the opposite view, believing that the financial system has become more stable since the birth of the Fed. This is also not true, as I have discussed in Chapters 2 and 3.

So why then are there two strongly opposing views? The two main caretakers in an economy that we trust to run it smoothly are the government (and its regulatory agencies) and the central bank, such as the Federal Reserve, Bank of England, and European Central Bank. My conclusion, after studying both sides, is that rising turbulence and financial crises in an economy are the direct result of the type of monetary system in that economy. Looking back through history, we can see that when discipline was forced upon governments and central bankers (typically, through a gold standard) the world economy was much more stable. It was not until war or other political situations forced governments to abandon the gold standard that discipline was removed ...