Between faith and finances is the rub

December 1, 2011

COLUMNS

I was recently speaking with an international graduate student about his impending graduation. As we talked about job possibilities, he told me that he would really like to work for himself. I asked if he had friends or relatives who would be willing to give him money to invest and manage. He hesitated. He smiled. He replied, “Ma’am, I’m Muslim.”
Usury is prohibited in the Islamic faith. One should not collect interest on money that is loaned out. For strict adherents to the faith, this means a ban on participating in financial markets. Islamic countries vying to compete in the global economy are finding themselves in a bind when it comes to this doctrine.
In financial markets, there are two parties to each transaction. In economics, we call these supply and demand. Somebody wants something. Someone else has what they want. Formal markets allow these two parties to find each other and exchange the item in question.
Investors or savers have extra money. Companies need money or capital to grow their businesses. It’s a match made in heaven, but not if you’re a strict Muslim. In order to entice investors to loan out their money, there must be a payment of interest. Interest is the price of money and the market clearing mechanism. — except when you’re not allowed to collect it.
Economies need well-functioning financial markets in order to grow. No price means no flow of money. No flow of money means a big limit on economic growth. Islamic countries are finding ways to bend their doctrines to acknowledge this fact.
Here in the U.S., we have long had well-developed financial markets. The problem is that they haven’t functioned very well for the last few years. The system has become biased in favor of the folks on Wall Street, while leaving the folks on Main Street out in the cold.
John Bogle’s latest book is called “Enough.” It’s a short little book about life and the financial crisis. Bogle is the founder of Vanguard, the second largest investment company in the country. He is the father of the index mutual fund and a favorite son of Wall Street, but he has long railed against the excesses in the industry. This is required reading for my graduate students.
So, I say to the Occupy Wall Street movement, you have a point. The excesses on Wall Street nearly caused our financial collapse, but I would say to my Muslim friend, you cannot have it both ways. We NEED Wall Street, but we also need for that street to be occupied by people more like Mr. Bogle and less like Mr. Madoff.

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