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You don't seem to have addressed the point I've made a few times - the same mechanisms you describe can operate where no interest is earned/charged, but where profits from investments are shared. (But if you have and I've missed it - apologies)

Isn't it the case that the bank is taking a guaranteed fee in the form of interest it earns, and keeping the profits in excess of interest it pays?

Won't society be better off if the investment returns are more equitably shared amongst those doing the savings? The banks will receive less, and the investors and borrowers gain.

And given that a tax on under/un-used capital will encourage investment - doesn't this work to stimulate the economy by ensuring that liquidity of 'real' capital is never threatened?

BTW - I seem to agree with what Ron Paul says about the Dollar and trade - but where I part company with him is his extreme 'small government' view.

Cheers,
Shafique

shafique wrote:You don't seem to have addressed the point I've made a few times - the same mechanisms you describe can operate where no interest is earned/charged, but where profits from investments are shared. (But if you have and I've missed it - apologies)

In my view, the abolishment of interest rates make it so much more complicated for the average saver. Now they all need to be risk sharing partners just so that money can roll? Not even guaranteeing the benefit for that person and society in general?

Isn't it the case that the bank is taking a guaranteed fee in the form of interest it earns, and keeping the profits in excess of interest it pays?

Won't society be better off if the investment returns are more equitably shared amongst those doing the savings? The banks will receive less, and the investors and borrowers gain.

We can debate the amount a bank manager should get paid, but lets not mistake investment banks with communal banks. Communal banks are not speculative in nature. They serve the (local) community. Whats wrong with rewarding a certain industry expertise?

And given that a tax on under/un-used capital will encourage investment - doesn't this work to stimulate the economy by ensuring that liquidity of 'real' capital is never threatened?

At what expense does this increased risk taking come? When a market corrects all the excess capacity, which was only possible by initial overinvestment!, is purged and losses will have to be shared with every investor. That means that your proposal of risk-sharing partnership with the bank is at a loss too. Is that beneficial to the average saver? If he just got paid a marginal interest rates, you keep the risk with the bank, and the bank only!

BTW - I seem to agree with what Ron Paul says about the Dollar and trade - but where I part company with him is his extreme 'small government' view.

Cheers,
Shafique

The bigger government gets, the more resources (30-40 percent taxes) it takes. This way it can redistribute the fruits of YOUR and others people labour to less capable or less willing people. Thats socialism like we have in Europe. Its a welfare state, that doesn't encourage contribution to society!

Did you know that the average private worker in America earns about $60.000 a year, while the average public worker earns $100.000 including benefits? Then we didn't even talk about the money it spends on silly projects and fraudulent practices.

Government is a drag on society. Its function should be simple. To protect and serve, and nothing else.

The first analogy shows that the interest systems of the banks only help the richest to get richer even faster, without any “effort” or without the risk of making "more money" is put at risk.
- If interest earning at banks is guaranteed then it leads people to rip off / steal money by utilising every effort to inflate prices and services of business on every opportunity,
If this opportunity leads them to own huge amounts of money then there is no need for further efforts to risk your savings with investment/production but by simply putting what's robed into interest accounts you’ll get richer without taking risks by injustice. This situation may lead to no further investments and increase in unemployment… then rich speculators who get richer through guaranteed interests will start exploiting the poor/unemployed through the same guaranteed interest system and get further rich until the whole system collapses.

-Guaranteed interests on deposits, will also deprive workers(labour) from earning more while working hard for business, only because what boss saves from their hard work will find it’s way into banks to generate guaranteed, effortless interests on workers stolen earnings, helping the boss get richer without taking risk of production especially at the hard times.

A single person cannot do this all at once.

Of course they can, without guaranteed interest rates, banks will have pools/funds made up of small/large savings of different people.
If you want to earn more with your savings then they will get invested into businesses and what each small saving holder gets is his share returned to the pools from the profit/loss of the company that was invested. There is more justice in this for the benefit of whole society in general and for those who is able to save and wants to earn "more money" than they need…

I recommend you to read the full section of the “economy” in Islam to get the full grip of the picture on that website, which has very plain and basic descriptions for non-Muslims to understand..

Berrin, can you please reply in the way that deductively addresses the logic I made clear?

Because when I have to reply to your new statements, I have to repeat myself each time to show you my deductive logic makes sense about how savings and interest rates influences human nature and the business cycle.

So please read my rebuttal to the core of Chapter 6 and reply parapgraph by paragraph so you can indicate to me to agree or disagree.

Lets keep it productive.

Let me not speak about capital in general and interest rate in particular, the things that White Anglo-Saxon Prorestant guys in smart suits reckon as the most important.

Recently I read an article in the Economist about Germany http://www.economist.com/displaystory.c ... d=15641069 .

I was amazed the flexibility of its work-force, which is rather important component of Hayek's model. It's a social partnership between management and employees.

First time I learnt about that phenomenon 10 years ago when I had a long conversation with an average Flemish worker. He told me that they are very different from the rest of Belgian, who are mostly French. The latter prefer go on strike for any insignificant issue but the former prefer directly discuss the issue with the boss and find the solution together without shouting on the streets.

It's some sort of fascism, as Mousalini tried to cultivate to Italians without visible success though, but it's viable within population with Kalvinist roots.

So what can we see? Big export powerhouse with skillful flexible work-force, which mostly keen on saving instead of partisipating in bubles or infinite consumption beyond their meenings.

The problem exists. One of the biggest is still DDR.

Rob, Have you found a remedy from the Dutch desease? I don't thing that you are far away from your powerful neibour.

Well Chief, the Dutch disease was a problem we had with the DSM mines (sandstone) back in the days. Problem was that the exchange rate of the currency went up because of export surplus from this resource producer DSM. Other sectors like truck manufacturing were struck in a hard place with this higher exchange rate. They became uncompetitive.

So yes, we closed the mines and diversified the economy. We learned our lesson.

By the way, Russia has the same disease, only multiplied by factor 1000. All resource producers of this world have a problem with diversification of the economy when commodity prices go up!

What will Russia do with its Dutch disease, as its called in economic terms?

RobbyG » Wed Mar 24, 2010 2:52 pm

shafique wrote:
Done.

Banning the FED would make sense.

But banning interest rates in general is just asking for excessive risk taking by finding the best return available from asset inflation. Hence bubble prone.

Try and come up with a solution that makes sense Shafique. The logic doesn't add up so far.

How? Can you example a business model in a competitive free market environment? where lenders have no option of earning "more" from interest rates but through an investment into healthy business?

Berrin wrote:

RobbyG » Wed Mar 24, 2010 2:52 pm

shafique wrote:
Done.

Banning the FED would make sense.

But banning interest rates in general is just asking for excessive risk taking by finding the best return available from asset inflation. Hence bubble prone.

Try and come up with a solution that makes sense Shafique. The logic doesn't add up so far.

How? Can you example a business model in a competitive free market environment? where lenders have no option of earning "more" from interest rates but through an investment into healthy business?

No, I can't imagine a working system of banking that doesn't allow interest. The only thing close would be sharia compliant loans, which are loans without interest.

Its the same system as in the West, just tweaked by a higher loan amount.

For instance:
1) An interest bearing loan of 10.000 carries 5% interest for one year (Western banking system)
2) Sharia compliant loan of 10.000 with no interest possible, would need a premium for the bank to earn money, so the total loan amount becomes 10.500 to be paid back in one year.

Again, the loan is higher, more money in the system chasing the same amount of good, for instance property, and thus asset inflation. There's nothing healthy to this. Its bubble prone since more investors want that nominal return on capital.

There is nothing beneficial by creating higher prices in a certain sector.
In a system based on fractional reserve banking, this would result in massive price inflation. Just look at Dubai property!

And after the boom, a bust will follow. Had interest rates been significantly higher, capital would be harder to get by and the property bubble could never have formed, because people can't afford the high interest cost. This way the market coordinates time with interest. The result is (long term) social benefit (affordable rents and house prices) and less speculation.

If you don't agree, dissect this reply with your logic, line by line so we can agree or disagree.

The 'shariah loans' are indeed just loans with interest dressed up - so they aren't really shariah compliant, as they are indeed charging interest but in a round about way.

Loans to consume, as opposed to loans to invest, will therefore become scarce. People will have to save up and actually earn before they can spend, or find those willing to lend without charging interest. (The system includes taxation which is meant for the use of society - and can be used for social projects as well as roads/defence etc)

Banking can provide loans, it just needs to be a source of capital and earn returns linked to the use that the money is put to. More investment leads to more jobs etc. The bank earns the same returns it was making before (if not more, as it is now not charging fixed interest rates but earning real returns) - so it isn't losing out from this aspect.

I really can't see how an asset price bubble will be created by people investing in property in this model. The money that is being lent out to buy properties is still available to buy properties, only now it will be the banks only who can afford to buy these properties. The banks will not compete against themselves to bid up house prices (and if they do, they are only screwing with other banks - and this will be no different from the price inflation of Van Goghs or Ferrari Enzos or Snake oil - as long as the rich are the ones speculating their money against other rich people, it's a private bet)

You're saying that high interest rates will put a lid on liquidity via loans and stabilise house prices. Totally agree. But I'm saying the same thing - not allowing banks to offer mortgages will have a greater impact on liquidity and result in fewer people being able to buy houses they can't afford without a loan. Simple supply and demand will result in house prices falling in this scenario - and my point is that mortgage capital will then be put to productive use and NOT be fuelling a destructive house price bubble.

Ergo, disecting your logic, I don't agree.

Where does that leave us

shafique wrote:The 'shariah loans' are indeed just loans with interest dressed up - so they aren't really shariah compliant, as they are indeed charging interest but in a round about way.

Loans to consume, as opposed to loans to invest, will therefore become scarce. People will have to save up and actually earn before they can spend, or find those willing to lend without charging interest. (The system includes taxation which is meant for the use of society - and can be used for social projects as well as roads/defence etc)

Ok, so where do you think you are going to find those willing to lend without interest?

Just think of it this way. The communal banks (9000 of them in the US) are in abundance and aimed at the community lending practises for a fee. They get their money from savers who get paid interest.

In a venture capital model, you would need to find investors with plenty of money, who are willing to invest millions to start up a business that may take 10 years to become profitable. The more partners who provide capital, the less influence you have over your own (small) contribution. This is not for the average saver or entrepreneur who wants to start a restaurant down the street. They go to a bank that gathers deposits by paying a marginal interest on savings. You see the logistical problem here?

Venture capital is for the rich. Its part of high finance, people with plenty and who can lose big for a big return. Risk is exponential to return in venture capital markets. The average saver on the street isn't going to put his money in ventures where bigger players call the shots, right!? The little saver just wants a small return. Not all the risk of losing his life savings!

Banking can provide loans, it just needs to be a source of capital and earn returns linked to the use that the money is put to. More investment leads to more jobs etc. The bank earns the same returns it was making before (if not more, as it is now not charging fixed interest rates but earning real returns) - so it isn't losing out from this aspect.

If that would work, explain to me the following:
How can a bank earn a return on capital without earning an interest (dividend, rent), besides selling their appreciated investment, hence limiting a company to use that capital? After all, the company is not allowed to pay a form of interest.

You cannot come to me and form a logic that dividends and rents are no form of interest. Because that would be hypocritical. They are simply named differently, but just like a dividend is a paid interest on stock investment, so is rent an interest on a housing investment. Its as simple as that.

That would mean, you have to sell your initial investment to earn a return. At least you would have to sell your appreciated capital from the initial investment. If you don't sell your appreciation, then your capital would not earn you a return. This doesn't exactly bode well for businesses that have a long investment cycle.

I really can't see how an asset price bubble will be created by people investing in property in this model. The money that is being lent out to buy properties is still available to buy properties, only now it will be the banks only who can afford to buy these properties. The banks will not compete against themselves to bid up house prices (and if they do, they are only screwing with other banks - and this will be no different from the price inflation of Van Goghs or Ferrari Enzos or Snake oil - as long as the rich are the ones speculating their money against other rich people, it's a private bet)

Here's another problem underlined.
How can a bank attract savings without paying an interest? The simple man on the street can just as well keep it under his bed when he doesn't collect interest for it. That would be dead capital. The only way a bank is able to attract all the capital it needs to benefit societal development, is when it pays a marginal return on deposits. Hence interest!

If you miss this simple logic, then its really hard to come together on this one. There has to be an incentive for people to put the money at the bank first, before investments can be made. Especially under gold standard where the FED can't create money by electronic decree (input on computer).

Interest is essential to a capital model where money needs to flow and is used productively rather than being hoarded under the bed or stored at the bank without earning a return (interest, dividend or rent)

You're saying that high interest rates will put a lid on liquidity via loans and stabilise house prices. Totally agree. But I'm saying the same thing - not allowing banks to offer mortgages will have a greater impact on liquidity and result in fewer people being able to buy houses they can't afford without a loan. Simple supply and demand will result in house prices falling in this scenario - and my point is that mortgage capital will then be put to productive use and NOT be fuelling a destructive house price bubble.

Ergo, disecting your logic, I don't agree.

Where does that leave us

I'm trying real hard to see all sides of your logic, but the most essential thing is still missing in your logic.

a) How will a bank attract capital without interest rates on an inelastic money supply (gold standard)?
b) Where will the average saver be, when its a given that not all venture capital investment projects succeed?
After all, the average saver would be way better off when he can simply earn a little interest at the bank, while keeping his money safe AND where the money is put to use by banks that can go bankrupt according to rule of law.

We agreed on abolishing the FED, since we don't want money creation (monetary inflation) out of thin air by fractional reserve banking. Thats was set.

RobbyG wrote:a) How will a bank attract capital without interest rates on an inelastic money supply (gold standard)?
b) Where will the average saver be, when its a given that not all venture capital investment projects succeed?
After all, the average saver would be way better off when he can simply earn a little interest at the bank, while keeping his money safe AND where the money is put to use by banks that can go bankrupt according to rule of law.

Rob,
Did you use the virtual model with old-fashioned terms to explain something specially to Shafique or it's a part of "The Business Cycle Theory"?
As far as I know "gold standard" hasn't existed since 1973 and your "average saver" lives only in Germany nowadays.

Red Chief wrote:

RobbyG wrote:a) How will a bank attract capital without interest rates on an inelastic money supply (gold standard)?
b) Where will the average saver be, when its a given that not all venture capital investment projects succeed?
After all, the average saver would be way better off when he can simply earn a little interest at the bank, while keeping his money safe AND where the money is put to use by banks that can go bankrupt according to rule of law.

Rob,
Did you use the virtual model with old-fashioned terms to explain something specially to Shafique or it's a part of "The Business Cycle Theory"?
As far as I know "gold standard" hasn't existed since 1973 and your "average saver" lives only in Germany nowadays.

Look Chief, if we want to find a capital model that is based on sound money policy you need to get rid of fixing interest rates per FED decree. Hence abolishment.

Second thing would be to reintroduce a gold standard, which is cyclical, less volatile since the money supply is stable and only grows by the approx 3 procent of new gold (and/or silver) digged from the ground each year.

After all, the most economic prosperity was gained before 1971, when the last silver link to the gold standard was abondoned. Since 1971, we had a system based purely on monetary inflation. This growing bubble cycle has been continuing for close to 40 years now and its going to pop!
Government debt levels in the developed world are sky high by bailing out banks and other nations during crisis times. The limit is now reached. Next bubble that pops is going to lead to depression as currency crisis undermines total confidence in the system.

You must have some familiarity with an old brethren of yours, Nikolai Dmyitrxyerich Kondratieff. Great mind, unfortunately executed per Stalin decree for challenging the Soviet model by saying that the Capitalistic business cycle runs about 50 years.

If your interested: http://www.nowandfutures.com/buscycle.htm

RobbyG wrote:
Ok, so where do you think you are going to find those willing to lend without interest?

Well, if those with the capital don't invest it, it will be taxed. So these guys will invest the capital and earn real income from the economic gains they make. The state gains by taxing revenue, as well as taxing those who do not invest (the 'negative interest rate'). The state has to provide the social goods (roads, education, health, social welfare) - and these are done on a needs basis.

RobbyG wrote:Just think of it this way. The communal banks (9000 of them in the US) are in abundance and aimed at the community lending practises for a fee. They get their money from savers who get paid interest.

The savers won't be able to earn interest, but can still earn part of the return that the capital is put. Those borrowing from the bank and paying the bank interest, can still get the money from the bank (who will be acting as the agents of the savers) - but will pay back dividends instead of interest.

Savers get more. Borrowers pay back fair share of what they borrow, banks earn a fee for the process.

RobbyG wrote:In a venture capital model, you would need to find investors with plenty of money, who are willing to invest millions to start up a business that may take 10 years to become profitable.

VC will still be available, as there will still be the rich and the not-so-rich. The rich will have choices of where to invest. In fact, VC won't be affected by lack of interest rates - as they are halaal.

RobbyG wrote:The more partners who provide capital, the less influence you have over your own (small) contribution. This is not for the average saver or entrepreneur who wants to start a restaurant down the street. They go to a bank that gathers deposits by paying a marginal interest on savings. You see the logistical problem here?

Totally agree. The banks will be more like unit trusts for the ordinary savers and those with more money can choose to invest in banks that act like VCs.

Actually this is not too far from reality right now. Just look at Pension funds around the world. They are massive, I mean massive, in absolute terms. And yet, they are not earning interest (by and large) but rather are employing fund managers to invest the funds in various asset classes. The system works pretty well if people are just sensible and don't fall for Madoff-like scams - they invest in real assets for real returns.

The collective power of Pension funds dwarfs VC - and therefore why wouldn't non-Pensions savings similarly go into large funds that are invested for the benefit of the savers?

RobbyG wrote:Venture capital is for the rich. Its part of high finance, people with plenty and who can lose big for a big return.

Pension funds show that large numbers of small contributions from people can generate massive funds - not a theory, but a reality.

RobbyG wrote:

Banking can provide loans, it just needs to be a source of capital and earn returns linked to the use that the money is put to. More investment leads to more jobs etc. The bank earns the same returns it was making before (if not more, as it is now not charging fixed interest rates but earning real returns) - so it isn't losing out from this aspect.

If that would work, explain to me the following:
How can a bank earn a return on capital without earning an interest (dividend, rent), besides selling their appreciated investment, hence limiting a company to use that capital? After all, the company is not allowed to pay a form of interest.

By putting the money in investments that yield real returns - i.e. they buy stocks and shares and not bonds. They earn more in dividends than they would have from just charging interest.

RobbyG wrote:You cannot come to me and form a logic that dividends and rents are no form of interest. Because that would be hypocritical.

Err - well that is the crux of the Islamic system, Interest is forbidden but dividends and rent is not. The difference at the heart of what makes interest bad/pernicious.

Turning the question round - if dividends and rent are no different from interest, then the Islamic system still works then, because it allows dividends and rent.

RobbyG wrote:They are simply named differently, but just like a dividend is a paid interest on stock investment, so is rent an interest on a housing investment. Its as simple as that.

Au contraire, mon ami. Dividends are only paid when an investment makes some real returns. When losses are made, there is no obligation to pay dividends - but if the company has some money from previous activities it can choose to pay this out. Interest is payable regardless of the underlying performance of the asset - therein lies the difference.

RobbyG wrote:That would mean, you have to sell your initial investment to earn a return. At least you would have to sell your appreciated capital from the initial investment.

I can't see how earning less interest than you would get from dividends helps you on this score? Surely you agree that if your investments are giving you higher returns than a bank will pay you, you are better off? If the returns are coming from a diversified portfolio - then the risk of losing all your money is as remote as the bank going bust, isn't it?

RobbyG wrote:Here's another problem underlined.
How can a bank attract savings without paying an interest?

By offering higher returns than they were paying out in interest. Simple.

Banks become investment trusts, effectively.

RobbyG wrote:The simple man on the street can just as well keep it under his bed when he doesn't collect interest for it. That would be dead capital.

Except it will be taxed if he does. Ergo, he'll invest and the banks will readily invest it for him.

RobbyG wrote:The only way a bank is able to attract all the capital it needs to benefit societal development, is when it pays a marginal return on deposits. Hence interest!

But if interest is banned and they end up earning higher dividends - aren't they better off?

RobbyG wrote:If you miss this simple logic, then its really hard to come together on this one. There has to be an incentive for people to put the money at the bank first, before investments can be made. Especially under gold standard where the FED can't create money by electronic decree (input on computer).

My logic is that the incentive to invest with banks is higher - as the returns are higher. Is there something wrong with this logic?

The investments are demonstrably safer when you take into account that fractional reserve banking means your money is used to create fictional money, and that not all savers can withdraw their cash, because it doesn't really exist.

RobbyG wrote:Interest is essential to a capital model where money needs to flow and is used productively rather than being hoarded under the bed or stored at the bank without earning a return (interest, dividend or rent)

I disagree - do away with interest and dividends and rents are still available, and will earn the savers more.

RobbyG wrote:I'm trying real hard to see all sides of your logic, but the most essential thing is still missing in your logic.

a) How will a bank attract capital without interest rates on an inelastic money supply (gold standard)?

By offering returns which are real and which are higher than interest rates alone. I.e. they offer real investment trusts, and the participants share in the gains and losses. People can choose which bank's funds to invest in.

RobbyG wrote:b) Where will the average saver be, when its a given that not all venture capital investment projects succeed?

They will be in the same position as the average Pension fund saver - on average earning a real return higher than if they had only kept their nest egg in the bank.

RobbyG wrote:After all, the average saver would be way better off when he can simply earn a little interest at the bank, while keeping his money safe AND where the money is put to use by banks that can go bankrupt according to rule of law.

But why settle for less money, when they can earn real returns from diversified funds? If it works for pension funds, why won't it work for general savings?

(And yes, I haven't made the point that collective investment vehicles already do exist and do give returns higher than just putting the money in the bank - call them unit trusts, investment trusts, cooperative investment vehicles etc - the principle is working in practice).

Cheers,
Shafique
We agreed on abolishing the FED, since we don't want money creation (monetary inflation) out of thin air by fractional reserve banking. Thats was set.[/quote]

shafique wrote:

RobbyG wrote:
Ok, so where do you think you are going to find those willing to lend without interest?

Well, if those with the capital don't invest it, it will be taxed. So these guys will invest the capital and earn real income from the economic gains they make. The state gains by taxing revenue, as well as taxing those who do not invest (the 'negative interest rate'). The state has to provide the social goods (roads, education, health, social welfare) - and these are done on a needs basis.

Have you ever considered a model where coercion is absent? Like a system where personal liberty and choices are granted to determine what you want to do with the fruits that your labour have produced? The inherent right to self-determination?

Taxation is a form of control. It was only invented in the beginning of the 20th Century. Your system makes even more taxes look like a fascist model. I don't like coercion. I like freedom to choose instead and I'm sure i'm not alone in this one.

RobbyG wrote:Just think of it this way. The communal banks (9000 of them in the US) are in abundance and aimed at the community lending practises for a fee. They get their money from savers who get paid interest.

The savers won't be able to earn interest, but can still earn part of the return that the capital is put. Those borrowing from the bank and paying the bank interest, can still get the money from the bank (who will be acting as the agents of the savers) - but will pay back dividends instead of interest.

Savers get more. Borrowers pay back fair share of what they borrow, banks earn a fee for the process.

If only the world was so beautifully linear.

RobbyG wrote:In a venture capital model, you would need to find investors with plenty of money, who are willing to invest millions to start up a business that may take 10 years to become profitable.

VC will still be available, as there will still be the rich and the not-so-rich. The rich will have choices of where to invest. In fact, VC won't be affected by lack of interest rates - as they are halaal.

OK.

RobbyG wrote:The more partners who provide capital, the less influence you have over your own (small) contribution. This is not for the average saver or entrepreneur who wants to start a restaurant down the street. They go to a bank that gathers deposits by paying a marginal interest on savings. You see the logistical problem here?

Totally agree. The banks will be more like unit trusts for the ordinary savers and those with more money can choose to invest in banks that act like VCs.

Actually this is not too far from reality right now. Just look at Pension funds around the world. They are massive, I mean massive, in absolute terms. And yet, they are not earning interest (by and large) but rather are employing fund managers to invest the funds in various asset classes. The system works pretty well if people are just sensible and don't fall for Madoff-like scams - they invest in real assets for real returns.

The collective power of Pension funds dwarfs VC - and therefore why wouldn't non-Pensions savings similarly go into large funds that are invested for the benefit of the savers?

Idea is good, but also pension funds invest in bonds, which earn a yield ( ). Its a form of interest.
Perhaps we should determine a limit for interest, where interest rates becomes usury, like forsay 20 percent?

RobbyG wrote:Venture capital is for the rich. Its part of high finance, people with plenty and who can lose big for a big return.

Pension funds show that large numbers of small contributions from people can generate massive funds - not a theory, but a reality.

Agreed. With pension funds people have an option to participate or not. Lets not make it coercive in your system.

RobbyG wrote:

Banking can provide loans, it just needs to be a source of capital and earn returns linked to the use that the money is put to. More investment leads to more jobs etc. The bank earns the same returns it was making before (if not more, as it is now not charging fixed interest rates but earning real returns) - so it isn't losing out from this aspect.

If that would work, explain to me the following:
How can a bank earn a return on capital without earning an interest (dividend, rent), besides selling their appreciated investment, hence limiting a company to use that capital? After all, the company is not allowed to pay a form of interest.

By putting the money in investments that yield real returns - i.e. they buy stocks and shares and not bonds. They earn more in dividends than they would have from just charging interest.

Sounds nice, but I only see you talk about markets going linear up up up and away!
When are they coming down, if ever? Sound money moves cyclical Shaf!

RobbyG wrote:You cannot come to me and form a logic that dividends and rents are no form of interest. Because that would be hypocritical.

Err - well that is the crux of the Islamic system, Interest is forbidden but dividends and rent is not. The difference at the heart of what makes interest bad/pernicious.

Turning the question round - if dividends and rent are no different from interest, then the Islamic system still works then, because it allows dividends and rent.

Crux detected. Islamic system is as rotten to the core.
Interest is forbidden, but dividens and rent is not. How convenient.

C'mon, lets abondon this religious bullcrap and start talking linear for once.

RobbyG wrote:They are simply named differently, but just like a dividend is a paid interest on stock investment, so is rent an interest on a housing investment. Its as simple as that.

Au contraire, mon ami. Dividends are only paid when an investment makes some real returns. When losses are made, there is no obligation to pay dividends - but if the company has some money from previous activities it can choose to pay this out. Interest is payable regardless of the underlying performance of the asset - therein lies the difference.

Good point. I agree and leads to the risk taking aspect of venture capital models you propose. Be so kind to address what happens when markets go down or crash?

I have to reinvest immediately or pay coerced taxation on my leftovers?

RobbyG wrote:That would mean, you have to sell your initial investment to earn a return. At least you would have to sell your appreciated capital from the initial investment.

I can't see how earning less interest than you would get from dividends helps you on this score? Surely you agree that if your investments are giving you higher returns than a bank will pay you, you are better off? If the returns are coming from a diversified portfolio - then the risk of losing all your money is as remote as the bank going bust, isn't it?

Again, markets don't move up linear. The go down too. The average saver will be wiped out in the small JV you propose. Empty, broke, no retirment possible.

You can't expect only the big pension funds to rule the world, do you? Where's the small entrepreneur in this system?

RobbyG wrote:Here's another problem underlined.
How can a bank attract savings without paying an interest?

By offering higher returns than they were paying out in interest. Simple.

Banks become investment trusts, effectively.

Sounds good to me, if markets went up forever. In reality, they go down alot too.

RobbyG wrote:The simple man on the street can just as well keep it under his bed when he doesn't collect interest for it. That would be dead capital.

Except it will be taxed if he does. Ergo, he'll invest and the banks will readily invest it for him.

This is outright coercion Shafique. This is so unislamic!
Even an Atheist wouldn't allow coercion. We already complain about the income tax AND value added tax ! You fascist!

RobbyG wrote:The only way a bank is able to attract all the capital it needs to benefit societal development, is when it pays a marginal return on deposits. Hence interest!

But if interest is banned and they end up earning higher dividends - aren't they better off?

Yes, if markets went only up in a linear fashion!

Nice prospect: coerced taxation, forced investments, no control over my retirement. Whats next?

RobbyG wrote:If you miss this simple logic, then its really hard to come together on this one. There has to be an incentive for people to put the money at the bank first, before investments can be made. Especially under gold standard where the FED can't create money by electronic decree (input on computer).

My logic is that the incentive to invest with banks is higher - as the returns are higher. Is there something wrong with this logic?

The investments are demonstrably safer when you take into account that fractional reserve banking means your money is used to create fictional money, and that not all savers can withdraw their cash, because it doesn't really exist.

Surely something is wrong. Markets go down too Shafique. If too much money is invested in productive capacity, we get malinvestment resulting in losses. Its not all up up up, thats for sure.

RobbyG wrote:Interest is essential to a capital model where money needs to flow and is used productively rather than being hoarded under the bed or stored at the bank without earning a return (interest, dividend or rent)

I disagree - do away with interest and dividends and rents are still available, and will earn the savers more.

Wondeful crux, I never knew that Islam was so inherently coercive and hypocrital

RobbyG wrote:I'm trying real hard to see all sides of your logic, but the most essential thing is still missing in your logic.

a) How will a bank attract capital without interest rates on an inelastic money supply (gold standard)?

By offering returns which are real and which are higher than interest rates alone. I.e. they offer real investment trusts, and the participants share in the gains and losses. People can choose which bank's funds to invest in.

RobbyG wrote:b) Where will the average saver be, when its a given that not all venture capital investment projects succeed?

They will be in the same position as the average Pension fund saver - on average earning a real return higher than if they had only kept their nest egg in the bank.

RobbyG wrote:After all, the average saver would be way better off when he can simply earn a little interest at the bank, while keeping his money safe AND where the money is put to use by banks that can go bankrupt according to rule of law.

But why settle for less money, when they can earn real returns from diversified funds? If it works for pension funds, why won't it work for general savings?

(And yes, I haven't made the point that collective investment vehicles already do exist and do give returns higher than just putting the money in the bank - call them unit trusts, investment trusts, cooperative investment vehicles etc - the principle is working in practice).

Cheers,
Shafique
We agreed on abolishing the FED, since we don't want money creation (monetary inflation) out of thin air by fractional reserve banking. Thats was set.

[/quote][/quote]

Alright, we have a clear problem in understanding here. Too bad we can't solve it in jiffy here. I now understand why AIG had so much losses. You know that was a joke right?

Hey, I've learnt something from this discussion - and it's good to probe one's logic to see if it all hangs together!

Pension funds do currently use bonds, but for maximum returns they invest in real assets. If bonds weren't available, then the returns would go up with increases in production and the risk of fall in value of assets will actual decrease - as society as a whole is only investing in real assets and speculative bubbles are limited to those with enough money to risk losing it.

Couple that with the fact that general savings will effectively be added to the Pension fund mechanism, and it appears that I'm not actually proposing a radical shift in economics after all - I'm just proposing that the highest yielding investments are shared by all those investing.

I said I disagree with Ron Paul over the role of Government - and I do agree that taxing idle capital is coercion. I don't have a problem with tax, as I recognise I can't build all the roads or hospitals or schools, nor can I have my own private army and police, nor can I help all the poor people who would rob me if they don't have other safety nets

But that's not directly related to the financial system that forbids interest (taxation and what is done with taxation is a general social issue) - the tax on idle capital and low taxes on capital gains is actually a right wing measure. Most capitalists don't let their capital lay idle and want it making money - keeping more of what they earn is usually applauded

Cheers,
Shafique

The 'shariah loans' are indeed just loans with interest dressed up - so they aren't really shariah compliant, as they are indeed charging interest but in a round about way.

Shafique Is there any bank in ME which pays real returns on savings rather than dressed interests?

I think all the Islamic banks offer shariah compliant investment funds which give you real returns. These are in effect just 'ethical funds' by any other name and operate as conventional pooled investment funds.


On the lending point (for RobG), I came across this piece of info on Wiki:

Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy.

http://en.wikipedia.org/wiki/Islamic_banking

Cheers,
Shafique

Robby, did you know that every single muslim believer is a potential Hayek..,without the extra need for consultancy or that expertise provided on charges..

http://adnan-globalissues.blogspot.com/ ... ation.html
http://www.mustaqim.co.uk/usury.htm
http://www.khilafah.com/images/images/P ... ne2008.pdf

Berrin wrote:Robby, did you know that every single muslim believer is a potential Hayek..,without the extra need for consultancy or that expertise provided on charges..

http://adnan-globalissues.blogspot.com/ ... ation.html
http://www.mustaqim.co.uk/usury.htm
http://www.khilafah.com/images/images/P ... ne2008.pdf

Sounds great to me, spread the word of Hayek (Austrian Economics) and personal liberty and let us come together.

Vote against big government and for sound money policy. A vote for personal liberty and free market capitalism with efficient regulation, without corporate cronyism and special interest politics. Spread the word of economic freedom!

That is, if you are able to vote...

www.mises.org

Spread the word of economic freedom!

I am not a philosopher but I think you keep living on dreams that are unattainable. In reality there is no such thing as economic freedom. For that to happen you should never receive or give service/goods to live on.
Can you do that?

Sorry Berrin, I don't have that problem of religious limitations.

We free market proponents embrace the nature of human beings in using capitalism for the benefit of society. A philosophy is only a dream until it becomes widespread. When everybody shares that dream is becomes reality.

From what capitalism has brought us so far, it can be easily said that this model works, but needs refinement. Austrian Economics is that answer to a fair and productive capitalist society.

What the Islamic model say about Equilibrium in wealth accross society is unattainable in the first place. Perhaps it would be wiser to quote one of the founders of capitalism;

If the state of the economy were truly balanced, we would be in the dark ages. Adam Smith who wrote the celebrated Wealth of Nations in 1776, states: "Nothing, however can be more absurd than this whole doctrine of the balance of trade." (Book IV, chp III, part II). If trade were perfectly balanced, there would be no progress, for the advantage of one nation creates prosperty in that nation that can come only at the expense of .. another. That does not mean protectionism is the answer, for that creates the dark age with no prosperity.

For every winner there is a loser and due to the cyclical effect, next time you could be the lucky one.
In a lifetime, everybody benefits from the productive capacity of the few who find the breakthroughs in innovation, where total society benefits from. But these breakthroughs only come by embracing the inner nature of humans, which is greed. The wanting of more.

Embrace it, improve it, eliminate fraud and abuse and the world will be just fine.

But fraud and abuse is the natural outcome of "greed" another words the essence of "wild capitalism" where the rich gets richer by exploiting the needy and resources that belongs to everyone regardless of their buying power..Religious regulations are there for protection of humanity and life to survive as the one who gives you your life and inner nature knows in advance how you will manipulate them for personal gains.

Berrin wrote:But fraud and abuse is the natural outcome of "greed" another words the essence of "wild capitalism" where the rich gets richer by exploiting the needy and resources that belongs to everyone regardless of their buying power..Religious regulations are there for protection of humanity and life to survive as the one who gives you your life and inner nature knows in advance how you will manipulate them for personal gains.

Mate, you can try to talk inequality all day long if you want. Fact remains that capitalism brought us were we are today! You wouldn't have a tv in every house if it wasn't for a rich fella who had plenty of money left for an entrepreneur to pursue his need to find a solution to a problem!

Greed can be a good thing, if you structure it right in the economic system. Exploitation of people by forcing debt and usury rates of interest is not what I mean by embracing greed. I loath fraud and abuse. Hence effective regulation, checks and balances, rule of law.

Governments role is to stay out of the main economic system. Its role in society is just to protect and serve the people and they should be paid accordingly. Never more than a private worker. Thats for sure, since government doesn't produce economic growth. Its the private sector who does that.

RobbyG wrote: You wouldn't have a tv in every house if it wasn't for a rich fella who had plenty of money left for an entrepreneur to pursue his need to find a solution to a problem!

He-he. The Berlin Olympics were broadcasted around The Thousand Reich in 1936. Which rich fellas and/or capitalism are you talking about?

The main effect of the capitalism was the Great Depression and then the World got over it only owing to WWII. After that it was not pure capitalism, but a "competion"of two sytems, when bosses shared the wealth with working class to show the latter "benefits" of capitalism.

It's not a surprise that all those sharings were over just after one system won another.

Rob, we discuss the Theory here, not spread propaganda.

Red Chief wrote:

RobbyG wrote: You wouldn't have a tv in every house if it wasn't for a rich fella who had plenty of money left for an entrepreneur to pursue his need to find a solution to a problem!

He-he. The Berlin Olympics were broadcasted around The Thousand Reich in 1936. Which rich fellas and/or capitalism are you talking about?

Haha. Sorry Chief, I was thinking about LCD displays.

The main effect of the capitalism was the Great Depression and then the World got over it only owing to WWII. After that it was not pure capitalism, but a "competion"of two sytems, when bosses shared the wealth with working class to show the latter "benefits" of capitalism.

It's not a surprise that all those sharings were over just after one system won another.

The effect of the stock market crash during the '30s was indeed part of the Great Depression.
The origins of the that stock boom in the '20s, which was excessive, is debt induced. Even economist John Maynard Keynes was broke after that collapse because he borrowed like everybody else to fund his stock investments. At age 40 he lived back in with his parents. And that debt induced boom was nothing compared to the size we have now with fractional reserve banking type of debt induced leverage.

Rob, we discuss the Theory here, not spread propaganda.

I know Marxist philosophy doesn't match with free market economics. His record of an compelling intellectual in society is one of the horrors of history:

Marx is responsible for almost all white collar crimes. The politician responded first with the Interstate Commerce Act regulating commerce, to prevent what Marx said would happen that was not realistic. Next came the Sherman Anti-Trust Act that also sought to prevent the consolidation of business reducing the number of employers. This came to be followed by the Income Tax in 1909, that was politically justified by Marxism targeting the evil "rich" who threatened capitalism. All of this legislation was enacted and. the huge costs to the taxpayer that is now the average man, was all -created based upon Marxism. Sometimes, we just forget.

You wouldn't have a tv in every house if it wasn't for a rich fella who had plenty of money left for an entrepreneur to pursue his need to find a solution to a problem!

Well there is nothing wrong with this but something went wrong when the rich fella was meant to be the solution to all problems that were meant to be pursued in the first place.

The largest and first ever study of global household assets and wealth distribution done by the World Institute for Development Economics Research of the United Nations reveals that the richest 1% of adults in the world own 40% of the planet’s wealth and 50% of world’s adults own just 1%. The report also reveals that those involved in financial and internet sectors are amongst the super rich.
The first of its kind report reveals dreadful levels of inequality and the existing massive gap amongst people globally. This means that if the 1% rich part off even with a small amount of their wealth, it would be enough to feed those 800 million people who go to bed hungry every night.

Now this must be capitalism Robby where it deals with man’s needs and the means of satisfying those needs perfectly. It addresses the materialistic side of man’s life, I mean the rich men’. Fabulous…

Greed can be a good thing

Of course, how else do you think man would move his lazy butt to provide for his self and support his siblings to continue life and living.( your creator is a wonderful planner, isn’t it? Rob , thought it all in advance)

if you structure it right in the economic system

Unfortunately capitalism in the west was not geared to structure greed in the economic system. on the contrary it was to enhance it, hence why it turned out to be wild one and gives way to bubble prone economy.

Governments role is to stay out of the main economic system. Its role in society is just to protect and serve the people and they should be paid accordingly. Never more than a private worker. Thats for sure, since government doesn't produce economic growth. Its the private sector who does that.

You’re not a capitalist after all Robby, are you? May be just someone who enjoys luxury without the extra headaches!
Don’t you know that capitalism is the economic ideology of a state, and its main aim is to increase the country’s wealth as a whole (ergo, state’s role and its wealth is inseparable)
The law is made to be on the side of capital holder, and always protects entrepreneur and capital holder rather than worker or labour.

So you have no rights to complain Robby, you just have to learn how to steal and rip off as fast as you can than the rest of life becomes a matter of play and a calculation as to how much life span you have left to enjoy the abundance. Lets not forget...capitalism concentrates on production of wealth more than distribution of wealth.

Have more reads to ease your pain…
Economic Justice: Islam versus Capitalism
http://www.iqraa.org/Economic%20Justice%20v1.0.htm

Berrin wrote:

You wouldn't have a tv in every house if it wasn't for a rich fella who had plenty of money left for an entrepreneur to pursue his need to find a solution to a problem!

Well there is nothing wrong with this but something went wrong when the rich fella was meant to be the solution to all problems that were meant to be pursued in the first place.

The largest and first ever study of global household assets and wealth distribution done by the World Institute for Development Economics Research of the United Nations reveals that the richest 1% of adults in the world own 40% of the planet’s wealth and 50% of world’s adults own just 1%. The report also reveals that those involved in financial and internet sectors are amongst the super rich.
The first of its kind report reveals dreadful levels of inequality and the existing massive gap amongst people globally. This means that if the 1% rich part off even with a small amount of their wealth, it would be enough to feed those 800 million people who go to bed hungry every night.

Now this must be capitalism Robby where it deals with man’s needs and the means of satisfying those needs perfectly. It addresses the materialistic side of man’s life, I mean the rich men’. Fabulous…

I would never say that the current system is just. But it works! You should separate current day corporate cronyism with free market capitalism. We haven't had that, thats why I'm a proponent of it.

The poor won't earn a nickel if a government keeps debasing the currency to cover failures in business, like in Europe and the USA. Hence we need sound money policy, where interest rates are higher, where people who have little, can also save and earn an interest and grow capital.

The poor won't earn a drop if an autocratic leader in an Arab nation keeps money to the state or himself and doesn't provide services to ALL his residents. Here capitalism is pure semi-state owned monopolistic corporations where competition is almost absent. Its corporate cronyism that serves the state and not the people. This way they control you, and not by democratic processes. Some get a fat paycheck to keep their mouth shut. This can only be workable if regulation is crony, hypocrite or simply absent.

There's your inequality. Try to compare poverty rates with countries that don't have capitalism. You will see what system works.

Greed can be a good thing

Of course, how else do you think man would move his lazy butt to provide for his self and support his siblings to continue life and living.( your creator is a wonderful planner, isn’t it? Rob , thought it all in advance)

Lets not mix delusion with facts. God's existence has not been proven, if so, I would believe it.
Rational thoughts only approve that people bond by religion because of insecurity and fear for the unknown.

if you structure it right in the economic system

Unfortunately capitalism in the west was not geared to structure greed in the economic system. on the contrary it was to enhance it, hence why it turned out to be wild one and gives way to bubble prone economy.

Governments role is to stay out of the main economic system. Its role in society is just to protect and serve the people and they should be paid accordingly. Never more than a private worker. Thats for sure, since government doesn't produce economic growth. Its the private sector who does that.

You’re not a capitalist after all Robby, are you? May be just someone who enjoys luxury without the extra headaches!
Don’t you know that capitalism is the economic ideology of a state, and its main aim is to increase the country’s wealth as a whole (ergo, state’s role and its wealth is inseparable)
The law is made to be on the side of capital holder, and always protects entrepreneur and capital holder rather than worker or labour.

So you have no rights to complain Robby, you just have to learn how to steal and rip off as fast as you can than the rest of life becomes a matter of play and a calculation as to how much life span you have left to enjoy the abundance. Lets not forget...capitalism concentrates on production of wealth more than distribution of wealth.

Have more reads to ease your pain…
Economic Justice: Islam versus Capitalism
http://www.iqraa.org/Economic%20Justice%20v1.0.htm

[/quote]

I indeed am very blessed, but my realistic mind has also showed me that Islam hasn't been able to produce much since the demise of the Ottoman empire. Productive capacity turned inwards is all I can find.

If you are serious about these matters, you should improve the system that works and I don't have to tell you that Islam is still looking how to exclude interest in the economic model, while there is nothing wrong with interest in general. Its usury rates that is the problem which can be easily regulated by effective laws and regulation.

Maybe you should look at how the Christians finally changed from usury to accepted rates of interest. Evolve!

Berrin wrote:You’re not a capitalist after all Robby, are you? May be just someone who enjoys luxury without the extra headaches!

I cannot say better.

Why didn't you, Rob, replied all statement about depression with 40% of unemployed and hunger and the role of WWII.

Capitalism should be free at your point of view on one side but there should be a lot of regulation of banks and anti-trust law to make it productive on the other side.

I don't want to argue about the role of capitalism. As you said the main wealth were earned before 1971 and it failed 20 years later of the collaps of SU.

After all the talk that I did in this topic, you havent even come close to fully understand what I've said.
Arguing further doesn't make sense to me. You can bring a horse to the water, but you can't make him drink it.

I'll leave it at that.

RobbyG wrote:After all the talk that I did in this topic, you havent even come close to fully understand what I've said.
Arguing further doesn't make sense to me. You can bring a horse to the water, but you can't make him drink it.

I'll leave it at that.

Rob I read and am trying to understand as you see from my questions but please avoid emotional conclusions.

We don't discuss the Symbol of the Faith here, but economic theory only.