Lessons from the US Economic Crisis

Salman Ahmed Shaikh

The ongoing sovereign crisis in Europe and US is challenging conventional wisdom and is creating fears of a double dip recession. Massive levels of debt and consumption beyond means and speedy financial innovation with lax regulation has put major economies in a deep hole.

US, the world's biggest economy, recently witnessed lowering of credit rating by Standard & Poor's (S&P). In 1980, the US national debt stood at around $2 trillion. By 2011, it stood at a staggering $15 trillion. For the first time, debt to GDP ratio in USA has climbed over 100 percent of Gross Domestic Product (GDP). This debt may become more costly as the riskiness of the treasury securities increase further.

There are 7 million fewer jobs in the United States than there were four years ago. Some 25 million Americans who would like to work full-time cannot get a job.

With up-rise of BRIC, America’s manufacturing and even technological edge has migrated across the border and overseas. In the long run, this is decreasing US national wealth, and also de-industrializing it.

Monetary policy with ease in rates had been ineffective to say the least in last few years when interest rates were kept at near zero level since 2008. Fiscal stimulus again targeted the undisciplined financial sector which did not use the stimulus for extending credit to the private sector as much as required and hoped.

Below, we point just a few factors that have been prime cause behind much of economic problems being faced by USA or had been bad response to the crisis and which will not have featured in an economy based and run on Islamic principles. This brief discussion would provide a glimpse of contrast between the contemporary Financial Capitalism and Islamic economic framework.

1. The long-term habit of consumption beyond means. U.S. consumer debt has soared by 1700 percent over the past 40 years. With business cycles fluctuations, this is unsustainable. The securitization of consumer debt magnified the losses and created negative unjust effects on savers and taxpayers which had nothing to do with the mess.

2. USA fiscal deficit exceeded $1.3 trillion in Fiscal 2011. After taking on credit made extraordinarily easier for consumers, the promised but unsustainable and inefficient welfare spending showed recklessness on government’s part and encouraged public at large to be taking the same route.

3. Corporate financial sector earnings making up 40 percent of total income. These earnings are transaction costs for the productive sector. Amidst these highest earnings, the financial sector still could not do its job of matching credible business sector investors with limited number of savers. This failure resulted in injustice to the savers and to the productive sector that was not part of the mess in the first place to lose credit lines amid liquidity crunch in post-crisis scenario.

4. Quantitative easing adopted time and again to rescue economy discouraged savings, created even more fluctuation in real asset prices, and encouraged more speculation to profit from correct anticipation of inflation and financial asset prices rather to take the pain of productive enterprise which increases employment opportunities.

5. Financial intermediation growing in massive proportion and delinked with productive sector. In the financial crisis of 2007-09, the huge bail-out package to the few financial tycoons basically encouraged 'socialize losses and privatize gains' as remarked by Joseph Stieglitz. Financial institutions that were just supposed to be playing a supportive role to the productive economy got much bigger and unregulated through shadow banking practices.


(Salman Ahmed Shaikh is a researcher in Islamic Economics. He is author of "Proposal for a New Economic Framework Based on Islamic Principles". He has also written 20 papers and more than 60 articles on Islamic Economics. He can be contacted at salmanahmed_hyd@hotmail.com)