As the dust settles from the 2008 elections, pressing questions remain about the state of the world economy. “This is the major crisis that Western capitalism is facing since 1929,” said economist Loretta Napoleoni during a lecture sponsored by UNM’s International Studies Institute. Napoleoni’s talk on “The Global Financial Crisis” was the keynote of ISI’s lecture series, “Global Instability: Causes, Consequences and Cures.”

She traced the current crisis to a shift from “a nation state to a market state” – that is, from a focus on the welfare of citizens to growth of business. “Now, what is happening today, the credit crunch, is actually linked to the fact that this state did not regulate finance for fifteen years.”

She also attributed some of the severity of the crisis to the war on terror. “The war on terror… turned out to be a total financial folly. And part of the problem of what we’re facing today – not that it created the credit crunch, absolutely not, but it weakened the defenses of the American economy to deal with a crisis like that.”

She said that financial regulations in the Patriot Act led international investors to get out of the dollar and invest in other currencies. “What’s happened after 9/11 is that the tough regulations imposed by the monetary authority, coupled with the suspicious attitude that the U.S. had toward Muslim investors, convinced many investors from oil countries to repatriate their funds.”

Napoleoni is the author of “Rogue Economics: Capitalism’s New Reality,” “Terror Incorporated” and “Insurgent Iraq.” She is an expert on financing of terrorism and advises several governments on counter-terrorism. She is senior partner of G Risk, a London-based risk agency.

Explaining the concept of rogue economics, Napoleoni said, “In times of great transformation, economics moves much faster than politics, and politics can’t keep pace with the economy. And it is in these particular circumstances that the economy becomes a rogue force.” She suggested that while these circumstances can lead to great destruction, as with the fall of the Roman Empire, they can also lead to great progress, as with the industrial revolution.

Napoleoni said there are some differences between the current crisis and the Great Depression that make her optimistic. One difference is the presence of relatively stable economic systems outside of Western capitalism.

Islamic finance is a system based in shariah law. Central principals include a prohibition against charging interest and a code of ethics for investments – for example, barring investments in prostitution. Napoleoni said these principals are actually quite similar to the principles of classical economics.

Though the concept was first raised in the 1950s, it didn’t take off until the 1970s, when the oil crisis brought the necessary capital to oil producing countries. “Islamic finance is the product of two major crises of Western capitalism, the 1973-74 oil crisis and 9/11. And it is almost ironic that this system could help us to get out of the current crisis.”

One thing Napoleoni said the West can learn from Islamic finance is to balance profit with social responsibility. “A bank should be a profit organization, but the moment in which the social role is forgotten and the profit role takes over, then a bank is actually working against the people who are putting their money into the bank, the clients. Now that, of course, in Islamic finance could not happen, because there is this partnership between the client and the banks. There is a social commitment within finance which we had before, but we lost it.”

Another lesson from the Islamic system is striking a balance between flexibility and oversight. All Islamic bonds must be approved by a committee of scholars and bankers. At the same time, the bonds can be used to finance anything within the limits of shariah law.

Napoleoni said developing a new model based on Islamic finance may be the solution to the current economic crisis. “It is a crisis of confidence, and the solution is to bring back the confidence. But how do you bring back the confidence to a system like this, which is based basically on a pyramid scheme? And this pyramid is collapsing.”

“I really think that we are at a junction, and this junction could be very positive for us,” she said. “We’ve got to be open-minded if we want to carry on going ahead. Otherwise we’ll get stuck, and otherwise we’ll really be in a serious crisis, and then something new will come only from the ashes of what we have constructed before.”

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