Remember that from our perspective, premodern feudal, tributary, agrarian systems where ´static´systems. In such a system, interest, i.e. a requirement to pay back more than you received, is disastrous, since you can only take the money from a static pie, i.e. from somebody else. It is therefore very logical that traditional spiritual-economic systems (they did not differentiate then), not just islamic banking but the same goes for christian and jewish ideas), that interest was banned.

This started to change with pressure from the merchant class, and their growth based system. If the system grows, as long as the pie grows, nobody will feel the pinch directly. But as our world reaches physical limits, growth based interest becomes a problem again, and so do neotraditional solutions.

The issue today is with fractional reserve banking. I´m not sure about exact ratio, but any real input of money can be leveraged 30, 70, perhaps 100 times. This is no longer money that represents any real value flow, but an excess that becomes speculative, and seeks an outlet. It´s inherently inflationary, but instead of inflation in money, it can express itself in bubbles, inflation of housing prices. The problem is that they started over’leveraging not even real money, but mortgages that could not be paid back.

Another way to invest the excess, is through the valuation of the immaterial value of current production. We know that this value exists, but no one really knows how much it is really worth. This then, give scope for all kinds of financial speculatins, a game based on expectations and trust, not on any objective measure.

The dramatic problem now is the following, as over’leveraging has become toxic (98 or 99% of the money no longer represents physical production), they need an enormous amount of money to restore confidence, and this will be a painful process (until we go back to trustworthy underlying values to what is being leveraged). But that money, while having inflationary effects, also is an incredible burden on social policy, and can freeze money for a long time, making any progressive social policy impossible, or at least very difficult. This may lead to polarisation, as social movements start making demands, and this money needs to come from somewhere … If it is no longer available from the state, it needs to be taken from … Right, a recipe for serious social strife in the coming years.

Where do we go from here? Do the Islamic bankers have a point and a valid alternate model?

As it happens, I have islamic bankers in my class this year and they point out that the banning of interest leads to a) asking what is tangible in the service that is delivered and b) how the lender shares the risk with the borrower. They have piqued my interest and resolved the increasing anxiety I felt over years when i watched the cynical habits of business.

Walden Bello has an article situating the current crisis in the context of the long-term fall in the direct rate of profit, and various measures to circumvent it:
http://www.creative-i.info/?p=963

He starts with WWII, whose effects were a textbook example of Marx’s “counteracting tendencies” in vol. III of Capital. It turned the entire world outside the U.S. into an undercapitalized field for investing surplus capital and absorbing surplus output. But this came to an end, and with it the generation of profitable postwar capitalism,around 1970.

Afterward neoliberalism was adopted as a way to restore the rate of profit, but that has declined in effectiveness as productive capacity in the Third World (especially China) has expanded, and contributed to overproduction and a resumed falling direct rate of profit.

Finally, capital turned to financialization and a series of bubbles to counterate the falling DROP. That’s failing now.

Although he doesn’t mention it, the inability to capture value as a result of the unenforceability of IP is surely as much a factor as the failure of neoliberalism to restore the profit rate.

To sum up, the Depression was a crisis of overproduction and overinvestment, which was “solved” only by blowing up all the capital and all the productive capacity in the world outside the US, and by the US government buying up (as “defense”) a significant portion of surplus capacity even then. Since then, it’s been one expedient after another to combat the underlying tendency of the falling DROP.