Meanwhile, outside, camped in igloos, were the critics of the system, the Occupy WEF movement. The 99% were protesting in the cold, seemingly unaware that the culprit behind our current predicament is not the so called 1%, but a thought, held by billions.

The inability to imagine a smooth and peaceful resolution to the world's economic and monetary  challenges is linked to the deeply entrenched belief in scarcity. Indeed, scarcity is perceived as an ingredient of value. Thanks to a myopic science - mainstream economics - scarcity has managed to become more central in our worldview than the power of creative imagination. Instead of defining itself as the science that seeks to perfect and improve the tools and frameworks of prosperity, economics is defined as the science that studies the optimal allocation of scarce resources.

Across the world, the policy assumptions used to address the current crisis are based on a monetary architecture that is deeply flawed. It is so seriously flawed that the shortcomings in our architecture evoke the limitations we used to impose on ourselves when we believed without evidence that the Earth was flat. Today, our belief in the debt-based monetary architecture is as limiting and as restrictive. As such, the key change we need is a change in our thinking and beliefs in what is possible.

Despite and in spite of its limitations and pains, this system is being bailed out with more debts, and it is being sustained by more confusion and more credit. While banks, governments, and central banks find a way to print more debt/money for themselves, the rest must suffer through austerity measures.

The challenge for Islamic finance is to choose to diverge, to deviate, and be different. We have at our disposal principles that can allow us to build a better system. These principles, whether we call them Islamic or Buddhist, are useful and relevant. Indeed, they can help advanced economies engineer a more beneficial and more optimal solution to the crisis. They can help reform the global financial architecture in a way that can increase aggregate utility and overall productivity. They can help us reform and improve money mechanics, which is the ultimate source of our current woes.

The most daunting global policy paradox today is the simultaneous and parallel implementation of quantitative easing and austerity measures. The former is a pure invention and creation of money, the latter is a contraction in spending based on the premise that money is not as available as it was previously. The parallel adoption of these policies has fuelled an awareness of a serious imbalance.

An informed public is observing how banks are being bailed out and provided with fresh reserves or fresh loans, while hard working people are being penalized by the same banks for defaulting on their loans or mortgages. This is true everywhere, in the US, UK, Europe and the Islamic world. There is public discontent everywhere, and it is being aggravated by a lack of policy imagination across the board. 

While central banks are inventing new money, and helping out the banks from default, they are also allowing banks to foreclose someone's home because the concerned family is unable to pay its dues. This is most disturbing  as a practice when one is aware of the mechanics behind money and credit creation. Furthermore, and adding to the absurdity and irony of the situation, the key entities responsible for the current crisis are not families and individuals, but banks, central banks, and governments.

What is a sovereign debt crisis when the state is the creator of money? How absurd is this charade, and how tragic is this farce? We are the creators of money, the authors of the rules that govern it, and the builders of budgets that spend it, we are the inventors of central banks and governments, of banks and debt markets, we do as we please.

Islamic finance principles can help transform money mechanics in a way that preserves the value of money, but diversifies the instruments used to create and inject it. I have proposed such a transformation in other essays, where I have proposed the concept of equity-like monetization, and a product that can do the job just fine, i.e., Public Capitalization Notes (PCNs).

Public Capitalization Notes are profit sharing project-based real activity enhancing instruments. If such instruments were to be used for money injection, we could turn the page on this crisis in a relatively very short period of time.

PCNs, while channeling funding to where it is most needed, facilitate job creation, employment, income, deposits, and real activity. Public Capitalization Notes allow the existing system: 1) to survive through a bypass of its own mechanisms, and 2) to balance the inadequacies of a purely debt-based model.

Instead of backing money with Public Debt, which is untenable without ever increasing debt levels, we could also back it with Public Investments, i.e., wealth. Indeed, to resolve the current crisis effectively and fundamentally, the debt-based monetary architecture must be complemented with a channel of money creation that does not add more debt to the system and creates income without depending on bank credit.

PCNs are Islamic instruments in nature, and allow us to transform a debt-based money mechanics in a way where injection or creation of money is not synonymous or necessarily linked to debt or credit creation. Public Capitalization Notes are wealth-based instruments that involve a joint and coordinated investment by central banks and governments into the socioeconomic fabric of a country. We owe this to ourselves, and we owe it debt free. Unless, of course, we believe in scarcity.

The 99% need a better and fairer monetary architecture and Islamic finance principles can help. The Islamic finance industry must reach out to fulfill a universal role, and contribute to the betterment of a system that seems to be quite indifferent to ethnic, racial, religious, and national differentiations. In embracing its Universal destiny, Islamic finance must go beyond the Shariah, beyond the Islamic, and embrace a global urgency to ensure a better tomorrow for a planet in crisis. After all, a significant chunk of the 99% are in the Islamic world, and money creation in the Islamic world follows and emulates conventional methodology.

Dr. Armen V. Papazian is a financial economist, consultant, speaker and founding CEO of Keipr. He is a former head of Islamic finance at UBS, a former MD for innovation and development at DIFX - Nasdaq Dubai, and a former honorary fellow of the Cambridge Judge Business School, UK. He earned his PhD in financial economics at the University of Cambridge, King's College, Cambridge, UK.

© Zawya 2012

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