rules and the mark-to-market rules will be extremely useful to those
who believe in and apply the rules of Shari’aa. They decide to go to
cash. This reduces demand and increases supply, causing prices to de-
cline and, in most cases, sharply signaling the bursting of the bubble.
In most cases, the price of a real estate property, for example, may be
lower than the loan the owners obtained to finance it—as many experi-
enced during the 2008 economic meltdown. In most cases, especially in
today’s culture, that prompts many to declare bankruptcy to run away
from debt, and the banks repossess the properties. Because banks are
required to sell these properties as soon as possible, prices decline fur-
ther in a process of capital destruction. The same process happened on
the stock market, especially with portfolios that usemarginfinancing
(borrowing money against the value of the stock portfolio). Market
losses in the Dow Jones Industrial Average—in one day—can reach
more than $1 trillion (that is $1,000 billion). During this process, we
are witnessing the destruction of the fiat money created at the printing
press!
4.APeriod of Transfer of Crisis from the Financial Sector (Wall Street) to
the Real Sector (Main Street). As the recession sets in, businesses, in
their pursuit to cut expenses and overhead, resort to reducing employ-
ment and begin laying off employees and reducing production (in indus-
tries such as home construction and auto manufacturing), with a
resulting deep impact on local economies. This process results in mas-
sive economic dislocations and price reductions.
5.APeriod of Recovery that Takes the Economy Back to the First Period
described in number 1, above. At this stage, the government starts a re-
covery program with the help of monetary authorities, and we head
back toward the first stage; money creation begins anew.The five-stage process that ends with the bursting of the bubble has
been witnessed during the inflation of the stock market from 1987 to the
year 2000 and from 2003 to 2008. The reduction in interest rates that fol-
lowed the September 11 attacks caused inflation of real estate prices for a
long time, resulting in the 2008 meltdown and the near-collapse of the
financial system, not only in the United States but also in the whole world.
It is important to note here that one of the responsibilities of the Central
Bankers of the world—including the Federal Reserve of the United States—
is to try their best to timely stop the ‘‘bubblization’’ of assets by bursting
these bubbles before they become so large that they create a heavy burden
on the economy and the whole population when they collapse. It is interest-
ing to note that former Fed Chairman Alan Greenspan preferred to allow
the housing bubbles in the United States to fester for a long time. They
104 THE ART OF ISLAMIC BANKING AND FINANCE