| DEVELOPMENTAL AND TRANSITIONAL ISSUES OF THE US ECONOMIC CRISIS |
These data implies that the US Gross Domestic Products broadly stays unchanged. February unemployment rate was 4.8% and economics are expecting the rate rose to 5% in March. The data (if accurate) could imply that if expenditures remained unchanged the unemployment rate could tend to rise 0.2% each month. When GDP stays unchanged and unemployment rate increases, the reason for this could be that labor productivity has risen over time, it takes now fewer men to produce the same quantity of output. It is necessary to have expenditures increased in order to reduce the rate of unemployment. That’s why the government is spending money to stimulate the economy. Gus Faucher, an economist with Moody's Economy.com said "In the short run, given the economy is weak, budget deficit is probably a good thing"; output and employment may tend to rise. Government spending has risen 10.2% to $1.2 trillion compared to the previous year, while its revenue has risen only 1.3% to $967.2 billion. Some 130 million Americans are to get tax rebate checks up to about $600 for individuals and $1,200 for couples, with the first of the checks to start flowing in early May. U.S. Treasury Secretary Henry Paulson said on Friday that an economic stimulus program that will put $168 billion into consumers' hands this year and next could help create 500,000 to 600,000 additional jobs this year. Probably we need between 33 and 35 billions dollars of expenditures to create 100,000 t0 120,000 jobs in the US economy. By putting more money in the hands of consumers while the GDP stays unchanged, the stimulus package of 168 billions dollars of the Federal Government will increase demand and could create an inflation situation during the second and the third quarters of 2008. As the economy may not have reached its full capacity, productivity and production will continue to increase while the unemployment rate may remain unchanged. The GPD will continue to grow at a moderate pace and could reach 2% by the fourth quarter of 2008. To reduce the rate of unemployment, the productive capacity of the economy has to increase through private capital expenditures, but we need to see stabilization in the financial market before. The Federal Reserve is currently providing the financial market with fresh money at low cost, 3% through the discount window, in replacement to the capital frozen in the mortgage market. We expect that banks and other financial institutions will use the subsidized money to finance capital expenditures for businesses instead of using the money to eventually speculate in the commodities sector, for example. According to Paul B. Trescott, a former professor of economics, “the higher the existing level of unemployment, the more a given rise in expenditures will tend to raise output and employment and reduce unemployment”. In the short term, a reduction in the rate of unemployment will have an influence on prices, prices will increase. But, over the long term, as output will increase following capital expenditures to increase the productive capacity of the economy, prices will tend to stabilize and inflation will be neutralized. A reduction in the rate on unemployment may bring new homeowners on the housing market. We expect that the financial sector will continue developing the subprime mortgage market. The role of the subprime financial market is to improve access to sound financial services to low and moderate income players underserved by the traditional financial market thus help them to build assets and develop small businesses. Establishing sound and sustained modern financial system becomes a priority to avoid such crisis in the future, without stopping the dynamic of the subprime market. We may need to establish best practices patterns for the subprime financial market instead of tightening with regulations. Theory and practice indicate that, a financial system, whether prime or subprime, is sustainable when it can pursue its activities and provide the required services in a regular and continuous manner. Sustainability is therefore a primary issue for successful financial services. The sustainability of financial intermediation obviously depends (among others) on the operational locations, the economic conditions, the credit culture of the society, the efficiency of the Institution. These all are reflected in the rate of interest to be charged to credit clients. The interest rates charged to clients should contain five basics components: a) Cost of funds, b) Operating or processing costs, c) Cost of risk or loan losses, d) Rate of Inflation(sometimes included in the cost of funds), e) Investors compensations. Statistics from the Microfinance industry reveal that a well managed institution which carefully selects and then closely monitors repayments by its sub-prime customers will have to write off only a small proportion of its loans, say 2% and the write-off are covered by the cost of risks and loan losses called by the industry: the standard provision for loan losses (usually 2%-3% of disbursement) which seems to be similar to the PMI (Private Mortgage Insurance when equity is less than 20%). A Microfinance institutions poorly managed and/or lending to customers who either do not have the resources to repay their loans, or who refuse to do so, possibly for socio-political reasons, will suffer much higher loan losses, about 10-30% of default loans. Also, by analogy to the Microfinance industry, continuing education is an important step to promote good credit culture and high level of financial discipline and ensure high rate of loan repayment (about 98%). |