US Treasury is accused of fraud by American experts

The rescue plan of the American financial sector elaborated by the United States of America Treasury is just an ample fraud, Paul Craig Roberts, former deputy secretary of the USA Treasury states.  Spending 700 billion dollars for purchasing toxic assets (without liquidity) by the government it won’t solve the main problem of the system, respectively the collapse of the real estate market and of the securities, but will only transfer a huge sum of public money in the pockets of some bankers.

The crisis of the financial system from USA is mainly based on the overvaluation of the real estate market by investors (housing bubble), that have massively carried out speculative operations with derivates and financial instruments supported by mortgages. When the owners of the houses were in the financial impossibility of paying their installments afferent to the mortgage credits, the value of the mortgages has diminished over night, transforming the securities that based on ARM (adjustable-rate mortgages) in simple worthless documents. Several American economists accuse the USA authorities that they have taken into account just the modalities for covering the debts from the financial sector, without considering the debts cumulated by the owners of houses or the massive growth at the level of public debt through the measures adopted by the American Treasury. More and more voices blame the USA financial sector that it has determined the current crisis, both through the exotic loaning instruments which it has offered to the ones that wanted to buy houses, as also through the exorbitant expenditures with the wages and other advantages which the bankers have assumed. That’s the reason for which authorized voices from the American economic and academic environment say that it is a fraud that the ones that have generated the crisis to keep on benefiting by  unconditioned financial support of the American Treasury and Federal Reserve.  

Mortgage prescribing, in mass

Starting with the ‘90s, the American government has launched a program for increasing the number of the ones that own the houses in which they live, targeting especially the poor population and the minorities. Including the governmental program directed to the relaxation of the traditional standards for granting mortgage credits, concomitantly with the relaxation of the monetary policy of the American Federal Reserve. In this way, most of the poor population was able to benefit of a higher indebt level which to allow them to contract a mortgage credit. The development of the market directed soon to the turn up of the speculators that started to grant adjustable-rate mortgages (ARM), which initially stipulated a zero advance and the first reimbursement rates were very small. However, while the loaning product was developing, many owners weren’t able to pay the rates afferent to the mortgage credit and this directed to successive waves of prescribing mortgages.

Solution for the crisis

The crisis that started from USA is a crisis of liquidity of the financial sector, but in last instance it is the effect of the owners’ failure to pay their mortgage rates. If this major problem won’t be solved, the American economy will continue to confront with the effects of the real estate market collapse, Jonathan G.S. Koppell and William N. Goetzmann, professors within the Management School of Yale University, stated.  Koppell is the director of the Milstein Center for Corporate Governance and Performance, and Goetzmann manages the International Center for finances. Both of them criticize harshly the USA Treasury‘s plan of 700 billion dollars, the reason being that it completely ignores the bankrupt situation of the payers of mortgages.  Koppell and  Goetzmann share the opinion of the former deputy secretary of the American Treasury, Paul Craig Roberts, which states that the American government should have paid the remaining mortgages of the population, instead of purchasing the toxic assets from the financial sector. If the American authorities had proceeded in this manner, all the complex derivatives supported by the prescribed mortgages would have been as liquid as the governmental titles, Koppell, Goetzmann and Roberts state. The credit markets would have been resuscitated over night, and the mortgage prescription would have ended. Moreover, the entire operation would have worth less than those 700 billion dollars deposited by the USA Treasury for supporting the financial sector through purchasing the toxic assets. Different said, if the American government had directly sustained the population that was in bankruptcy because of the impossibility of paying the rates, instead of supporting the mortgage banks, the crisis would have ended sooner and cheaper. The American authorities would have become partners with the private owners of houses instead of the big financial-banking institutions. Moreover, the public money spent by the American government would have been recovered easier. The state would have purchased real assets from the mortgage domain, instead of complex derivatives whose value is at the moment difficult of being estimated.  

What’s the value of the toxic assets?

The Paulson plan is considered a fraud by many American experts, inclusively from the point of view of the value of 700 billion dollars that was hand in for helping the financial sector. The plan doesn’t justify the way in which was established the value of 700 billion dollars as being the most adequate for supporting the troubled banks. Moreover purchasing toxic assets belonging to the financial sector is problematical from the point of view of appreciating the right price. What really matters is the acquisition price of the assets which the Treasury buys from public money and that nobody wants to buy them, because of their lack of liquidities and so of the difficulty of their further revaluation. Many of the American experts in economy accuse the Paulson plan that those 700 billion dollars will be purely wasted. The toxic assets will be transferred from the patrimony of the financial sector in the possession of the American government, and the financial institutions will be generously rewarded with 700 billion, instead of being held responsible for the created disequilibrium. Moreover, the decline of the real estate market and the mortgages prescribing have determined the price of the assets that are going to be purchased by the USA Treasury to drastically fall, and some analysts estimate that taking into account that nobody wants them the assets without liquidity have no value. On these terms, those 700 billion dollars could be spent more efficiently for social programs or for the health insurance system from USA, which is also confronting with a sharp lack of funds.

“Toxic” wages for economy

Also the big wages cashed during the last 20 years by the American financial sector proved to have negative effects on the USA economy, representing an element that is possible to have contributed to the start of the financial crisis, shows a study published by VoxEU.org., the on-line portal of the Center for Economic Policy Research (CEPR). The financial sector from the United States of America (USA) represents about 8% from the Gross Domestic Product (GDP), with at least 2% more than it is demanded by its role of intermediary between entrepreneurs and investors. The difference can derive from the wages cashed in the banking sector, with 60% higher than in other sectors of the USA economy, calculated for the same level of professional competence, at the level of year 2000. More than that, a similar difference between the wages in the banks and the rest of the economy was recorded only in 1929, before starting the Big Crisis that has hit USA. A study carried out on the graduates of the Harvard University shows that those who started to work in the financial sector gain almost three times more than the others. In consequence, the temptation of a young talented of working within a financial institution is big: 15% of the series of graduates at Harvard, work in the financial sector since ‘90, comparative with only 5% in 1975. In this way, the difference between the average professional training of the employees from the financial-banking system, against the rest of the American economy sectors, is significant, comparable with the situation recorded in 1929. The problem consists in the fact that the financial sector has developed an existence quasi- autonomous, without any type of link with the needs of financing the real economy. And more serious, the crisis of the subprime credits is almost for sure connected to the needs of the financial markets – at full speed for obtaining profit, the banks have excessively developed the loaning, using toxic credit instruments that further proved to be non-performing.