SPEAKERS CONTENTS INSERTS
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EAST ASIAN ECONOMIC CONDITIONSPART 1
THURSDAY, NOVEMBER 13, 1997
U.S. House of Representatives,
Committee on Banking and Financial Services,
The committee met, pursuant to call, at 10:07 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.
Present: Chairman Leach; Representatives McCollum, Roukema, Bereuter, Lazio, Bachus, Weldon, Paul, Kelly, Ehrlich, Metcalf, Lucas, Hill, Fossella, LaFalce, Vento, Frank, Kennedy, Sanders, Cook, Hinchey, C. Maloney of New York, Bentsen, Jackson, Kilpatrick, J. Maloney of Connecticut, Weygand, and Sherman.
Chairman LEACH. On behalf of the committee, I would like to welcome our distinguished witnesses; and particularly I would like to thank Chairman Greenspan, who yesterday chaired a meeting of the Federal Open Market Committee, and has agreed to appear today without setting a precedent to help us interpret the implications of the recent financial instability in Asia. We are also pleased to see again Deputy Secretary of the Treasury Lawrence Summers and look forward to his testimony.
The purpose of this hearing is to examine the causes of the recent currency and financial market turbulence in East Asia, its implications for the region's and broader world's economy, as well as the policy response by the United States, other governments and international financial institutions.
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As we have all come to understand, the powerful waves of financial instability that had their origin this summer in Thailand have reverberated across the currency and equity markets of East Asia. Not even Hong Kong, with its extraordinary macroeconomic management and substantial foreign reserves, or South Korea, with its $500 billion GDP and OECD status, have emerged unscathed. And of course, the United States and European equity markets, as well as those in Latin America, have also been at least indirectly buffeted by Asia's economic turbulence.
From a congressional perspective, it would appear that in this new era of global finance, destabilizing events in one part of the world are not easily isolated. Instability is like a virus; nation-states which conduct imprudent macroeconomic policies, and which countenance lax banking regulation and supervision, can propitiate the contagions that may impair or threaten the stability of the international financial system. The quicker and stronger the medicine applied, the greater the likelihood any damage can be controlled.
In this context, Indonesia's recent announcement of a comprehensive package of macroeconomic policies and structural reform, supported by financing from the International Monetary FundIMFand backstopped by supplemental contingent financing by the United States and other countries, would appear to be appropriate. Should this IMF-led package help restore financial stability in Indonesia as hoped and expected, that would send a powerful signal to other countries of the region, which have yet to demonstrate the political commitment and economic policies needed to restore market confidence.
On the other hand, Congress needs to be assured that taxpayer resources are not exposed to imprudent risks, that U.S. participation in this financial assistance package is accompanied by strong macroeconomic conditionality, as well as an emphasis on banking system reform, improving governance and reducing public corruption.
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For a decade this committee has quietly urged the IMF and World Bank to give priority attention to the importance of developing sound banking systems as a prerequisite for orderly economic growth. A country that lacks a solid banking infrastructure where private savings can be protected and prudently recycled in lending and investment vehicles, is incapable of achieving economic security. In too many places, corruption has replaced Communism as the greatest threat to world order. In many countries, banks are particularly vulnerable to inside thievery for the same reason Willie Sutton stuck them up from the outside, ''that's where the money is.''
Hence, it is key that banks are properly incentivized, subject to responsible regulation and open to international competition. In the Indonesian models it is impressive that the IMF and the World Bank, in conjunction with the Asian Development Bank, are giving comprehensive attention to reforming the banking system. It may be good politics, as in Malaysia, to use foreign investors as scapegoats, but it is better economics to welcome foreign competition, particularly in finance. There is no protectionism more counterproductive for an emerging society than that which relates to banking.
As Members are aware, there appears to be substantial disagreement in the economic community on the impact of the October sell-off in world equity markets and potential for additional financial shocks in developing markets on the U.S. economy. Chairman Greenspan and Deputy Secretary Summers have suggested separately that the fallout from Asia on the U.S. economy is likely to be modest, but discernible. On the other hand, a rising chorus of private sector analysts suggest that the latest stage in turmoil is unambiguously disinflationary for industrial countries and possibly even deflationary and that the crisis this week is greater than the Mexican crisis two years ago.
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Indeed, evidence suggests that the economies of East Asia are suffering from substantial asset deflation and competitive devaluations that appear likely to impart a contractionary impulse to the rest of the world economy. Meanwhile, the world's second largest economy in Japan remains moribund.
How will developing countries react to recent events in East Asia? The most counterproductive course of action would be for them to conclude that open trade and open financial markets are more of a threat than an opportunity. In this context, one can only ask how prudential it is for the U.S. to refuse to endorse Fast Track and appear to turn our back on expanding the international trading system, particularly given that our economy is in the best shape in a generation, and the benefits of free trade are not only philosophically manifest, but in implementation have so evidently manifested themselves. Certainly the economic history of this century should teach Congress that the combination of competitive devaluations and hostility to trade jeopardizes U.S. economic security.
Finally, let me briefly comment on two interrelated international issues which the Congress has yet to address, but may today. The first relates to the United Nations, the second to the International Monetary Fund.
The United States, a country more than any other which precipitated the creation of the League of Nations in the aftermath of World War I and, subsequently, the United Nations in the aftermath of World War II, is now in substantial arrears in their obligations to the U.N., an institution made necessary in part because we failed to support the League of Nations and its collective security precepts in the interwar years.
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Today, we are confronted with the possibility of renewed confrontation in the Persian Gulf. The United Nations is with us, but incredibly we do not seem to be willing to support the United Nations. The alternative is for the U.S. to go it alone, a prospect few Americans prefer.
Similarly, in international economic affairs, the IMF and World Bank were created after World War II to establish a regime of shared responsibilities for the international economic system.
Today, a crisis in confidence in the economic order has emerged, precipitated by events in Asia. If this Congress does not approve an enhancement of the ability of the IMF to act by at least approving the New Arrangements to BorrowNABwhich legislatively stems from this committee, the international economic order could be subject to greater instability, with the U.S. forced to rely on unilateral economic tools.
Most Americans are apprehensive of anything hinting of foreign aid. Nonetheless, they prefer burdensharing to putting the U.S. taxpayers solely on the line, and they prefer lending arrangements which include practical free market and fiscal discipline quid pro quos to direct foreign aid.
Now is the time for the political games to stop in the Congress and the Executive and Legislative branches to stand tall together for responsible internationalism. U.S. national purpose cannot afford to be diverted by continued political posturing. The U.S. cannot face the world rudderless; it is time for leadership.
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Chairman LEACH. Mr. LaFalce.
Mr. LAFALCE. Thank you, Mr. Chairman, Drs. Greenspan and Summers.
I am pleased, Mr. Chairman, that you called this hearing to examine the events related to Asia's currency crisis, a crisis that has rippled through economies and stock markets worldwide. If we have learned anything from the events since last July, it is that globalization of international finance is a reality. We cannot wall off our economies, our stock markets or our currencies. We therefore must develop our economic and financial policies with the clear understanding that they will have an impact on the international financial system.
I will not go into any detail on the financial gyrations of the last months or on the October crash heard around the world, but I do want to make three general points. First, as with Mexico's peso crisis that began in December of 1994, we should not think that Asia's currency crisis occurred without warning. Certain economic conditions warned of pending trouble. Much of the dynamic 8- to 12-percent annual growth of the Southeast Asian countries was spurred by speculation in real estate and stocks, rather than rising productivity or innovative creativity. Combined with weak and unregulated banking and financial systems, the bubble was waiting to burst.
In addition, most of the Southeast Asian countries kept their currencies artificially pegged to the dollar, perhaps for too long. This policy helped their exports sell cheaply on world markets when the dollar was weak. As the dollar strengthened, Southeast Asian exports became less competitive. Competition from Chinese exports also undermined their export performance, and trade balances worsened.
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My point is that there are usually warning signs to a coming financial crisis. We must learn to recognize and then heed those warning signs.
Second, I continue to believe that we must give more attention to the role of currency speculators in destabilizing financial markets. In this world of global electronic exchange, between $1- to $2-trillion in currency exchange occurs daily. Some have blamed currency traders, especially those outside Asia, for most of today's currency crisis, and called for tighter regulation or even a total ban on foreign exchange trading.
I can understand the frustration with currency speculation. The funding available to central banks and monetary authorities that may try to defend their currencies is no match for the volume of currency trading in open market economies. I am uncertain whether we should rely totally on the whim or fate of the markets. We must examine much more closely the interrelationships between currency trading, speculation and financial stability.
Third, I continue to hope and believe that Treasury's semiannual report to Congress in international economic and exchange rate policy could be an important tool, a warning device for anticipating crises in the financial markets. I have been disappointed in past reports, either because they have not been timely or because their treatment of exchange rate issues has been cursory, some would say superficial.
I understand the next report will be issued tomorrow, but in reading the last report of February, 1997, there were no warnings of problems that might arise three months later. Perhaps these reports could do better in the future.
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Mr. Chairman, I wasn't going to mention this, but you mentioned Fast Track, and so I just want to say a brief word about that. Some people confuse the issue of Fast Track with being either pro-global trade or protectionist. That is an absolutely, totally false dichotomy. One can still support global trade enthusiastically and either have reservations or opposition to Fast Track.
I just want to say this about Fast Track: We give the President no authority, although that is how the debate is usually framed. The President has plenary authority to negotiate whatever he wants at any time with whichever country he wants.
We are asked to give up congressional authority; that is what Fast Track is all about. Congress is asked to give up its authority to amend a bill implementing an agreement. There are some things that are difficult with that, even fraudulent. First of all, we can pass laws purporting to give up our authority, but those laws would be constitutionally unenforceable. We cannot give up a law forfeiting our right to offer amendments to bills; it is in the Constitution. We can't bind ourself, much less future Congresses; so to that extent, it is fraudulent.
Second, no one seems to know that the bills that have been submitted in previous Congresses and the bill considered last week have provisions within that say Congress shall offer no amendments unless Congress wishes to offer amendmentsthat is in the fine print. Congress shall offer no amendment to an implementing bill unless either House passes a rule permitting amendments.
Page 9 PREV PAGE TOP OF DOC We passed rules on every single bill. The bill itself is fraudulent. So some people just view Fast Track as converting, for purposes of tradeat least I dofrom the constitutional system we have to a parliamentary system where, for purposes of trade, we treat the President as prime minister and the Congress as the parliament; and as parliaments simply vote yes or no, the Congress would simply vote yes or no. So there is a convergence of interest between foreign governments and the President on that issue.
We can favor global trade, tremendously expand it, and still have qualms about giving up a constitutional prerogative, something we cannot do by legislation.
I thank the Chair.
Chairman LEACH. I thank the gentleman. I didn't know I precipitated such a debate. But his comments, from his perspective, obviously are warranted.
Mr. MCCOLLUM. I have very brief and limited remarks.
I do want to welcome our witnesses today, Mr. Chairman. I too want to hear from them what they feel are the primary causes of the disturbances we have seen in the economies in Southeast Asia. I know there has been a lot written on the subject lately, but we are all greatly interested in what both of the primary witnesses with us today have to say, as well as our second panel. I am also curious to know their responses to various criticisms that have been leveled over the past few weeks with regard to both the International Monetary Fund, World Bank and United States policies that may have affected or aggravated the policies in Southeast Asia.
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Some have argued that the devaluations that have occurred should not have occurred, that the International Monetary Fund was primarily responsible for those devaluations. There have been others who simply have said that the results were inevitable and there was nothing anybody could do about them. But there are a lot of questions that are out there, not only about where we go from here in Southeast Asia, but what, if anything, we did or didn't do that aggravated those conditions. So I am keenly interested today and thank you for having this hearing.
Chairman LEACH. Mr. Vento.
Thank you, Mr. McCollum.
Mr. VENTO. Thank you, Mr. Chairman. I am anxious to hear from our witnesses. I think it is important to articulate and try to analyze the phenomenon that is going on today in terms of the global marketplace, especially as the genesis of it appears to be in the Pacific Rim, an important global trading partner and market for many nations; and our role in trying to provide economic leadership and stability in the global marketplace is, I think, well understood or should be well understood.
I think that in looking at the Fed's main points and trying to analyze this, I am not interested in necessarily assigning blame until we properly dissect and examine this and find out what the important elements are that we can change. Whether this is market driven, whether it is driven by the conduct of the financial intermediaries and/or the economy, it would be appropriate for us to try to analyze that and try to fill in the gaps that are occurring, and try to rectify the problem with the least amount of disruption that we can experience.
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It is apparent Mr. Chairman, and I think to all, that we are not insulated and that these events take place with a rapidity and electricity that have immediate and profound effects upon our domestic economy. And so I am very pleased that the Chairman of the Board of Governors and others in the Administration have come to engage us and involve us in this problem as we search for solutions.
And I look forward to working with you, Mr. Chairman, and with others to try and rectify and address the challenge that we face today in the global economy. Thank you.
Chairman LEACH. Thank you, Mr. Vento.
Does anybody else wish to be recognized?
Mr. BACHUS. Thank you.
Chairman Greenspan and Secretary Summers, we welcome you to our hearing today. I, bottom line, have just one question and that is what are the risks of the Asian economic crisis, what they are to the United States, what they are to the world economy and, therefore, to the United States. So that will be my entire line of questioning.
And also what factors here might make that crisis a greater threat to our economy, like a high stock market.
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I did hear a comment that we had had a stock market ''crash'' in October. I missed that; I didn't realize that was a crash. But, you know, maybe we need to know whether we could have a real crash.
Second, you testified two weeks ago before Congress. At that time, this economic crisis was somewhat confined to being a Thai crisis; there was some question about whether it would be contained. Since then, it has spread to Japan, South Korea, Latin America, so I would ask you to maybe if you have any reassessment over the last two weeks from the events that have occurred since that time to maybe revise your remarksor not revise them, because they wouldn't be a revision, just update them.
And one reason that I would ask why this is a risk to the United States and what the extent of that risk is, is because this Congress has been asked to fund IMF and to tell the American people that this is a proper expenditure. And we really need to be able to justify this expense, and therefore, if it is not a risk, it is hard to justify us intervening.
So that will be the focus of my questions. Thank you.
Chairman LEACH. Thank you, Mr. Bachus.
Mr. FRANK. Thank you, Mr. Chairman. I want to focus on Fast Track, because I think this is directly relevant.
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What we have here in the Indonesian loan is a very clear-cut example of why many of us who support in concept the notion of increased acceptance of the global economy so strongly oppose Fast Track. What we have here is a program put forward by the IMF, strongly supported by the U.S. Government, which in fact then added its own standby supplemental program which focuses exclusively on improving the mobility of capital.
Now, I believe the mobility of capital is a good thing. As technology has made capital physically more mobile, we have been asked to support legislative and other changes that make it more mobile legally, and I do believe that adds ultimately to the overall production in the world. But the mobility of capital at any given moment, in any given society, is often used to the disadvantage of working people. The threat we are going to move, we can do this elsewhere, is one that strikes fear in the hearts of all those who are concerned about compensation to workers.
We have had a situation in this country where working people have clearly not participated in a proportionate way in the increase in the overall economy that we have seen. We have seen great growth, with stagnation in wages. Indeed, we have been told by many economists that the only reason we have been able to continue economic growth is that we have had stagnation in wages, and the threat that wages would begin to increase has been held out as one factor that would lead to a reduction in growth. What many of us have argued is that given that the mobility of capital has two effects: one, it promotes the overall efficiency of production; but two, it increases the leverage of owners over workers in a way that retards equity. We believe that policies that promote globalization and the mobility of capital ought to be accompanied by concern about equity.
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Now, we are told by people in power in the Administration that they agree with that, but I must be honest and say that the Indonesia example shows what I fear is the case. Yes, they may agree, they think it is a hobby, they think it is nice, indeed admirable, for liberals to be worried about the environment and human rights and worker rights, but when adults sit down to serious business, they disappear, they get brushed off the table. When adults get down to running the world, all that counts is to enhance the mobility of capital; and concerns about the rights of workers, the rights of indigenous people such as the East Timorese, the size of military budgets, which my colleague from Massachusetts has focused on, those things are just the distractions.
We have in Indonesia a country which is guilty of the most outrageous abuse of the people of East Timorin defiance, by the way, of the United Nations. Those who believe international law is important obviously know that the Indonesian oppression of the people of East Timor is an absolute, flagrant abuse of United Nations rule. We have a corrupt dictator in charge of the country; his notion of family values is to make sure every member of his family gets cut in on a juicy monopoly. We have no serious rights for labor, we have no genuine democracy. The head of the opposition party was kicked out. Now we have this country in need, so they come to the IMF.
By the way, we have a package of bills that have passed out of this committee, most of themalthough some are at the Appropriations Committeewhich say, when we, the United States, goes to the international financial institutions, we should use the voice and vote of our executive director to promote human rights, to promote the rights of indigenous people, to reduce excessive military spending, to promote the rights of labor and to protect the environment.
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We voted, I assume, for an IMF package that does none of those things. Now I read the package, I am enjoined, by confidentiality, from quoting the package, but that is not a problem, because you don't have to quote what ain't there; and what I am talking about is zero evidence that any of these issueshuman rights, the rights of indigenous people, environment, worker rights, or the reduction in military expendituresat all figured in. In fact, not only did we vote for the program, but we have thrown another $3 billion standby into the pot.
Now, I do not contest the fact that it was in our interest to try and help restabilize East Asia; my problem is, this is done with zero regard for these other issues. You just brushed them off, and that is why many of us voted against Fast Track. International trade, which expands the mobility of capital, but pays attention to the inequities that will be the result of that, will be an attractive policy. But here is a test case of that, and right in the middle of the debate over Fast Track, when people are trying to show us that they take seriously these concerns, we get a package for Indonesia which totally ignores them. I read Secretary Rubin's October 31 statement, and he lists four things about the IMF program: tight monetary policy; tight fiscal policy; closing insolvent banks and improving bank regulation; and then improve economic efficiency by ending monopolies, reducing tariffs and nontariffs and bringing off-budget accounts under tight supervision. That is his summary of the package, an accurate one, it seems to me, and not a single one of our concerns is there.
I appreciate the indulgence on the time, Mr. Chairman. And by the way, I read Mr. Camdessus' speech and I have read the IMF's own package. There is one reference to maintaining the social safety net, but that is a statement of fact; and what it says is, we won't reduce what we are now spending on poor people. But that isn't even a condition; there is no conditionality about that, that is a statement of intent. Conditionality comes in improving the mobility of capital.
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So I just want to end by saying to those who are concerned about this, I share your view, it is in our interest to help stabilize East Asia and Southeast Asia. I think increased globalization will add to our overall product, but it inevitably will have, both here and elsewhere, effects promoting inequity in the near term; and until you are prepared to integrate concern about equity and the environment into that overall approach, you are going to continue to have this situation.
And I have said it before and I will say it again, people have forgotten what John Kennedy said when he launched the Alliance for Progress and referred back to Franklin Roosevelt's Good Neighbor Policy. ''Franklin Roosevelt,'' he said, ''could be a good neighbor abroad because he was a good neighbor at home.''
Until and unless there is more willingness on the part of the Administration and others, including the business community, that think this is a one-way street where they get help any time they need it from Government action, including Government money, but then resist any effort to promote equity, until there is a recognition that those two have to go hand in hand, you will continue to have the kind of frustration you encountered in Fast Track.
Thank you for your indulgence on the time, Mr. Chairman.
Chairman LEACH. Well, I thank you.
Mr. Kennedy, I have been handed a request
Page 17 PREV PAGE TOP OF DOC Mr. KENNEDY. Is it my hair, Mr. Chairman?
Chairman LEACH.About the time we are taking; and the Chair apologizes, because he took an inordinate amount of time to begin with. If we can hold some requests to lower levels of time, it would be helpful.
I know Dr. Paul has requested to speak. Dr. Paul is recognized.
Dr. PAUL. Thank you, Mr. Chairman, for yielding. I appreciate your bringing these hearings about and welcome Chairman Greenspan and Secretary Summers. I do have a couple-page statement.
Chairman LEACH. Without objection, it will be placed in the record.
Dr. PAUL. I would like to read the introduction.
Chairman LEACH. Of course.
Dr. PAUL. The Asian financial markets are unsteady, and for good reasons. Many have correctly anticipated the ongoing financial events as a natural consequence of a sustained worldwide credit expansion of unprecedented proportions. According to free market sound money economics, all credit expansions set the stage for the correction. These corrections are undesired by the dreamers of perpetual prosperity generated by loose central bank monetary policy.
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The source of the problem the world financial markets currently face is unwise monetary policy, plain and simple. Although the business cycle has been fully understood by the Austrian free market economists throughout most of this century, they have been ignored by our Government-run universities and the major media and the politicians. And since the now-collapsing financial bubble was the largest ever, due to an unprecedented globalization of credit expansion, the implications for the world economy should gain the attention of everyone concerned about public policy.
The world has been functioning with total fiat currencies for more than a quarter centurya first. Even with continuous adjustments in the international exchange markets, artificial relationships develop between currencies. These imbalances are subject to market forces demanding new exchange rates, and as we are witnessing, they occur with shocks to the entire financial system. More huge IMF, U.S. Treasury, ESF bailouts and Federal Reserve bailouts as are currently planned cannot solve the problem. They will only make our problems worse.
I yield back.
Chairman LEACH. I thank the gentleman. Does anyone elseMr. Kennedy.
Mr. KENNEDY. Thank you very much, Mr. Chairman. I want to welcome both my good friend, Larry Summers, and Chairman Greenspan as well. Last evening, the House of Representatives stripped out from the Foreign Operations Bill the funding for the IMF. I think it is always a terrible mistake that this country makes to try to pursue our domestic agenda by virtue of the fact that we end up beating up on the World Bank, the U.N. and the IMF, whose basic functions provide some stability throughout the world. But I also think it is a terrible mistake, as well, to ignore what is the root cause of a lot of the disruptions that have ended up taking place throughout many of the world's economies.
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You read a few weeks ago when the stock market dropped over 500 points, most of the analysis done indicated that this was as a result of instability in the Asian markets. In today's paper, as a result of a 157-point drop in yesterday's market, they are saying it is because of instability in the Asian markets. Now, if you look at what that means, it seems to me what people are really saying is, whether you talk about Indonesia or Thailandand many others think that Korea is on its way in a much bigger way than either one of these two countriesthat there is a serious problem with regard to how these regimes have propped themselves up.
If you look at how they do prop themselves up, the fact of the matter is, they do it in many ways to the detriment of their own people. And I think that it is an incredible mistake for the United States, which is the leader of the free worldnot just in terms of our economy, but in terms of the moral authority of this nationnot to stand and talk about what is really going on in these countries.
What is going on when Indonesia itself, in 1994, spent 16.3 percent of its budget, $4.8 billion on military expenditures. And we are not going to bring that up in terms of what is going on with how these countries spend their money. We are going to say, ''Well, listen, the United States is going to spend $8 billion bailing out the Indonesian government, but we are not going to bring up how they spend their funds.''
It seems to me when you look at, as Mr. Frank indicated, East Timor, some of the worst human rights abuses that take place on the face of the Earth have taken place by the Indonesian Government. If we allow the kinds of corrupt regimes to continue to be propped up, when they come on their knees, looking for the bailout from the international community, if we don't bring up at that time how they spend their money on their military, how they abuse their people, we are going to come back here and you will be back here within two or three or four or five years, looking for more money to bail out these same countries, because they are not dealing with the fundamental wrong of how their economies are built.
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If you build your economy solely on an immoral purpose of squeezing out the lowest possible wages and providing the highest possible profits to the fewest amount of people, if you at the same time build up a military, which then wreaks havoc upon your own people, if you squeeze out all the natural resources in your own country, without any benefit going to the ordinary folks to build up an economy where people can buy and sell and grow and prosper themselves, I think, in the end, we end up being asked to bail out countries that are fundamentally corrupt in nature.
So I just hope, Mr. Chairman and Mr. Summers, who I know care about these issues, that we recognize the importance.
I am willing to provide the funding necessary to all of these international organizations, but I do it with the hope that we use our strong voice to stand up for the moral authority that has made this country not only a strong economy, but has made this country the envy of the rest of the world in terms of what we stand for as well.
Thank you very much, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Kennedy, for that thoughtful statement.
Mr. SANDERS. Thank you very much, Mr. Chairman. I am also delighted to welcome Mr. Greenspan and Mr. Summers here today to talk about the economic crisis in Asia and the Indonesian bailout, which includes a $10 billion loan from the IMF, a $3.5 billion loan from the World Bank and a $3 billion contingency loan underwritten by the taxpayers of the United States.
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Mr. Chairman, I have one slight problem with this bailout. It is illegal, and I intend to do all that I can to stop it.
Now, let me read directly from the law, commonly known as the Sanders-Frank Amendmentor maybe Mr. Frank thinks it is the Frank-Sanders Amendment. Nonetheless, it is the law, and it was enacted by Congress in the spring of 1994, coming out of this committee.
Mr. Summers, this is the law:
''A: The Secretary of the Treasury shall direct the United States executive directors of the international financial institutions to use the voice and vote of the United States to urge the respective institution, one:'' please listen closely, ''to adopt policies to encourage borrowing countries''for example, like Indonesia''to guarantee internationally-recognized worker rights and to include the status of such rights as an integral part of the institution's policy dialogue with each borrowing country.
''Two: In developing the policies referred to in paragraph one, to use the relevant conventions of the International Labor Organizations, which have set forth, among other things, the right of association, the right to organize and bargain collectively, a prohibition on the use of force, or compulsory labor and certain minimum labor standards, that take into account . . .'' and so forth.
In plain English, now we are off the law, and now we are back to English. In plain English, what this means is that the United States Government cannot support any IMF or World Bank loans to Indonesia unless the loan proposal guarantees internationally-recognized worker rights.
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Mr. Chairman, I have before me the proposal of the Indonesian military dictatorship, led by General Suharto, which details the policies they are proposing in order to obtain these loans. I have read this proposal carefully, and I have not found one word in it which suggests they will adopt policies guaranteeing internationally-recognized worker rights.
Further, as the law very clearly requires, they do not include the status of such rights as an integral part of the institution's policy dialogue. Therefore, plain and simple, it is against the law for the United States and the Secretary of the Treasury to support this bailout, and I hope that they will desist immediately from doing so.
Mr. Chairman, almost nobody, except total apologists for the Indonesian government, disputes that Indonesia is an authoritarian society and that workers there do not enjoy internationally-recognized workers' rights. I can quote you forever, but let me be very brief. Let me quote from the U.S. State Department's Annual Human Rights Report for 1996. I would hope that the Department of the Treasury occasionally talks to the Department of State, and this is what the State Department says, ''Despite the surface adherence to democratic forms, the Indonesian political system remains strongly authoritarian. The government is dominated by an elite comprising President Suharto, his close associates and the military,'' and on and on it goes. The State Department tells us that it is not a democratic society and that workers' rights do not exist. I won't read it all; I will submit that to the record.
Further, let me quote from Dickinson School of Law in Carlisle, Pennsylvania, which on June 2nd, 1997, awarded a special Rule of Law Citation in absentia to Muchtar Pakpahan, an Indonesian lawyer who has risked his life and sacrificed his freedom for democratic ideals. What they say at the Dickinson School of Law is, you have a courageous man, fighting for the rights of workers in that country, who is now rotting in jail on a totally trumped-up charge.
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And now let me quote from a statement of the AFL-CIO Executive Council, February 19, in awarding Muchtar Pakpahan the George Meany Human Rights Award, ''The heavy-handed campaign against Brother Pakpahan and his union, culminating in the short trial now being held in Jakarta has made a mockery of the rule of law in Indonesia, and any pretense that the Indonesian government has any respect for internationally recognized worker rights.'' And the AFL-CIO Executive Committee, quite rightly, suggests that the United States Government vote against all projects submitted by Indonesia to multilateral development and investment institutions.
Now let me conclude my remarks, Mr. Chairman, by saying the following: Even if this bailout was legal, and it is not legal, I would oppose it. Not only is it morally wrong for the United States to provide political and economic support for an illegitimate, authoritarian government, such as the Suharto regime, but it is totally absurd.
It is an outrage that the taxpayers of this country are forced to bail out a family which Forbes Magazine claims is one of the richest families in the world. They estimate that General Suharto alone is worth $16 billion. His family is worth $30 billion; and you take 50 more of their allies, they are worth $60 billion.
And I would like Mr. Summers to tell the taxpayers of the State of Vermont, whose real incomes are in decline, why they should have to bail out a group of people worth $60 billion? If they need the money so much, let them pay for their own bailout and not ask the taxpayers and the working people of this country.
So I would hope, and I am going to persist on this issue. You are disobeying the law, and what you are doing is wrong, and I hope you don't go forward.
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Thank you, Mr. Chairman.
Chairman LEACH. I would like to start with the witnesses, but if someone has something else that is very important.
Mrs. MALONEY OF NEW YORK. I likewise would like to welcome Chairman Greenspan and Larry Summers. Since the 199091 recession, this country has experienced sustained economic growth under the monetary policy of the Federal Reserve and the economic policies of the Clinton Administration. I have confidence in your ability to provide leadership to the United States in cooperation with the International Monetary Fund and other countries to minimize financial market instability in Asian markets.
We have seen the domino effect in Asia and other financial markets around the world. When Indonesia allowed the international value of its currency to float on July 2 of this year, the value of its currency fell by 20 percent in July. Financial markets around the world quickly responded to the declines in Asian markets.
It is very important to keep financial markets working as smoothly as possible. Prolonged chaotic changes in exchange rates and the prices of stocks and bonds fuel more instability and uncertainty; that chaos can turn market adjustments into financial crises and panics. The financial markets lose their ability to perform the important function of allocating investment funds and reflecting underlying economic conditions.
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Two weeks ago, it looked like there was going to be a disaster. That disaster was averted and calmed. It is critical that the calm remain and that we continue to contribute toward that calm by providing appropriate contributions to the International Monetary Fund for America's sake, for America's economic stability.
I ask some of my Republican colleagues who want to block the funding for the International Monetary Fund and attach highly volatile issues to the legislation, such as the Mexico City antiabortion legislation. I ask them to ask themselves if they understand that they will only be undermining the United States's efforts in stabilizing markets around the world. These issues must be resolved separately.
This is a critical time that calls for a united effort. I thank the gentlemen for coming here and addressing these concerns.
Chairman LEACH. Mr. Lazio.
Mr. LAZIO. Thank you, Mr. Chairman. I want also to welcome the Chairman and the Secretary. Good to see you again.
Putting things in perspective, there have been some valid points that have been made, I think, by my colleagues, but let's keep in mind this: If one of our concerns is to increase and enhance average wages for Americans, one of the ways, one of the best strategies of doing that is to ensure that we have a growing share of the world market and that we increase trade.
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The problem is not just Indonesia, it is global deflation; and to the extent that there is deflation or a pressure worldwide that has an impact on our markets, on our ability to export, we are going to affect our own jobs.
Emerging Asian markets account for about 20 percent of all of our exports; taking into account Japan, you are talking about one-third of all of our export dollars. So to the extent that these economies deflate or disintegrate, this is going to have a very lasting, sustained impact on our ability to create not just jobs, but good jobs, because jobs tied to trade statistically and empirically command higher salaries than those that are attached to domestic output. So I make that point.
I also make the point that those who wrung their hands over the peso destabilization efforts only a short while ago were saying we would lose money and we were bailing out a regime that ought not to be helped. The fact was that increased deflationary pressure in Mexico has had a positive impact, as we have had stabilization of the peso. That means fewer workers have been displaced, it means we are beginning to increase our exports again and it means we have more political stability on our border.
All those things are very good; and on top of that, we actually made money on the deal. I don't know what the exact number was, but I think it was $1 or $2 billion we actually earned, so we had a return to the taxpayers. That is an example of an arrangement that actually works for the American people, so let's keep all of that in mind when we discuss this subject.
Page 27 PREV PAGE TOP OF DOC I yield back my time.
Chairman LEACH. I thank the gentleman.
Mr. HINCHEY. Mr. Chairman, I want to thank you very much for holding this hearing. I think it is a very critical subject, and I think it really needs the broadest possible open discussion.
And, Mr. Greenspan, I thank you for being here, and Mr. Summers as well.
I want to start by making an observation that I have made on other occasions such as this about interest rates. The minutes of the August Open Market Committee meeting reflect an observation that real interest rates are high by historical standards. I think that we need to pay attention to that.
It is important, I believe, in the context of this Asian situation, that the Federal Reserve in future meetings consider reducing the real interest rate substantially so that we can minimize the affect of the deflation that is occurring in the Asian economies and, for that matter, around the world.
I would anticipate in your testimony today, that we will hear from you something about the overproduction that exists in the economy here in the United States and Asia and in Europe. That overproduction exists throughout the industrial sectorit exists in cars, it exists in semiconductors, it exists in the chemical industry. All of the major aspects of industrial economies are experiencing overproduction at the moment. The effect of that on not just disinflation, but deflation, not just in Asia, but elsewhere in the world, including potentially the United States, is devastating; and that is something that we need to look at carefully.
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This is why I am suggesting that the Federal Reserve has held real interest rates too high for too long. The experience of 1994 was devastating to the economy, and those interest rate increases, seven over a 12-month period, injured this economy, and we have not recovered fully from that injury.
And, furthermore, the point has been made that the economic benefits we have seen have not flowed equitably in the economy, and this is contributing to the overproduction, and interest rates can obviously affect that. I hope that we will have an opportunity to examine the U.S. trade deficit.
I think the U.S. trade deficit is going to worsen. We have seen a devaluation of Asian economies, 35 percent devaluation in the Chinese currency, and an average of 17- to 20-percent devaluation generally throughout Asian currencies. That of course is going to make their exports cheaper; it is going to make our exports more expensive. About 30 percent of our exports go to Asia; we can expect that number to fall. About 35 percent of our imports come from Asia; we can expect that number to rise. That will have a profound effect on our economy in both the short and the long term. So I think we are facing a situation worldwide of disinflation and, potentially, deflation. The Asian economies are currently exporting deflation into the United States.
I think also that this has to be seen in the context of what is occurring in Germany. The European nations, under their obligation to meet the requirements of the Maastricht Treaty, are fluctuating their economies and interest rates. The Germans have just raised interest rates; they are already facing a very serious problem of overproduction in that country, much worse than we are facing here, and ours is getting worse.
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We are facing a very serious global economic problem of disinflation leading into deflation. This situation is exacerbated by the high rates of interest in Europe and here in the United States. I hope that the Federal Reserve, in its future meetings, will pay close attention to this, and we can anticipate reductions in real interest rates so that we can countereffect the disinflation and deflation that is going on around the world, and also so that more of the people of this country can begin to enjoy the benefits of what economic growth we have had over the course of the last several years.
I will look forward to your comments on these issues, and I thank you very much.
Chairman LEACH. I thank the gentleman.
Mr. BACHUS. Mr. Chairman, the Members on this side are ready to hear from Mr. Greenspan.
Chairman LEACH. Sure.
Let me say, we have gone for a full hour, and I think many perspectives have been reflected, and if there is no great objection, I would like to ask if other Members would put opening statements in the record.
Hearing no objection to that approach, I would like to introduce Chairman Greenspan, and we welcome you to this committee for an opening statement.
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STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. GREENSPAN. Thank you very much, Mr. Chairman and Members of the committee.
Recent developments in world finance have highlighted growing interactions among national financial markets. The underlying technology-based structure of the international financial system has enabled us to improve materially the efficiency of the flows of capital and payment systems. That improvement, however, has also enhanced the ability of the financial system to transmit problems in one part of the globe to another quite rapidly. Doubtless, there is much to be learned from the recent experience in Asia that can be applied to better the workings of the international financial system and its support of international trade that has done so much to enhance living standards worldwide.
While each of the Asian economies differs in many important respects, the sources of their spectacular growth in recent years, in some cases decades, and the problems that have emerged are relevant to a greater or lesser extent to nearly all of them.
Following the early post-World War II period, policies generally fostering low levels of inflation and openness of their economies, coupled with high savings and investment rates, contributed to a sustained period of rapid growth, in some cases starting in the 1960's and 1970's. By the 1980's, most economies in the region were expanding vigorously. Foreign net capital inflows grew, but until recent years, were relatively modest. The World Bank estimates that net inflows of long-term debt, foreign direct investment and equity purchases to the Asia-Pacific region were only about $25 billion in 1990, but exploded to more than $110 billion by 1996.
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A major impetus behind this rapid expansion was the global stock market boom of the 1990's. As that boom progressed, investors in many industrial countries found themselves more heavily concentrated in the recently higher valued securities of companies in the developed world, whose rates of return, in many instances, had fallen to levels perceived as uncompetitive with the earnings potential in emerging economies, especially in Asia. The resultant diversification induced a sharp increase in capital flows into those economies. To a large extent, they came from investors in the United States and Western Europe. A substantial amount came from Japan, as well, owing more to a search for higher yields than to rising stock prices and capital gains in that country.
The rising yen through mid-1995 also encouraged a substantial increase in direct investment inflows from Japan. In retrospect, it is clear that more investment monies flowed into these economies than could be profitably employed at modest risk.
I suspect it was inevitable in those conditions of low inflation, rapid growth and ample liquidity that much investment moved into the real estate sector, with an emphasis by both the public and private sectors on conspicuous construction projects. This is an experience, of course, not unknown in the United States on occasion. These real estate assets, in turn, ended up as collateral for a significant proportion of the assets of domestic financial systems. In many instances, those financial systems were less than robust, beset with problems of lax lending standards, weak supervisory regimes and inadequate capital.
Moreover, in most cases, the currencies of these economies were closely tied to the U.S. dollar, and the dollar's substantial recovery since mid-1995, especially relative to the yen, made their exports less competitive. In addition, in some cases, the glut of semiconductors in 1996 suppressed export growth, exerting further pressures on highly leveraged businesses.
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However, overall GDP growth rates generally edged off only slightly, and imports, fostered by rising real exchange rates, continued to expand, contributing to what became unsustainable current account deficits in a number of these economies. Moreover, with exchange rates seeming to be solidly tied to the dollar, and with dollar and yen interest rates lower than domestic currency rates, a significant part of the enlarged capital inflows into these economies, in particular short-term flows, was denominated by the ultimate borrowers in foreign currencies. This put additional pressure on companies to earn foreign exchange through exports.
The pressure on fixed exchange rate regimes mounted as foreign investors slowed the pace of new capital inflows and domestic businesses sought increasingly to convert domestic currencies into foreign currencies or equivalently slowed the conversion of export earnings into domestic currencies. The shifts and perceived future investment risks led to sharp declines in stock markets across Asia, often on top of earlier declines or lackluster performances.
To date, the direct impact of these developments on the American economy has been modest, but it can be expected not to be negligible. U.S. exports to Thailand, the Philippines, Indonesia and Malaysia, the four countries initially affected, were about 4 percent of total U.S. exports in 1996. However, an additional 12 percent went to Hong Kong, Korea, Singapore and Taiwan, economies that have been affected more recently. Thus, depending on the extent of the inevitable slowdown in growth in this area of the world, the growth of our exports will tend to be muted.
Our direct foreign investment in, and foreign affiliate earnings reported from, the economies in this region as a whole have been a smaller share of the respective totals than their share of our exports. Their share is, nonetheless, large enough to expect some drop-off in those earnings in the period ahead. In addition, there will be indirect effects on the U.S. real economy from countries such as Japan that compete even more extensively with the economies in the Asian region.
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Particularly troublesome over the past several months has been the so-called ''contagion'' effect, of weaknesses in one economy spreading to others as investors perceive, rightly or wrongly, similar vulnerabilities. Even economies such as Hong Kong, with formidable stocks of international reserves, balanced external accounts and relatively robust financial systems, have experienced severe pressures. One can debate whether the turbulence in Latin American asset values reflects contagion effects from Asia, the influence of developments in U.S. financial markets or home-grown causes. Whatever the answerand the answer may be all of the abovethis phenomenon illustrates the interdependencies in today's world economy and financial system.
Perhaps it was inevitable that the impressive and rapid growth experience by the economies in the Asian region would run into a temporary slowdown or pause. But there is no reason that above-average growth in countries that are still in a position to gain from catching up with the prevailing technology cannot persist for a very long time. Nevertheless, rapidly developing, free-market economies periodically can be expected to run into difficulties, because investment mistakes are inevitable in any dynamic economy. Private capital flows may temporarily turn adverse. In these circumstances, companies should be allowed to default, private investors should take their losses and government policies should be directed toward laying the macroeconomic and structural foundations for renewed expansion. New growth opportunities must be allowed to emerge.
Similarly, in providing any international financial assistance, we need to be mindful of the desirability of minimizing the impression that international authorities stand ready to guarantee the external liabilities of sovereign governments or failed domestic businesses. To do otherwise could lead to distorted investments and could ultimately unbalance the world financial system.
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The recent experience in Asia underscores the importance of financially sound domestic banking and other associated financial institutions. While the current turmoil has significant interaction with the international financial system, the recent crises would arguably have been better contained if long-maturity property loans had not accentuated the usual mismatch between maturities of assets and liabilities of domestic financial systems that were far from robust to begin with. Our unlamented savings and loan crises come immediately to mind.
These are trying days for economic policymakers in Asia. They must fend off domestic pressures that seek disengagement from the world trading and financial system. The authorities in these countries are working hard, in some cases with substantial assistance from the IMF and the World Bank and the Asian Development Bank, to stabilize their financial systems and economies.
The financial disturbances that have afflicted a number of currencies in Asia do not, at this point, as I indicated earlier, threaten prosperity in this country. We need to work closely with their leaders and the international financial community to assure that their situations stabilize. It is in the interest of the United States and other nations around the world to encourage appropriate policy adjustments and, where required, provide temporary financial assistance.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Chairman.
Page 35 PREV PAGE TOP OF DOC Deputy Secretary Summers.
STATEMENT OF HON. LAWRENCE H. SUMMERS, DEPUTY SECRETARY, U.S. DEPARTMENT OF THE TREASURY
Mr. SUMMERS. Thank you very much, Mr. Chairman. I am pleased to have this opportunity to discuss recent developments in Southeast Asian financial markets, which have been of considerable interest to this committee and other Members of Congress. We at the Treasury broadly share Chairman Greenspan's diagnosis for causes of these crises.
I have submitted a more detailed analysis in my written statement for the record, but let me focus here on international efforts to respond to the crisis, and the principles guiding us in seeking to devise the best ways to respond to crises and promote financial stability over the longer term.
Recent developments, to be sure, have serious ramifications for the countries that have been worst affected to date, and potentially quite significant implications for the United States and for the international financial system as a whole. While the crisis originated in Asia and has been most acutely felt in Asia, to date, the associated turbulence has clearly affected many other important markets around the world. The United States has a very strong stake in the restoration of confidence, sustainable flows of capital and a return to growth in countries where financial problems have been most serious. Equally, we have a strong stake in avoiding further contagion to other emerging economies. It is a stake based on the growing importance of these countries as markets for our exports, and it is a stake based on our recognition that a prosperous, integrated Asia and a prosperous, integrated global economy are very much in the strategic interest of this country.
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The Treasury Department, working with the Federal Reserve, has been actively involved with other countries in the Asia-Pacific region and the international financial institutions in supporting efforts to restore financial stability to Thailand and Indonesia and to prevent further contagion effects. Let me be clear, these efforts have not been motivated by charity or comity; they have been motivated by our concern with America's interest in a strong American economy as part of the world economy.
In the case of Thailand, international assistance has been provided in the form of a $4-billion IMF standby facility, conditioned on the implementation of a major macroeconomic and financial foreign program. This was supplemented by a further $13.2 billion in official and bilateral support from several countries, also conditioned on the IMF program.
In addition, we joined others in agreeing to participate and provide short-term liquidity as a bridge to official disbursements, if that need should arise.
Last month, the IMF and the Indonesian government announced a substantial support program for Indonesia, again conditioned on a strong effort to achieve an orderly adjustment to the domestic economy and to restore confidence to financial markets. This program included a wide range of measures to reform in a profound way economic governance in Indonesia, including measures to reduce connections between the government and private institutions, to curb monopolies and to address problems in the banking sector. The program was centered around a $10 billion IMF standby facility, supplemented, in line with the IMF program, by $8 billion from the World Bank and ADB, and a further $5 billion from Indonesia's own reserves.
Page 37 PREV PAGE TOP OF DOC To support the program, the United States joined a number of other countries in the region in expressing a willingness to provide contingent financial support for Indonesia as a temporary second line of defense in the event that unanticipated external pressures gave rise to a need to supplement Indonesia's own reserves and the resources made available by the IMF. Our participation reflected our concerns about the risks of further contagion and our desire to join a number of other countries, showing our support to rebuild confidence for this program.
I would like to note that the United States has spoken out and continues to speak out within the World Bank and the IMF, in advancing the purposes of the Frank-Sanders Amendment, by urging measures that would help improve the conditions of workers in Indonesia, Thailand and across the developing world. Workers' rights issues, along with issues of corruption, governance and military spending, will remain important priorities for us in the international financial institutions in the months and years ahead.
There is, I believe, broad agreement that an effective approach to problems of this kind must focus on preventive measures to increase transparency and to guard against the creation of large domestic imbalances and strengthen financial systems; and when problems arise, must focus on strong, credible, domestic policy responses in the countries concerned. There will, however, be circumstances where it will be important to mobilize international support to restore financial stability.
Thinking through the appropriate mechanisms for such assistance, it would be important, in our view, to remember three principles.
First, the principle of country and investor responsibility. While external assistance can play an important role, the primary burden of responsibility for both preventing and responding effectively to crises must continue to fall on the countries concerned. It is critical that in a global capital market, investment flows be based on investors' perceptions of the underlying fundamentals of each country and not on the probability of some kind of international support.
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The second principle, following from the first, is that the IMF must remain at the heart of any international response. Its unique ability to provide a political condition financed in the context of, and only in the context of, strong reforms, makes it the appropriate vehicle for providing support. We must therefore ensure the IMF has the financial means and modes to act promptly and effectively.
I would note here that important added resource capacity to enable the IMF to carry out its critical work would be made available by the New Arrangements to Borrow, and it is my hope that the Administration's request to participate in the New Arrangements to Borrow, which is still pending before Congress, will be acted on favorably before the Congress adjourns for the year.
A third principle is to ensure that regional cooperative arrangements compliment the global objective of safeguarding financial stability. To this end, we are exploring the arrangements that would give the countries of the Asia-Pacific region a larger stake and voice in decisions affecting them, and would, importantly, reinforce the IMF's capacity to act quickly and effectively at a time of crisis.
In this context, as we have said before, we believe a forum for enhanced surveillance among countries in the Asia-Pacific region, would be a useful step. Any cooperative regional financing arrangement must be designed with great care to limit moral hazard risks. It would have to be restricted for use in association with IMF programs, only be made available to supplement resources provided by the IMF and a country's own reserves, not risk undermining the IMF's position as the major global provider of stabilization assistance, and critically, give countries flexibility to determine whether their participation is appropriate in any given case.
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With their high rates of savings and investments, strong outward orientation and tradition of sound macroeconomic policymaking, Thailand, Indonesia and other Southeast Asian economies have been among the fastest growing economies in the world in recent years. These same strengths leave them well placed to achieve a rapid return to rapid growth once confidence can be restored. But recent events have underscored that being a member of the more integrated world economy brings risks as well as opportunities, and the governments and investors in Southeast Asia are no more immune to these risks than anyone else. The task for all of us is to develop policies and institutions to minimize such risks, and give us the means to respond to difficulties promptly and effectively.
I look forward to working with you, Mr. Chairman, with this committee and others in Congress, as well as our partners in the Asia-Pacific region and elsewhere as we seek to meet this vital challenge. Thank you very much.
Chairman LEACH. Thank you, Secretary Summers.
Before beginning the questioning, let me announce that we have a new Member of our committee, Mr. Vito Fossella, who comes to us from Long IslandStaten Island, I apologize. In any regard, Vito is a graduate of Fordham University Law School and the Wharton School of Business, and we are proud he is a new Member of this body and we welcome you and your presence in this Congress.
Mr. FOSSELLA. Thank you very much.
Page 40 PREV PAGE TOP OF DOC Chairman LEACH. Let me just first ask a question as background to our two distinguished panelists.
How do you relate this current Asian-generated circumstance or crisis to the Mexico circumstances of two years ago. Is it more or less serious? What are the analogies and what are the differences?
Mr. SUMMERS. There are important similarities and important differences. In common, one has the situation of an emerging market with a weak financial system that has encountered large capital inflows and that then encounters financial strains with consequent pressures from both domestic and international investors. In common, one has the element that problems in one country lead investors to reassess situations in other countries leading to contagion effects.
In the situation in Mexico, because of the extremely large accumulation of short-term debt, we faced the situation in January of 1995 where Mexico was within a small number of days of possible default. A situation of that kind has not arisen to date in Southeast Asia. A crucial lesson of the Mexican crisis, a most important lesson for events in Southeast Asia, in our view, is the importance of a strong domestic policy response. The Mexican authorities' courageous steps to repair their financial system, to pursue sound policies, to stabilize financial conditions, were the primary reasons for the restoration of confidence, which led to large capital inflows into Mexico, and as you know, Mr. Chairman, made possible an early repayment of the support that had been provided by the United States. And I might say that those sound policies have served Mexico well in the face of the turbulence that now exists in many emerging markets.
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Chairman LEACH. Mr. Greenspan.
Mr. GREENSPAN. Well, I would agree generally with what the Deputy Secretary said, and I would add only that what we are learning, indeed, from both these episodes and previous ones as well, is the crucial importance of the financial system in these sorts of crises.
There has been, as I indicated in my prepared remarks, a fairly strong inclination on the part of financial institutions to lend long largely in real estate of one form or another, financed short term too often with foreign liabilities. And that will work and that will be profitable for a considerable period of time until something untoward occurs.
What has clearly occurred in too many instances is that the risks that were being taken in the financial system to achieve inordinately large rates of return, in too many cases, turned out to be mistakes. And one of the issues which I think we are learning in this process is the importance of making certain that financial institutions, especially banks, which are, by nature, highly leveraged and are involved in very substantial interbank lending, that these institutions be bolstered in a manner in which they don't add to the contagion either domestically or internationally.
Chairman LEACH. I think I have a second question, but I don't want to, since we have so many Members here, to proceed with it, but I would like to end with one modest observation.
Page 42 PREV PAGE TOP OF DOC One of the ideas on the table comes from Japan creating a new Asian Development Fund which might have U.S. participation. I think I speak for the majority of Members in suggesting it would be very awkward at this time to assume congressional support. We are going to have a hard time getting support for the NIB and regular IMF replenishment and the new fund would be very difficult.
Second, as I think has been indicated by other speakers, Congress shares the Administration view on an IMF centric conditionality approach and programs that are not structured within IMF conditionality would be, I think, ill advised from our perspective.
Mr. LAFALCE. Thank you, Mr. Chairman.
A number of concerns, most of them addressed to Dr. Summers, but some of these are to Chairman Greenspan also.
First of all, I was wondering about the international political dynamics. We did not intervene in any significant way with respect to Thailand. I was wondering if political repercussions were a contributing factor in our agreement to intervene in a contingent way with Indonesia?
Second, I want to underscore the fact that although I did not sign the letter circulated by Mr. Frank, I strongly support every word of that letter with the exception of the last paragraph, which called upon the U.S. Treasury not to assist Indonesia. I think there was a strong case for assistance, but I think that that strong case is difficult to maintain and prevail unless the Clinton Administration gives much more emphasis to these labor rights issues and human rights issues in the future. I think it was imperative, though, that the United States participate in this Asian difficulty, at the risk of looking as if they were anti-Asian.
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Third, I want both of you, Dr. Greenspan and Mr. Summers, to address the role of Taiwan in this currency devaluation problem. Did Taiwan adequately defend its currency? Did Taiwan deliberately, on the eve of President Jiang Zemin's visit to the United States, attempt to destabilize the Hong Kong currency? Have they acted in an unfriendly, hostile way, referring to international norms of behavior?
And then, lastly, what about a warning system? Shouldn't we have been aware of this? What were we doing, what were we saying that helped mitigate thisat least Asiancrash that took place? Those are my questions.
Mr. SUMMERS. Perhaps I might begin our response.
On the question of warning, Congressman, I believe the best thing that we can do to promote surveillance is to work as we have in the IMF; and we will need to continue to work to ensure a maximum of transparency in global economic management, because it is with the availability of information on national economic practices, on reserve levels, on the health of banking systems, that investors can make the best possible judgments, because as somebody once said, ''Conscience is the fear that someone is watching.''
The effort to encourage transparency will in turn encourage sound policies, the avoidance of mistakes like the excessive depletion of reserves. I know of no evidence that Taiwan's decision was based on anything other than the economic conditions that Taiwan found itself facing in the context of what was happening in Asian financial markets generally and the pressures that they were experiencing.
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We share very strongly your concern, the concern of Congressmen Frank, Kennedy and Sanders, about workers' rights and about a whole set of issues arising by policies in Asia and work very actively through the international financial institutions to encourage evolution in the direction that we favor.
I believe that the Indonesian program does go to many of the critical issues that have concerned people about governance in Indonesia for quite some time, and in particular, represents important steps that affect family control of the Indonesian economy.
Mr. GREENSPAN. I would just like to point out that Taiwan, before it moved its rate down, actually was endeavoring to support the rate and apparently had run through several billion dollars' worth of reserves in order to do that. We know of no evidence to suggest that there has been any concerted political action of the type that you are suggesting, so we see no reason to in any way dispute the conclusions that the Treasury Department has brought forth with respect to that issue.
Chairman LEACH. Thank you, Mr. LaFalce.
Mr. MCCOLLUM. Thank you, Mr. Chairman. I am interested in knowing, Chairman Greenspan and Secretary Summers, what you both think about whether the devaluations in Thailand, Taiwan, Indonesia were the wrong thing for them to do? And did the International Monetary Fund influence those devaluations, encourage them to occur? And related to that, who is right?
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The Wall Street Journal yesterday said these devaluations will make it more costly to buy imports, and ultimately devaluations produce inflation, or those who are saying that what we are facing in the aftermath of the crisis in Southeast Asia will be global deflation. I am confused by the arguments, and I would like to know your wisdom on both whether the valuations were a good idea, did the IMF encourage them, and what do the results mean? Will they produce inflation ultimately in those countries or will they produce a path potentially to global deflation?
Mr. GREENSPAN. Well, I think the issue is, in a certain sense, misstated. At the point at which the devaluations took place, they had no choice. They were running out of reserves; there was no way they could support their currencies, so that the question that really has to be on the table is, do devaluations help a country? The answer is, they do not. They may, in the short run, create some competitive advantages, but very shortly, that is eroded by inflation and those competitive advantages rapidly disappear.
One cannot argue that devaluation is a positive factor in anybody's economy. The question should really have been asked, ''What could those countries have done earlier-on to structure their economies in such a manner in which they would not face the inevitable run on reserves and the really quite irresistible pressures on their exchange rates?'' Once you get to a certain point, it is not an issue of will; it is an issue of inevitability.
I think the real important issue is, how do you set up an economy's structure and financial institutions and overall policies in a manner which is consistent with the specific exchange rate, and then one will not find the problem of having continuously to try to defend it.
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Mr. MCCOLLUM. So we will likely see ultimate inflation in those countries as a result of what they had to do, as you put it, not disinflation.
Mr. GREENSPAN. Unless they take actions now which restructure the economies in a manner which effectively avoid that.
Mr. MCCOLLUM. I am going to ask Mr. Summers to respond, but I am curious, Mr. Greenspan, do these countries have relatively independent central banks, like the United States; or are they like much of the world, which have continued to have their executive branch control the central bank?
Mr. GREENSPAN. The issues of central banking and finance, which we have very strong traditions on, rarely exist in those countries; and we even have the serious question as to whether, in fact, the private external liabilities, denominated in foreign currencies are de facto insured or guaranteed by governments or central banks. In short, the sharp divisions that we have in this country and in other developed nations and that do in fact exist in some emerging nations, as a general rule, are not a worldwide phenomenon.
Mr. MCCOLLUM. Mr. Summers, as we have to run to vote in a second, can you generally respond, do you agree with Mr. Greenspan that the devaluations were a good thing, a necessary thing?
Mr. GREENSPAN. I didn't say they were good; I said they were inevitable.
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Mr. MCCOLLUM. And do you believe they will be inflationary, as he suggested, ultimately?
Mr. SUMMERS. I agree with what the Chairman said: At the points they took place, I think they were inevitable, given the pressures on those economies.
Mr. MCCOLLUM. Including Taiwan?
Mr. SUMMERS. I am less familiar with the details of the situation in Taiwan.
Mr. MCCOLLUM. They have been criticized for competitive devaluations, which, you know, they were in a much stronger position in their economybut go ahead. I am running out of my time and yours; I apologize.
Mr. SUMMERS. I believe the devaluations result from the pressures that come from inconsistent monetary policies and exchange rate policies, and the only solution, as the Chairman suggests, is for those policies to be made consistent at an earlier stage.
Mr. MCCOLLUM. Will they ultimately be inflationary?
Mr. SUMMERS. I would expect the devaluations will lead to somewhat higher rates of inflation, perhaps not too much higher if sound policies are pursued in the countries in question. The effect of the reduction in cost of producing in those countries will be some reduction in the prices of the goods they sell, and therefore, someI judge quite modestreduction in inflationary pressure in other parts of the world.
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Mr. MCCOLLUM. Thank you. Thank you very much, Mr. Chairman.
Chairman LEACH. Thank you, Mr. McCollum.
We have a vote, and it is to be followed by another vote, so the hearing is in recess subject to the voting on the floor.
Chairman LEACH. The hearing will reconvene.
Mr. VENTO. Thank you, Mr. Chairman. I have a number of questions.
I think the questions that my colleague, Mr. Frank, raised with regard to his amendment and the other qualifications or stipulations that we placed in terms of IMF legislation are important. I guess the question isand I think it is a question that is in a circumstance of immediacy; I won't use the word ''crisis''whether or not these goals fit in. So I think it becomes important to set the stage, the groundwork for these particular prerequisites ahead of time, and consequently, of course, back into the topic of the day in terms of trade and other issues, so I do think that we need to establish those. In fact, I think the functioning of these economies in the absence of democratization, a free economy and a free people, is very difficult.
Page 49 PREV PAGE TOP OF DOC There are a number of things that I have questions on. My three questions for now are basically on the IMF's capacity to deal with this; and the secondary nature of our unilateral intervention or assistance and the capacity of the IMF. Does it have the authority and the resources, given the magnitude of the crisis in the Pacific Rim today, on a global basis? And then, added to that, what is the expectation that we are going to have with this? All of a sudden, of course, this is going forward.
What we see in one case is $3 billion that the United States put up; it is likely we would have other such arrangements, I guess. And we have had such with key economies on our border, and of course, at that time, we were suggesting that we were taking the lead.
Here, of course, other nations are taking the lead with other independent actions backing this up in the case of Japan. But, again, that economy is having its problems, so that is my issue as a whole issue, the IMF capacity in terms of the specific multilateral tool that we have for liquidity and for stabilization in the individual countries.
Maybe you can take these in the order that you want. What is the impact of China as becoming a more active participant and presence in these Asian markets? To us, of course, it looms very large because of the amount of trade we have with them, but I am curious as to the impact.
My impression is, Japan plays a much more important role with these developing nations in the Pacific Rim currently than does China, but I am wondering if some of the adjustments and some of the uncertainty and instability that is present here is due to the Hong Kong market and the presence of the Chinese economy posed to integrate itself into that Pacific Rim.
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So those are my questions, and I will then yield and ask the Governor of the Fed and Dr. Summers to respond.
Mr. GREENSPAN. Congressman, it is fairly obvious, in the sense when one looks at the data, that Japan has a fairly significant stake. Forty percent of their trade is with Asian countries, and they have very significant investments throughout Southeast Asia, so there is no doubt that Japan has very substantial interests.
China is obviously a rapidly growing country and is potentially a very substantial economic force, especially in Asia, because of its 1.2 billion population and very substantial growth over a number of years.
I do not say that one should look at this as a zero sum game, that one's benefit is another's loss. On the contrary, I think that the evidence is increasingly overwhelming on a worldwide scale that trade has been a very major force in engendering rising standards of living throughout the world, not the least of which has been our standard of living.
There is a general view abroad that we are all trying to enhance, one; rapid growth and international trade in goods and service and, two; an international financial system which fosters that to the maximum extent. So in that regard, we all have very strong concerns that the contagion and weakness that have occurred in the Asian markets be stabilized as quickly as possible because, as I indicated in my prepared remarks, while this may be inevitable in a very dynamic financial system, nonetheless these contagion problems slow down overall world economic growth, including our own, and that as soon as we can get them resolved the better.
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It is in everybody's interest, and especially in the interest of the United States, that this weakness in the Asian economic and financial systems be reversed as quickly as feasible.
Mr. VENTO. Dr. Summers, my time has lapsed but maybe you could respond briefly to my inquiries.
Mr. SUMMERS. I think Chairman Greenspan stated exactly my views on the question of China's role and Japan's role. I would just add that I think you are right to emphasize the importance of the IMF as the primary vehicle of support for crises like this. The enormous benefits that we as Americans derive from having an institution that shares the burden of responding to these kinds of problems in a multilateral way and is in a position to impose conditionality so as to ensure that domestic policies are as healthy as they can be to bring about changes in these situations. And we will continue, as we have since the Mexico crisis, to work to strengthen the IMF's capacity to respond through its emergency financing mechanism.
It is of particular importance in that regard that, as rapidly as possible, the New Arrangements to Borrow be authorized and come into force so that in the event that it is necessary, extra liquidity can be provided to the IMF on a risk-free basis from the point of view of the countries providing the liquidity, so that the IMF is adequately positioned to take the central role in responding to problems like those that we have seen.
Mr. VENTO. Well, I think maybe you can answer in more detail in writing.
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Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Vento.
Mrs. ROUKEMA. Thank you, Mr. Chairman.
I was not here for all of Mr. Vento's questions, so I hope I am not repeating anything here. But in both of your testimoniesand by the way, you gave a very lucid overview of the reality of the global economy as it relates to these markets. In both of your testimonies, there are inferences but nothing specificmaybe you don't want to be specific, but there are inferences as to whether or not there might be needed new regulatory authority or new oversight in these areas.
I don't want to go into particulars. For example, in Mr. Summers' testimony, he concluded by saying the task for all of us is to develop policies and institutions to minimize the risk, and Chairman Greenspan said it in another way.
Do you have any recommendations for either how we deal with the existing institutions to have more regulatory authority? Or as Mr. LaFalce referred to it earlier, and I don't remember your addressing it specifically, as to what early warning systems there might be? And in that context the Chairman referred to the savings and loan crisis as coming to mind. Are there early warning systems we should put in? Is there new regulatory authority or do we require new legislation or new requirements ofwhether it is IMF, World Bank or the banks that the Chairman referred to that are highly leveraged and the question of their relationship to adding to the contagion?
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I don't know what the implication was there. But could you just give us an overview of your approach?
Mr. GREENSPAN. Yes. As I indicated in both my prepared remarks and in answer to an earlier question, the more I have observed these types of problems the more I get concerned that our banking systems too often are either the catalyst or something which exacerbates the nature of the problem.
In this regard, early-on the Bank for International Settlements, with whom we deal, has been a vehicle through which numbers of central banks work together and through the auspices of the BIS, a fairly general code of capital requirements and related regulatory issues have been developed, generally accepted voluntarily by large numbers of countries.
In addition, there have been recent discussions that the IMF and the World Bank, in their evaluations of individual countries, would employ these general principles promulgated by the BIS, the so-called Basel Committee on Supervision, and apply them to the individual countries' cases.
When they bring conditionality, for example, in their loans to these countries, they are trying to find means by which they can use the generic principles of the BIS to specific recommendations with respect to individual banking structures. And I am sure that Secretary Summers, who used to be very closely involved with World Bank economic issues when he was associated with that agency, knows a good deal more about that than I. But what I do know is that it is essential that in going forward with the rapidly changing international financial structure that seems to be getting larger and larger every day and will continue to do so, because it serves a useful purpose, it is important that we make certain that these wide variety of banking structures around the world are capable of effectively dealing with that system in a manner which doesn't create significant problems for themselves and, because we are all involved with that structure, for other economies as well.
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Mr. SUMMERS. I would just echo what the Chairman said, that the central regulatory imperative is a strengthening of the domestic regulatory capacity in emerging markets and the G7 launched an initiative, the fruits of which the Chairman described, at the Lyon Summit that was directed at promulgating standards and then working to ensure that there was effective surveillance to ensure that those standards were complied with through the IMF and the World Bank.
One element of developing effective financial systems in developing countries that I would stress is openness to foreign participation, because we have found in many cases that openness to foreign participation is an important source of stability, because of the knowledge about best and most modern practices the foreign institutions bring, and because foreign institutions have external capital that stands behind them. And I think that one of the things we will have to do over the years ahead is promote openness of developing countries with respect to foreign financial institutions
Mr. GREENSPAN. And there is the issue of transparency.
Mr. SUMMERS.As a source of stability. And the Chairman reminds me that I think the other crucial, in a sense, regulatory imperative is transparency; transparency, because if you look at the history of the American capital market, I would suggest to you that the idea of generally accepted accounting principles was probably as important as any other single step in the development of the kind of capital market that we have in the United States. And I think transparency with respect to providing information on all types of financial variables is something that is critical.
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Mrs. ROUKEMA. Well, our time is up. But could I request that if you haveI don't know whether I can assume by your answers that you feel that the legislation is adequate in and of itself.
Mr. GREENSPAN. Are you talking about U.S. legislation?
Mrs. ROUKEMA. Well, both.
Mr. GREENSPAN. Or are you talking about
Mrs. ROUKEMA. Well, both. Both.
Mr. GREENSPAN. I don't see that aside from the various different initiatives which Treasury has put forth with respect to various funding arrangements, that we perceive of any particular change in U.S. legislation that is required. I think we have got the structure that I think is necessary. So further authorities, I don't believe, are necessary.
Mrs. ROUKEMA. All right. Well, if you have anything to add, would you please put it in writing for us?
Mr. SUMMERS. Absolutely.
Mrs. ROUKEMA. I would appreciate it. And we will make it a part of the record.
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I do appreciate your comments. Thank you.
Chairman LEACH. Mr. Frank.
Mr. FRANK. Thank you, Mr. Chairman. Let me just say I very much appreciate your having this hearing. I think this is as important an issue as is affecting us right now, and your willingness to have this hearing today when people are otherwise distracted, is I appreciate your indulgence in letting us deal with this.
I want to reiterate before I get into my questions, I do believe we are at a very critical period here, and if we are not able to do a better job of showing people that we can combine globalization and modernization with some concern for equity, we are going to stumble, and I hope that this is part of a process of getting beyond that.
Mr. Greenspan, let me ask you, I mentioned earlier I was going to raise this, obviously there is a good deal of concern here about the recessionary effects here. Obviously it is going to mean a great drop in growth in the Asian economies themselves that are affected. There will be some carryover to us. What worries, obviously, all of us is the notion that there is kind of a macroeconomic drag here to some degree.
And it is in that context that I raise the question about our continuing to argue that inflation is the graver danger, and I understand there are some factors that lead you to think that; but one point, suggested to me by Jude Wahniski, as I mentioned earlier, and it seems to me a reasonable thing to raise here, is the question of the gold price, because what he and others have represented is that, for instance in 1994, which was the last time interest rates were raised by the Fed, you moved in that direction, the high price of gold was taken as one indication of inflationary expectations.
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People have argued that you and some others have historically said the price of gold is an inflationary indicator.
The fact is that gold is now at a very low rate. And so the question is, how do you reconcile an historic viewnot that you are old enough to be historic, Mr. Greenspana consistent view over time to regard the gold price as an indicator of inflation with the fact that gold is now at a very, very low rate? I mean, does that mean that inflation is not much of a problem, or has gold for some reason become, the gold price, an irrelevancy when it comes to indications of inflation?
Mr. GREENSPAN. No, I don't think it has become irrelevant. I have argued, and I would continue to argue, that it is a meaningful tool to evaluate the expectations of inflation, which if you are talking about the gold price denominated in dollars, then it is one of the major indicators that we would employ to make judgments about the degree of inflation expectations.
Mr. FRANK. It is very low right now, isn't it, by historic standards?
Mr. GREENSPAN. Well, at the current price we are still more than 9 times what we were a generation ago.
Mr. FRANK. Well, there have obviously been some very different changes. We have had some changes that account for that, haven't we?
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Mr. GREENSPAN. Well, that is an interesting and a very important question and I don't think we know fully the answer to that. But there is no doubt that the decline in gold prices in the recent past parallels the decline in inflation expectations which we see elsewhere.
I don't think that there is any question that the Asian crisis has imparted a degree of disinflation to the rest of the world. I think that's fairly evident, and I don't think we have fully seen the full impact of that as yet.
But you have to remember that a goodly part of that impact is coming in the form of goods, tradable goods. And tradable goods, while important to our economy, reflect a not very large part of the overall business structure that we have got. If we take nonfarm business, goods production is a third of it. It is not as big a part as are services.
Mr. FRANK. I was going to say, well, a third is a pretty big chunk of the economy.
Mr. GREENSPAN. Oh, yes.
Mr. FRANK. Let me ask one other question, because this is something which I know you have touched on in your Joint Economic Committee testimony. Am I correct in understanding that your view is that one of the major constraints in our ability to continue to grow at the current rate without inflation is the size of the workforce and that you believe that we are, in fact, absorbing workers at a rate that may prove to be unsustainable?
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Mr. GREENSPAN. Well, I merely pointed out the arithmetic of what the data show; namely, that the sustainable rate of growth of employment over the longer run is, one must presume, the number of additions to the working-age population who wish a job. Remember that the working-age population includes students, who are increasing quite significantly in number and who tend to be less likely to actively seek a job. The growth rate of the working-age population who wish a job is a number significantly below what the rate of growth of employment has been in recent years.
Mr. FRANK. Mr. Chairman, I would just ask, if I could, for one more minute to say first, Mr. Greenspan, other people are entitled to invoke mere arithmetic. With you, I am afraid it is prophecy, whether you like it or not. You are not allowed the luxury of mere arithmetic. I think when you talk, people are going to draw policy implications. And I would like to draw one from this; which is, that given what you say and given your view that this is a constraint, is not a logical answer increased immigration as the only way that we can, in fact, increase the workforce? If we did the right kind of immigration, you would have people eligible to join the workforce which would make the right kind of immigration in fact a good thing for the economy rather than a problem?
Mr. GREENSPAN. Well, of the increase that we have in the working-age population who wish to work, a third are immigrants.
Mr. FRANK. I appreciate your confirmation of my point before, that a third is sometimes a big number and not a small number, because I take it you citing a third there is a significant factor. But, in other words, if we were to tighten up
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Mr. GREENSPAN. I didn't say whether it was large or small. I said it was a third.
Mr. FRANK. I think the eyebrow suggested it was large. But significant, let us say significant. But does that then not mean that if we were, in fact, to reduce immigration substantially, we would exacerbate the problem of being able to grow in a noninflationary way?
Mr. GREENSPAN. I think we would.
Mr. FRANK. Thank you.
Chairman LEACH. More than a third of the gentleman's time has expired.
Mr. BEREUTER. Thank you, Mr. Chairman. As the Chairman of the Asia and Pacific Subcommittee, I was looking forward to having a hearing like this, but hearing that you were going to do this, this is the proper venue so I commend you for doing it.
I am a little frustrated with the way we spent our first hour, despite the individual wisdom of my colleagues. But I am not going to pursue that any further.
Page 61 PREV PAGE TOP OF DOC There are two points, Secretary Summers, in your statement that I think need to be highlighted, because I think they answer a lot of people's questions. They weren't said, and I am just going to read them quickly.
With respect to the unsustainable mix of monetary and exchange rate policies, you said, ''Thailand and others increasingly faced a choice between raising interest rates to save an exchange rate peg or cutting interest rates to keep insolvent banks afloat. In many cases, the very delay meant that their actions were insufficient to achieve either objectives.''
And later on a different point, much speculated, you said, ''Short-term speculative flows were not the major source of the pressure on governments. Overwhelmingly, these flows are driven by domestic investors losing confidence in their own country's currencies and seeking to diversify their holdings often in response to new information.'' I think those bear highlighting.
I would like to talk about the banking, the domestic banking systems, of these countries. Mrs. Roukema has already pursued that slightly. One of the witnesses on the second panel will say the following in their written statement: ''Weak and inefficient financial sectors were a pervasive and central cause of the crisis throughout the region.'' And, Chairman Greenspan, you, in your testimony say, ''. . . underscore the importance of financially sound domestic banking and other associated financial institutions.''
Mr. Summers, you have got something very similar in your statement, where youwell, I can't find itbut you go to the discussion we had before about transparency, adequate capitalization, adequate financial supervision of domestic banking systems.
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I hope that, in fact, we are all on track if we have that emphasis and we are not just trying to pursue worthy objectives and suggesting these had a bigger role than they might have had in what happened in Southeast Asia.
But in any case, I noted what one of you said, Chairman Greenspan, I believe, about the possibilities that the Basel principles could be applied by the IMF. And perhaps it's possible in light of what the WTO negotiations are doing on liberalization of financial services, which is supposed to be due, I think, December 12. And possibly in light of the Vancouver meeting of APEC, is it now possible for us to do something concrete as a Government with the help of other governments to assure that, in fact, by the Basel principles being applied, by using APEC which can be enlarged to the WTO, that we begin to see some improvement in those domestic banking systems?
Can we take those steps as a Government? Are we willing to do that? Will that be a priority? Or should we admit that our rhetoric is overblown, that these were not major contributing factors?
Mr. GREENSPAN. Well, I remember at a general discussion of the Basel principles in Stockholm two or three years ago, I was startled by how many countries were represented to try to understand and find means by which these individual countries could apply those principles to their domestic banking institutions.
So I don't believe it is an issue of the Bank for International Settlements, the IMF, the United States, or anybody, trying to impose principles on individual countries. They are seeking ways to solidify their financial structures which in very many instances are fragile, because they increasingly recognize the importance of finance in the development of standards of living within their own countries.
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The crucial question, however, is that it is not a simple issue of bringing a sophisticated banking system to an emerging nation. The development of experienced loan officers who fully understand the nature of market risk and what constitutes appropriate lending practices is a very difficult issue to advance.
So I don't think that we need to press them very hard. They want to, and we should very much try to find means by which we can assist them to do that. We at the Federal Reserve have been engaged for a number of years in extending technical assistance to individual bank supervisory organizations around the world, because we recognize that it is to our interest that finance become far more sophisticated than it is, because it serves everybody's purpose and it is an essential component for the issues of trade across borders and rising standards of living.
To the extent the IMF and the World Bank in their conditionality can sharply focus on these questions, I think it is very much to the interests of the individual recipients of contingent aid and it is certainly in the interest of the G7 countries, and especially the United States.
Mr. SUMMERS. I might just add, Congressman, that this is a critical priority for us. This is something that we have focused on, and in light of recent developments will be focused on with greatly increased intensity within APEC. As we address the Asian region, the context of the WTO allows us to discuss the particular role of foreign financial institutions which, as I suggested, is important to developing integrity. And as the Chairman suggested, the international financial institutions have a critical role.
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I would caution that this is work that will take a long time to complete, because the question of a healthy financial system is really very much diffused with the question of a healthy economy. Issues of credit culture, of the establishment of property rights, of a judiciary that can enforce bankruptcies, can enforce property rights, issues of basic government integrity, are crucial to an effective financial system.
One of the things that I think is most important about the IMF program for both Indonesia and Thailand is that it contains a set of quite specific conditionality addressing the need to close failed financial institutions and to stop pouring liquidity into them and, in crucial cases, to wipe out the equity of crucial share owners, because it is both a healthy regulatory framework and a willingness, as we have learned in the United States, to take prompt action when institutions are in trouble that is essential to developing a healthy financial system.
Mr. BEREUTER. I thank the gentlemen for their very good responses.
Chairman LEACH. Mr. Sanders.
Mr. SANDERS. Thank you very much, Mr. Chairman. And like many of the other Members, I want to congratulate you on holding this very, very important hearing. With your permission, I would like to enter into the record some information that I think is relevant to this issue.
Page 65 PREV PAGE TOP OF DOC What I would like to do is, given the fact that Mr. Greenspan and I have on occasion dialogued already, I would like the privilege of maybe just chatting with Mr. Summers. And given the fact that we don't have a whole lot of time, Mr. Summers, I would appreciate it if you would be able to answer my questions as briefly as you might be able to.
Mr. Summers, do you disagree with the statement from the U.S. State Department's Annual Human Rights Report, and I quote: ''Despite a surface adherence to democratic reforms, the Indonesian political system remains strongly authoritarian; the government is dominated by an elite comprising President Suharto, now in his sixth 5-year term, his close associates in the military.''
Do you agree with that?
Mr. SUMMERS. I agree with that statement.
Mr. SANDERS. Thank you. Do you agree that Muchtar Pakpahan, one of the leaders of the Free Trade Union movement in Indonesia, is currently rotting in jail on trumped-up charges? That's what human rights groups and many people state, including the State Department, I believe.
Do you agree with that?
Mr. SUMMERS. I have no direct personal knowledge of it, but no reason to disagree with those statements.
Page 66 PREV PAGE TOP OF DOC Mr. SANDERS. Do you agree with the AFL-CIO of this country and human rights groups all over the world that in Indonesia, internationally recognized worker rights do not exist?
Mr. SUMMERS. I certainly recognize the inadequacy of adherence to core labor principles in Indonesia.
Mr. SANDERS. And as you are aware, many groups throughout the world use an expressionthere is a body of law called International Recognized Workers Rights. Many groups throughout the world say they do not exist in Indonesia. What do you think? Do you accept that?
Mr. SUMMERS. I accept that judgment.
Mr. SANDERS. OK. Mr. Summers, are you aware of an Amendment passed in 1994 by Congressman Frank and myself, which is very clear? And let me read that Amendment for you in case you don't remember it.
It says: ''The Secretary of the Treasury shall direct the United States executive directors of the international financial institutions to use the voice and vote of the United States to urge the respective institution to adopt policies to encourage borrowing countries to guarantee''that's the wording ''guarantee''''internationally-recognized worker rights of the Trade Act of 1974.''
Are you aware of that Amendment?
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Mr. SUMMERS. I am aware of that. I am aware of that Amendment, yes.
Mr. SANDERS. Are you aware, Mr. Summers, that there is nothing in the proposal offered by the Indonesian government which, as the law requires, quote, ''Guarantees internationally recognized worker rights''?
Mr. SUMMERS. Congressman, with respect, I would suggest to you that we have been in full compliance with the Amendment. The Secretary of the Treasury has directed U.S. executive directors to use their voice and vote to urge adherence to labor rights and, in fact, executive directors have used their voice and vote to urge that the international financial institutions take those steps.
Among the results of that effort have been a set of consultations, historically unknown, between the international labor organization and international financial institution officials and government officials in a number of key countries, including Indonesia.
In the context of the country assistance strategy discussion for Indonesia, the U.S. executive director at the World Bank, in discussing development efforts, raised extensively a set of issues relating to labor rights.
Mr. SANDERS. I don't mean to interrupt you, but there is not a whole lot of time. Let me get back to this point. What the Amendment says, ''. . . to use the voice and vote.''
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Mr. SUMMERS. That is correct.
Mr. SANDERS. Did our representative vote against this bailout?
Mr. SUMMERS. Our representative voted in favor of the IMF program.
Mr. SANDERS. OK.
Mr. SUMMERS. That is, I am advised by counsel, entirely consistent with the Amendment, which requires that the voice and vote be used to urge policies in these institutions
Mr. SANDERS. But as the author of the
Mr. SUMMERS.In account of labor rights.
Mr. SANDERS. As the author of the Amendment, I would respectfully disagree with your interpretation. I do know something about the Amendment. And I do not understand how you can say that you have acted faithfully on behalf of the Amendment when there is not one word in the agreement which guarantees internationally recognized worker rights.
And I will pursue this issue. I think we may disagree up here. You know, we have all different political philosophies, but I hope that we can agree that when law is passed that an Administration, whether it is a Democratic Administration or Republican Administration, actually follows the law or else we are wasting a lot of our time.
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And my last question
Chairman LEACH. Excuse me. I am sorry. We have a large group here, and I am particularly apologetic, but I want to give the benefit of the doubt to Members who didn't make opening statements. I think it is only fair to the panel.
Mr. SANDERS. OK.
Chairman LEACH. In addition, Chairman Greenspan has to leave at 1 o'clock and I think it fair to move on.
Mr. BACHUS. Thank you.
Chairman Greenspan, we all know that the Federal Reserve looks closely at inflationary pressures when they set monetary policy. To what extent have the recent developments in Asia affected U.S. inflationary pressures?
Mr. GREENSPAN. Well, as I commented to the Joint Economic Committee a couple of weeks ago, it has clearly reduced them, in the sense that the growth rates are significantly slowing in those areas and the international trading system is such that when growth slows in any part of that system, it works its way through the total system. It is very difficult to know exactly what specific estimates one uses, but clearly the sign is unambiguous.
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Mr. BACHUS. OK.
Mr. GREENSPAN. Namely, that it has reduced some of the pressures.
Mr. BACHUS. All right. Has that had an impact on Federal Reserve decisionmaking?
Mr. GREENSPAN. As I have said before this committee on numerous occasions, Congressman, we review a wide variety of factors in making judgments as to how our policy comes out at the end of our meetings.
Certainly this is one of the factors which is involved in an evaluation of what is happening in this country, among others.
Mr. BACHUS. OK. You said you consider various factors. When you are setting interest rates, you held them firm yesterday, you consider inflationary pressures. Do you also consider the effect of your decisionmaking on international markets?
Mr. GREENSPAN. We do, to the extent that it affects the United States. We are a very major part of the international trading system, obviously. It is very much to our advantage that that system function in an effective manner, fostering economic growth around the world, and therefore we obviously take that into consideration, as we must.
Page 71 PREV PAGE TOP OF DOC Mr. BACHUS. I would agree.
We have talked about the growth shocks that we have had from East Asia and also the currency devaluations. There are some concerns that that could lead to global deflation. Do you share those concerns?
Mr. GREENSPAN. Whenever you are dealing with the type of crises that we have seen periodically over the years, one must be prepared at all times for what can happen.
In other words, you just do not make a judgment and then freeze it. What you do, especially in a dynamic changing situation such as we have been through in Southeast Asia, is we reevaluate every day. In a sense, we monitor the markets as closely as we can. We try to understand as best we can the conceptual framework, if I may put it that way, that explains how the forces are evolving, and we change that periodically as events alter it. So we focus on this in some considerable detail.
Mr. BACHUS. Mr. Chairman, could we already make the judgment, and I think you said unequivocally, that the developments are going to be disinflationary for the industrial nations?
Mr. GREENSPAN. No. I am saying that the forces that have emerged out of the Southeast Asian difficulties are imparting a disinflationary effect on the United States and others. I am not saying that they are dominant or overwhelming. Indeed, as I mentioned in my prepared remarks, they are a force but they are not at this stage being a severe dominant force on this country.
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Mr. BACHUS. I see. Would you characterize the East Asian economic instability as a significant threat to the world economy or to the international finance system?
Mr. GREENSPAN. No, I wouldn't. I would say it is something which is cause for concern. It is one which has got contagion effects associated with it.
Mr. BACHUS. Well, let me ask you this: Why not, if we had trade conflicts and you had escalating trade conflicts, would that then, added to this, be a significant threat?
Mr. GREENSPAN. I think we are falling far short of anything where we have really serious threats. It is certainly of an order of magnitude that requires our attention, and I think the reason that it requires our attention is we don't wish it to become something which is a far more serious threat to the system.
Mr. BACHUS. All right. And my last question: You mentioned that this would have an effect on exports from Japan and, therefore, affect them. Do you consider it a real influence on their banking system? Could it undermine their banking system?
Mr. GREENSPAN. To the extent that Japanese trade will be and has been and is being affected by the problems in Southeast Asia, it clearly affects all parts of the Japanese system. They are acutely aware of all of those problems, and from my conversations with various officials in the Japanese government and in the central bank, they are very assiduously endeavoring to address them.
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Mr. BACHUS. Thank you.
Chairman LEACH. Mrs. Maloney.
Mrs. MALONEY OF NEW YORK. Thank you, Mr. Chairman.
On the Dow Jones wire that just came out today, it says Chase Manhattan, the Nation's largest bank, had a pre-tax trading revenue loss of $160 million in October, because of what it termed, ''Unusually volatile and adverse trading markets.'' And it goes on to talk about their problems and the problems that, according to this, were touched off by the worldwide equity sell-off in Southeast Asia. And if we don't stabilize the markets, Mr. Greenspan, do you expect that other banks, other major banks and small banks, will be suffering these same types of problems that Chase Manhattan is reporting today?
Mr. GREENSPAN. I would scarcely argue that that is an amount of money which we would find de minimis. But it is not a large number in the sense that over the years, having observed what are the pluses and minuses to bank earnings, that is not a particularly fulsome number, if I may put it that way. The aggregate size of their earnings is quite substantial.
The losses that are involved in those trades in no way threatens, in any means whatever, the financial status of that institution. And I would surely expect that before this crisisand I think it is a crisis because it has got certain types of contagions associated with itbefore it is over there will be a lot of other losses recognized, but they are nowhere near the orders of magnitude which threaten the financial system of the United States nor any of the major banking institutions in the developed world.
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Mrs. MALONEY OF NEW YORK. If we delay stabilizing the markets with support to the International Monetary Fund, which Secretary Rubin has supported, if we delay moving forward in that direction, would you expect, even given the strong economy of the United States, that there might be other small losses, like $160 million worth, to other institutions in our economy?
Mr. GREENSPAN. One of the reasons why we at the Federal Reserve, and certainly at the Treasury, are advocating that we move forward in endeavoring to contain the contagion is precisely that we are trying to fend off problems of that dimension becoming more general, especially for smaller institutions. One hundred sixty million dollars for a small institution is really a pretty big hit.
Mrs. MALONEY OF NEW YORK. Uh-huh.
Mr. GREENSPAN. I would say to you that at the moment, we don't have seriously contemplated financial problems in any of our institutions. If you ask me to hypothesize what types of events could happen, I could find scenarios which would get our attention pretty rapidly. But I see no evidence to suggest we are anywhere near close to that, and I should certainly hope that the endeavors that Treasury is moving forward on, and on which we have been fully consulted about, will be more than sufficient to stem the contagion and instabilities that we have observed.
Mrs. MALONEY OF NEW YORK. Well, I certainly support the Treasury's efforts, and according to the Dow, this, even though it is, as you said, a small ripple, they certainly feel that it will hurt the company's goal of annual growth and operation. One problem that we confront today in Congress is that it is my understanding that the Republican leadership will put on the floor a bill today which links the International Monetary Fund, and the funding of that, with the U.N. arrears, the State Department reorganization and family planning, and if IMF is attached to these contentious issues, then it makes it more problematic, to say the least, to secure the needed funding for the International Monetary Fund, and do you think that this will undermine the credibility of U.S. efforts to cooperate with the International Monetary Fund and other countries to stabilize the Asian markets, if for some reason we are not able to secure the funding, due to the fact it is tied to so many other issues, for which there is a great deal of debate and lack of support in Congress?
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Mr. GREENSPAN. I can't get into the politics of it. All I can say is it would be to the interest of the United States to be able to go forward with that funding.
Mrs. MALONEY OF NEW YORK. My time is up.
Chairman LEACH. Mr. Lucas.
Mr. LUCAS. Thank you, Mr. Chairman.
Chairman LEACH. Excuse me. Mr. Greenspan has informed us that he should leave at 1:00, and you are welcome to, sir. It is your discretion.
Mr. GREENSPAN. Thank you. I give my proxy to Secretary Summers.
Mr. SUMMERS. My announcement about forthcoming interest rates will impend.
Mr. GREENSPAN. I was about to say that I nonetheless reserved the right to edit his copy.
Chairman LEACH. Thank you, sir.
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Mr. LUCAS. Thank you, Mr. Chairman.
Secretary Summers, we have had quite a bit of discussion here today about one of the more popular buzz phrases of recent times with the popular media, that being ''deflation,'' and I know that with the recent financial turmoil in Asia that it has given a lot more emphasis to that question and that concern, but I guess my question to you, along the line is, remembering my basic college definitions of not disinflation, but deflation, and doesn't that require a general currency appreciation or at least a fall in the general price levels. With that in mind, and enlighten me, please, do you really see any signs of that kind of thing, whether it be in Asia or around the world, a general decline in price levels or a general currency appreciation, as opposed to perhaps values of particular commodities, be they land or other things, that perhaps have taken some realigning moves in recent months or days?
Mr. SUMMERS. I do not see, at this point, any signs of a generalized decline in prices, certainly not in the United States or in other major countries. I think we are seeing disinflationary pressures of a quite profound kind reflecting increased competition, increases in productivity, reflecting the impact on export prices of some of the developments that we have seen in Asia, but at this point, I would describe the pressures on the United States as being of a disinflationary sort, and certainly not as representing a deflation.
Mr. LUCAS. And, certainly, being disinflationary, that is not an ominous sign; that is, in many ways if it helps to promote general stability pricewise, it is potentially a positive thing, as long as it stays on this side of the line and does not become deflation.
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Mr. SUMMERS. Certainly we in the Administration have respected the independence of the Federal Reserve, precisely because we recognize the importance of the goal of price stability.
Mr. LUCAS. And another comment along those lines, which might have been better directed to the Chairman, but my learned colleague made the comment earlier about the price of gold and the general decline of the last so many months, year or so, to the levels we had reached now. By tradition, gold has always been not only a store of value but a hedge against uncertainty. Is it fair for me to assume that as long as we have stable gold prices or a gentle decline in the gold prices, that reflects confidence by those individuals out there in the financial markets, in the economies, that they would not pursue gold in such a fashion, as to push the price up? Am I reading too much into that?
Mr. SUMMERS. I think it is a relevant. I think the price of gold would generally be felt to be a relevant indicator, both of inflation, psychology, and of the degree of uncertainty, but I think many, many factors go into the price of gold at any point in time, including sales of gold by official institutions, including the demand for gold in jewelry and all of that, that I think one would have to acknowledge, despite the fact that the price of gold has declined, that with events in financial markets in the last several months, there has been some generalized increase in financial market uncertainty and I think that is reflected in the increased volatility of many prices. It is an increase that is reflected in the ways in which various kinds of options are priced. So I think it is a relevant indicator, but I would have to say that the degree of uncertainty is higher now than it has been at many points in the past.
Page 78 PREV PAGE TOP OF DOC Mr. LUCAS. Would you agree with the assertion made in the earlier testimony today, if I might paraphrase, as long as short term resources chase long-term obligations, that we will always have the potential for these periods of realignment?
Mr. SUMMERS. Yes.
Mr. LUCAS. Thank you, Mr. Secretary. Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Lucas, and I see you have given back a few seconds and that is appreciated.
Mr. HINCHEY. Thank you very much, Mr. Chairman.
Mr. Summers, the BLS just this morning reported that productivity growth for the third quarter is up by 4.5 percent. That means that we have had four quarters of steady growth now in productivity. What policies ought we be pursuing in order to ensure that the benefits of this growth in productivity can be shared more equitably among American citizens?
Mr. SUMMERS. I think the single most important thing we can do in that regard is to make our education system work more effectively, and that has been a centerpiece of what we in the Administration have been trying to do over the last several years, both to increase the quantity, if you like, of education, by making community colleges available through the HOPE credit and college increasingly affordable through the tuition deduction.
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Mr. HINCHEY. May I interrupt you? Please excuse me, but I only have five minutes and I know that that is a good answer, and it is one that I support. I know it is one that the Administration is pursuing and I fully endorse it and I want to do everything I can as a Member of Congress to help that. But that is more of a long-term prospect. I am concerned with the fact that we haven't had any increase in the standard of living of American workers now for more than two decades. Since the Clinton Administration has been in, we have seen some marginal increase, but it was stagnant or declining for the 20 years prior to that. What policies ought we be pursuing immediatelymonetary, fiscal policiesto try to spread the benefits more equitably?
Mr. SUMMERS. I think, because of the success of the policies we have pursued, particularly a deficit reduction over the last five years, we are enjoying the first investment in export led recovery that this country has enjoyed since the early 1960's, and the rate of investment in our country as a share of income, particularly for equipment investment, is higher than it has been since statistics began to be computed. That means more tools for workers, which means more productivity and means rising standards of living.
So I think we have to maintain the kind of policy approach that we have been pursuing, now that a balanced budget is in sight, and that that offers us the prospect for the kind of inclusive prosperity that I think we all see. That along with the longer term public investments in education, in something that we in the Treasury have been particularly focused on, ensuring theif you like, democratizing the access to capital by making sure that capital is available in our inner cities, in some of the poorer parts of our country, to create jobs, I think offers us the best prospect for making sure that these benefits are as fully shared as they possibly can be.
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Mr. HINCHEY. Would you agree with the remark that was made at the August Federal Open Market Committee that real interest rates are too high?
Mr. SUMMERS. I would be reluctant to comment on the appropriate level of interest rates. I would say that a traditional problem we have had in our country is too low a rate of national saving, and that means there is less capital supply, which leads interest rates to be higher than they otherwise would be, and I think that one of the fortunate features of the economic policies we have pursued in recent years is by bringing down deficits, they have operated to increase national saving and take some of the pressure off credit markets. A trillion dollars that otherwise would have gone into the sterile asset of Government bonds is now available for private investment.
Mr. HINCHEY. Isn't it time we did something about the exchange rate with Japan in the context of this apparent deflation in the Asian markets, and the overproduction that is seemingly replete throughout the industrial world?
Mr. SUMMERS. As I am sure you can appreciate, I am reluctant to comment on exchange rates beyond observing that our policy continues to be what it has been, as articulated by Secretary Rubin and by the GCF in Hong Kong.
Mr. HINCHEY. If I may be so bold as to suggest that it may be time for the Treasury to pay some attention to that exchange rate and it may be time for us to begin to deal with the problem of the trade deficit, which is only going to be exacerbated as a result of what we have seen in the Asian markets. Our trade deficit is going to increase, I think that is a sound prediction, and most other people are making it, as a result of what is happening over there. I think now is the time to address that exchange rate problem as a way to attempt to mitigate the possibly dramatic increases that are going to occur in the trade deficit.
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Chairman LEACH. Mr. Hinchey, I apologize, your time has expired.
Mr. HINCHEY. Thank you, Mr. Chairman.
Chairman LEACH. Mr. Metcalf.
Mr. METCALF. Thank you, Mr. Chairman. I will try to be really brief. Could you briefly explain what new arrangements are embodied in the New Arrangements to Borrow? If you have already covered this, I was out for a while, I apologize, but what do the New Arrangements to Borrow embody?
Mr. SUMMERS. The New Arrangements to Borrow is, in effect, a credit line that the United States, along with other countries, can make available to the IMF to supplement its liquidity in the event that it needs extra liquidity in order to be able to respond to a financial crisis. The resources under the New Arrangements to Borrow are then secured by the IMF's guarantee, backed by the IMF's reserves, including a substantial volume of gold.
Mr. METCALF. OK. In a recent op ed in the Wall Street Journal, former Secretary of the Treasury William Simon recently suggested the IMF be abolished, arguing the fund has been ineffective in preventing currency crises and in promoting international monetary stability. Is that criticism fair?
Mr. SUMMERS. Respectfully, I would strongly disagree with former Secretary Simon. There is, to be sure, more currency instability than any of us would like to see, but I believe that the IMF and the actions that it has been able to take has served Americans well. It has served Americans well by maintaining stability in situations where there otherwise could have been very substantial instability, with threats to the financial system, and with threats to American security interests. I think of examples like the IMF's participation following the debt crisis in 1982 in Latin America, which had very serious potential consequences for the entire American financial system. I think of the IMF's role in what I think has been a successful effort to bring Russia, which was five years ago on the brink of hyperinflation, toward a more effective private sector economy, and I think of the IMF's role in making sure that the burden of responding to problems of this kind is internationally shared, as it has in the program that it has provided for Indonesia. So I believe that both on grounds of burden sharing and on grounds of our major national interest in stability around the world and on grounds of our direct commercial interest in avoiding devaluations and currency instability that would put American workers at an unfair disadvantage, we have a very strong interest in maintaining the IMF as a strong institution.
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Mr. METCALF. Thank you. I haven't looked, and this is my fault, but does it guarantee loans and then generally doesn't have to pay, or does it lose money? How much money does it take each year for the IMF? Any rough guess. I would not hold you to it.
Mr. SUMMERS. The IMF does not cost the American taxpayers one penny. In the 50 years of its existence, it makes loans which, with a very small number of quite minor exceptions, have been repaid in full and the exceptions are more than fully reserved against it.
Mr. METCALF. So we don't have any appropriations to the IMF every year?
Mr. SUMMERS. We do not have an annual appropriation for the IMF. We make a quota allocation to the IMF, which scores at zero, under our budget system, because it is treated, in effect, as a risk-free loan.
Mr. METCALF. I wasn't aware that it doesn't cost us money, but, thank you.
Mr. SUMMERS. Just for precision, Congressman, I should say that the IMF maintains a small concessional program for some of the world's poorest programs, EESF, and since that program is concessional, it does involve a cost. The appropriation we have sought each year for that is in the range of $7- to $10-million each year.
Page 83 PREV PAGE TOP OF DOC Mr. METCALF. I have a very brief question on the U.S. is going to backstop the IMF, perhaps with money from the Economic Exchange Stabilization Fund. What are the limitations on the use of the Exchange Stabilization Fund?
Mr. SUMMERS. The statute from 1933 setting up the Exchange Stabilization Fund grants the Secretary of the Treasury authority to use it, with the approval of the President. It gives the Secretary broad authority to provide loans and credits to foreign countries, provided that such actions are consistent with U.S. obligations in the IMF, to provide a stable system of exchange rates. The EESF was established in 1934 with a $2 billion appropriation, and it now has total assets of $37 billion, of which $30 billion are available in the form of dollars and foreign currencies. The statute authorizes the Secretary to provide loans and credits for the purpose of maintaining orderly exchange arrangements and the stable system of exchange rates. Historically, it has been used many times in the past to enter into swap arrangements, to finance exchange market intervention and on occasion to provide guarantees.
Mr. METCALF. Thank you very much.
Chairman LEACH. Thank you, Mr. Metcalf.
Mr. BENTSEN. Thank you, Mr. Chairman.
Secretary Summers, just for a point of reference, and this is not my question, but hasn't the United States actually used some of its drawing rights under the IMF, under its agreements with the IMF in the past, in the early 1980's, I think?
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Mr. SUMMERS. In 1978, at a time of substantial currency instability in the value of the dollar, the United States withdrew a portionas countries are allowed to do when they have a problemwithdrew a portion of its quota contribution.
Mr. BENTSEN. So in fact we have utilized the IMF?
Mr. SUMMERS. We have utilized the IMF in that sense.
Mr. BENTSEN. I have a number of questions, I hope to get through them. I have been waiting for a few hours, as you have. First of all, I supported the Administration on the peso devaluation situation. I think that was the right thing to do. The EESF now has more money in it I think as a result of that and we were lucky, but I think it was important, because of Mexico's trading position with the United States and the border we share, among other things. Probably I will support, if it comes to us, something to do with the Asian situation, but we talked a little bit about the 1982 debt crisis, we have talked about parallels with the S&L crisis, we haven't talked as much about the high yield or junk bond market in some parallels that exist, and of course we have Mexico, and it seems we have this recurring trend, sort of hot money or fast money chasing higher yields. And those markets do correct themselves. The junk bond market today is actually pretty good. What is left of the S&L industry is in pretty good shape. The debt crisis seems to have been worked out.
But the problem keeps coming back to these crises that occur, and you talk about transparency and the need for developing structures in lesser developed countries. In your testimony you list the fact that we have gone from 16 countries in 1992 that could issue sovereign debt in the open markets to 56, I think, currently, and I guess the one question I have got, and it makes it harder for myself, and I know it is hard for a number of Members on my side, is the source of external capital is not coming, necessarily, from individual investors. It is coming through mutual funds and pension funds and things like that, but it is being directed by people who are big boys, who are sophisticated investors, and at some point they have to bear responsibility, and I know you addressed that, Chairman Greenspan addressed that, and I realize we had to be concerned about the systemic effects of even a 12 percent part of our trading economy, but, again, at some point, we have to look back and say ''Aren't your analysts, aren't you guys looking a little more closely at what you are investing in and where you are putting your capital?'' Certainly you would think they would and we can't write the disclosure rules for the rest of the world. We can certainly make requests and have international standards, but ultimately they have to decide, but there does have to be some responsibility borne by the investors themselves. And you don't need to comment on it, necessarily. If you want to, that is fine, but I did want to raise that point.
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I also, if I could, wanted to ask, and this was touched on in part by Chairman Greenspan. From what I read with respect to Japan, Japanese banks have almost $38 billion of loans in the Asian countries, an increasing nonperforming status, and in today's Wall Street Journal, in one of the articles, they are talking about an increasing premium that Japanese banks are paying for capital, 20 to 25 basis points over what the market rate would otherwise be. Chairman Greenspan sort of touched on this, but I don't think addressed it, probably didn't want to, but do you see a concern with the Japanese banking system down the road? We have had hearings in the past and it is of course their problem with their internal recessionary situation, but now it is external. Is that a crisis waiting to happen?
Mr. SUMMERS. Let me first say that I share the Chairman's judgment that there is nothing that has happened to date or that is in prospect that represents a threat to the integrity or robustness of the U.S. financial system. I think the Japanese authorities have recognized that Japan faces serious financial problems, have recognized the need to work through those financial problems by disposing of bad assets, off-bank-balance sheets and the like, and that what is critical is that they now carry through with effective policies on the commitments that they have made. I think for them to do so is very much in Japan's interest, and is more generally in the global interest.
Mr. BENTSEN. With the Chairman's indulgence, very quickly
Chairman LEACH. We have two more witnesses, but go ahead.
Page 86 PREV PAGE TOP OF DOC Mr. BENTSEN. If the Congress does not appropriate the funds that were stripped out of the foreign operations bill, can you go forward with the planor can the IMF go forward with the plandealing with the Asian economic situation?
Mr. SUMMERS. The Indonesian program can go ahead, but I believe we will have diminished our own capacity to respond to what the unpredictable future may bring in a way that is detrimental to our national interest, our national economic interests.
Mr. BENTSEN. Thank you. Thank you, Mr. Chairman.
Chairman LEACH. Thank you.
Dr. PAUL. Thank you, Mr. Chairman. I have two questions. One is for Mr. Greenspan dealing with the value of the dollar, which I will ask you, since you have been lucky enough to stay, and I also had a question on the Exchange Stabilization Fund which I think you partially answered. I don't know whether it is to my entire satisfaction, but I do want to bring that up once again. I see the responsibility of us here in the Congress to protect the dollar. I do not see where we should assume that our responsibility here or the American taxpayer is to protect the value of foreign currencies. So that is where I start.
Now Mr. Greenspan in his testimony mentioned that there were significant factors contributing to the problem in the Far East that had to do with real exchange rates and also unsustainable current account deficits, and yet we run an accounts deficit highest in the world, and we have the largest foreign debt. So I would say that this should concern us about the future of the dollar, although the dollar is riding high. We have high real interest rates, and this may well tell us something about the dollar, as well as the price of gold, so the bond market gives us some information there, and those who are concerned about the deflation might just look at the monetary figures showing that M3 right now is currently rising at greater than 10 percent, so I don't think we are on the verge of a rapid deflation here anyway. I would like to suggest, though, that to say that the IMF costs us no money is just a little bit disingenuous. We put probably $50 billion in over the year, and we can't use it for anything else, we can't take it out of there and send it to our Social Security beneficiaries. So just because we don't count it in our deficit isn't quite fair. I mean that, to me, is just a gimmick. It is sort of like us borrowing from the trust funds and borrowing from Social Security and not counting it in the deficit, but our obligations keep going up, our national debt keeps going up. We have an obligation now of $17 trillion, which to me is all pressure on the dollar, and every time we go in to bail out these other currencies, I see this as putting tremendous pressure on the dollar, and I wanted to get your opinion about do you have any concern about the dollar? Shouldn't we be cautious when we do these things? And also on the Exchange Stabilization Fund, you indicate that there is some technical explanation on Exchange Stabilization Fund to allow you to do what you are doing, but is it not true that this fund was never used to bail out foreign currencies before, basically it was set up to protect the dollar? And here we are, we did it in Mexico and now we are doing it again, and if you come up short, I am sure there are plans to borrow more from the Federal Reserve, because if the IMF funding does not go through, you will not have enough money and you are going to need to go over to the Federal Reserve and get the credit from the Federal Reserve. So I can't be convinced that the Exchange Stabilization Fund is really set up to do this, and I am, indeed, concerned about the future of the dollar.
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Just a few years ago, we got 80 yen to the dollar, so the markets can turn down, the economy can turn down, revenues can go down and there is no reason in the world for us not to expect some real burdens here, and my obligation, under my oath of office is to protect the American taxpayer and protect the dollar, not to be carelessly bailing out everybody and our investors overseas.
Mr. SUMMERS. Congressman, let me first just emphasize something I have tried to emphasize in my original oral statement, that the actions we have taken, and will take, are based on our judgment of how best to pursue American interests and are not motivated by any goal of charity with respect to other countries.
On the question of the Exchange Stabilization Fund, I have just been handed legislative language in which Senator Helms explained that the purpose of this amendment, referring to an amendment in 1977, is to specify that the purpose of the exchange stabilization is not exclusively to stabilize the exchange value of the dollar, and, indeed, as part of maintaining financial stability, loans to other countries or guarantees to other countries have been provided on many, many occasions in the past, going back at least into the 1960's. That is not a recent practice. We believe that as Americans, concerned with the stability of our own economy and our own financial system, we have to recognize that that stability can be put at risk by developments abroad and that it is appropriate therefore, as a kind of forward defense of preserving our stability, for us to be supportive of efforts to maintain financial stability in other countries, and that is what we have done through our contribution and our support for efforts at the IMF. The question of the cost of those efforts, perhaps the distinctions are a bit academic, what we have incurred in return for the contribution to the IMF is that we hold an asset represented by our share in the IMF and its financial proceeds. It is a question of what the value of that asset is, but in light of the historical experience, which is that the financial support the IMF has provided has almost invariably been repaid in full and on time, with interest, and in light of the substantial gold reserves that are held by the IMF, I do not feel that we have in any way put taxpayers funds imprudently at risk with our support for the IMF.
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Chairman LEACH. Thank you, Dr. Paul.
Dr. WELDON. Thank you, Mr. Chairman, and I thank you, Mr. Summers. This has been a very important hearing so far. As I understand it, the U.S. stock market is up a little bit today or it's holding its own, but as we all know, it went down about another 2 percent yesterday. You alluded to, in your comments, the importance of the $3.5 billion of additional funding to the IMF, and certainly that is something I am very interested in. In the House here that has gotten tied up, as Mrs. Maloney alluded to, with the so-called Mexico City policy, the policy established by Ronald Reagan back in 1984 that said no U.S. taxpayer dollars can go to organizations that perform abortions or that lobby foreign governments to overturn their pro-life laws, and the Houseand that is very similar to the so-called Hyde language, which is supported by most Americans and most Members of the House and Senate, to not use U.S. taxpayer dollars for abortions in the United States. The House had an overturn of the Mexico City or reinstating the Mexico City policy. Despite the President's claim that he wanted to keep abortion rare but legal, the first thing he did after he got elected was he overturned that Reagan policy. The House reinstated that policy and the President has been opposing that, and what I am very curious about, maybe you can answer this question for me, in an attempt to try to get us through the process here, the House negotiators said to the President, ''You can have your money to go to these international organizations that perform abortions, but in an effort to compromise, we don't want any money to go to organizations that are lobbying to overturn pro-life laws in all these foreign countries,'' and the President said no, or at least his staff said no, and as a consequence, we are at the impasse that we are at. And for me as a legislator, the question I have for you is how serious is the Administration about this $3.5 billion to the IMF, if they are willing to literally allow it to be held hostage like this over something like lobbying foreign countries for abortion? It would seem to me, at least from my perspective, that the White House is not very serious, that it considers spreading abortion on a global basis more important than stabilizing these currencies and stabilizing these markets.
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Mr. SUMMERS. Congressman Weldon, I know that the Mexico City issue is one on which there are very strong feelings on both sides, although I am not personally involved with details of that issue. What I think what I can say is that from a point of view of what I think is an important national interest, maintaining economic stability in our country, that it would be best that these issues not be linked, and a judgment be reached on the merits of providing support through the NAB, which I think is very much in our national interest, and that we reach that judgment, and then that the political process reconcile different views in whatever way is best with respect to the set of issues around Mexico City. But I do not see the advantage, and I see some real risk, in terms of the objective of promoting financial stability to the linkage of the two issues.
Dr. WELDON. Well, certainly, let me say this. Everything is linked, you know. We have in this legislation, the funding for, for example, Israel is in the foreign operations bill, and in there is the money to go to family planning, and certainly I am not opposed to family planning, I certainly supported it, as it was implemented by the Reagan Administration, where they were not taking U.S. taxpayer dollars and using it to perform abortions overseas and to lobby foreign governments to overturn their laws, and I think we have a real international crisis here, and I am quoting Chairman Greenspan when I use that word, I was surprised to hear him say that, yet the President is allowing this to be, you know, involved like this, and I think it is a mistake on his part.
Thank you, Mr. Chairman.
Mr. BENTSEN. Mr. Chairman, can I do a quick follow-up?
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Chairman LEACH. Yes, Mr. Bentsen, but I hope not at great length, but you are welcome to do a follow-up.
Mr. BENTSEN. Very brief. Secretary Summers, with all due respect to my colleague, who is holding you hostage here? Is it the Administration or is it the leadership of the House that has tied family planning with the IMF funding?
Mr. SUMMERS. I believe the Administration is happy to see each of these issues considered on its own merits. I would just want to stress that the IMF does not have any connection, of any kind, to my knowledge, to any issues associated with family planning or abortion, and so it would seem to me to be appropriate to make a judgment about whether, as I and Chairman Greenspan very strongly believe, the NAB is very much in our national economic interest.
Mr. BENTSEN. Thank you. Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Secretary Summers, and I would just like to conclude with the observation that the Administration has certain discretion in terms of issues like that, and that discretion from the Congress is implicitly one that involves consultation, and I hope that the Treasury understands that and that close consultation with our leadership and this committee would be appreciated.
Mr. SUMMERS. We look forward to exactly that kind of close consultation, and let me thank you once again for providing me with the opportunity to present the Department's views on these important issues.
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Chairman LEACH. Thank you, Mr. Secretary.
I would like to ask the next panel if they can come forward. The second panel is composed of Dr. John Lipsky. Dr. Lipsky is Chase Manhattan Bank's Chief Economist, and previously he was Chief Economist at Salomon Brothers; Dr. Robert D. Hormats, who is Vice Chairman of Goldman Sachs, and he previously served as Senior Deputy Assistant Secretary for Economic and Business Affairs at the Department of State. Our third witness is Dr. C. Fred Bergsten, who is Director of the Institute for International Economics. Our fourth witness is Dr. David D. Hale, who is a Global Chief Economist for the Zurich Insurance Group and its investment affiliates. Our final witness is Mr. Jerome I. Levinson. Mr. Levinson is currently a professor at American University's Washington College of Law. He is also Research Associate for the Economic Policy Institute and has served as counsel to Arnold & Porter. We will begin with Dr. Lipsky.
STATEMENT OF DR. JOHN LIPSKY, CHIEF ECONOMIST, THE CHASE MANHATTAN BANK
Dr. LIPSKY. Thank you, Mr. Chairman and Members of the committee, I am John Lipsky, Chief Economist and Director of Research at the Chase Manhattan Bank. I am honored by the invitation to appear today to discuss the recent foreign exchange and financial market instability in Asia. I have submitted a written statement, and I would welcome the opportunity to summarize it briefly.
The principal points I would like to make are, first, global growth prospects will be diminished next year as a result of the financial crisis in Asia. With regard to the United States, Chase Research anticipates that the U.S. expansion will slow to a below-trend pace of 1 percent to 1.5 percent, lower by a half, or 1 percent lower than we had expected prior to the Asian currency crisis.
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Second, inflation risks will recede: U.S. consumer price inflation will remain within the current range of 2- to 2.5-percent next year. By 1999, however, the dollar's strength versus Asian currencies should help to drive U.S. inflation noticeably lower. Thus, the ''Goldilocks'' phase of the U.S. expansion is drawing to a close, in that the recent remarkable combination of solid growth, high rates of capacity utilization and low inflation likely will be superseded over the course of the coming year by a more conventional combination of sluggish growth, modestly rising unemployment and stable or falling inflation. If Chase Research's U.S. growth forecast is on target, the Federal funds rate could be reduced by between 50 to 100 basis points over the coming year, as an appropriate aid to an eventual return to trend growth. Additional reductions in long-term Treasury bond yields also would be likely, extending the recent rally.
For financial markets, this combination of factors points to a repricing of risk, reflecting the significantly heightened uncertainties about the outlook, and an expected reduction in average credit quality. Of course, this follows several years in which improving credit quality helped reduce the risk premium charged to borrowers to record low levels. Even if the recent widening of credit spreads proves to have been overdone, therefore, a return to recent lows would be unlikely. Of course, the international financial situation has not yet been stabilized, and market pressures remain intense. New Asian currency declines would further undermine economic prospects in the region and elsewhere, reducing asset values and continuing the disquieting process of competitive devaluation. In this sense, the current situation contains potential systemic threats. The highly successful efforts of the past 50 years to create an open, multilateral, nondiscriminatory market in international trade and payments cannot be taken for granted.
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The roots of the current crisis are complex and multifaceted. I discuss that topic at some length in my prepared statement. The problems range far beyond simple choices of exchange rate policies. There can be little doubt, however, that the recent set of decisions to depreciate currencies in the ASEAN area, beginning in mid-July with the Thai baht, was handled in a fashion that exacerbated the problems. It was as if a group decision was made to jump into deep water, without anyone checking first to see if they knew how to swim.
Essentially, this is the first widespread crisis of confidence to occur in the 1990's world of securitized global finance; Today, long-term cross-border capital flows are dominated by direct investment and securities purchases rather than by bank loans. Restoring financial and economic stability inevitably will involve efforts by both the individual countries, as well as by the international community, led by the International Monetary Fund. Inevitably, monetary and fiscal policies will have to be tightened and structural reforms accelerated in countries whose currencies have been weakening.
While financial support from the international community for reform efforts may be helpful in some cases, the principal challenge today is restoring policy credibility and investor confidence, rather than in increasing liquidity. These problems will not be solved simply by throwing money their way.
Focusing on the U.S. economy, I see five basic channels through which events in Asia will influence the outlook. Most powerful is the growth channel. Pan-Asian economic growth will slow meaningfully next year. Up to a 3 percentage point reduction in growth prospects is expected and more could occur if the instability in financial markets is allowed to continue. There is an exchange rate channel. The dollar has appreciated by more than 13 percent in trade-weighted terms versus Asian currencies since midyear. This will make American products more expensive to Asians and Asian products cheaper to Americans.
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There is also a wealth channel. The plunge in Asian stock markets has reduced financial wealth, especially of Asian investors, that will further weaken the Asian economies.
There is a disinflation channel. Asia's currency turmoil and the resulting economic slowdown in that region will increase excess global capacity, while intensifying competitive pressures. This will extend the U.S. disinflation trend that has been in evidence for more than a year. Fears of outright deflation, however, are exaggerated.
Finally, there is an interest rate risk channel. Investors' reassessments of risks in emerging markets and elsewhere has led to a sharp widening of yield spreads that will raise the cost of financing, business investment and consumption. Consumer spending here in the U.S. will also be muted by the stock market's recent decline, and, frankly, the potential exists for additional stock market setbacks in response to slowing growth. Plausible estimates of the wealth effect imply that a 10 percent stock market correction would reduce GDP growth by about 1/2 percentage point over the course of the following year. It also seems likely that falling long-term interest rates will do little to cushion the economy in the near term.
Declining Treasury bond yields reflect a flight to quality that has been associated with a widening of risk spreads. Indeed, the fall in Treasury yields in recent weeks has offered little relief to investment grade borrowers, while the cost of financing for most non-investment grade borrowers has risen. Today, the dampening influence of the Asian crisis already is evident beyond the United States as well. In particular, heightened uncertainty about the economic and financial environment has altered the Latin American outlook. This has become widely recognized in the wake of the serious policy tightening that has been undertaken in Brazil. Even in the best case scenario, Latin American growth will slow significantly next year.
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So far, European leaders have suggested that the events in Asia will have only a limited impact on their economies, yet Asian trade is as important for Europe as a bloc as it is for the United States. Such trade counts for about one-third of their total external trade. Moreover, the spillover of the Asian crisis to emerging markets in Europe, most especially Russia, indicates that the impact on industrial economies in the region could be felt sooner rather than later.
In any case, with growth set to slow next year in all of the major non-European countries, it is not realistic to expect that European economies will avoid the effect. The risk, therefore, is that the negative impact on European growth of developments in Asia and Eastern Europe, as well as in the Americas, will turn out to be similar in scope or greater, than that for the United States. If so, Europe's expansion could sink to a below-trend pace, and the already high unemployment rates there could rise further.
The Asian currency crisis is still unfolding, yet it is not too early to consider carefully the causes of the turmoil, so that appropriate remedies can be adopted. As I mentioned earlier, the problems evident today in Asia have deep roots that are both domestic and international. Three of these are particularly notable: One, Japan's unresolved structural problems and troubled financial sector; two, opaque and inefficient domestic financial systems in many Asian countries; and, three, the rapid opening of China to foreign trade and investment, which was accelerated by their sharp 1994 currency depreciation. I explore the causes more fully in my statement.
In the interest of brevity, I will turn instead to measures that we think might be appropriate to halt the crisis. In order to stop the financial instability and restore confidence before even greater damage is done to global growth prospects or, more importantly, to the international trade and payment system, both domestic and international actions will be required. With regard to domestic initiatives, it has become clear that Asian monetary policies will have to be tightened in order to stabilize the region's currencies and calm fears of a new round of competitive depreciation. Until now, even those Asian countries that hiked rates when their currencies came under pressure have been anxious to ease monetary conditions as soon as possible in order to stimulate domestic activity. Protecting the banking system from losses has taken priority over restoring investor confidence, as if the two were mutually exclusive. Official attempts to shield their economies and financial sectors from market forces should be curtailed. Such actions, though politically appealing, have been counterproductive in the extreme.
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The lack of timely financial disclosure earlier had muted the potential for market discipline, while subsidized credits and other aids introduced substantial moral hazard. By now events have gone so far that the credit quality even of sovereign borrowers, particularly Thailand and Korea, has been impaired. The international financial community, led by the IMF, must play a central role in halting this dangerous spiral, which seemingly has grown beyond the ability of individual countries to control. Whatever its limitations, the Fundas a proxy for the international community as a wholeestablishes the guiding principles for international financial relations. Nonetheless, it must be recognized that we are faced with new challenges that require new thinking.
In 1994 and 1995, the Mexican peso crisis represented a new challenge that required an unprecedented infusion of official funds in order to stabilize the situation and restore confidence. In contrast, the current situation represents a policy-induced crisis of confidence. In the current circumstances, the challenge for the Fund is not one of providing additional liquidity. In fact, if a loss of confidence is the problem, no amount of IMF money is enough. On the other hand, if confidence can be restored quickly, official funds might not be required at all. To deal with this crisis of confidence in a world of securitized finance, the IMF should consider alternative mechanisms for supporting policy reform and encouraging better macroeconomic cooperation at the regional level.
Specifically, we would suggest three initiatives. First, the Fund should reinstate its earlier practice of encouraging precautionary standby arrangements for countries that adopt appropriate policy measures but which do not exhibit a clear balance of payments financing need. Thus, countries could benefit from the Fund's seal of approval without sending investors a signal that there is a serious balance of payments financing problem. To a greater extent than in the past, such precautionary arrangements should be activated preemptively in order to forestall a renewed loss of confidence.
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The Fund also must recognize its unavoidable role in guiding investor perceptions about the appropriateness of policies in member countries. I am, of course, conscious of the importance of the Fund's confidential dialogue with its members. Nevertheless, more can and should be done to encourage countries to be forthright about their economic and financial situation, so that investment decisions are based on accurate perceptions of risk and reward.
Third, the Fund should encourage greater regional cooperation in macroeconomic management so that the current cycle of competitive devaluation can be avoided in the future. We learned in the 1930's just how destructive such practices can be. Indeed, setting clear and binding rules for international commercial relations was the principal motivation for the IMF's founding.
The approach I am proposing differs significantly from the conventional wisdom about the Asian crisis. The common view is that the ASEAN countries are being victimized by a combination of poorly chosen exchange rate policies and runaway capital markets.
So-called ''hot money'' is being withdrawn in a panic, so the story goes, suggesting that the appropriate remedy involves little more than providing new external credits in order to restore depleted liquidity, together with flexible exchange rates and perhaps new controls on short-term capital flows. The analysis I have offered today suggests that this is exactly the wrong approach. Greater, not less, reliance on market forces is needed. Transparent domestic capital markets are essential, not new controls. The choice of exchange rate regime is far less important than the application of coherent monetary and fiscal policies within a well-understood framework. Private cross-border capital flows are not the principal source of the regional instability that has afflicted Asia and beyond, and there is no practical possibility that official flows could provide a substitute source of capital.
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Thank you very much.
Chairman LEACH. Thank you, Dr. Lipsky. Let me say to the other panelists, we are in our last day of the session. This panel was set up when we thought Congress would be adjourned, and I would be appreciative if people could bear us some time constraints in mind.
STATEMENT OF DR. ROBERT D. HORMATS, VICE CHAIRMAN, GOLDMAN SACHS INTERNATIONAL
Dr. HORMATS. Thank you very much, Mr. Chairman, I will try to keep this brief, consistent with your thoughts on this. Let me just try to cover in a very summary way some of the key points in the written testimony.
Let me make a point at the outset, and that is that the critical ingredient in managing these problems is, first of all, the internal actions of the countries themselves to improve their own circumstances and put their economies on a stable footing to achieve growth in the medium term, but another critical ingredient is American leadership in this process, and I think this is why this hearing is particularly important and why I commend you and your colleagues for this, because American leadership is the critical ingredient.
The President is fond of saying we are the ''indispensable'' country. We certainly are in terms of restoring market confidence and helping these countries to address their problems, and there are a variety of ways that this affects the world. First of all, in Asia, the position in the United States and Asia is beginning to be suspect in the minds of some Asians, for a variety of reasons, as a feeling the United States is looking inward more and we are not playing as active a role in Asia, politically, from a security point of view and from an economic point of view as we should, and that is a major concern down the road, a major geopolitical concern, but it is also a major economic concern, because Asia is an extremely important, as you pointed out, area for American trade and investment. The question of the NAB is very important here.
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It seems to me that for reasons that Larry Summers mentioned a little while ago, the NAB is critical, both to the IMF, in general, in supporting other potential problems, but also demonstrating that the U.S. is still the leader of the global economy. The U.S. has been champion of open markets and a stable economy and a growing economy for the last 50 years. That is an important symbol of this and particularly it is important to the American economy, because so much of our growth depends on increased exports, and, therefore, we need a thriving global financial market to help with the overall improvement in exports that we need, both to create jobs and because more and more Americans in their pension funds have stocks and bonds of American companies and foreign companies, and if we are talking about pensions and the long-term well-being of America's workers, their jobs and their pension funds increasingly depend on an open global economy.
I know the issue of Fast Track is a divisive one in the Congress, but I do think it is important to say that the failure of Fast Track creates, in the minds of a lot of countries around the world, a feeling that the United States is not playing as active and progressive a leadership role as it can, and Chairman Greenspan made the point a few moments ago that one of his concerns was that some countries would turn inward. My concern is that if they see the biggest economy in the world, the most prosperous economy in the world, the leader of open markets, what they perceive in their view to be moving back from commitment to a global economy, then the pressures in these countries to turn their backs on the global economy will grow, and I think John Lipsky has made an interesting point. The answer to these questions is more use of market forces, more openness to trade, more openness to financial services, and that is what we ought to be promoting. It is much harder for us to do if we don't have our own new trade legislation.
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Then I would simply make one other point, and that is the events in Iraq, if in fact the United States is required to take some action, will have an important effect on the stability of financial markets and we are going to need to demonstrate that we are working with these other countries and other areas to maintain the sort of coalition support that is important in terms of global solidarity, if in fact it comes to that.
The last point, to start this out, and then I will just cover everything else very briefly, is the critical ingredient here is Japan, China and the U.S. working together. They are the three major economies. China is playing a greater role in the region, Japan has an enormous stake in the region, and the U.S., for reasons that have been amply discussed before this committee over the last couple of hours, has a critical role to play. And the Chinese have been very constructive in this, the Japanese for their own domestic reasons have not been able to do as much at home and abroad as they should and the United States has been seen by the region to be somewhat tentative in the case of Thailand and beginning to move back with respect to Indonesia, but there are a lot of question marks as to whether we are going to play the very positive role we should play. Let me just briefly go through a few highlight points of this testimony, and then I will turn it over to my colleagues.
One, the recent currency and financial market turbulence in East Asia is very different from other instances of instability in the post-World War II period. For the first time, financial turmoil in emerging economies of East Asia has caused volatility in U.S. markets, rather than vice versa. The oil crisis of the 1970's and early 1980's demonstrated dramatically to Americans that the United States was part of an interdependent global economy. The recent East Asian turbulence has demonstrated dramatically to the U.S. citizens that the U.S. is part of an independent global financial market.
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One significant cause of the current set of problems besetting many nations in East Asia was that domestic financial systems, particularly banking systems, were not up to the task of effectively absorbing and channeling to productive use large foreign capital inflows as well as large amounts of domestic savings these economies have generated. This is a point everyone has made and I think the banking system is an important problem.
The second cause was the large flow of external capital that these countries enjoyed for much of a decade. There was the creation of the impression of sustained currency stability in these countries, and when that broke apart, it set forth a cascading series of depreciations in currencies. The current multinational crisis is essentially a chain reaction of asset reallocations around the world, sparked by the bursting of asset bubbles created in many of these economies. The adjustment was triggered by the Thai devaluation on July 2, but it really has three distinct phases: Round one after the Thai devaluation; Round two, after a loss of confidence in Indonesia; and Round three, after the Hong Kong Hang Seng correction. The challenge now is to avoid a Round four.
The overleverage that I have just talked about created the vulnerability, but the catalyst for the crisis was basically the result of four other developments during the same period. One was the large effective devaluation of the Chinese yuan since 1994; two, a dramatic decline in China's rate of inflation for the same period; three, a 50 percent decline in the Japanese yen against the U.S. dollar since 1995; and, four, Japanese price deflation over this period.
All of this increased Southeast Asia's relative price inflation, making the region's already strong and relatively rigid currencies more expensive and its products less competitive, thereby increasing external imbalances. And the point that John made, and I think it is an interesting point, competitive devaluations are really an enormous problem and it is extremely important that efforts be made to stabilize the environment to stop that from occurring, and as one of my points here illustrates, the devaluation of the decline of the yen over a period of time has been extremely important.
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I think it is also important, and Secretary Rubin has made this point, Japan cannot get out of its internal problems or expect to by further devaluing its currency, in part because that is going to lead to a widening trade imbalance with the United States, and in part, because if Japan does this, it goes right to this point about competitive currency devaluations and this just causes other countries to engage again in the same process, willingly or unwillingly, because the markets might force them to do it.
Let me just turn very briefly, in the interest of time, to a couple of suggestions for addressing this problem, and I am sure my fellow panelists will have others.
The first priority, I think appropriately, is for the IMF and the U.S. to work together to assist countries most dramatically affected by the crisis to implement domestic policies, to restore stability and to establish the basis for noninflationary growth in the future. The fund needs money to do this, and the NAB is a critical element in those funds. If the fund doesn't have the money, its credibility diminishes and then you do run the risk of competitive devaluations. And we may need money for troubled countries down the road, so that is an important part of it.
Second, I just want to underscore again, only the U.S. can really play the critical role in this process, only the U.S. has the perceived stature to restore market confidence. Then, let me just address the question of APEC, which is important.
Larry Summers is going out to Manila to meet with his APEC colleagues. The President will be meeting with four other heads of state and government in Vancouver this month. I think there are a number of things APEC could do. One is a support fund, to focus on regional issues, to demonstrate U.S. support for the region and help mobilize additional funds to supplant IMF resources. An Asia-only fund is not a good idea, because it implies the world financial system is breaking down into regions, much as some fear the world trading system is today, and that would present a problem. But across a transpacifica group to deal with this problem, with the United States and the Asians, is very important.
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Second, I think it is urgent APEC finance ministers or their deputies meet regularly during this period to press one another to implement sound policies. And there is a third thing. I am a member of a group called the APEC Financiers Group. It's a private sector group that meets periodically with the finance ministers. That group could play a very useful role in generating private support for the sort of market-oriented improvements and providing relevant advice on market reaction to various policy alternatives in the region. I think APEC also should continue to press countries to move ahead on the financial services negotiations within APEC and of course within the World Trade Organization.
Those are very important, because a critical element here is, as we have all said, improving the banking systems of these countries, and many of the things that the World Trade Organization is urging these countries to do in these financial services negotiations is also necessary. Indeed, it would be necessary in any case to improve their banking systems, to create greater transparency, to allow foreign companies to play a greater role in the system, points that Larry Summers made earlier.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Dr. Hormats.
Now we are in the unusual position of turning to Dr. Bergsten, who the United States Department of the Treasury and the United States Federal Reserve Board has said is wrong, at least with regard to Taiwan. So, please, go forward.
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Dr. BERGSTEN. Mr. Chairman, I heard them say that they had no evidence to confirm what I suggested. I didn't hear them say that I was wrong. I will come back to the point.
Chairman LEACH. Fair enough.
Dr. BERGSTEN. I have given you a fairly comprehensive statement and time is tight. I will try to make four central points and do it quickly.
First, the overriding priority at the moment is to avoid a new spiral of competitive currency depreciations. Any such spiral would have enormous effects on world markets, including our own, and would have huge effects on our economy. Our trade deficit is already headed for $300 billion, and John Lipsky has indicated that we will lose half-a-percent of GDP over the next year as a result. If there were a whole new set of depreciations, further eroding our competitive position, those numbers would get even bigger, our economy would lose even more, and, in the short run, markets would be severely disrupted. Avoiding more depreciations has to be the overriding objective at the moment.
To achieve it, the strong countries in the region have simply got to hold their exchange rates where they are. That is why I am so critical of Taiwan. Leaving aside possible political motivation, Taiwan is a country with very strong economic growth, a huge trade surplus, and the third largest monetary reserves in the world. For a country in that position to permit its currency to be driven down sharply, as it did, indeed perhaps to encourage that, is a ''beggar thy neighbor'' action out of the 1930's, and I am amazed that the Treasury and Federal Reserve in essence defended the action of Taiwan. It is unacceptable.
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Chairman LEACH. Let's be very careful, not in testimony before us today.
Dr. BERGSTEN. OK. I hear you.
Chairman LEACH. I acknowledge your correction, but I think you need to be correct, they did not defend the action, they observed about their action.
Dr. BERGSTEN. Fair enough. But, remember the sequence; it is when Taiwan's currency was driven down that the enormous attack on Hong Kong occurred, because the markets rightly said that if a strong country in the position of Taiwan is going to do it, then can or will Hong Kong hold, will China hold, and won't there be a big spiral? Fortunately, the others have held so far, but this is the kind of problem that could trigger a renewed crisis that would make what we have seen so far seem like child's play.
The second big concern is Japan. Very much echoing what Bob Hormats just said. For all its economic woes, and I will come back to that, Japan is the world's largest surplus country and the world's largest creditor country. Why would its exchange rate be permitted to depreciate even as far as it has? That is increasing Japan's trade surplus further, exporting its problems to the rest of the world, ducking its internal responsibilities, and thereby adding to the global problems, hitting us hard as well.
China has done a good job. It was an underlying source of the current problem with its devaluation four years ago. But it has held the line so far on this occasion. Hong Kong, in the eye of the storm, has so far held the line too. It is critical for those strong countries to maintain their positions, or else we will see an enormous new set of market instabilities and hits to our economy.
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The next key point is that the weak countries have to change their policies. Here I am going to include Japan, because its internal economy is weak and its fiscal policy is the worst in the world. It tightened fiscal policy by 2 percent of GDP this year, in an economy that has been essentially flat for the last five years. It is throwing itself into a new recession, intensifying all these problems. It has got to change that policy.
Moreover, it has been doing very little to deal with the world's biggest financial sector fragility. The Japanese have simply got to do what we, after ourselves delaying for a number of years, did with the savings and loan problem: take the bad loans off the books, put in place a Government agency to fund their removal, and get the financial system back in track. If they don't, we are foreseeing another five years of stagnation in Japan, and I have had top Japanese admit that to me. So they have to change critical policies as well.
Thailand and Indonesia clearly have to fulfill their fund programs and maybe go beyond them. Every one of these countries, including notably South Korea now, which is the next potential crisis, have very weak internal financial structures and reforms of the type I described have yet to take place.
The third point is that the United States has to support all of this in a very central way; indeed, it will have to take the lead in many cases, even when we don't want to. We shouldn't have to take the lead in Asia like we did with Mexico in this hemisphere, but, frankly, there is nobody else out there that can or will do it.
I believe it was a bad mistake for the United States not to participate in the initial Thai rescue program. Why didn't we? The Administration says it is because it didn't think that the Congress would support it. I realize the difficulties in the Congress. I have been hearing them for the last four hours up here today. But, we simply have to make a better effort so that everybody can understand the stakes involved for the U.S. economy, the plight of American workersincluding as investorsin terms of jobs, price stability, and the like if the international system is permitted to go leaderless, as it will without the United States.
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I am glad that the United States came back and participated in the Indonesia package. Unfortunately, you can't do everything you want in a country, as Mr. Frank has pointed out, through these IMF support programs. I have been in Indonesia eight times in the last three years. I support Mr. Frank's statements about the need to improve worker rights, democracy and equity in that country. But I don't think we can use an IMF rescue package in the midst of a global financial crisis to do it. We have to work on it every way possible, through every structural device possible, but I don't think we should make that linkage.
The third policy step for the United States is the linkage between these financial issues and trade issues. Countries in the face of financial crisis are tempted to restrict trade. A headline in the Financial Times today notes that Argentina and Brazil have raised their tariffs 25 percent. That is because they are using that device to fight a financial crisis. It won't work. The markets know such steps are ad hoc devaluations, so they won't even succeed in the short run, but it is an indication of how countries will move on trade if the trading system is not moving forward.
I don't say that happened because the Congress didn't pass Fast Track last week, but if the U.S. doesn't get back on track on the trade side, we are going to see more market barriers around the world. We are going to see a retreat from open markets. That too is going to hurt our economy very badly.
I don't want to conjure up specters that are too bad, but we have had a period of several decades of growing international consensus in favor of our modelopen markets, privatization, cooperation, and support. If we back out, if we don't go ahead with trade liberalization, if we don't support financial arrangements, other countries are going to back away, as surely as night follows day, and that is going to be bad for us.
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Final point that is beyond the immediate crisis response, which has to be the focus of the day, is that we again have learned from this crisis that our current system isn't working; the early warning system failed. People knew Thailand was in trouble, but it didn't act, and the crisis broke. The financial support system didn't succeed either; the IMF had all sorts of programs, but Japan had to cobble together an ad hoc response for Thailand. We cobbled together an ad hoc response for Indonesia. The system is still inadequate.
Two things are needed. One is a new kind of multilateral surveillance procedure at the regional level, probably through APEC, in which the peer pressure approach that the Asians like to use could be mobilized for this purpose. The IMF advised that Thailand was in trouble, but Thailand didn't act. What you have to do is get pressure from other countries to translate the good advice into preventative action. The neighboring countries are the best candidates, because they are the ones who will be hurt if action is not taken.
I therefore think that APEC at the Vancouver Summit in ten days should institute new consultative arrangements intended for that purpose. I was delighted that Deputy Secretary Larry Summers said today that he now supports a new regional surveillance mechanism of that type. I believe it can be launched in ten days at the APEC Summit in Vancouver.
The second point is to put in place a new financial mechanism. The problem with the IMF, even when augmented by the New Arrangements to BorrowNAB, and the General Arrangements to BorrowGAB, is not that the IMF doesn't have enough money. It is that the amount of IMF lending to a given country is limited by that country's quota in the IMF. Even with generous multiples700 percent for Mexico, 500 percent for Thailandthe IMF lending could only be a modest share of the total resources needed, because of the IMF quota system. Therefore, you need additional funds to be used along with the IMF programs, funds that are fully in support of IMF programs, to avoid moral hazard risk. But that would not go through the IMF. That is why I believe that an APEC regional fundnot Asia only, but including the U.S. and othersis a necessary additional step so you don't have to rely on ad hoc, episodic, fortuitous circumstances to see whether you can do it in the teeth of a crisis.
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Again, I believe that the APEC Summit at Vancouver can put something of that type together and should do so. The meeting at Manila next week is a step in that direction. I certainly hope our representatives, hopefully supported by the Congress, will want to move in that direction.
Chairman LEACH. Thank you, Dr. Bergsten.
STATEMENT OF DR. DAVID HALE, CHIEF GLOBAL ECONOMIST, ZURICH KEMPER INVESTMENTS
Dr. HALE. Thank you very much for the opportunity to speak at your hearing today.
The first point I would make is we are discussing the second most important financial crisis to occur in the aftermath of the Cold War. The first was the Mexican crisis of two years ago, but this crisis already differs significantly, both in quantitative and qualitative terms, from that crisis.
Chairman LEACH. Excuse me. Could you bring the mike a little closer?
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Dr. HALE. We have seen far greater financial contagion from this crisis on a global basis than we saw in the aftermath of the Mexican peso devaluation two years ago. We have not just had a wave of competitive devaluations in ASEAN, we now have a major financial crisis evolving in Korea, we have a major financial crisis evolving in Brazil and we have the possibility for further spillover effects in other countries, in places as far away from Asia as Estonia on the Baltic, Poland and South Africa. This phenomenon is occuring because of the tendency of the emerging markets to move together as a result of the compartmentalization of portfolio flows and the way money is managed in the financial system today.
What I would like to do right now is focus on the issues of cause, effect, and consequence.
First, to summarize the cause, it does reflect a mixture of macro and microeconomic factors, and I think there are three sort of central factors that explain it. The first was the whole nature of the exchange rate that East Asia has had over the last decade. That system of pegging to the dollar worked very well in the 1980's in helping to encourage low inflation and giving Asia a reasonable anchor for its interaction with the world economy, both in terms of trade and capital flows. But in the 1990's, in this new era of tremendous growth of capital mobility, both through securities markets as well as bank lending and foreign direct investment, it did encourage the corporate sectors of many Asian countries to become significantly overleveraged in U.S. dollars, in foreign currency, and not to have any effective hedge for it. And I would stress this is very different in qualitative terms from the Latin American financial crisis of 10 and 15 years ago, because those crises typically came from public sector deficits, from governments becoming leveraged in foreign currencies, and then defaulting in a sovereign sense, not through corporate failures and corporate bankruptcies.
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The second dimension to the crisis was the access to low cost foreign capital and how it interacted with the capital allocation systems that exist in many Asian countries to produce significant misallocation of investment. In the case of some countries, such as Malaysia and Thailand, we have had significant overinvestment in commercial real estate and various infrastructure projects that are perhaps larger in fact than the countries actually need in the short to intermediate term.
In the case of South Korea, we have had a massive overinvestment in various forms of industrial capital stock. Korea has created significant excess capacity for itself in sectors such as semiconductor, steel, petrochemicals, and so on, with the result that many of its largest industrial conglomerates today are bankrupt and the Korean banking system is now confronting such a large stock of nonperforming loans that publicly disclosed information about the balance sheets and income statements of Korean banks indicate those loans could be worth more than 200 percent of the country's bank equity.
The fact is, Korean companies in the modern period have not focused on profitability. They have focused simply on maximizing the growth of assets and market share. So we have had a different method of allocating capital compared to this country and other industrial countries, certainly English speaking countries, and the result has been to produce now a banking crisis that is leading to a significant decline in the currency and probably will in the year ahead also lead to trade tensions.
A third dimension of the crisis also mentioned here today is that China did have a major devaluation four years ago. This has had some secondary effects on other countries in the region, both in terms of China gaining more access to their markets, but also for competition in third markets. I would also add in the textile and footwear industries, countries like India and Bangladesh are now also becoming major players, imposing a competitive challenge to producers in countries that had low wages in the past, such as Indonesia and Thailand and indeed even China, perhaps.
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In terms of analyzing the effects of the crisis, I would just repeat some of the points that have been made previously, but also add some additional data. The first point I would make is this has to be a shock to world economy, because since 1990, the countries of East Asia, excluding Japan, have accounted for half the growth in world output. If we had not had this Asian economic boom since 1990, the world economy would have been significantly weaker. Indeed, Japan would have probably had a much more severe recession, because of its high level of trade and commercial integration with the countries of East Asia.
Second, these countries have had significant overinvestment compared to other regions of the world. The average rate of investment in the countries of East Asia is in the 35- to 45-percent range, compared to 15- to 20-percent in many other regions. As a result, these countries have accounted for two-thirds of all capital investment in the world economy since 1990. Indeed, last year capital spending in East Asia, excluding Japan, was equal to almost 85 percent of U.S. business investment, compared to only 30 percent ten years ago. These devaluations will therefore unleash into the world economy a significant amount of new productive capacity, significant price discounts compared to where we were six years ago and have a disinflationary effect on the goods markets in sectors such as textiles, footwear, petrochemicals, steel, electronics, and so forth. This will have an adverse effect on the U.S. trade account. I would guess when we add up the effects of the recession now developing in Asia with the effects on exchange rates not just in Asia but also still evolving in places as far away as Brazil and Mexico and Poland and South Africa, that the U.S. trade deficit by the beginning of 1999 could be approaching $300 billion. This trade deficit is in many ways benign, it is an inflation safety valve, it is allowing us to have a higher rate of economic growth than would be possible, given our full employment economy, our high level of domestic resource utilization, but there is no doubt in my mind, a 12- to 18-month view of the large increase in this trade deficit will become politically controversial. Indeed, the Fast Track legislation was basically lost last weekend in the American Congress, despite the fact we currently have a full employment economy with a trade deficit of less than $200 billion. The magnitude of the coming trade shock will be, I think, disruptive and controversial and probably lead to protectionist sentiment becoming stronger in this town than it has been in recent years.
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Finally, the magnitude of this crisis in the Asian countries will create shocks in the global banking system. These countries have imported over the last decade hundreds of billions of dollars of capital. I would guess that global banks will have losses on their Thai loans in the 20- and 25-percent range, on Korean loans in the 10- to 20-percent range, and for other countries in the region, probably numbers in the range of 5- to 10-percent. This will not happen all at once, but it will, over the next two or three years, be a dent in the profits of various banks and again be a major challenge for the Japanese banks, because they already have a major banking crisis at home. They have got significant losses still to be recorded on the real estate loans and other asset inflation loans that occurred occurring during the 1980's.
So now we move to the policy consequences. Obviously this is an issue we can debate for days, for hours, for years, but I think a few points stand out. First, it is clear to me that if we had not had the IMF play an active role this summer, albeit a modest role so far, the crisis might have been worse. There is no doubt the intervention of the IMF did give the market some hope that there would be a combination of coherent economic policies, as well as greater access to foreign exchange reserves, to both reform the economies and also stabilize the exchange rates. In the absence of IMF intervention, the currency depreciations might have gone much further. And I would add we still have a major crisis unfolding in Korea. I can easily construct scenarios where over the next two or three months Korea could be compelled to seek a loan far greater than what has occurred so far from the IMF, because of the scope of its domestic financial problems. Indeed, there is already widespread speculation in the financial markets in Tokyo, Hong Kong, New York and elsewhere, that Korea may need between $50- and $80-billion of assistance in the year ahead to cope with its financial problems. This is an awesome number because the current, underutilized resources of the IMF are somewhere in the range of $50- to $60-billion. The IMF can call upon other resources through expansion of quotas, through the New Arrangements to Borrow and so on, but the fact is this will require additional legislation in this body, as well as active policy changes by other countries. In the very short term the IMF could not cope with Korea's potential financial needs. It would have to be some kind of international loan arrangement encompassing not just the IMF but other countries, contributing on the scale of perhaps $40- to $50-billion, and needless to say it is hard to imagine a program on this scale unless the U.S. is playing an active and important role.
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The second issue that is clearly coming out of this crisis, and this issue was very apparent in the case of the Mexican crisis two years ago, but now has magnified further, is the need to improve bank supervision. This is a very simple proposition, not one that requires much elaboration, but again it is quite striking to me that two years after the Mexican crisis, both international banks, as well as international organizations failed to move more quickly in addressing the magnitude of the problems that were developing in countries such as Thailand, because of the very inefficient allocation of capital that came on the back of their exchange rate links with the dollar.
Third, as Fred Bergsten just indicated, this crisis once again raises questions about the whole nature of the global exchange rate system. Are floating currencies going to be optimal in the long term if we are going to have harmonious trade relations, and when you have devaluations on the scale and of this magnitude encompassing so many countries, how can we prevent an upsurge, not just of the protectionism of the old industrial countries but, as we have seen in recent days, even in developing regions? This is obviously one of the most complex questions, one that has been debated indefinitely, since the collapse of Bretton Woods in 1971, but it is one I think we will have to revisit in the near future, because of the sheer scope of the shocks we are going to be experiencing in the next 12- to 18-months and the fallout that could occur for the trading system.
And finally, as previous speakers have mentioned, the U.S. will have to define its role further this winter in how it copes with the coming crisis in South Korea. We did abstain from playing a role in the Thai program, because of concern about the potential adverse reaction. Then, because we had volatility in our stock market, not just in Asian stock markets, the Treasury dared to play a role in the Indonesian program. I would stress to you right now we are on the verge of a further major financial crisis, beginning with what we have experienced so far, because of the scope of Korea's problems, the possible effects of this on the Japanese yen, the Tokyo stock market, and then the spillover effects on markets in Europe and North America.
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I can't quantify it precisely, but I could easily build scenarios for very, very significant stock market corrections to come if the Korean situation spins out of control and there is not an effective international program to deal with it. And needless to say, this could also have military implications that might cause North Korea itself to become more assertive if it felt that South Korea was consumed in some last great crisis of its form of capitalism, a form of capitalism that has given her very inefficient resource allocation and now a busted banking system. So we will have to keep an open mind, I think, over the next two or three months on this question, because there is no doubt in my mind, as I look at how this crisis has evolved, that Japan and China and other countries in the region will not be able to provide an effective leadership role without a major role also being played by the U.S. And indeed I shudder to think that if we really do abstain from the coming crisis in Korea, that Korea might be forced to turn to a country such as China simply because the resources won't be available in this country, and a combination of us failing to play an effective role in the Asian region in the aftermath of the Fast Track vote would be, I think, a very negative set of signals for the international economic and financial system as we move into the final years of the century. I would also stress this would have domestic consequences.
In my opinion, the great market we have experienced in this country in the 1990's has been a byproduct of the process we call ''globalization.'' There is no doubt in my opinion we have been able to achieve a full employment, low inflation economy, that dramatically increased U.S. equity prices, because of the impact of globalization on the inflation performance of this country, on our capacity to combine full employment and high levels of resource utilization with a benign price environment. If this international order is now threatened by an ineffective American policy response to this crisis, we will see it in asset price declines in this country in the year ahead. The fact is, 45 percent of the American people now own equities. We have a stock market whose value is 120 percent of GNP, compared to a previous high of 82 percent in 1929, a 60 year moving average of 48 percent. You will hear about that market decline from your constituents, because so many now are very much a part of the equity market as a result of the tremendous changes in the last seven or eight years with the boom in mutual funds, the boom in defined contribution pension plans and so on.
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So there is no way we can isolate ourselves from this crisis. We are going to be affected by it, whatever we do. The challenge for us is to develop an effective policy response so that we can in fact influence and guide the outcome.
Chairman LEACH. Thank you, Dr. Hale, a man who I am sure has sold most of his stocks.
STATEMENT OF JEROME I. LEVINSON, PROFESSOR, WASHINGTON COLLEGE OF LAW, AMERICAN UNIVERSITY; RESEARCH ASSOCIATE, ECONOMIC POLICY INSTITUTE
Mr. LEVINSON. Mr. Chairman, thank you. And as the last speaker and the one farthest to the left, I will necessarily be the briefest. I want to make just three points.
First, we have had a tendency to look upon the questions of democratic institutions, worker rights, and those elements as ancillary, feel-good, do-good elements in this international trade investment and finance regime. And what I want to suggest to you is that the crisis, which is cast in financial terms and discussed primarily in financial and economic terms, has its roots basically in politics; that, in fact, the absence of institutions which could demand accountability in the Indonesian context are an essential reason why and integral to the evolution of this financial crisis and economic crisis in Indonesia.
Page 117 PREV PAGE TOP OF DOC Why? Because you have had a government which has been without any constraints. You don't have free trade unions, you don't have a free press, you don't have an independent judiciary, and you don't have an opposition political party. So a surrounding clique, the Suharto clan, is able to assemble enormous financial interests in virtually every economic enterprise in the country and make uneconomic investments, borrow indiscriminately in the financial markets, in the belief that this was going to continue indefinitely.
And then we can replicate this again in some of the things we have heard here today. Why are Koreans overinvested in the Chaebol, which expanded because their dynamic is growth, where were the constraints? Which asks, does this make sense within the Korean context, where were the constraints within Indonesia?
There are no constraints, and consequently, what we have is a discussion of remedies which focus almost exclusively around the financial and the economic.
We are told that we should not raise issues with respect to worker rights, because the time is one of ''crisis.'' Well, that would be more credible if any of the people who raised that objection now, from Mr. Summers to Dr. Bergsten, when there wasn't a crisis, had stood for worker rights and had demanded the effective implementation of the Frank-Sanders Amendment.
Mr. Sanders spoke about the implementation of the Frank-Sanders Amendment. We have yet to see the United States Treasury vote against any loan in any multilateral institution regardless of how egregious the abuses have been in worker rights. So if not now, when?
Page 118 PREV PAGE TOP OF DOC They didn't do it when there was, so to speak, calm. We are told that it couldn't be done in the Fast Track negotiation, or it shouldn't be, that this was not part of the trade and investment regime. This whole discussion has been miscast in terms of international trade. The North American Free Trade Agreement is misnamed; it is a North American Free Trade and Investment Agreement. NAFTA had chapters on intellectual property and protection of investments. If Fast Track went down, then part of the responsibility surely has to rest with Members of this distinguished panel, among others, for failing to understand that this increasingly open investment regime, where capital could move with previous restrictions having been removed, needed to be complemented by minimal standards with respect to worker rights and with respect to environmental considerations. And because that was not perceived to be the case, the base of support in this country did not, and will not, exist for what we are going to face in the coming year or so.
Now, reference has been made in sufficient detail, it seems to me, about the consequences for the decline in exports from the United States to the Asian region. But what has not been given sufficient recognition is that this is also spilling over, as well, to Brazil. Some reference has been made to that. Brazilian industry has historically been able to turn around on a dime when the domestic economy closes and export.
So you are going to be adding Brazilian exports to the Asian exports. What markets are they going to be exporting to? They are sure as hell not going to get their industrial exports into Japan, and they are sure as hell are not going to get them into the European Community with unemployment rates of 11- to 12-percent in Germany, France, and so forth. So where are they going to export to?
Page 119 PREV PAGE TOP OF DOC They are going to do what they did to export their way out of the debt crisis in the early 1980's, they are going to export here; and if Dr. Lipsky's forecast is correct, that this is going to coincide with the slowdown in the American economy, with rising unemployment, the combination of this explosive deficit that has been described, and the visible increase in Asian and Brazilian exports, in particular to this country, is going to create a domestically explosive political situation which will make Fast Track look like a tea party.
You can't underestimate also the effects in Latin America of the Brazilian situation. The Brazilians have been carrying the Argentines, particularly with respect to exports, employment-sensitive automobiles and automobile parts, to prevent the United States from splitting Argentina apart from the Brazilians.
Well, the Brazilian slowdown means there is going to be a fall in Argentine exports. It is highly dubious the Argentines are going to be able to maintain their economic program, so we are going to have a ripple effect through here, in which everybody is going to be looking to solve their problem by exporting to the only open market that exists, which is our market.
Combine that with the total imperviousness to these elements of worker rights and environmental considerations as part of this open trade and investment regime which we have seen as part of the Fast Track debate, and the admonition that we shouldn't raise this in the context of a crisis situation, and we can't raise it in connection with Fast Track, and we can't raise it in connection with the Treasury's refusal to invoke the vote of the United States in any of these international institutions.
Page 120 PREV PAGE TOP OF DOC So, in effect, what they are saying is, we can't raise it, period, and as long as that perception exists, of this imbalance in this emerging more globalized economy, which is shorthand for the ability of capital to move indiscriminately and seek out the lowest-wage jurisdictions with the most repressive labor relations system and the lowest environmental standards, you are going to have a growing perception in this country that this system does not work for ordinary working men and women; it is ordinary working men and women who faxed their Congressmen, who wrote the letters, who ran the telephones, and who demonstrated when their Congressmen came home.
It seems to me that the missing element in this whole debate is the absence of any balance and any understanding that the Indonesian financial economic crisis arises integrally out of the absence of any institutions of accountability; and at some point, you have to begin to address that, and you might as well begin now by demanding effective implementation of the Frank-Sanders Amendment, which is only one element. It is not a panacea, but at least it begins to introduce one element, because if you had free trade unions, they might have asked, ''If you can't grant us wage increases, but you can make all these crazy investments, how come?''
Thank you very much.
Chairman LEACH. Thank you, Mr. Levinson, and let me also thank Mr. Frank for suggesting you as a witness. I think you have added a different dimension to the panel on issues that should surely be raised.
Let me make a couple of comments and then turn to several questions.
Page 121 PREV PAGE TOP OF DOC First, coming back to Taiwan. Dr. Bergsten, of all the prominent public policy economists, has probably spent more time emphasizing the exchange rate issue and putting it at the forefront. And basically, with regard to the Taiwan observation, let me say sitting here and listening to Treasury, I was struck by the lack of attention to Taiwan. I thought that was quite noticeablerather than any approval.
As one who follows Taiwan affairs more than some, I would certainly suggest that probably of all governments in the world, Taiwan's is probably the single one most capable, with ease, of affecting its own exchange rate, given the nature of its society and the size of its reserves. And so, clearly, I think a signal from this country should be, given the strength of its economy, there is probably no society that should be leading any competitive devaluation effort more than Taiwan.
As most people in economics know, there are always some winners with devaluation, but there are a lot of losers too, so it isn't as if America would be giving Taiwan advice against Taiwan's own interest, because I think a strong Taiwanese currency is probably well in the interest of the Taiwanese people.
With regard to Japan, I think the total size of currency flows are probably a little larger than for governments themselves to manage, and I think one has to be very cautious about suggesting that Japan itself, particularly well manages its own currency relationships. Sometimes that is the case, but I think it is increasingly not.
With regard to Mr. Levinson, let me just make the observation, I think you have tied back, in Fast Trackas several people here didto this debate profoundly, but one of the aspects of Fast Track is the idea leading to agreements in which all sides can cut back on tariffs. And since the United States has the lowest tariffs, if we don't do anything, that implies the United States will be the major dumping ground without our capacity to insist that the Brazilians and the Argentinians, that are demonstrating the capacity of wanting to raise tariff rates, will be less able to if we have agreements in that part of the world. And so if we are going to have open foreign markets in Latin America or elsewhere, there is a reason to have Fast Track which, after all, leads to, most seminally, reduction in other countries' tariffs.
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And so in a world in which we might well be seeing competitive, not only devaluations, but competitive tariff raising, Fast Track, which leads to international agreements on trade, could well be the best technique to keep other countries not only from not raising tariffs, but from causing them to lower tariffs, as the antidote to a recessionary circumstance, instead of the other way around.
But I would like to come back. Dr. Bergsten made the recommendation that we have a new APEC fund, as I understand it. And I would only say that new funds are hard to set up, and we have institutions that exist; and one of the questions that seemed seminal to me is that we have on the table a New Arrangements to Borrow, which is about a $3.5 billion U.S. commitment, and we represent, let's say, 20 percent of this arrangement, so that in total we are talking five times that, so $20 billion or so in the fund.
We also have on the table a replenishment of the IMF of a substantially higher magnitude of approximately four times that to five times that.
It strikes me that the IMF mechanism which impels burdensharing, where the U.S. is a fifth participant, is the better technique than coming forth with new arrangements that I think there are a lot of reasons the American people, through their elected representatives, might have doubts about; and shouldn't we, as a Congress, be looking at the full replenishment of the IMF that has been agreed to by the United States Administration, plus the NABthe New Arrangements to Borrow, as first priorities?
Let me ask the panel, beginning with you, Dr. Bergsten, because you raised it, and then the other economists.
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Dr. BERGSTEN. I certainly strongly support both of those initiatives and think they should be the priorities. The problem is the one I mentioned briefly in my statement, that when it comes to lending to an individual troubled country, be it Mexico or Thailand, the constraint is usually not the shortage of resources in the fund, but how much the fund can lend to an individual member country, which has a quota.
There is a way to reform the IMF process. Instead of viewing a Mexican loan at 700 percent of quota as an abnormal thing that is hard to get done, we must come to a policy judgment that when you do have a rescue package of this type, you not only go to a multiple of quota, but go to a much larger multiple quota. The problem is that, with the Europeans and others putting limits on how much the IMF can lend to a given country, the amount of lending is simply not enough, as revealed by what has happened in Mexico, Thailand, and now Indonesia.
Chairman LEACH. Why can't you simply change the percentages?
Dr. BERGSTEN. I would support that. I think you are right; it is better to avoid new funds. My proposal for the new fundthe Japanese proposal, the different variantsis a reflection of this shortcoming in the IMF system, which I think has not gotten much attention. I would recommend that, as you pass the NAB, you put in, at a minimum, a policy statement that the IMF should greatly increase those multiples so it can be preferably the whole source of lending in a crisisat a minimum, it can provide the great bulk of lendingin order to preserve its central role on conditionality.
Chairman LEACH. I appreciate that. Thank you.
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Dr. HORMATS. I think that, given the constraints you are under and sensing the tone of this discussion, I accept your point that it would be awfully hard to get money for another fund; and my view would be that the highest priority is to pass the currently pledged money for the NAB, if you can, as soon as possiblecertainly before the Congress goes outbecause that will be the highest priority, that will be symbolically very important, and it gives the IMF additional resources which it is going to need. Because I think the general tone of this panel is, there could be an emergency down the road, and not very far down the road, for the IMF. To have to confront that emergency without the funds that are put forward in the NAB would be an enormous problem, and then there would be more pressure for bilateral money, which would be even harder to get out of this Congress, I assume.
Chairman LEACH. Dr. Lipsky.
Dr. LIPSKY. Thank you, Mr. Chairman. I have two comments.
First, I am very sympathetic to the notion that the IMF needs to be given access to sufficient resources to make it a credible force in dealing with situations that might arise. Beyond the practical considerations of setting up a regional fund, I am somewhat skeptical of whether that is a useful concept in the current situation. One, some of my skepticism is because of the increased regionalization of economic relations.
We all talk about globalization, but the data tell us that the world in fact has become more regionalized in recent years, not more globalized. If there are problems within a region, they are likely to spread quickly within the region, as we have just seen. In other words, trying to raise funds within a region, in a time of emergency, is likely to be a difficult business.
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Furthermore, such a proposal creates the idea that the way to deal with these problems is by increasing liquidity in the hands of official organizations to be doled out in emergencies. I am not quite convinced that that is the right way to focus public efforts.
Korea is an example. The problem in Korea is a crisis of confidence in the context of a fragile banking system. It is not clear to me why large amounts of official external funding is the right way to solve their problems. Those problems, just as we found in the United States in dealing with our financial fragilities in the 1980's, are essentially an internal issue, and do not necessarily create large needs for external funding.
Chairman LEACH. Thank you.
Dr. Hale, did you want to comment?
Dr. HALE. There are risks for the regional approach, we saw in the second quarter with Taiwan. For several weeks and even several months, we thought it could avoid going to the IMF by getting help from other countries in the region that might be more sympathetic and less demanding in terms of micro and macro reform, and indeed it did in various meetings of the so-called East Asian Monetary Authorities, in Shanghai and so on, seek out the possibility of getting aid independent of a traditional IMF framework.
Governments in Japan and elsewhere realized what this meant basically is subsidizing and supporting an ineffective and corrupt government in Bangkok. They decided they did not want to take responsibility for providing that assistance, and then turned to the IMF to, in fact, do the dirty work and provide the prescriptions for reform and so on.
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So, I think that our limited experience with regionalism tells us we don't want to go too far down that road. I think that because of the constraints on the IMF, the financial constraints right now with the quotas and so on, there is a case perhaps in the short term, organizing a regional fund to reinforce it; but if we create a truly independent, autonomous body with its own secretariat and so on, it could in the end rival the IMF and could create new tensions.
Chairman LEACH. Thank you. My time has been well expended. If Mr. Levinson wanted to make a brief comment.
Mr. LEVINSON. If I might, just a brief comment. Mr. Camdessus is quoted in today's paper as reassuring the Indonesians that if they take the measures recommended by the IMF, they will emerge stronger. I think this is exactly the wrong message delivered by the wrong messenger. In effect, what he is telling them is, just take these financial correctives, although the IMF program goes somewhat further in terms of calling for the dismantling of some of the important monopolies, the closing of some of the banks, and so forth.
But in effect, he is saying, ''You don't have to deal with worker rights, permit free trade unions, you don't need an independent judiciary.'' He isn't saying that explicitly, but implicitly by limiting himself and saying, ''All you have to do is take care of these economic financial things and you will emerge stronger.'' No, they will still have the same lack of institutional constraints which led integrally to this crisis, so he is giving the wrong message which shows, in my opinion, the limitations of the IMF approach to the problem.
Page 127 PREV PAGE TOP OF DOC Chairman LEACH. Thank you very much.
Mr. FRANK. Thank you, Mr. Chairman.
Dr. Bergsten, you said you agreed with some of the things I raised about Indonesia, but that this is not the time to do them. How would you do them?
Dr. BERGSTEN. As you said rightly and Mr. Levinson said, these are long-term, fundamental, structural problems.
Mr. FRANK. I didn't ask what they were. How would you do it?
Dr. BERGSTEN. I would work on them as long-term structural matters.
Mr. FRANK. How?
Dr. BERGSTEN. When the World Bank goes to make a sectoral loan for education, training, or specific industrial sectors, that is the place to involve labor concerns of the type you raise. When you talk to the country about its overall trade policy, and I have no objection to linking it to trade policy, you can do that tooin APFC, in the WTO, in our bilateral efforts.
Page 128 PREV PAGE TOP OF DOC Mr. FRANK. Let me ask you. See, here is part of the problem I am having. When I say ''I have no objection,'' that says something I am not really for, and I think that is a general human trait. ''I have no objection'' means, ''OK, I am not going to stop you from wasting your time.'' There isn't the passion when you talk about that. I mean, let me ask all the panelists, and maybe you don't all take this position, but in your work and in your writings, can you show me where you have advocated that we take some specific steps and might try to use our leverage to advance
Dr. BERGSTEN. I can send you a number of those, and I will; but I don't think they're going to save the world. Mr. Levinson argued that, had efforts of that type been made, the Indonesian situation would be 180 degrees different. But, country after country with good worker rights, with lots of unions, with all the things you want, also have financial crises.
Mr. FRANK. But do you think the things you proposed will save the world? I mean, I think ''save the world'' is a somewhat unfortunate term.
And now I just want to comment for the record, I think you reinforced my view. Unlike some of my liberal friends, I really agree with many of your specific prescriptions. I know there are some differences in the margins, and I am not enough of an expert to choose them.
I do believe in the market. I believe more in the market than most businesses in America, because I have sat in committees and listened to the bankers tell me why nobody should go into banking, and the securities industry tell me why nobody should go into securities but them, and the insurance industry tell me that nobody but them can go into insurance; and I have listened to the cable industry and the broadcasters and the long distance people and the short distance people all tell me why nobody but them can do what they do. They all think competition is a spectator sport and they spend more money keeping other people out of their business than they do trying to get into anybody else's.
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I do believe the market will be helpful. I also believe, at two levels: one, I believe there has been inequity in the way in which the fruits of the Goldilocks economy have been distributed, the porridge ain't getting to everybody, but whether you agree with that or not, there is no room for argument that that is the perception.
And here is my problem with the business community, of which you gentlemen are among the most articulate and thoughtful representatives. You tell working people, labor unions, environmental groups and others that while the goals they are pursuing are important, the fact that Indonesia is smoking out the world while we are sitting here and nobody is talking about trying to make a deal seriously with that. You say, ''those goals are important, but in the interest of the greater good you have to downplay them.'' ''How about a little sacrifice?'' you say. ''How about recognizing the overarching importance of the economic growth?''
I think in real terms that is true. I do think the economic growth is helpful. But I think you don't take what you prescribe, because the business community on the whole has been unwilling to make the kind of ideological compromises that you are urging others to make.
If there was, on the part of the business community, some willingness to say, ''OK, we will look at equity.'' You are telling us to tell American workers that they should support globalization, even though in the short term some are going to lose their jobs. But they are not just going to lose their jobs; they are going to lose their health care. And until you help us deal with loss of their health care, they are going to tell you, ''the hell with your globalization.'' And the problem is that you talk about, as I said, other people compromising their ideological goals. But the business communityI don't mean you individualsbut you, as representatives of the business community and the financial community, aren't prepared to do similar things. And you can all talk articulately about how this would be in their interest and we should pass Fast Track, and it isn't going to happen.
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I agree with what Dr. Hale said about the likelihood of this getting worse rather than better if things turned down. If you couldn't get Fast Track passed now, with Bill Clinton and Newt Gingrich working togetheryou know, this is the real campaign reform; and they shook hands about campaign reform, but they cared about Fast Track.
You had all of the energy of two very skillful political leaders, Bill Clinton and Newt Gingrich, in the midst of an economy which has been performing better and has unemployment very much lower; and you still couldn't get Fast Track, because many of us, including many of us who think in the end that is a good thing, said we really believe if we give this up, we can kiss equity good-bye. We will continue the trend of labor unions being eroded, of health care being cut back.
I just read a new thing. Fewer and fewer people now are buying the health care being offered to them, because it is costing them too much, particularly lower-wage people. When we talked about raising the minimum wage on the whole, the business community patted us on the head and they said, ''Oh, yes, yes, there you go again, you want to do equity, that is very admirable, but you are not going about it in the right way.'' And you are always telling us, and Mr. Levinson used the phrase I was going to use, ''If not now, when; if not in this context, in what context?'' I think that is an old saying from the Hebrew.
But the point is, you have to understand, as a pragmatic factor, the kind of resistance you saw to Fast Track is going to increase, because we are not just talking about trade or about products made in company A being sent to country A, to country B, to country C, and so forth; we are talking about increasing the mobility of capital. And workers understand that when people talk about moving, that means, in the short term, an erosion of their bargaining position. I mean, it is not an accident that the only strike that was successful recently was UPS, because you can't go to Asia to mail your package.
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The UPS people had a degree of insulation against the threat to move, the mobility that others don't have, and I think it is likely we will have these negative consequences. But to simply lecture the average American about his or her responsibility to take on the world, taking on these issues, isn't going to work until many of us are ready to sit and say, ''OK, we will work with you because we think this is true, this is in our interest.''
But there has got to be some concern about equity, and the business community has made a mistake. They had a short-term advantage that grew, and it was helped by the Reagan approach to the NLRB, and it was helped by technology and it was helped by a lot of other things. And they have clearly beaten unions down to the lowest level of influence in economic terms in many, many years, and they have gotten many, many States to cut back and they have gotten a general reduction.
Indeed, we got the deregulation, and this is one of the things that I think is part of the problem. We deregulated many industries. I think that was a good idea; it increased efficiencybut didn't get any credit for that. At least we do appear to be beyond that we are growing too fast and we need some more unemployment.
I was delighted to hear Dr. Lipsky say if any movement comes in interest rates over the next year, it is more likely to be down. I think thatif I had a hope, and it never won permanently, but I hope in the near term we have it.
But, when it comes to public policy, I am as sure of this as anything I can be after all my time in politics and studying political operations. If the enlightened element in the business community isn't prepared to work with some of us to talk about improving equity and getting a somewhat fairer share of the increased growth, you are going to see the continued frustration with what you and I believe is necessary.
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I will be glad to let them all respond, Mr. Chairman, in whatever time I have.
Chairman LEACH. Would anyone like to respond?
Dr. BERGSTEN. I would like to respond very briefly.
First of all, I am not a representative of the business community. Just to be clear where I come from, I run an independent think tank. I am often very critical of the business communityas in the last few days, about their performance on Fast Track.
On your substance, I agree with not just the perception, but with the reality. There has been an inequity in the distribution of our growth performance over the last 15- to 20-years. The issue you raise is how to handle that in the trade context. I believe that even if those who support better international labor standards got everything they wanted.
Mr. FRANK. I was guilty of a misimpression, and let me clear this up, because I should have been more explicit.
I agree with you, you cannot do it just in the trade context, but the ankle bone is connected to the shoulder bone. I am talking about health care and other things. I agree, you can't just do it with conditions of trade; you have to address it overall.
Dr. BERGSTEN. But you obviously believe it should be linked to trade, and I do too. But my point was going to be that even if you got everything you wanted on international labor standardswhich you won't, because the rest of the world will block itbut even if you got it, it would do very little for American workers. What we need linked to trade legislationand the Administration failed miserably in this caseis domestic worker training programs that would convert the victims of globalization into those who could take the opportunities of globalization.
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Mr. FRANK. I agree.
Dr. BERGSTEN. I have been working on that for 30 years, and it hasn't made it very far, but that is the course that I think we ought to pursue.
Mr. FRANK. Yes, and what some of us are going to dosee, we just signed a budget deal that will make that much harder, because there is a lack of any funds to increase if you keep this up in the military. So what you are going to see is people holding things like Fast Track hostage, because if we don't do that, then we don't have the leverage to do the other.
Chairman LEACH. Mr. Sanders.
Mr. SANDERS. Thank you, Mr. Chairman. Let me ask a kind of dumb-bunny question, if I might.
In my State of Vermont, the Census Bureau recently reported that family income has declined by 7 percent over the last two years; and throughout the country, I think people are working longer hours for lower real wages are lower now than they were 20 years ago, and so forth. And if somebody in my State or anyplace in the country picks up the paper today and they say, ''Let's see, United States, we don't have health care for our people, we can't afford to send kids to college, we have cut Medicare by $115 billion, but gee, that is a good thing; we do have $3 billion of contingency funds for the bailout of Indonesia, and on top of that we are putting substantial sums of money at risk through the IMF and the World Bank, we have money to do that and, lo and behold, the government that we are bailing out is run by a dictator, an authoritarian society.''
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Forbes Magazine says this guy himself is worth $16 billion, estimates are his family is worth $30 billion, and estimates are that his 50 cronies or so are worth another $30 billion. So you have 50 or 60 people in a poor country who are worth $60 billion dollars, and the United States Government is there aggressively to help bail them out.
But my farmers in the State of Vermont are going under, workers are seeing decline in their standard of living, 40 million Americans have no health insurance, because there is no money available. But for a handful of crooks, who have $60 billion among them, in a poor country, hey, we are there and moving vigorously.
Now that is a dumb-bunny question that one or two Americans might ask, and I am sure we have sophisticated answers to tell us why we are wrong; but Mr. Levinson, would you want to comment on maybe that question?
Mr. LEVINSON. Well, first, I don't think you are wrong. You have a complete imbalance in this whole system. Fifty billion dollars for Mexico was mobilized internationally; I guess it is $40 billion now for Indonesia, $17 billion for Thailand, so we are at $107 billion. We just heard that we may need as much as $80 billion for Korea, and these numbers are thrown around, that they can be mobilized and it is cast in terms of saving, ''the system.''
But for ordinary working people, the system ain't so good, and it is not throwing off the benefits that they see others are reaping. After all, Jack Welch of GEwages at GE have been stagnant; his last number I saw was $27 million in benefits. So people begin to say, ''Well, listen, what system are we saving?''
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And that goes to Congressman Frank's point. Where is the equity in it, where is the balance? And that is all that any of us asked in the Fast Track debate. I don't want to keep coming back to Fast Track, but in the end what we said was, ''Is this system going to have a minimum element of balance?'' Their answer has been no.
Mr. SANDERS. Let me ask my other friends up here. Does anybody have any qualms about using taxpayer dollars to bail out a corrupt military dictatorship? Anybody who would like to answer.
Dr. BERGSTEN. I would like to answer, because I don't think that characterization is either accurate or helpful. Your farmers in Vermont, Mr. Sanders, will be worse off if Indonesia goes through a financial crisis that has the kind of effects that I described before. Your workers will be worse off.
The money that the United States puts into the IMF or these packages comes back with full interest. It makes money for the U.S. taxpayer. It doesn't cost him anything. If we don't do it, whatever you believe are the equities, whether Jack Welch ought to pick it up, whether Suharto's daughter ought to pick it up, the real fact is that if we don't play the kind of role that we have in the past, your farmers in Vermont are worse off.
Mr. SANDERS. If I can have the mike back, and I am quite familiar with the trickle down theory, we have to help the very rich.
Dr. BERGSTEN. No trickle down.
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Mr. SANDERS. Let me finish.
You said I mischaracterized the regime. Let me quote from the U.S. State Department's Annual Human Rights Report for 1996, and I quote, ''Despite a surface adherence to democratic forms, the Indonesian political system remains strongly authoritarian. The government is dominated by an elite comprising President Suharto, his close associates and the military.''
I can go on and on. Do you disagree with that characterization?
Dr. BERGSTEN. I did not say you mischaracterized the Indonesian regime. I was talking about the global economic system and what, in practical terms, will hurt or help your farmers in Vermont.
Mr. SANDERS. My farmers in Vermont are honest people who work 12 hours a day, seven days a week and they get very little help from the Government. Farmers in Vermont and workers throughout this country, as Mr. Levinson mentioned, do wonder that at a time when Medicare is cut, when Medicaid has been cut, when we cut back programs for low-income kids because there is no money available for those needs, why suddenly there is money available.
And your thesis is, as is usually the thesis that we hear from representatives of big business, that we have to prop up the wealthy and the powerful, because in the long run
Dr. BERGSTEN. No.
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Mr. SANDERS. Let me finish. In the long run, it is really going to help everybody; and the fact the richest 1 percent own more wealth than the bottom 90 percent, the fact that the CEOs make 200 times more than workers, in some magical way it is all going to come down. But I think as Mr. Frank and Mr. Levinson indicated, not everybody accepts that line.
I give it back to you, sir.
Dr. BERGSTEN. You have mischaracterized my thesis. I never said you should defend the wealthy. I said, now for the third time, your workers in Vermont will be worse off if a global monetary crisis is triggered by what happens if Indonesia, South Korea, and wherever else; and I can demonstrate to you, point by point, why that would be. You and I can both come up with more equitable
Mr. SANDERS. Let me get back to my question, and maybe somebody else wants to pick it up.
Simple question: You have a corruptand if anyone disagrees with me, please tell me. You have a corrupt military, authoritarian society whose leader is worth $16 billion, whose family is worth $30 billion and whose cronies are worth another $30 billion.
Now, among other things, let me take another twist on my question. Why don't we ask these guys to bail out their own country? Why don't we say to Mr. Suharto, ''You want any help, hey, you know, you are going to have to go into your gold or whatever you have, you take $15 or $20 billion out of your family wealth to bail out your country before you come to the taxpayers of this country.'' Does anyone want to respond to that?
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Dr. HALE. The Suhartos are now worth only $10 Billion and their assets are illiquid. Indonesia is facing a liquidity crisis, a run on the banking system, capital flight, loss of confidence in the currency.
What President Suharto and his family own are the toll roads. They have control over some factories; they also, up until a week ago, controlled some small banks that have been seized in this IMF package and, in fact, are going to be shut down and will probably cost the family a couple of billions of dollars.
So you are quite right, there is tremendous inequality; but the fact is, we just don't have a framework to use their resources to solve this liquidity problem.
Let me also continue for a minute, because you have grossly mischaracterized many aspects of Indonesia.
Mr. SANDERS. I would like to hear this, Mr. Chairman, please.
Dr. HALE. There is no doubt Indonesia is an authoritarian, political regime; there is not doubt there is a great inequality of wealth. The fact you didn't mention is that 80 percent of the income is controlled by a very small Chinese minority, which has been far more successful as entrepreneurs in developing business of the modern period than the traditional Indonesian part of the population.
There are dozens of studies now available from the World Bank and academic institutions, showing that since the economic modernization program began in the late 1960's, after the passing of the first president, Mr. Sukarno, Indonesia has not just had a high rate of economic growth, but has had a very broad distribution of that income growth, that there has been a very significant increase in living standards which, if it could be sustained for another generation, the phrase would be among development economists, ''a lower middle income country.''
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Now, that said, there are greater imperfections, and I think all of us recognize, over the next 10 or 20 years, one of the major challenges will be to move from a family dictatorship, with Mr. Suharto into some kind of effective democracy that has more accountability to the people. But as we know, given the history of Asia, going back a thousand years, democracy is very rare in Asia. It is only in a few countries, in the last quarter century, as a by-product of economic growth, successful integration of the world economy, that we have seen any attempt or any success at having any form of democracy, even if it is imperfect.
Mr. SANDERS. The bottom line of what you are saying, Dr. Hale, is, you don't have any moral qualms about putting at risk billions of taxpayer dollars to bail out a corrupt billionaire military regime.
Dr. HALE. The answer is, I have great qualms about that, but I don't think the issue has been specified correctly. The issue is, do we want to prevent an example of financial contagion from spreading throughout the world and causing instability in the world economy that would be quite disruptive to people in this country?
And let me also add, I am a seventh generation Vermonter, and I think you have grossly mischaracterized the economy of Vermont, which I know intimately. First, Vermont currently has an unemployment rate of 3 percent. It has been very successful at lowering unemployment, despite the fact it does have some significant competitive disadvantages to nearby States, because of its very high level of marginal income tax rates, which have been among the highest in the Nation during the modern period. There is no doubt, we do suffer in Vermont from various kinds of inequality.
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Mr. SANDERS. Do you deny the Census Bureau just told us the family income has gone down by 7 percent over the last two years?
Dr. HALE. I have not had an opportunity to examine the data, so I cannot, obviously, respond.
Mr. SANDERS. Well, those are what the facts are, sir. And if you think that that is a good economy
Chairman LEACH. Gentlemen
Dr. HALE. The answer is, I suspect that the data is exaggerating the problem. I stress to you that this current economic environment in the United States is going to be far more conducive to reducing inequality and addressing our social problems than any of the economic environments I see elsewhere in the industrial world.
I am a regular visitor to Europe and other parts of the world, and what I see in a country like France and Germany, which tries to legislate equality
Mr. SANDERS. And how much more do the workers in Germany make than the workers in the United States?
Dr. HALE. And it is producing mass unemployment.
Page 141 PREV PAGE TOP OF DOC Chairman LEACH. The time of the gentleman has expired.
Dr. HALE. And is undermining the very, very forces you would like to nurture in this country.
Chairman LEACH. Will the gentleman withhold?
Dr. HALE. Sorry.
Chairman LEACH. Mrs. Maloney.
Mrs. MALONEY OF NEW YORK. Thank you, Mr. Chairman. I am very concerned about the stability of the economic markets and about American jobs; and a number of my constituents happen to work for Chase Manhattan Bank, which happens to be located in the district that I represent, and I was very distressed to read today, just in the Dow Jones News Service, that there was a pretax trading revenue loss of $160 million in October, because of the, ''unusual volatile and adverse trading markets.'' And this was a loss to Chase Manhattan Bank, and I am concerned what this loss may mean to jobs of my constituents and the stability of a major employer. Again, I think it has worldwide ramifications as the Nation's largest bank, but in my particular district, it has importance because many people are employed by this bank.
Earlier, I asked Chairman Greenspan about this $160 million loss, and he said it was really nothing; and now that we have someone from the bank here, I want to ask him if he thinks losing $160 million in October is really nothing? And I would like to ask him specifically what percentage of this year's profits is $160 million? I thought $160 million was a lot of money, and I was distressed to see this loss. And I hope we are able to get this IMF loan and stabilize the markets, but since you are representing Chase, if you don't mind if I am a little parochial and ask about the health of a major employer in a district I represent.
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Dr. LIPSKY. I am very glad you brought the subject up, Representative. Should I respond directly?
Chairman LEACH. Absolutely.
Dr. LIPSKY. Chase put out a statement today that was in line with regulatory and legal requirements. Parenthetically, such statements are an example of the transparency of financial systems that I think should be followed in general.
Your question, first of all, is what percentage of the annual profits do the losses described in the statement represent? The year isn't over, so we don't know the answer. I am happy to say that the Chase Manhattan Bank just completed the most profitable quarter in its history, in which pretax profits exceeded a billion dollars. The Chase balance sheet contains assets valued at over $330 billion. Thus, the amounts disclosed today do not materially affect the stability, soundness or profitability of the bank, nor will they affect in any way, shape or form, the bank's business operations. If the question is ''Will people lose their jobs?'', the answer is absolutely not.
There is a point worth mentioning in this context. In a global capital market, there are many institutions that would like to be global market participants. To achieve this successfully requires three characteristics, it seems to me: first of all, willingness to accept risk; second, the ability to control risk; and third, capital sufficient to withstand possible temporary adverse outcomes. Recent market developments have shown that today there are very few institutions that possess all three characteristics. One of them, I am happy to say, is Chase.
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When global markets shake, they all shake, and as a result, it can be difficult for market-makers to provide liquidity at all times. The Chase Manhattan Bank, in fact, provided liquidity to its customers at all times in all markets, something that I am proud to state.
International market participants have to accept the possibility that there may be, temporarily, adverse results. To be successful, institutions have to be able to control and contain risks in order to preserve the stability of the organization. There is no doubt that Chase at present has these capabilities. As a result, we look forward to a very profitable year.
Mrs. MALONEY OF NEW YORK. If I could ask Dr. Hormats, I would like to hear your follow-up, but I have another question for you.
If we don't control these volatile and adverse trading markets, if we don't control the instability that we are feeling, what will happen to the pension funds of American workers? I know I used to work for the City of New York, and our pension funds, a large part of them, were invested in the markets, and if there are falls, such as what we have seen at Chase Manhattan, in other institutions, what will be the impact on the pension funds?
If it is not going to be a job impact, what is the impact on our savings, the savings of American workers?
Dr. HORMATS. You have raised a very important point, and I think this is something that needs to be borne in mind too.
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We were talking about the jobs of workers and the employment of workers and the salaries of workers. A very substantial portion of the increase in salaries of a number of workers, and an increase in jobs that the United States has created over the last several years has been because of increased exports; and I think this is true for Vermont, and it is true for New York, and it is true for everywhere. The job increases and wage increases, to the extent they have occurred, have depended, in part, on exports; and in answer to your question, which I think is a very important one, it used to be 10 or 15 years ago, a large portion of American savings were in deposits, bank deposits, relatively stable financial assets and, still, stable financial assets. But over the last 15 years there has been a big shift through mutual funds, 401(K) plans, pension funds, funded pension plans toward equities. And it is, for a larger and larger number of workers, how the equity market does will determine how well they do when they retire, their pension fund profits. And it is extremely important, I think, that there be an effort to try to address these problems that we have been discussing and to stabilize markets, not just because it is good to stabilize markets, but because a lot of the well-being of American workers depends on that.
And I think you have identified a very interesting and, I think, very important argument for attempting to address these issues; and more and more workers down the road are going to depend on markets, too. And the high tech companies, the companies that have exported a lot, are companies that depend very heavily on sales to countries like Korea, Thailand, Indonesia. A lot of their profit expectations are based on doing more and more business there, so there is a strong set of arguments for addressing these problems and for passing the NAB and other things that help to address these problems.
Page 145 PREV PAGE TOP OF DOC Mrs. MALONEY OF NEW YORK. I am most interested in the stability of our own economy and American jobs, and we have been told that we will be going out, possibly tonight, meaning we will adjourn possibly for several months; and I would just like to ask one brief question, and I would like it to be answered as briefly as possible, because there are other Members who want to speak.
If we are not able to secure the International Monetary Fund loan contribution from the United States to participate with the other countries in the International Monetary Fund, to attempt to stabilize these markets, what do you think will happen to the American economy? Are we strong enough that we can just ignore what is happening over there, or is thatwhat if we don't get this guarantee? I don't know in what form it is coming to the floor; I am hearing rumors it is going to be tied to all kinds of problematic, difficult, other measures whichthey often roll a lot of bills togetherthat will make it more difficult possibly to get the vote.
If it comes down, run downif you would like to answer, any of youwhat will happen if we don't walk out of here tonight with an American participation with other countries for International Monetary funding?
I would just like to hear very briefly from each of you. What do you think will happen?
Dr. BERGSTEN. I think you have to see it in the context of the failure of Fast Track trade legislation last weekend. If the U.S. also fails to make its contribution to the IMF in the midst of these crises, then the world quite logically is going to say, ''Can we count on the United States?'' And if they answer that question negatively, they are going to reassess their own policies. They will put on new trade barriers, they will put on capital controls; they will not open up their financial marketsthey will not do the kind of things that are good for them but are also good for us, because they frankly won't know if the traditional leader of the system and the main proponent of openness and international cooperation is still in the game. That is an enormous cost, and we take an enormous risk of triggering not just market instability but a real downward spiral in the world economy that could have a huge impact on us.
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Dr. HALE. It will leave us less equipped to deal with the coming crisis in Korea, and to the extent we are not prepared to deal with that crisis, it would increase the risk of the financial contagion, and the adverse effects of any shock in Korea will be felt not just in Tokyo, but also in New York.
And to magnify the comment to your previous question, I would just point out to you that one way to kind of capture how different wealth is held in this country today, compared to the past, is that our mutual fund industry now has $4 trillion of assets, compared to $4.5 trillion in our banking system; and at current growth rates, America in six months will be the first country ever in history to have a mutual fund industry bigger than its banking system. And in that you can see vulnerability, not just to the wealth of a few people, but indeed to the 45 percent of the American people now who are in the equity market, in the financial markets, through these new forms of financial intermediation.
Dr. HORMATS. I would just say, it renders us much less able to deal with a potential crisis down the road, and that potential crisis down the road would not only shake financial markets, including stock markets here, but as Fred has indicated, could lead other countries who can't get resources to help them address these problems to turn inward. And then that does have an effect on agricultural and manufacturer and services exports, so it is an extraordinarily negative and very harmful and very dangerous thing if this doesn't pass.
Chairman LEACH. Dr. Lipsky.
Dr. LIPSKY. The IMF is the principal organization by which the international community is encouraging countries to adopt the internal reforms necessary to defend the multilateral, nondiscriminatory trade and payments system that has been the basis for our postwar prosperity. To send a message of doubt about American support for that institution at this time would be a serious mistake.
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Mr. LEVINSON. Mr. Chairman, may I?
Chairman LEACH. Of course, Mr. Levinson.
Mr. LEVINSON. If we didn't have the IMF and the World Bank, we would probably have to invent them in terms of today's world economy. The issue is whether or not the prism through which they have seen the world and promoted their policies has been too narrow and, consequently, that you have what we are hearing here and what we hear constantly if the United States does not exert leadership: The United States role in the world, and so forth, that we will have plagues, pestilence, famine, fire, and the offering up of the firstborn children will probably occur.
Well, if the United States doesn't approve this participation, as Mr. Summers already told us, the United States can go through with the Indonesian operation through the exchange stabilization fund, so the Indonesia operation is not immediately at risk. What I object to is being stampeded to avoid the issue, which some of us have been trying to put before the international agencies and this international community, as to what the shape of this international trade and investment is to look like. And every time we raise it, we come up against it, there is always a reason why we should not raise this issue.
The WTO. We should not raise it in the first Singapore Ministerial. It wasn't appropriate. Fast Track. We shouldn't raise it in Fast Track or we shouldn't raise it in connection with the bailout for Indonesia. We should not raise it in connection with any loans to the World Bank or IMF. So I repeat, if not now, when?
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Mr. FRANK. Could I take 30 seconds, Mr. Chairman?
Chairman LEACH. Please, Mr. Frank.
Mr. FRANK. What I hear from many of the panelists is the following: The United States, in its policy, has to take into account and accommodate and work with the fears, self-protective reflexes, irrationalities, prejudices, and insecurities of everybody in the world except the American worker, and it is not going to happen.
Because you keep telling us that we should adjust and do this and do that, but you don't help us make the kind of policy changes here to get you the political support to do it.
Dr. HORMATS. I think that mischaracterizes the position of those of us who are supporting this. I think the central reason I support this, and I think my colleagues as well, is that we believe it is in the interest of the United States, in terms of exports and in terms of
Mr. FRANK. I understand that, but, I didn't say it wasn't in their interest. I talked about fears and self-protective reflexes.
One of you said, I am not sure which, that the countries, if we don't pass the IMFand I am all for itif we don't pass it, those countries will take actions which are against their own self-interest. What I am telling you is that so will some people here, as you define their self-interest.
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And you are prepared to worry about the politics of trying to deal with those fears everywhere but domestically, and it just isn't going to work.
Dr. BERGSTEN. Just to be clear, I have been working passionately, to use your word, for better worker training and trade adjustment assistance for the last 30 years and we have not gotten it.
Mr. FRANK. It is not going to work. And I think we then say, ''OK, we are not going to give you what you want unless we get what we want,'' it is not going to work unless you are prepared to get serious about it.
Dr. BERGSTEN. Unless you want to throw the baby out with the bathwater, which is what that would do.
Chairman LEACH. Mr. Hinchey.
Mr. HINCHEY. Well, since I am probably the last one to harass you this afternoon, I want to express my appreciation to you. I very much enjoyed listening to the testimony of each of you five gentlemen, and I very much enjoyed the exchanges that you have had with my colleagues. I think this has been a very interesting afternoon and, to a large extent, a very educational one as well.
Chase Manhattan has taken a hit this year, but Chase has not been the only bank affected by this so-called ''crisis.'' Bank America has been affected, Morgan Stanley and Citicorp have been affected. So the Asian contagion is causing a few colds to be caught over here in the United States as well. And my concern, frankly, is that we may, in fact, be on the verge of a more serious crisis and that this is just the opening act of a larger play which may have some very serious and severe implications for the United States and for the global economy.
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I can recall that Japan, if I remember correctly, was the first country in Asia to get into trouble. One of the reasons they seem to have done so is because they tried to manipulate growth on the basis of exports alone, and they continue to try to do that. They continue to refuse to open up their domestic consumer economy in any meaningful way, and the stagnation that they have seen now for several years has been only because of the stubbornness of the Japanese policymakers in concentrating exclusively on the export market to try to finance their economy.
Something similar, it seems to me, is going on in the rest of Asia. Not that their leaders are stubborn in the same way, but they don't have a domestic economy to open up, and that goes to the heart of some of the things that were said by Mr. Frank and Mr. Sanders a few moments ago. Their Amendment is very important. And one of the things that that Amendment would do is begin the process of opening up domestic economies in these countries so that people there could make purchases.
The world economy, to a growing extent, is fueled by the American consumer and the ability of countries to export to the United States. Now, this cannot go on indefinitely. It will stop at some point. No country can support the economies of all other countries indefinitely. We have been doing it for Japan since the end of the Second World War essentially, but that has to stop at some point.
If we are going to have a global economy, it has to be one where everybody has an opportunity to participate. The problem with this global economy is the benefits of it have accrued only to a handful of people. And I am not speaking just about the Suhartos. They are the most egregious example. But I am talking about the multinational corporations, to a large extent, that have been the primary beneficiaries.
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The American people have a hard time seeing how they have benefited from all of this trading activity. And if it is true that we are looking at a situation of saturation of manufactured productsand it looks like it is that way, automobiles in the United States are being downpriced, automobiles in Europe are being downpriced because there is a glut on the market, the same thing is true with computers and chips and chemicalsthat whole business is going to have to come tumbling down on us at some time.
So, all of this is by way of asking you what are we going to do? How are we going to respond to this? We are facing overproduction; we are facing a glut of manufactured products in the world markets. The United States cannot assume everything. And, in fact, it is increasingly difficult for us, and to the extent we are assuming responsibility for this glut, it is based upon borrowing. Consumer debt in this country is at a record level; consumer bankruptcies are at a record level. This looks to me like an increasingly fragile house of cards. And unless we take some very different steps from those we have taken in the past, this business is going to just come to an end, and it may be a very unhappy end, at least for a period of time.
I would just ask you if you would respond to that?
Dr. BERGSTEN. I share those fears, as I said in my statement.
Let me just indicate two facts on some things you said. It is very true that exports are critically important in the Asian countries we are talking about. But remember that exports do not exceed 15-, 20-, or 25-percent of output in any of those countries. The great bulk of their domestic production goes to domestic consumers.
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As Larry Summers, I think, said in his statement, income in the Asian countries in just the last 30- to 35-years has risen by a factor of fourfold to sevenfold, depending on what country we are talking about. This has been an enormous increase in purchasing power domestically. Middle classes have raised their living standards in those countries dramatically.
So, even though exports are important, you should keep in mind that it is only a minority, a distinct minority of those economies. It is domestic demand that is the driving force behind this enormous economic success they have had.
Related point: You talked about the gains going mainly or only to multinational firms, the Suharto family, and other disproportionately beneficial groups. You are absolutely right in that. But as David Hale said, the fruits of this development success in Asia have been very widespread.
In Indonesia, to take the favorite case of the day, the absolute poverty level, as defined by the World Bank, has dropped from 70 percent of the population in 1965 to 11 percent today. They are not rich by our standards, but there has been an enormous distribution of the gains within the country. Yes, it could have been better, but it has been, according to the World Bank, the most successful country in the world in reducing absolute poverty. And it may surprise you to know that number two is China.
So, we do tend to focus, and it is understandable, on the egregious cases of excessive wealth, corruption, and the like, and we should do everything we can to get rid of that, but we cannot lose sight of the broader reality, which is the enormous progress of individual peoplelower income, normal, average people, whose status in life has improved unbelievably rapidly and dramatically in this last 30- to 40-year period all over the world, but particularly in Asia. We cannot lose sight of that.
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And all that gets put at risk if these crises are permitted to fester and we don't help deal with them.
Dr. HORMATS. The first part of your statement related to Japan, which I think is an extremely important point. They do need, and I think your question implied this, to make a much greater effort to restore growth in domestic demand. That is a big problem for Japan, it is a big problem for Asia, and it is becoming an increasingly big problem for the United States-Japan trade imbalance.
Now, the Japanese are in the process of putting together a plan of some sort, which is supposedly a stimulus plan. We have not seen it yet, so we don't know, and we have been promised this before and we haven't seen it. But this is extremely important in managing this crisis, how the Japanese react in terms of what kind of stimulus plan they come up with. And it should be unveiled within the next three or four days and presumably will be very important.
Can they stimulate more demand in Japan, help their banking system? Can they stimulate more demand so they can buy more goods from other countries in East Asia? Can they stimulate demand so they don't have to rely quite as much on increased exports to the U.S.? That is a critical point in the management of this crisis, and I am glad you raised that, because it is important.
Chairman LEACH. Thank you.
In conclusion, let me raise a couple of observations. First, the issue of transparency, which is so thoroughly important and that all of you have raised. I would like to suggest something about this panel that this Congress appreciates, and that is we have industrial intellectual transparency. And by that I mean that Chase Manhattan Bank has come and testified on its best judgment of the world and has given to its competitors its judgment on the world as it has given to the Congress. Likewise with Goldman Sachs. Dr. Bergsten represents a nonprofit institution, but likewise with a major American insurance company, as well as a law firm, to that extent.
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Mr. LEVINSON. No, no, no, a
Chairman LEACH. A private citizen.
Mr. LEVINSON. American University.
Chairman LEACH. American University. But I only reference that because that is an appreciated circumstance that, I think, deserves note.
Second, we as a country want to export some of our systems, and I think that the fact that intermediary financial systems in many parts of the world lack credible regulation and credible integrity is a massive problem in terms of international stability, and that it is very appropriate that as a banking committee we continue to underscore this as one of the highest systemic circumstances the world has to pay attention to.
I would stress as well, as I did in my opening statement, that I know of no area of commerce in which protectionism is more counterproductive. Countries that do not want to bring in financial systems that have the highest, not only competitiveness, but integrity, make a major error.
Third, I think we don't want to import from other countries their systemic problems. And by that, part of it relates to the circumstances of wealth by today's valuations, but also part of it relates to how they operate. I don't want to exaggerate or raise a new issue this afternoon, but we had a mini example of that in terms of an Indonesian bank that wanted to influence the American political system.
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One of the things, and here let me just conclude with the observation, that we take for granted in this country is that not only do we have the most competitive financial system that serves the American worker and average citizen exceptionally well, but we have the most honest. And one of the things we are going to have to be very careful of is not importing dishonest techniques and rather export them, and to ensure that the integrity of our system and its individual institutions holds its ground.
Dr. Lipsky is embarrassed by his institution losing a bit of money today, but transparency, as he has indicated, indicates under American law he reveals it. It is 15 percent of his last quarter's profits. He would rather not have that occur, but it is something that underscores, I think, what stabilizes our system rather than what destabilizes it. So an error system is a great example of what is good rather than what is bad.
In any regard, let me thank all of you. You have been exceptional witnesses. This has been one of the most enlightened hearings that I have ever attended, and I think some of the most important observations have been made from many different perspectives. So I thank you all.
Dr. HORMATS. Thank you for holding the hearing.
Chairman LEACH. The hearing is adjourned.
[Whereupon, at 3:50 p.m., the hearing was adjourned.]
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