Segment 1 Of 2     Next Hearing Segment(2)

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U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    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 Roukema, Bereuter, Bachus, Castle, Metcalf, Paul, Hill, Manzullo, LaFalce, Vento, Frank, Kanjorski, Kennedy, Waters, Roybal-Allard, Watt, Hinchey, Bentsen, Jackson, Sherman, and Sanders.

    Chairman LEACH. The hearing will come to order. Let me say on behalf of the committee, I would like to welcome an extraordinary panel. I would particularly like to welcome Secretary Cohen. In my memory, this is the first time the Secretary of Defense has appeared before this committee, and we welcome your presence. And we certainly also welcome the presence of our distinguished Secretary of the Treasury, Mr. Rubin; Chairman of the Federal Reserve Board, Mr. Greenspan; and the Deputy Secretary of the Treasury, Mr. Summers.

    First to note on procedure. We are adopting for this hearing and subsequent ones, a rule on opening statements that we are going to limit them to 10 minutes on each side of the aisle and then move directly to the hearing testimony. And let me, in that regard, ask unanimous consent to place a statement in the record of my own, as well as unanimous consent that all other Members be allowed to place opening statements in the record, as well as unanimous consent that the full statements of any of our witnesses be placed in the record. Without objection, so ordered.
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    First let me just say that with regard to the subject matter of the difficulty in Asia and the response to it, there is a very natural American concern about anything that smacks of foreign aid, whether it be through the International Monetary Fund or our own Government. On the other hand, there is an even larger concern we may well be dealing with issues that will affect directly our own prosperity, so we have to balance those concerns. As far as I am concerned, the challenge is to establish a policy that neither ignores the problem nor totally Americanizes responsibility for a solution to the problem.

    In this regard, an abstract international institution called the International Monetary Fund, that has existed since 1944, seems in my view to fit the bill in certain ways. First, one of the advantages of the International Monetary Fund is that it involves burden-sharing. The United States role is only 18 percent and it is about to decline to about 15 1/2 percent if certain replenishments are agreed to by the international community.

    Second, it is a loan-giving institution, not an aid-granting one, and throughout its entire existence it has made money, so contributions to the International Monetary Fund are not gifts, they are like the transfer of assets from one bank account to another.

    Third, the International Monetary Fund, because it has the authority of the international community, has a precedent and a practical capacity to insist on certain kinds of reforms in the countries to which it gives loans. And those reforms are largely the types of reforms that most of the American economics community concurs with, involving greater market practices, greater democratization, greater attention to anti-inflationary, fiscal and monetary policies.
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    Finally, I would stress it is an institution that emphasizes stability to currencies and to economies. It has nothing to do, or only has tangentially to do, with bank bailouts, a circumstance that I think virtually everyone in Congress is attentive to and concerned about. This Congress is not about to authorize anything that amounts to bailout of private sector financial institutions. It wants to stabilize the economic problems, but not bail out institutions.

    Finally, let me just say that quite naturally when we view issues like the IMF, human rights concerns come into being. And here I would simply stress that there is unanimity in the Congress, I think from all sides, about concern about human rights, but there are differences in judgments that exist.

    Some critics of the International Monetary Fund believe it is responsible for human rights abuses. Proponents like myself suggest that if we don't have International Monetary Fund support for certain economies in Asia today, we could well have a human rights inferno, particularly in a country like Indonesia, where there are Chinese residents that are subject to a great deal of persecution and where food assistance is desperately needed. And so on the human rights issue you will hear differing judgments, but an underlying common theme of concern.

    Chairman LEACH.With that as an opening statement, let me ask Mr. LaFalce if he would like to make an opening statement.

    Mr. LAFALCE. Thank you very much, Mr. Chairman. It is my very strong hope that Congress will approve the Administration's request for increased IMF funding. I believe this is the single most important economic action we must take in 1998. If the United States does not exercise appropriate economic leadership, the global economy and its citizens and even our economy and our citizens could suffer serious consequences.
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    The risks of inaction far transcend the risks of action. The risks of inaction could be profound.

    First, continued currency instability will further erode Asian economies and damage the U.S. economy. It is imperative, therefore, that currency stabilization be achieved and competitive devaluations prevent it.

    Second, inaction will inevitably lead to significant social and political turmoil, as the poor and middle class bear the brunt of further economic deterioration.

    Third, inaction carries the risk of spreading serious economic upheaval to other regions, including Latin America, Eastern Europe, Russia and so forth, areas which have fought hard for their own economic stability.

    And, fourth, U.S. refusal to replenish the IMF would abrogate U.S. economic leadership, inevitably and significantly undercutting our influence in Asia, the world, and within the institution of the IMF itself.

    Yet legitimate concerns have been raised that must be taken seriously and must be addressed; concerns that international labor rights be given a far higher priority; concerns that the IMF not impose severe austerity programs that can do untold harm to Asian citizens and potentially our own as Asian markets contract and take fewer U.S. exports; concerns that we not insulate creditors from the consequences of imprudent business judgments. These and other issues must be addressed.
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    But we can only help shape the response to this crisis if we take a constructive role in resolving it. The IMF may not be a perfect tool, but right now it is the only tool we have, and it provides the very real benefit of burden-sharing among developed countries in the face of international economic crises.

    We can and must use our economic, political and moral authority to bring new attention and commitment to international workers' rights, press for improvements in the financial services sectors of countries using IMF standby instruments, and open these economies to both internal and external competition. But the United States can only use its voice and vote to reform the IMF if we do not walk away from it in the midst of crisis.

    Moreover, I believe the IMF can play a significant, legitimate and leading role as intermediary in private sector creditor-debtor discussions. The IMF has the capacity and experience to serve as a facilitator and honest broker during debt negotiations.

    To a certain extent, assisting creditors is inherent in any policy of intervention. However, historically the United States has insisted that creditors share meaningful sacrifices as part of any rescue package. Such an approach could both mitigate the moral hazard of intervention and also help garner political support.

    Ultimately, I agree with Secretary Rubin and others that we need a new architecture for the international financial system to manage and, more importantly, help avert crises of the future. But before we perform this surgery, we must stop the bleeding, we must face the reality of where we are and deal with the crisis before us.
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    Mr. Chairman, I thank you very much.

    Chairman LEACH. Thank you, Mr. LaFalce.

    Our distinguished colleague from Delaware, Mr. Castle.

    Mr. CASTLE. Mr. Chairman, thank you for holding this hearing. It is especially timely as we face yet another crisis situation where the American taxpayers are being asked to rescue foreign economies and some domestic investors from the logical consequences of ill-considered policies and imprudent loans. In effect, we are being asked to intervene in the marketplace and alleviate the severe sanctions it imposes on foolishness and greed. This situation has arisen before, and it is legitimate to ask why Congress received no advanced warning from the IMF or the Treasury.

    I accept that the world's economies are increasingly interconnected, and my instinct is to support our international commitments because they are generally in our national interest. Having said that, it does not mean we have to accept being passively manipulated by events and simply pony up every time nations around the world come to economic grief and need bailing out. Today's problems present us with an opportunity to exert substantial leverage, to insist upon real reforms that would help protect us from a repetition of this situation in a few more years.

    It is unacceptable that nation-states who are facing bankruptcy and turn for help to international entities such as the IMF when they have exhausted their domestic resources, should do so with unclean hands. They should not be permitted to persist in false characterizations of their economies and mislead the markets in vain attempts to shore up currencies, postpone accountability and evade the consequences of their own actions. The IMF must insist on more transparency and enforce accepted principles of accounting in reporting of economic data on nations and central banks as a condition precedent to receiving assistance funded by U.S. taxpayers.
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    Unless we are going to endorse the wholesale defrauding of investors, the reforms demanded in H.R. 3114 should be a minimum requirement for any authorization of the IMF funding by this Congress. My support will be contingent upon an acceptable plan of reformation of international financial crisis management. Clearly, a mere restatement that there is a crisis will not be convincing enough to sway this Congress to come to the rescue. I hope this new planning is well started when today's hearing is complete.

    I yield back the balance of my time.

    Chairman LEACH. Thank you for that very thoughtful statement.

    Mr. Vento.

    Mr. VENTO. Well, Mr. Chairman, having returned from a meeting with the political and financial leaders in China, Korea and Japan this week, a trip that you led, I was deeply impressed by the Asian economy and the crisis that affects the enterprise and people of these Asians. The Asian economic crisis will not be isolated to Asia. In fact, the macro- and micro-economic effects will impact our economy, the balance of trade, business, and especially American workers.

    There are many choices and many roads in front of us, but really only one viable option, one tool. The IMF is the tool to engage and provide the foundation which would prevent the Asian economic corrosion. This committee and Congress should respond positively to the Administration request to support and fund the IMF. The IMF isn't the problem, it is the solution to the long litany of complaints of what is wrong with these economies, and the economic restructuring and changes will in fact be leveraged by the IMF.
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    As we look forward today without the advantage of 20/20 hindsight, I wonder what value we place on avoiding a substantial hit in the future to our own economy? Certainly the cost of the IMF to the United States is comparatively little for what I believe we would pay to avert a continuing world market crisis that could hit America and our economy like a shock wave.

    Working through the multilateral organizations such as the IMF, burden-sharing has spread. The costs and risks of the IMF are much less than if we had to bear them alone. The IMF costs us little but achieves tangible and substantial economic benefits.

    The IMF provides a toehold for the markets and countries so they can begin to make necessary corrections. The IMF-promoted economic restructuring and changes should help spread the economic burden fairly to those who have advanced credit and those who face the cuts in wages, profits and business. What is clear to me is that without the IMF, the prospects are likely worse for the Asian nations in this instance and for U.S. citizens.

    Mr. Chairman, we have seen the power of the U.S. ideals and ideas of self-determination in a mixed market economy change the face of the Earth. Democracy is on the rise around the globe, but to flourish it must be nourished, not undercut by extremes of market discipline theory more akin to economic Darwinism.

    Nothing would set back the decades of democratic progress more than the failure of the current mixed market economic systems, the failure to evolve and change to meet the fundamental needs of these nations and people. With a satisfactory resolution, economic strife and civil unrest in these nations will be resolved.
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    Clearly the IMF economic restructuring isn't enough. The economic power of Asia and Japan must respond with a stimulus of its economy. The seven years of flat growth in Japan have contributed significantly to the stagnant Asian circumstance. A revitalized economy for Japan could and should lead Asia back to a healthy economy.

    Mr. Chairman, I have joined in sponsoring the measure. I urge my colleagues to support this IMF replenishment.

    Chairman LEACH. Well, I thank my distinguished friend. How many on our side would like to make opening statements that would be brief? Under the format laid out, I would like to limit you each to about a minute-and-a-half, if that is OK.

    Mr. BACHUS. About a minute.

    Chairman LEACH. Mrs. Roukema.

    Mrs. ROUKEMA. Thank you, Mr. Chairman. I didn't come prepared with my one minute, but I just want to state unequivocally that I can't wait to hear from our panelists. I also want to say, without equivocation, that this is in our own self-interest. IMF funding is not foreign aid or bailing out banks. We have got to understand this objectively and not get it mixed up with a lot of other political issues, as unfortunately was done in the last Congress.

    I am most interested, also, in not only having strong statements on the need for our funding of the IMF—although, Mr. Chairman, I recognize your statement about not totally Americanized aid, and I support that—but at the same time we have got to look at how the IMF can be improved as well. But I am shaking my head at these—and I hope nobody misinterprets this—I am shaking my head at these politics making strange bedfellows of the left and the right here on this subject. I don't understand them.
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    And perhaps today we will put some of those unwarranted concerns to rest. At least, that is my expectation. We have the finest minds in the country here on this subject. And I thank the Chairman for the hearing.

    Chairman LEACH. Thank you, Mrs. Roukema.

    How many on the minority side seek recognition? Let me recognize Mr. Frank for a minute-and-a-half.

    Mr. FRANK. Thank you, Mr. Chairman. I regret that in this short time I won't be able to answer Mrs. Roukema's interest in my bedding habits, but we can talk about that later.

    What I do want to say is I agree to a great extent with what the gentleman from Delaware had to say. I don't think this is a question of whether or not we should do this, but with what conditions we should do it. But I want to be very clear, I am prepared to vote ''no'' if the conditions aren't satisfied.

    We have raised a number of concerns which for the first time in the areas, for instance, of democracy and labor rights and fair governance, we have been told are now of significance, and better late than never. But it is not enough to say, ''Well, yes, those are important, but we can't do them in a crisis.'' Because we have previously been told we couldn't do them when there was not a crisis. Now, since the world is going to be divided into times when there was not a crisis and times when there was a crisis, I am not happy being told we can't do them either time.
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    And I am prepared to work, and there are several areas; there is a question of IMF governance. I thought those pictures, Mr. Chairman, were borrowed from the IMF to show their view of transparency. There is a certain nonrepresentation of opacity to those pictures which seems to me to represent the IMF approach very well.

    We have the question of one of the worst-governed countries in the world from a moral standpoint, Indonesia, and what we will do about that. And we have finally the general question which Mr. Greenspan addressed to some extent yesterday, which is the deflationary aspects of this, and we need to know both in the international sphere or the domestic sphere, to what extent there will be public policies that will offset that deflation with its inevitable negative impacts on the lowest income people.

    So with those three sets of issues: IMF governance; particular attention to the enormous abuses of virtually every principle of decency that go on in Indonesia; and then a question of a global deflation or at least recessionary aspects and what we do to offset those. If those three can be addressed in a satisfactory way, and no one expects them to be solved instantly, then maybe, Mrs. Roukema, the left side of the bed will be left vacant, but I can't guarantee that.

    Chairman LEACH. I thank the gentleman. It is not the Chair's intent to respond to everyone, but I would point out that this painting is by a man named Kenneth Boland who is a post-abstract expressionist, and whether post-abstract expressionism applies to economic policy, we will see.

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    Mr. FRANK. I would think that would be a fair discussion of what we are getting here.

    Chairman LEACH. Mr. Bereuter.

    Mr. BEREUTER. Mr. Chairman, I would like to state for the record that I have serious reservations about some crucial elements of the approach being taken by the IMF in South Korea and Thailand. In contrast to the case of the usual fiscal basket cases demanding IMF help, these two countries did not have substantial fiscal, budgetary or inflationary problems. Having recently visited the Republic of Korea, I have come to the conclusion that Korea, and perhaps both countries, still have the fiscal strength to invest in appropriate public infrastructure which would ease the pressures they are only beginning to experience due to layoffs and increasing unemployment.

    Although I agree with many, if not all of the IMF's recommended reform measures, I am concerned that their austerity requirements may in some cases only exacerbate these nations' problems. I have a list of questions which I believe must be answered by the Administration before I and other open-minded colleagues can support any request for an IMF quota increase. Therefore, I wish to have my prepared questions entered into the record for Secretary Rubin so the Administration may address them.

    In closing, I want to state for the record that my reservation should in no way be misconstrued to imply opposition to a U.S. role in resolving the current crisis in Asia. Chairman Greenspan stated yesterday before the Senate Budget Committee, in what probably is conscious underestimation or understatement, ''We have experienced only the peripheral winds of the Asian crisis,'' end of quote.
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    I am convinced that we must commit ourselves to resolving this crisis, but resolve it in an appropriate manner. We must learn from the process and do what we can to put in place the necessary reforms to help these troubled countries and reform the IMF, and at the same time help to avoid similar problems in the future.

    Thank you, Mr. Chairman.

    Chairman LEACH. Well, thank you, Mr. Bereuter. And by unanimous consent, his questions as well as those of any other Members, some of whom are not here today, will be placed in the record.

    Mr. Kennedy.

    Mr. KENNEDY. Thank you, Mr. Chairman. I want to welcome the witnesses as well.

    I think there is a pretty good rule of thumb around here, which is, whenever Members of Congress start sounding like economists, the taxpayers better watch their wallets. But in this particular case, I think it is important that we recognize that this isn't about high economic theory, this is about American jobs. It is about whether or not we are going to maintain the jobs that we have that are dependent on exporting to Asian nations. It is about whether or not we are going to prevent Asian nations from coming in here and dumping goods on the American people, which in the short term might sound good, but the fact of the matter is we are going to be losing jobs in that circumstance as well.
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    Ultimately, we have a responsibility of making sure that the American taxpayer is protected and that the American worker is protected, and I think that that is the desire of those of us who are willing to support this package.

    What we don't want to do, in the desire to support the package, is to close our eyes to what could be tantamount to an elaborate Ponzi scheme that essentially creates the impression that we are underwriting these attempts at strong democracies and the like, when in fact we don't see the kind of labor reforms that are necessary to any real economic advances taking place. When we see huge amounts of money—and I would like to hear Secretary Cohen address the fact of how much money Indonesia alone is spending on its military, much less all these other countries that divert money we are going to give to them into activities that are not economic in nature, but rather military in nature. I just think there are a number of questions that need to be raised.

    I think many of us are willing to take the risk on making sure that the package is put together, but done properly and done with the necessary restrictions to make certain that the money goes toward rebuilding those economies, and not into the back pockets of a few or into the back pockets of the military.

    Thank you very much, Mr. Chairman.

    Chairman LEACH. Thank you very much.

    The gentleman from Alabama, Mr. Bachus.
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    Mr. BACHUS. Thank you. Gentlemen, I have to tell you right up front, I am quite skeptical about this request. Secretary Cohen, we are facing down Iraq today over an international agreement that hasn't been enforced, and I think our experience in Iraq tells us that sometimes we go in united with other world powers but too often we find ourselves alone at the end of the day. And we made an agreement, it was a world agreement, international agreement, a U.N. agreement, that if it has to be enforced, it looks like the United States is going to have to do it in Iraq. We went into Bosnia. We were told that was a six-month commitment.

    Now we had supposed ironclad enforcement powers with Iraq. Is this going to turn out to be another Iraq, where we are standing alone? Is this going to turn out to be another Bosnia, where four or five years later, we were told it was six months in Bosnia, now we are told we have an unlimited commitment. How big a commitment are we making to those Asian powers? That is one of my questions.

    I am also very concerned with the IMF. You are talking about an organization that didn't even see the warning signs in South Korea, and said they had a stable financial system six months before this happened. And if the New York Times article of January 14 is to be believed, their initial actions in Indonesia caused more trouble than they did good. So I want to know, I need some assurance this money is going to be well spent.

    Those are some of my concerns. I am going to address them in questions to you later. Thank you.

    Chairman LEACH. Thank you very much.
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    And we have Mr. Sanders. Let me just say, we agreed to a certain amount of time on each side. Does a fourth want to speak? Let me just say, by unanimous consent, why don't we accept a fourth statement on this side and a fourth on this side, because Dr. Paul would like to speak.

    We will go to the gentlelady from California.

    Ms. WATERS. Mr. Chairman, I would like to thank you for holding this hearing today on the East Asian economic crisis. We had a hearing not more than two months ago where we heard about the crisis and steps that are being taken to address the failing financial markets and economies in East Asia. Unfortunately, we are here today because the crisis in these countries continues.

    Facing us here in Congress is a request by the Administration for congressional action to provide $3.5 billion for the New Arrangements to Borrow and $14.5 billion for capital replenishment of the fund. The debate is going to be rather heated. It is my hope that this debate will be based on a full understanding of the issues and sound public policy objectives. We must all be concerned about ensuring global financial stability because our economic security is tied to the fate of other countries, but I also want the scope of our discussion to be broader. Ensuring global stability has economic, social and political dimensions that must be addressed.

    As we take action to stabilize a crisis, we must not forget that we have a responsibility to fashion solutions that address the underlying causes of this crisis. As we hear and read more about this crisis, it is becoming clear that doubtful speculation in these countries created fundamentally unsound economic expansion. Moreover, many of these governments are authoritarian regimes, with their political system acting as little more than an arm of the economic elite. We see the economic devastation that is being experienced by the people of these countries. As we work to stabilize our global economy, we must develop solutions that help to protect the citizens of those countries from bearing the brunt of our stabilization efforts.
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    While we currently enjoy stability here at home, we will not go untouched. It is estimated that the East Asian crisis will lead to a 1 1/2 percent decrease in our gross domestic product and that the flood of cheap imports could lead to significant domestic job loss. As we consider how we intervene, we must make sure our efforts to address the East Asian crisis are coupled with a domestic and urban agenda that addresses our urban crisis.

    We must have a domestic agenda that will benefit those communities across the country that have not experienced the economic boom being felt by others. The President will include in his budget some important initiatives on economic development and education that move us in the right direction. We must make sure this becomes a reality.

    Chairman LEACH. If the gentlelady will yield, could she conclude briefly, please.

    Ms. WATERS. Yes. Here on the committee we must also take a look at what has been described as the unintended consequences of the bailout. Chairman Greenspan, who is here today, as well as Comptroller of the Currency Eugene Ludwig and Director of Thrift Supervision Ellen Seidman, recently came out to Los Angeles to discuss the Community Reinvestment Act and how to revitalize our communities. This kind of work must continue.

    I will just cut this short by saying a few months ago I would have been an unequivocal ''no'' in opposition to the bailout. Today I am not. I have an open mind, and one of the reasons I have an open mind is because of something as simple and fundamental as Chairman Greenspan being willing to listen to what I am concerned about, and taking that trip to South Central Los Angeles and walking along a block that can be redeveloped, that can be invested in. And because of that, my mind is open, and I hope we can fashion a solution that works.
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    Chairman LEACH. Dr. Paul.

    Dr. PAUL. Thank you, Mr. Chairman. I think I can do this in less than a minute. I would like to make two points.

    It has been continuously argued that there is no cost. You wouldn't be here if there wasn't a cost. You want an $18 billion authorization. The American people don't buy that argument. You are not going to convince very many in the Congress and you are not going to convince the American people there is not a cost, or we wouldn't be going through this process.

    The other thing is, we should think about the cause, rather than propping up a bad system. Credit expansion in the Far East caused this problem. Our dollar participated in it. We have a reserve currency of the world. They buy our debt, they use our dollars as a reserve currency, they have expanded it, it is inevitable that you have to have these crises, so unless we address the basic currency problems, we cannot solve this for the future or protect our dollar.

    Thank you.

    Chairman LEACH. Thank you, Dr. Paul.

    For our last statement we will have Mr. Sanders.

    Mr. SANDERS. Thank you, Mr. Chairman, for holding the hearing, and welcome to our guests.
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    I have some concerns. I am always amazed at how quickly the United States Congress can move to protect the interests of the largest banks in this country, banks which are enjoying huge profits; and at the same time protect the interests of people like General Suharto, a cruel, authoritarian dictator whose own family is worth between $40 and $50 billion, boy, we move pretty quickly. Yet when some of us say, ''How about building some affordable housing?; How about policies to raise the minimum wage?''—which Mr. Greenspan opposes—''How about proposals dealing with the fact that 22 percent of our children live in poverty, the highest rate of childhood poverty in the industrialized world?'' My goodness, how slow we are to move.

    The bottom line for me is that large banks have made millions of dollars investing in corrupt dictatorships like Indonesia, made billions of dollars. Now they are about to lose some money, and instead of proclaiming the goal of personal responsibility and the virtues of the free enterprise system that we hear so much about, my goodness, these multibillion dollar institutions are running to the middle class taxpayers of this country and saying, ''Bail us out.'' Some of us have real concerns about that process.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Sanders.

    We would like to begin with the panel, and our first distinguished witness will be Secretary Rubin.

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    Secretary RUBIN. Thank you, Mr. Chairman. I would really like to respond to the various points that have been raised, but instead what I will do is I will make a statement, if I may, and I am sure we will have plenty of time later to get into a lot of very interesting and important questions.

    I would like to start, if I may, by discussing the financial instability in Asia, the international response to it, and discuss the key role of the IMF in addressing the immediate crisis, and also our efforts to modernize the architecture of the international financial system to better prevent crises in the future and better deal with them if they occur.

    First, I would like to welcome very much the support of Chairman Leach, Congressman LaFalce, cosponsors of the legislation that was admitted yesterday expressing support for much-needed funding for the International Monetary Fund.

    The United States has critical economic and national security interests at stake, as many of you have recognized in the comments you have made, in promoting restoration of financial stability. When we support IMF-led programs, our purpose is clear: to protect and benefit the American people, American workers and American businesses.

    The countries in Asia are our customers, our competitors and our security partners. Financial instability, economic distress, and depreciating currencies all have direct effects on the pace of our exports to the region, the competitiveness of our goods in world markets, the growth of our economy, and ultimately the well-being of American workers from farms to factories, and American businesses.
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    Thirty percent of American exports go to Asia, supporting millions of U.S. jobs, and we now export more to Asia than we do to Europe. In States like California, Oregon and Washington, exports to Asia account for over 50 percent of each State's total exports.

    Already major American companies such as Boeing, Motorola and Intel are reporting effects from this crisis, which impacts the workers in these companies and in the very large number of much smaller companies that supply these companies. However, thus far, the effects on our economy in our judgment are relatively moderate. The most likely scenario in our judgment, going forward to next year, the year we are now in, is solid growth and low inflation.

    But if the financial instability were to spread more broadly to other emerging markets, the impact on American workers, farms and businesses could be far greater, because roughly 40 percent of our total exports today go to developing and transitioning countries around the world, and because the spread could lead to currency depreciation in this broader range of countries.

    By doing everything sensible to help address the situation, we protect our workers, our farmers, and our businesses. When financial stability is reestablished, these Asian countries will once again be strong markets for American goods and have stronger currencies to help the competitiveness of our goods in worldwide markets, and the risk of financial instability spreading elsewhere through contagion will have been averted.

    The United States also has critical national security interests in seeing a restoration of financial stability in Asia, which Secretary Cohen will address.
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    The approach we have supported to resolve this issue has focused on four key elements: supporting reform programs in individual nations; providing temporary financial assistance when needed; encouraging strong action by the other major economic powers to promote growth in their countries, particularly Japan, which, as the largest economy in Asia would, if on a strong economic track led by domestic demand, be a larger market for Asian goods, a source of bank credit, and a radiator of confidence for the region; and, fourth, fostering policies in other developing and emerging countries to reduce the risk of contagion and prevent future crises. Today I would like to focus on the first two, both of which revolve around the IMF.

    First and most importantly, our approach requires that these countries take the concrete steps necessary to reform their economies. These programs, which are designed with the IMF, address the specific causes of each nation's crisis and are adapted as the situation changes. They are not austerity programs. At their core, these reform programs aim to strengthen financial systems, improve transparency and supervision, eliminate inappropriate interrelationships between banks, the government and commercial entities, open capital markets, and institute appropriate monetary and fiscal policies. Let me also stress, Mr. Chairman, the countries that do not take these steps, do not adopt such programs, do not receive financial assistance.

    The second element of our approach is to support these programs of reform with temporary financial assistance if necessary. When a nation's financial stability is at risk, this money provides the breathing room for a nation to establish the conditions to restore economic confidence, attract private capital, and resume growth. Without it, these nations face the risk of default, either by the government itself or systematically in the banking system, which could readily result in deep and prolonged distress in these countries, possible contagion effects for developing and emerging countries around the world, and potentially serious impacts on the industrialized countries, very much including our own, as developing country markets for our goods shrink and their currencies' depreciation increases, which undercuts the competitiveness of our goods.
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    Mr. Chairman, financial assistance, while critical for a short period, is not the key. Only when nations pursue sound policies will confidence and private capital return.

    The central provider of this financial assistance is the International Monetary Fund, with additional support from the World Bank and Asian Development Bank. In addition, the United States has joined the other industrial nations in indicating its willingness to provide supplementary financial resources in some situations, if a country fully adheres to the reform programs and further resources become necessary. Up to this point, we have not actually disbursed any funds, and to the extent they will be disbursed, it will be in the form of short-term loans to the sovereign, and the sovereign will be fully obligated for repayment.

    Mr. Chairman, the IMF, which has had 50 years of bipartisan support, is the right institution to be at the center of these support programs. The United States has worked forcefully to help the IMF meet the new challenges of the modern financial system. With tremendous expertise and technical resources, the IMF has the ability to shape effective reform programs. As a multinational organization, it is able to require economically distressed countries to accept conditions that no contributing nation could do on its own, bilaterally. And the IMF internationalizes the burden during a global financial crisis by using its pool of capital, instead of the United States having to bear this burden alone.

    The American people also need to know that over the past 50 years, our contribution to the IMF has not cost the taxpayer one dime. There are no budget outlays. Our contribution does not increase the deficit or divert resources from other spending priorities.

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    Today we come here to ask you to support two critical IMF funding requests: an increase in our quota subscription, and an augmented backup facility, the New Arrangements to Borrow, to supplement the IMF's resources, if needed, in the event of crises such as this one which critically affect our economic and national security interests.

    This funding is absolutely necessary to enable the IMF to respond quickly and effectively if this financial instability were to spread and intensify, which we obviously all want to avoid, and to deal with future crises that could similarly affect the interests of the American people. Moreover, failure to provide funding could reduce our leverage in the IMF, and could shake confidence in American leadership in the global economy at a time when confidence and American leadership are so critically important in reestablishing stability in Asia.

    Some have said supporting the IMF and providing financial assistance to these countries shields investors and countries from the consequences of bad decisions and sows the seeds of future crises. With respect to the countries, it should be obvious they are not now shielded from the effects of bad decisions. They may receive temporary financial assistance, but these countries inevitably go through a very difficult economic period before recovery takes hold.

    Let me also add that it is the financial instability and the loss of confidence, and the problems in the economy that gave rise to the financial instability, not the reform programs, that leads to economic hardship for these countries. Reform is the solution, not the problem. The alternative, not acting to address the root causes of the crisis, would create a serious likelihood of default either by the sovereign or, as I said a moment ago, systematically by the banking sector, which would lead to far longer and far deeper economic duress for the people of these countries.
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    As to investors and lenders, the problem is far more complicated. The right principle is that investors and creditors should bear the full consequences of their decisions. We would not spend one nickel to help a bank or an investor.

    In fact, vast numbers of banks, investors and other creditors have taken large losses in Asia. For example, three major American banks, J.P. Morgan, Chase and Citibank, have reported developments in Asia have had a substantial negative impact on their profits. Just yesterday, the largest bank in Germany announced it would set aside three-quarters-of-a-billion dollars to cover potential losses on loans to the region.

    However, it is true that a by-product of programs designed to restore stability and growth may be that some creditors will be protected from the full consequences of their actions. But any action to force investors and creditors involuntarily to take losses in the context of these programs, however appropriate that might seem, would risk serious adverse consequences. It could cause banks to pull their money out of the country involved. It could reduce that nation's ability to access new sources of private capital and, perhaps most troubling, it could cause banks to pull back from other emerging markets, which would cause serious global economic disruptions, including in our own economy.

    Having said that, it is critically important, as I have said on other occasions, that we work toward changing the global financial architecture so that creditors and investors can bear the consequences of their decisions as fully as possible. But devising such architectural changes is difficult and complex. We cannot wait until that work is complete to take the steps necessary to deal with the crisis at hand that so powerfully affects our interests, or to provide funding that will equip the IMF to deal with a substantial spread of the present financial instability, which we are all working to prevent, should such a spread occur, or to deal with future crises.
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    Others have said these programs do not require nations to take specific steps to promote the environment, protect core labor standards and promote human rights. Let me be clear: These issues are critically important to the United States, because they reflect our core values and because they are central to a successful modern economy. We will work with the international financial institutions and other countries around the globe to effectively promote these objectives.

    But designing programs and obtaining sustained adherence to programs to restore financial stability in countries in crisis is extremely difficult, given the wrenching changes that must be instituted in a relatively brief period of time. To try to accomplish additional objectives, important as these additional objectives unquestionably are, in the same brief period of time would complicate and delay the effort and greatly reduce its chance of success.

    Moreover, if one set of objectives were added, others would seek to add still additional objectives, and the whole undertaking would become impossible. Failure, in turn, would most likely greatly prolong economic duress in the countries, hurting their workers as well as our exports, our own workers and competitiveness.

    Moreover, failure raises the further risk of spreading financial instability to other developing countries, with the additional harm to those countries and to our workers. In contrast, financial stability and growth provide an environment most conducive to achieving and advancing human and labor rights and environmental protection, while instability and economic duress are inimicable to those objectives.
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    Even as we have worked to resolve this crisis, we have begun an intensive internal effort with the Federal Reserve Board and others to analyze possible mechanisms for dealing with new challenges to the international financial system. All of this follows on the work of the last four years, when we have been working with financial institutions to improve crisis prevention and crisis response in the global financial system.

    This initiative will focus on four objectives: improving transparency and disclosure; strengthening international financial institutions; developing the role of the private sector in bearing an appropriate share of burden in times of crisis, though that is an extremely complicated and difficult objective, but one that nevertheless is seemingly important for the reasons we discussed; and strengthening the regulation of financial institutions in emerging economies.

    While nobody can say for certain what will happen in the current situation, the countries in Asia that are experiencing these difficulties have great underlying strengths, such as high savings rates, firm commitments to education, and strong work ethics. With a sustained commitment to the necessary reforms, they are well-positioned to establish strong economic growth and strong currencies going forward, which is enormously in their interest and enormously in our interest.

    While some Members of Congress who agree with our overall approach will disagree with specific details of the programs we support, I strongly urge Members not to let these differences on specifics stand in the way of the larger purpose of support for the IMF. We must all join together and work vigorously to respond to the financial crisis at hand, to be equipped to function as effectively as possible to prevent future crises and, if they occur, to deal with them as effectively as possible.
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    Mr. Chairman, a strong IMF has been critical to dealing with financial instability in Asia. An IMF with the capacity to respond effectively if this crisis were to deepen and spread and to deal with future crises is critical to protecting and promoting the interests of the American people. We very much look forward to working with you on this most important undertaking. Thank you very much.

    Chairman LEACH. Thank you, Mr. Secretary.

    Secretary Cohen.


    Secretary COHEN. Thank you very much, Mr. Chairman. As you noted, this is perhaps the first time a Secretary of Defense has appeared before the Banking Committee. And let me say to some of my former colleagues, in 24 years serving in Congress I didn't have a chance to appear before this committee in any capacity, so I welcome the opportunity now.

    Mr. Chairman, I do have a fairly lengthy statement which I am going to submit for the record.

    Chairman LEACH. Without objection.

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    Secretary COHEN. I will try and summarize it. I know you are interested in moving along as quickly as possible and of course hearing from Mr. Greenspan.

    Security policy, very basically, cannot be separated from economic policy. This is not an argument I came to make today just because it happens to be accommodating to the current crisis of the moment. This is something that has been historically true.

    There was the false notion that somehow once the Cold War was over, that economic power and influence would really guarantee and dominate security interests, and of course nothing could be further from the truth. From the very first days of the Cold War, when Paul Nitze, who is responsible for drafting MSC–68, made it very clear, and I can submit the language to you, but he made it very clear that policy of ours was designed for two things: Number one, to contain the Soviet Union and its aggression; and, number two, to be economically diplomatically engaged in world affairs and to promote international stability and international economic prosperity. Those were the key elements in that document. They were true for the entire period through the Cold War. They remain true today. You cannot separate out economics and security. They are interrelated.

    We went through last year a very profound examination of our policy in trying to devise our strategy and programs for the future in the Department of Defense. It was called the Quadrennial Defense Review. In the QDR, we came up with a shorthand summary of what we were trying to do in the world with our policy, and it came down to three words: It was ''shape, respond, prepare.''

    We wanted to shape the environment in ways that were friendly to U.S. interests and to those of our allies. And to do that, we not only had to have a forward-deployed posture, which we have, not only having our military personnel, who are forward-deployed all over the globe, shaping people's influence about our power, our competence, our professionalism, our responsibility to them and our commitment to them. That was all part of it, but also shaping it through our diplomats and also through our economic engagement. That has all been part of shaping the environment so the United States could remain the most prosperous Nation in the world.
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    If I could summarize it in a shorthand fashion, I would say that security breeds stability. Stability in turn attracts investment. Investment in turn yields prosperity. Then you have something of a virtual cycle, because the more prosperity, the more security, stability, and the cycle continues.

    So it is very clear, for example, that business follows the flag. You are not going to have investment into those countries and those regions where there is great instability. If there is stability, business will follow. If there isn't, they will pull out. So it is very key that we understand that security itself breeds stability, which in turn allows for the investment, which is really crucial in terms of what we are talking about as far as Asia today.

    Let me tell you how successful we have been on a security level for the past 40 or 50 years. I was following the Chairman in his committee's footsteps throughout Asia just recently. I think you were one step ahead of me each step along the way. It was fascinating to me to see how the attitudes have changed toward the United States by virtue of, yes, our majority power, but also by virtue of our economic power in terms of what has happened over the past few years.

    When I went, for example, to Singapore, Singapore announced upon my arrival that they were building a massive pier that would now accommodate our aircraft carriers, and we were welcome to send our aircraft carriers and any other of our military equipment and personnel to Singapore on visits. What a change from the attitude that might have taken place five or ten years ago.
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    At the very same time that we are talking about having our aircraft carriers visit Singapore, there was an announcement made that we had reached an agreement with the Philippines. We were now going to be able to train and exercise with the Philippine government and their military, the so-called SOFA Agreement—Stations And Forces Agreement—another very positive development for our country.

    We recently released the U.S.-Japan defense guidelines, and revised those guidelines to clarify what the role of the United States and Japan, which is crucial for the stability of that region, is going to be for the future; a very important document, very important to Japan and also important to all of the countries in Southeast Asia, and most importantly to China as well, another very positive step.

    In Korea we have, once again, announced our intention to sign a document this past summer, and I reaffirmed that when I was in Korea just after this committee, that even assuming, we hope, that the Koreas will be united in a peaceful fashion in the foreseeable future, assuming that takes place, we still intend to maintain a presence in Korea and throughout the region, another positive development.

    Finally, with respect to China, here I think there were some really good things in terms of what we have been able to do with China. China is an emerging power. There is no one that would contest that viewpoint. They are going to be certainly a regional power and an emerging power in the near future. I signed a maritime safety consultative agreement sort of establishing rules of the road, rules of the sea, the first time this agreement has been signed, a very positive development to avoid incidents at sea with China, whose sea power is bound to expand in the future.
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    I was the first, I think, Westerner, if not Secretary of Defense, to be admitted to their air defense command center in Beijing. It was something quite different in terms of the attitude on the part of the Chinese government about allowing U.S. officials or Western officials into their command center. That was something that is leading to more and more transparency in dealing with China itself.

    They made a pledge and they affirmed that, and went even further than when the President was there and said no more transfers of cruise missiles to Iran, which could threaten our ships in the Gulf. They will not transfer more technology, nor will they provide the kind of technology that would allow Iran to develop this capability contingency, very important to our security interests in the Gulf. They pledged no nuclear technology to go to Iran, which, of course, is seeking to build their own nuclear capability.

    Finally, one of the other firsts was I was allowed to address the PLA's Academy of Military Sciences. It was an extraordinary experience for me to have several hundred of their academicians sit and listen to me deliver a statement about our security policy for the future: that yes, we were going to maintain a strong relationship with Japan; and yes, we were going to have our facilities that we could visit in Singapore; and yes, we had an agreement with the Philippines,; and yes, we were going to be in the region for the foreseeable, indefinite future, because that was part of our security interests, and they were the principal beneficiaries of that. It was an extraordinary experience for me to have that opportunity.

    I mention all of this because I think much of this is at stake. Secretary Rubin has just indicated why we should be concerned about that region, the fastest growing economy perhaps in the world, our fourth largest trading partner, strategic sea lanes of communication. These are some of the most heavily trafficked sea lanes in the world. If you think about the choke points that all of those ships have to go through in that region, that is all at stake.
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    And I must tell you that Southeast Asia is critical to how we manage our relationship with China. How much we support stability in the region will be critical for how we manage our relationship with China, which I hope will be in a very positive way. So we use the word ''crisis.'' It comes from the original Greek meaning ''turning point.'' We are at a turning point in terms of how we deal with this crisis.

    If we turn away, if we think we can simply exist in splendid isolation and sort of envelop ourselves in sort of a continental cocoon here in the United States, I think we are sadly mistaken. The fact is that we need to be deeply engaged. We need to do so, be so, in a way, if I could respond to Congressman Castle, in a way that doesn't forfeit American taxpayer dollars and simply squander them, without regard to the consequences.

    But I think indifference, if we would choose to be indifferent in this respect, runs a risk of forfeiting everything that we have achieved in the past 50 years in that region. We have a deep security interest in that region. We have had three wars. We have lost 100,000 people during this century in that part of the world. There are dynamics under way, that could be under way, where they have had enormous prosperity in the last several decades. But when that affluence starts to abate, then the regional hostilities, the ethnic conflicts, the ethnic tensions could spill over and make that a very dangerous region, indeed.

    And if we are not prepared to remain engaged in that fashion, I think we would forfeit all that has been achieved for the past 50 years. At least we run that risk. At least that is the risk that we should be aware of that we are running.

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    So I came here today to offer the benefit of my experience over there. I spent a long time in traveling all throughout Asia for the past 18 years when I was in the Senate. I can simply say I think it is one of the most important regions in the world. We have important security interests, and we ought not to jeopardize them, if we can possibly make a contribution without forfeiting our taxpayers' dollars.

    A couple of quick points. I suspect I won't be able to stay long enough to answer all the questions that might come up. Let me just address a couple of them. With respect to Indonesia's military, I am told that their budget for 1995–1996 is $2.7 billion, or 1.4 percent of their GDP, and about one-half of what we spend as a percentage of GDP in this country. Very little military equipment comes from the United States to Indonesia, so we are not looking at a major military consequence as far as our relationship with them.

    I would like to just respond, if I could, to Mr. Bachus, just quickly. Do we have to act alone in Iraq? My answer is I hope we don't have to act alone in Iraq. In the Persian Gulf, we had many nations who had supported our efforts in the Persian Gulf. If you look at the facts, it was the United States who carried the heavy load. It was our troops, our logistics, our intelligence, and our 500,000 troops there carrying out the major effort, even though we had the strong support of a number of key allies, and we shouldn't diminish that, but we were the principal actors.

    With respect to Iraq, we are working with our allies right now. Secretary Albright is in Europe explaining our position relative to Saddam Hussein, encouraging them to support the United States. I believe if there is a strong united support that is exhibited by the Security Council members and the United Nations, that makes conflict less likely rather than more likely, because Saddam Hussein has two goals.
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    Number one, he wants the inspectors out. For the most part they have been negated as far as effectiveness. But number two, he wants the sanctions to end. Those are his goals. If he thinks he can split the Security Council members, then he has a better chance of seeing an end to what he has seen as a restriction on his ability to generate the kind of revenues that will allow him to rebuild his military, which he has been precluded from doing.

    We have a no-fly zone in the North, we have a no-fly zone in the South. We have him contained. And if we can have the inspectors on the ground, we make it very difficult for him to reconstitute his weapons of mass destruction. He has lied about them in the past. He said he had no chemicals, he had no biologicals.

    We found out as a result of the defector, his son-in-law, who he since has murdered, that he had something in the neighborhood of 2,100 gallons of anthrax, that he had nearly 4 tons of VX, that he had missiles that were, in fact, equipped to carry anthrax in their warheads.

    So he does, in fact, possess the capability—or has possessed it in the past—and we are still unsure how much he has, but we know he has the capability, and we know from his past actions he has not hesitated to use it against either the Iranians or Kurds in the North, and would not hesitate to use it in some capacity in the future.

    So for these reasons we think it is very important that the United Nations remain solid and unified in its statements about condemnation of his actions, and the more solid the United Nations is, the less likely conflict will be.
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    On Bosnia, we have come down from 27,000 to about 8,500 or 8,000 troops right now. We hope to get much lower in the near future. We have made an enormous difference. Frankly, I had the same hesitations that all of you have had about Bosnia when I was a Member of Congress, and I went there on a number of occasions. What I have seen is a remarkable transformation that has taken place in that country. It would not have happened without the United States unless we became engaged. It wasn't going to happen with the European nations. The slaughter would have continued. The slaughter has stopped.

    Things have started to happen in a very positive way there. I won't take your time to articulate all of the positive developments that are taking place that would not have happened but for the United States. It is not yet finished. Hopefully we can see an end to it, and we are now working with our NATO allies to see what those benchmarks and timeframes can be.

    Let me just conclude by saying I think that we have enormous issues at stake in Asia, and I think how we proceed and how we define what our responses are going to be, and what sort of changes have to take place, and how we get more accountability from those nations who don't have the same ideals that we do in terms of their democracies, those are all important.

    But what is critically important is that we not be seen as turning away, saying it is an Asian problem. It is not an Asian problem. It is a global problem. We have to be engaged globally or forfeit our influence in that region of the world, and perhaps others.

    Thank you, Mr. Chairman.

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    Chairman LEACH. Mr. Secretary, thank you for that less than opaque statement.

    Dr. Greenspan, you are not obligated to address Bosnia.


    Mr. GREENSPAN. I am more disappointed than you know, Mr. Chairman.

    I, too, have a rather extended written statement, and ask that my full remarks be included for the record.

    Chairman LEACH. Without objection, sir.

    Mr. GREENSPAN. The global financial system has been evolving rapidly in recent years. Technology has radically reduced the costs of borrowing and lending across traditional national borders, facilitating the development of new instruments and drawing in new players.

    One result has been a massive increase in capital flows. Information is transmitted instantaneously around the world, and huge shifts in the supply and demand for funds naturally follows.

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    This burgeoning global system has been demonstrated to be a highly efficient structure that has significantly facilitated cross-border trade in goods and services, and, accordingly, has made a substantial contribution to standards of living worldwide. Its efficiency exposes and punishes underlying economic weakness swiftly and decisively. Regrettably, it also appears to have facilitated the transmission of financial disturbances far more effectively than ever before.

    As I testified before this committee three years ago, the then-emerging Mexican crisis was the first such episode associated with our new high-tech international financial system. The current Asian crisis is the second.

    We do not as yet fully understand the new system's dynamics. We are learning fast, and need to update and modify our institutions and practices to reduce the risks inherent in the new regime. Meanwhile, we have to confront the current crisis with the institutions and techniques we have.

    Many argue that the current crisis should be allowed to run its course without support from the International Monetary Fund or the bilateral financial backing of other nations. They assert that allowing this crisis to play out, while doubtless having additional negative effects on growth in Asia and engendering greater spillovers onto the rest of the world, is not likely to have a large or lasting impact on the United States and the world economy. They may well be correct in their judgment.

    There is, however, a small but not negligible probability that the upset in East Asia could have unexpectedly negative effects on Japan, Latin America, and Eastern and Central Europe that in turn could have repercussions elsewhere, including the United States. Thus, while the probability of such an outcome may be small, its consequences, in my judgment, should not be left solely to chance. We have observed that global financial markets, as currently organized, do not always achieve an appropriate equilibrium, or at least require time to stabilize.
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    Opponents of the IMF also argue that the substantial financial backing, by cushioning the losses of imprudent investors, could exacerbate the so-called moral hazard. Moral hazard arises, as you know, when investors can reap the rewards from their actions when things go well, but do not suffer the full consequences when things go badly. Such a reward structure obviously could encourage excessive risk-taking.

    To be sure, this is a problem, though with respect to Asia, some investors have to date suffered substantial losses. Asian equity losses, excluding Japan, since June of 1997 worldwide are estimated to have exceeded $700 billion, of which more than $30 billion has been lost by U.S. investors. Substantial further losses have been recorded also in bonds and real estate.

    Moreover, the policy conditionality associated principally with IMF lending, which dictates economic and financial discipline and structural change, helps to mitigate some of the moral hazard concerns. Such conditionality is also critical to the success of the overall stabilization effort.

    The root of the problems is poor public policy that has resulted in misguided investments and very weak financial sectors. Convincing a sovereign nation to alter destructive policies that impair its own performance and threaten contagion to its neighbors is best handled by an international financial institution such as the IMF.

    What we have in place today to respond to crises should be supported, even as we work to improve those mechanisms and institutions. Accordingly, I fully back the Administration's request to augment the financial resources of the IMF through U.S. participation in the New Arrangements to Borrow and an increase in the U.S. quota in the IMF.
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    Hopefully, neither will turn out to be needed, or more appropriately, they will turn out not to be needed and no funds will be drawn. But it is better to have it available if that turns out not to be the case, and quick response to a pending crisis is essential.

    I also believe it is important to have mechanisms, such as the Treasury Department's Exchange Stabilization Fund, that permit the United States in exceptional circumstances to provide temporary bilateral financial support, often at short notice, under appropriate conditions, and, on occasion, in cooperation with other countries.

    In the remainder of my written testimony, I endeavor to carry forward the analysis of the current crisis presented in my mid-November testimony before this committee. I also explored in that testimony possible explanations for its particular virulence.

    As a consequence of the unwinding of market restrictions and regulations, and the rapid increase in technology, the international financial system has expanded at a pace far faster than either domestic GDP or cross-border trade. To reduce the risk of systemic crises in such an environment, an enhanced regime of market incentives involving greater sensitivity to market signals, more information to make those signals more robust, and broader securities markets coupled with better supervision is essential. Obviously, appropriate macropolicies, as ever, are assumed. But attention to microdetails is becoming increasingly pressing.

    Nonetheless, it is reasonable to expect that despite endeavors at risk containment and prevention, the system may fail in some instances, triggering vicious cycles and all the associated contagion for innocent bystanders. A backup source of international financial support provided only with agreed conditions to address underlying problems—a task assigned to the IMF—can play an essential stabilizing role. The availability of such support must be limited, however, because its size cannot be expected to expand at the pace of the international financial system. I doubt if there will be worldwide political support for that.
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    In closing, Mr. Chairman, I should like to stress that the significant degree of volatility that continues to exist in Asian markets indicates exceptionally high levels of uncertainty bordering on panic. It is not reasonable to expect that the substantial investments needed to implement meaningful structural reforms can proceed very far until we observe a simmering down of frenetic changes in asset prices and exchange rates. That is likely to result only when stability of banking and financial systems generally is achieved.

    As I indicated in my November testimony, the failure of the fragile banking systems of East Asia to hold steady as financial pressures increased was a defining element in the developing crisis. The stabilization of those banking systems is crucial if confidence that has been so thoroughly undercut in this most debilitating crisis is to be restored.

    Thank you very much, Mr. Chairman. I look forward to answering questions.

    Chairman LEACH. Thank you, Dr. Greenspan.

    Secretary Summers.


    Mr. SUMMERS. I have no prepared statement, Mr. Chairman. I would only just note that on my trip to Asia, which crisscrossed with yours and with Secretary Cohen's, I came back very much impressed by both the gravity of the problems we face, and by the extent to which those in Asia, as they sought financial confidence, were watching what we in the United States and the IMF did.
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    Chairman LEACH. Thank you very much.

    We will begin with questions. I would like to begin with Secretary Cohen. Let me inform the panel that the Secretary is obligated to leave at an early point, and given the issues of the day, we are understanding, and also very appreciative of your testimony.

    Sir, you commented that politics and economics are increasingly intertwined. There have been a number of observers of international affairs that have pointed out that perhaps the last half century strategic decisions have been driven by political factors, and in the next half century, they may increasingly be driven by economic.

    If the United States fails to lead in the multilateral arena of finance in institutions like the IMF, would it be fair to conclude that we will have a more difficult leading in other multilateral fora that might be of a more political and strategic nature?

    Secretary COHEN. I think the clear answer to that is yes. I can point by way of example to Thailand. The Thais really felt quite hurt by the fact that when they were experiencing their economic difficulties, as they are today, there was no sound of support coming from the United States. They had been a very strong friend of the United States, certainly during the Cold War, and the feeling was, well, now that the Cold War is over, that we really care very little about them. That was not the case, but to pick up on what Congressman Castle has indicated, it came up very quickly with little, if any, warning. I don't think anyone, including the United States, was prepared to respond that quickly. But it left some wounds.

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    I recently visited with them, and they have a new administration with an incredibly talented new foreign minister and a new prime minister, and they are determined to set their house in order. But the very notion that the United States was unwilling to participate in some form, and it wasn't a question of how much, but whether we would participate in any form, that really sent the signal that perhaps the United States was pulling away. This is the one thing that we have to be very careful about in our dealings not only with our European friends and allies, but especially in Asia, which is more remote from our shores as such as far as their perception.

    If we send a signal that we are moving away, slipping away, coming back to the United States, this is something I tried to deal with last year when I said during the Quadrennial Defense Review, we are going to have approximately 100,000 of our troops forward-deployed throughout the region.

    I said that for a very important reason, because if they detect that we are pulling out and downsizing our forces, pulling them back, they will take action in their own self-interest, which may be an arms race of their own. It may be associating with other countries in a way that would not be favorable to the United States' interest. But they will obviously have to act in a way that protects their interests.

    We believe that by being engaged with them, by having these forward-deployed forces, that we reassure them that, number one, we are a power; number two, we are reliable; number three, that we are concerned about their welfare, not because it is necessarily a pure generosity on our part, but it is in our self-interest to be concerned about their security, because it relates directly to ours.
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    So I think the short answer is that our response in this particular arena will have, I think, far-reaching implications for future relations in other types of regional associations, be it ASEAN, the ASEAN regional forum, and any type of international organization. We will have more difficulty because we will be seen as either becoming more nationalistic in our focus, rejecting the heritage that we have had from Paul Nitze and others, Weisman and others of prior generations.

    Secretary RUBIN. Can I just augment the Secretary's comments, Mr. Chairman, just so we have it? I think it is important, since we are on the record here.

    With respect to Thailand I agree with Secretary Cohen, it is very, very important that we be involved in helping Thailand get back on its feet.

    With respect to the initial program, what we did was to work very actively through the IMF to support a large, well-financed, and strong program. At that time, as you may remember, we had restrictions on the Exchange Stabilization Fund which prevented us from functioning in many respects, although there were some other reasons why we felt, given a well-financed IMF program, it might not be necessary to have American additions to the other international support, or international involvement. But we were very deeply involved in the IMF program to make sure it was substantial and well structured.

    Secretary COHEN. One of the countries that I really did not focus on in my opening remarks, South Korea, they were experiencing great difficulty as well. We happen to have 37,000 of our troops in South Korea. It is very important that we do whatever we can to work with the new South Korean government to make sure that we send a signal not only to the South Korean government, but we send it to the North that they not mistake U.S. either lack of interest or lack of commitment as a signal that perhaps we will not be there either when it comes time for any kind of a military action on their part. We ought not to tempt them to think that there is any lack of resolve on our part.
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    That is also another issue dealing with economics and security which is very much at the heart of matters right now.

    Chairman LEACH. Thank you, gentleman.

    I frankly have another question, but I think it would require a lengthy response, so I would rather save that and turn to Mr. LaFalce.

    Mr. LAFALCE. Thank you very much, Mr. Chairman.

    Mr. Secretary, in your prepared statement you say that any action to force creditors or to force investors and creditors involuntarily to take losses would risk serious adverse consequences. That envisions a stick approach, force and coercion. I don't think anyone is talking about that. We are talking about conditionality as part of IMF assistance, a carrot approach: ''If you want our assistance, then you are going to have to share in the sacrifices.''

    We did this with New York City, we did this with the Chrysler loan guarantee. That, too, was the essence of the Brady bonds. I worked with Secretary Brady, Edward Holford, and so forth.

    And even talking about the desirability and necessity of that could help. It could help the sovereign governments, such as Korea, in their rearrangements of the existing debtor-creditor relationships. So we have a much lower rate above LIBOR than we otherwise would have had on account of that for the renewal bonds, and so forth.
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    Don't you think this is an appropriate role for the Treasury, an appropriate role for the Federal Reserve Board, Mr. Greenspan, and an appropriate role most especially of the IMF; that is, to use whatever assistance the IMF has as a carrot to bring about shared sacrifices for a rearrangement of the existing debtor-creditor relationship?

    Secretary RUBIN. Mr. LaFalce, I think the concept of appropriate consequence, of taking appropriate consequence for investments, is exactly right.

    I think that in the case of the Brady bonds, as you know, you had about something a little less than 10 years, almost 10 years, of economic duress in Latin America, 10 years of lost growth. It has often been called the lost decade. That is precisely what happened in health care, 10 years of economic duress.

    Mr. LAFALCE. Because we waited for almost 10 years before we came up with the Brady bonds. We shouldn't wait now.

    Secretary RUBIN. We waited, but they had a different circumstance, enormous debt loads related to the GDP of the country. I think it was a very different set of circumstances. I don't think it is actually a particularly good model in terms of what we want to accomplish. I think it is what we want to avoid, if we can.

    The problem with our objective, as I said in my remarks, the mechanisms we now have, if the IMF were to say ''We will provide the resources, but only if you take losses, or those would be determined, on your loans,'' one scenario is that they will simply say—they have a run on the bank, in effect, with respect to the country involved.
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    The other risk, I think really the much greater risk, is they will call down to their foreign country management desks, like we used to have with the firm I was involved with, and say, ''If they are going to function this way, get us out of other countries. We have a problem in this country, but pull back our exposure elsewhere.'' And it is setting off that kind of a reaction around the world that is the danger of doing that in the current context.

    But we certainly agree with you in the objective. I think we all need to work to try to find mechanisms that enable us to realize the objective without suffering the consequence.

    I would point out in the Korean situation, I think it would be fair to say largely with the catalytic effort of the United States, the banks have coalesced around playing a very important and critical role. I think there is something in that that can be a model for the future.

    Mr. LAFALCE. What about the concept of using the IMF as a de facto referee in bankruptcy in the future, not to bring about the bankruptcy of institutions, but to help bring about the rearrangement of the debtor-creditor relationship, point one; and point number two, it hasn't been discussed much, but in my conversations with a number of individuals, they have stressed to me the importance of the adoption by these countries of their own bankruptcy laws, so that they can deal with their private sector debtor-creditor imbalances.

    Secretary RUBIN. The brief answer, Mr. LaFalce, on your second point, adoption of bankruptcy laws, we do think that is important. I think we have actually been encouraging that in several countries.
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    Mr. SUMMERS. With the good work of our executive director at the IMF, the IMF programs for all three countries, Indonesia, Thailand, and Korea, call for the development and implementation of bankruptcy statutes and procedures.

    Secretary RUBIN. On your first point, Mr. LaFalce, that is an issue—that is one of a goodly number of ideas that people have been discussing with respect to what the future architecture would be like. I don't have a comment on the merits right now because the analysis that this is going to require I think is going to be very substantial, and more than somewhat time-consuming. But it is those kinds of ideas that we need to analyze and very rigorously get into. But they are enormously and mind-bogglingly complex. It is these kinds of ideas that we will be looking at.

    Mr. LAFALCE. Mr. Greenspan, do you have any comments on any of the issues I have raised?

    Mr. GREENSPAN. Yes. I would like to underscore the question of the importance of bankruptcy. It seems like a strictly simple legal question, but it has profoundly important economic implications because one of the characteristics of this new high-tech international financial system is that funds flow in and out of countries fairly rapidly.

    One of the reasons they flow out of countries in emerging markets with very poor or no bankruptcy statutes is that there is no way to allocate losses. Obviously, you work very hard as an investor not to be caught in an eroding situation for fear that when push comes to shove, at the end of the day, you will lose everything.
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    If you have an effective bankruptcy statute, especially for cross-border trading, people will be more inclined to hold still, recognizing that in the event of default the types of haircuts that will occur will be uniform across the board and of modest dimension.

    But if you are concerned that you will be at the end of the list, and for political reasons or other reasons you will be, as a foreigner, essentially given a 100 percent haircut, you are going to move much more quickly than you otherwise would. And I think a goodly part of what we have observed in Southeast Asia, especially Indonesia, has been a reflection of this phenomenon.

    It is an extraordinarily important institutional change, which I believe can have very significantly important, positive consequences.

    Mr. LAFALCE. Thank you very much.

    Chairman LEACH. Thank you, Mr. LaFalce.

    If I could have ten seconds, Mrs. Roukema, let me just say, I think the American public and the committee owes the Secretary of the Treasury a note of appreciation.

    When he says abstractly that the United States Government helped lead in pressing banks to reach negotiations, I think the Secretary's leadership has been eminently reasonable in pressing the banks to move before the brunt of IMF resources are provided. It was an appropriate strategy that I think is shared by everyone in this committee, whether or not they support the IMF itself.
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    Mrs. Roukema.

    Mrs. ROUKEMA. Thank you, Mr. Chairman. As I think you sensed from my opening statement, I am in agreement with your endorsement of what needs to be done to deal with this contagion, and particularly with what the IMF has done at this point in time, not necessarily endorsing every particular action, but the need for support and the recapitalization of the Fund.

    I want to thank Secretary Cohen for his brilliant addition to this discussion. I think it is very important for the American people to understand the military and national defense component of this issue. I thought it was a brilliant dissertation.

    I want to go back, and follow up, regarding the bankruptcy question, and I think Mr. LaFalce opened the discussion in that area. I want to talk about, and get comments from both Treasury as well as Chairman Greenspan regarding not only conditionality and the requirements for particular IMF actions, but also looking to the future. In Chairman Greenspan's terms, given the new high-tech global financial regime, how do we deal with the IMF now and on future occasions? Should we be talking about conditionality?

    I think we are past that point, although maybe not. I would like you to tell me if we are past the point of imposing conditions.

    Mr. Summers, you have been over there dealing at the grassroots with the problem.
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    But given the present problem, and knowing what questions legitimately have been raised about the IMF—and I am not necessarily opposed to the actions they have taken, but there are legitimate questions that you have outlined in your own statements. Can you give us more specificity about what reforms you think would be necessary in the reauthorization of IMF and their practices?

    Chairman Greenspan, could you lead off, please?

    Mr. GREENSPAN. Let me say first that we are dealing with a new international phenomenon which essentially, because of the major technological changes that have occurred in the last decade or so, is taking on dimensions quite different from the international structure that we have seen in the past.

    I wish there were a simple textbook which we could read to tell us exactly how it works in all details and enable us to make a very sound, sensible set of judgments of precisely what the form of conditionality should be in every single instance. Regrettably, we don't have that. We are learning fairly quickly as to how this system is working, and I think the IMF is also.

    In the past I have been a critic of the things that the IMF has done. On occasion they have made mistakes. But in this current situation, very specifically in the most recent actions, they have been quite sensitive to the forces which I think are fundamentally contributing to the instability and they are addressing it in an appropriate manner.

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    That is not to say that when we look back on this whole experience, which is unique in very many respects, that we will not think of new ways to structure an institution such as the IMF, which has been evolving quite significantly since its initiation out of the Bretton Woods agreement of 1944. But I don't think that we can at this stage give you a complete list. We can come forward with certain very important issues, and I raise a number of them in my written statement.

    But what is important at this moment is to move forward with the Administration's request. I hope that Barney Frank is mistaken that when this issue passes we will go back to square one. I don't believe that.

    This crisis has come as a real shock, because it has been utterly unanticipated with respect to its degree of virulence. Enough things have changed that we are not going to go back in our cocoon, but we are going to move forward until we get in place a structure which will enable the very potent market forces which are so effectively galvanizing economic trade and growth. We have to reinforce this really quite impressive expansion of international trade and finance, and I think we can do it in a way that we come to grips with the types of problems which many of you have raised in your opening remarks.

    Mrs. ROUKEMA. Mr. Chairman, do we have time to hear briefly from Secretary Rubin or not?

    Chairman LEACH. Let me suggest to the committee, we have got real awkwardness in a timing sense. My distinguished colleague Mr. LaFalce and I have done the math, and if everyone takes five minutes, we have several hours to come.
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    If we could ask the Secretary to respond in writing, would that be appropriate?

    Mrs. ROUKEMA. Fine. I appreciate that. Thank you.

    Chairman LEACH. Let me also make an announcement, first that the timing constraints are going to be very difficult. I hope all Members will bear that in mind.

    Second, we are going to, at 12:30, take a 5-minute break. So I want to alert Members to that circumstance as well.

    Mr. Vento.

    Mr. VENTO. Thank you, Mr. Chairman.

    Much of what is before us in legislation is to put into frame a new policy path, and to give some authorization and hopefully appropriation to the New Arrangements to Borrow, the new quota increase.

    There is about $200 million that is in the IMF up to this point, and we are talking here about Korea, Indonesia, and Thailand largely because that is the most recent group of nations that were assisted. But in fact, most of the other credits, some $160 billion, $150 billion, were also in force back in other nations that have been subject to agreements of something like one to three years.
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    Do you want to just highlight a few of those, Mr. Summers?

    Mr. SUMMERS. Thank you very much.

    The IMF has been involved in a number of places. The IMF played a key role in the stabilization program for Mexico, which has created a situation where the Mexican economy is now growing at nearly an 8 percent rate. There have been substantial increases in our exports to Mexico, well above where they were at the beginning of the crisis.

    Of particular relevance perhaps in Secretary Cohen's sphere, five years ago the situation in Russia was a very perilous one, and the lion's share of the international financial support for economic reform in Russia, that has resulted in a situation where the ruble is essentially stable, and where economic growth is resuming in Russia, and where there has been a massive transfer of resources from public to private hands, has come from the IMF.

    That has been at the center of reform in Africa, has led to a situation where growth in Africa this year will be nearly twice the rate that it was just three or four years ago. Its programs have protected forests in a number of countries by cutting explicitly timber expenses, and have worked very hard in recent years to protect basic investments in education and health care in Africa.

    So it has played a crucial role in a country in which we also have very substantial security interests, in Egypt's very substantial economic reforms that have been a constructive part of what is still a very, very difficult area.
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    Mr. VENTO. I think we should get this for the record, too. The loan program plus the liquidity program—which I understand the United States is one of the most frequent users of the liquidity program, historically——

    Mr. SUMMERS. The United States—the IMF, Congressman, is in a sense a credit union, and in which everybody contributes and countries withdraw. The United States made a major withdrawal of its IMF reserve in 1978.

    Mr. VENTO. I just think for the record, of course, the issue here is, to put it all in place we are talking about the past and future.

    One of the criticisms that has come up is that we don't know enough about what is going to happen. In fact, I think there is some suggestion that we didn't know what was going to happen in Thailand. I think that, in fact, that is one place where maybe we did forecast right. But the fact is they didn't necessarily respond, Secretary Cohen.

    But what about the forecast issue? Is it possible to lay on the table who is going to be the beneficiary of this new quota or this New Arrangements to Borrow?

    Secretary Rubin.

    Secretary RUBIN. In a sense, Mr. Vento, the beneficiaries will be the American workers and American businesses, because it will be used when financial instability threatens our interests. In terms of which countries might experience these kinds of financial instability, we obviously—at the IMF, we try to identify problems, but I don't think anybody can really predict where a crisis might develop.
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    Mr. VENTO. So we are going to likely be surprised again. Some people don't like surprises at Christmas, and especially we don't like these types of surprises.

    Secretary RUBIN. I think what you can do is identify problems. Especially with respect to Thailand, as you said, there was a high level of cognizance with respect to the problems that existed there. But particularly when problems become a crisis I think is a highly chancy enterprise at best.

    Mr. VENTO. Mr. Chairman, I think the other side of the equation in terms of security here is the economic stability. They are interrelated.

    I think that the suggestions of Secretary Cohen concerning security are important, but I think we have actually—it is a lot cheaper to put the money into this type of a program, or at least a credit, than it might be to deal with the consequences of instability on a security basis.

    Thank you, Mr. Chairman.

    Mr. LEACH. Thank you, Mr. Vento.

    Before turning to Mr. Bereuter, let me notify the committee that Secretary Cohen will be required to leave at 12:15, so if people——

    Mr. FRANK. Is there a crisis we should know about? Is there a crisis that you are going to go to?
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    Mr. LEACH. In any regard, questions might particularly be directed to him, if that is possible.

    Mr. Bereuter.

    Mr. BEREUTER. Mr. Chairman, gentlemen, thank you very much for your testimony.

    Secretary Rubin, you referred to the need for a change in the global financial architecture, to suggest, of course, that it is not easy to make those changes, that it is complex. It seems to me this is the time when we have to push hard for those kinds of changes in the IMF.

    The Chairman's bill has a laundry list of very appropriate kinds of actions, it seems to me. Many critics, some of whom will be on the next panel, critics of the IMF, not the Treasury per se, suggest that secrecy is part of the problem in the way the thousand economists at the IMF do their duty. They have a huge impact on such a huge percentage of the world's people today.

    You took exception to the characterization of any of the IMF programs as austerity programs. I happened to use that word in my remarks, as you may have noticed, with respect to Korea. When you see all the construction cranes idle for two months in Korea, you see a country without fiscal problems, you ask them whether or not they intend to consider accelerating their infrastructure program, and they say, ''we don't have that option, we have to cut back,'' knowing full well that they are going to have to lay off people from their banking structure in order to sell banks to make the kind of changes necessary to meet commitments of those bankrupt banks and a whole range of other things—I can't see the desirability of cutting back on highway construction, for example, in that country. That doesn't make any sense to me at all.
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    So whether or not that is the direction coming from the IMF, it is the perception, at least, of the people in Korea that that is exactly what their orders are.

    One of the people who will be testifying soon here is Dr. Lawrence Lindsey of the American Enterprise Institute. In his testimony he suggests that the IMF does not represent the successful American model of the past two decades, but as a conglomerate of interests representing members. It is based in part on the less successful models of Europe and Japan.

    He goes on to make some suggestions, including something about a subject that Mr. LaFalce brought up, the possibility of making international bankruptcy business practices standard. Wouldn't this be the time for America to use its economic clout and to suggest a reorientation of the IMF; and to suggest that member countries make the kind of reforms in banking and bankruptcy practices and a whole range of other things that are called for as a result of this crisis; and say ''You must have those in place by X year out there,'' so that the sentiment in the Chairman's bill is more than simply sentiment, but begins to have an impact upon the way that the countries perform; so we don't have American investors shut out of markets and American investors taking big losses now, while the major banks seem to escape?

    Secretary RUBIN. You have asked a whole list of questions which I think are very serious questions.

    I think in part my response would be I would be delighted to come visit with you on some of this. This is a whole host of things. Let me try quickly to respond, if I may.

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    I think there do need to be changes, probably significant changes, in international architecture. I would agree with something Chairman Greenspan said. I think we need to get our funding now with the IMF, because with this crisis we are spinning out of control, and if we didn't have the funding to deal with it, we would then have a horrendous problem.

    Having said that, we are very focused on trying to develop better mechanisms for the global financial markets. When you start getting into issues, though, like international bankruptcy, which is not quite what you were raising, but I think Mr. LaFalce may have raised this, these are enormously complicated. They have to be thought through very carefully. It is going to take time if we are going to get changes of that kind to make sense.

    The bill that you have all introduced, there are limited changes because they are sort of in the context of existing architecture, if I may. We have not had the chance to fully analyze it, but there are a lot of things in there, objectives, that we would agree with. Transparency, for example, is clearly one.

    In terms of requiring countries around the world to make the kinds of changes that you referred to, we do spend a lot of time at Treasury, and the IMF spends a great deal of time and so does the World Bank, in urging and advocating these kinds of changes. We can't force people to make changes, we can advocate it. We at Treasury do spend a lot of our time doing that.

    Mr. BEREUTER. Secretary Rubin, if they expect to use the IMF, I think that is a very important element we can use to assure they do make those changes, not immediately, but off in 2001, 2002, wherever we go.
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    Secretary RUBIN. I don't disagree with you. I think those are the kinds of things we need to work on. The problem we run into, if you have a country that hasn't done it, and it then gets in a great deal of trouble, it is dissolving into financial instability that is going to hurt us, do we not then try to help them? The answer, at least in my view, would be at that point you use your leverage to get them to make the changes they didn't make voluntarily. But we are very much on the track you are right now.

    I might add, the developing nations around the world are doing a great deal, because they see what is happening in Asia, and they do not want to be where these countries are. I actually agree with the thrust of a lot of what you said.

    Mr. BEREUTER. Thank you.

    Mr. LEACH. Before turning to the next person, let me say that Congressman Jackson has indicated that he has a question he would like to ask of the Secretary of Defense. I do not want to recognize him out of order, but if any Member would like to give up their time, he might be prepared to yield them his time.

    Mr. FRANK. I have to leave at 12:05 to make a speech.

    Mr. LEACH. Mr. Frank.

    Mr. FRANK. Thank you. Particularly to the economists and Treasury people, would any of you say that the creation and existence of the National Labor Relations Board would have significantly greater import in American history than the creation of the Federal Reserve System? In economic terms, would any of you think that the NLRA, the Wagner Act, was much more important than the Federal Reserve Act? Would any of you say that?
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    I assume no one would say that. The reason I raise it is I read in the paper yesterday that one of the things we are insisting on is that South Korea create, in fact, a Federal Reserve-type system, that they give some independence to their central bank. That would seem to me to be a fairly intrusive thing to insist on.

    But when we talk about labor rights in Indonesia, we are told, gee, national sovereignty, and be careful. I have to say, I think most of us would say that, particularly recently, the existence of the Federal Reserve System has had a much more profound effect on the American economy than the existence of the National Labor Relations Board. And when we tell them that they have to give independence to their banks, that is routine.

    But when we tell them that—and we are being told that is conditional, that if they don't give independence to the central bank, they get cut off. But we can't even tell them to let a labor leader out of jail in Indonesia, and that is the kind of disproportion that is a problem.

    Mr. Secretary.

    Secretary RUBIN. Let me try to respond, if I may, Mr. Frank, in three parts.

    One, as you know because we have discussed this, with respect to that labor leader in Indonesia, we very much sympathize with trying to help. I have spoken to the State Department, and they have in many different ways tried——
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    Mr. FRANK. I sympathize with the notion of independent central banks. And I will take conditionality over sympathy any day.

    Secretary RUBIN. OK. Let me get to the third part of my response. It has been some accomplishment, I gather you may know actually more than than I do, but they got medical help to him in jail and so forth. I think they actually got—look, I am on your side on this. I am on your side.

    Mr. FRANK. Woodrow Wilson said, ''Don't worry, I will send them EMT.'' I don't think that would have made a big impact.

    Secretary RUBIN. We are on your side in terms of doing everything we can to help.

    The question of an independent central bank versus labor rights, as I said in my remarks, I do think labor rights, human rights, are very central with respect to the economy, to say nothing of what one believes in.

    But I do think that when you are dealing with the problems we have here, which you basically have to do if you are not going to have those countries dissolve into financial instability—let me finish and then you can respond—you have to do the kinds of things that will establish financial stability. The kinds of things that will establish financial stability and win confidence in the markets are going to determine what happens in these countries are things like creating an independent Federal Reserve Board, as opposed to some of the other measures which may be equally important but don't go to that question of financial stability.
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    Mr. FRANK. I have two points. First, I said, and you were in this conversation, and I don't often quote the rabbinate, but I do think Rabbi Hillel then becomes relevant: If not now, then when? That is one of the things you are going to have to address, and Mr. Greenspan tried to allude to it.

    You beat me to the point I was hoping to be able to underline here. Here is the problem. We have a terribly antidemocratic situation. We have a worldwide economy. There is a very good article in Foreign Affairs, either the current issue or the previous one, about the fact that we now have a global economy, but we don't have global governance.

    We do not have and we particularly do not have anything remotely resembling democratic governance. That is why I thought the previous question from Mr. Bereuter was so important about the IMF. That is why transparency in the IMF is so important. Because you have got a global economy with global economic forces and rudimentary governance in the IMF but opacity destroys it. Here is an example of it. Why is it relevant to make them establish an independent central bank and not a labor union? Let me say why. Because the power here is with the international financial community. The owners of capital—and I don't deny this—the problem is that when we are being told this, we have got to pacify the owners of capital. It is the insecurities and fears of the owners of capital that are relevant. And people who own capital and have it at their disposal need to see that there is an independent central bank. I understand that.

    The problem is that the other concerns have no advocate and what we need to know is that there is some mechanism for it. I have to tell you, I am glad to see some of this conversation now about worker rights. I know it is considered appropriate to say, ''Oh, I don't like to say 'I told you so.' '' I never met anybody who doesn't like to say ''I told you so.'' I find it is one of the few pleasures that improves with age, so I am going to say it now. Some of us have been trying for some time to get this on your agenda. I am glad it is now on your agenda. But given that we are in a situation in which there is a global economy and no global governance and certainly no democratic governance, which gives the needs of the owners of capital a whip hand in this situation, to some extent, we are told we can't make them take too much of a loss because then they will walk away. I accept all of that. But you have to tell me what commitment you are going to give us and how you institutionalize them to offset that going on from here as a condition for many of us responding to the crisis.
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    Secretary RUBIN. I think a very legitimate question which I think is the one you are raising is if it is the case, and I believe it is the case in the context of these programs themselves we can't do a lot of the kind of things you have advocated, for reasons I have said in my remarks and I won't repeat them, what other ways you can try to accomplish those purposes. I think that is the way you are framing the question. Dr. Summers and I have been talking about it the last couple of days. We are going to try to respond in a sensible fashion and relatively briefly.

    Mr. FRANK. Let's do conditionality. For many of us that is the conditionality you confront in trying to get this legislation.

    Secretary RUBIN. I understand that. What we need to do is have a good and sensible response on that. Is that a fair comment, Larry?

    Mr. SUMMERS. That is fair.

    Secretary RUBIN. I said good and fair. He only said fair, but that is OK.

    Mr. FRANK. He was always a tough grader.

    Chairman LEACH. Mr. Bachus.

    Mr. BACHUS. Mr. Jackson, how long is your questioning going to be?
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    Mr. JACKSON. About a minute-and-a-half, sir.

    Mr. BACHUS. I would yield him a minute-and-a-half.

    Mr. JACKSON. I thank the gentleman for yielding.

    Mr. Secretary, I agree with much of your statement about the cycle of security and prosperity. I want to again share with many of my colleagues, which I will pass around to both sides, what I think to be the gravity and the nature of the crisis. On January 19, 1998, this was the cover of Newsweek Magazine in the United States. January 19, 1998, the cover of Newsweek Magazine in Southeast Asia was the possibility of Indonesia's meltdown and also the looming possibility of civil war as the by-product of this. My question, Mr. Secretary of Defense, many of my colleagues are very concerned that the one million workers expelled from Thailand, the additional 1.2 million expected to be expelled, the one million workers expelled from Malaysia, the one million laid off in Indonesia, the prospects of an additional 10 million workers being laid off in the next 90 days in Indonesia are included under the U.S. security umbrella. I don't think anyone here wants U.S. forces committed or singularly focused on protecting foreign investment. But the protection of other American values, including the respect for the environment, protection of workers' rights, the expansion of the middle class, the elimination of child labor abuses are all security concerns of Members of this body. I am very interested in your opinion of this.

    Also you raised the question of Iraq. Any assurances that you can offer the American people today about the possibility of shooting rockets at biological and chemical sites, that those sites will not release into the environment something that our Government and the first world may not have a cure for would be greatly appreciated.
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    Thank you. Thank you, Mr. Bachus.

    Secretary COHEN. Let me respond very quickly, if I can. With respect to any sites that might be involved in Iraq, number one, I would emphasize again, no decision has been made in terms of whether or not there will be a conflict or not. We are still seeking a diplomatic solution to that situation. But we are also always concerned should conflict ever become necessary that we minimize any possibility of collateral damage. That is not to say that some cannot take place, but it has always been our goal to take into account what could take place with injuring innocent people, and that would fall into that category.

    With respect to the rights that you have mentioned, obviously we are not there to defend governments who are repressive. That is not our goal. What we have found, however, is that the more engaged we are with these other countries, the more prosperity and stability they enjoy, the more likely we are to be able to promote these values that we hold dear as opposed to perhaps what is being practiced by these countries. The less contact they have with us, the less interchange they have with us, the less IMET program they have in terms of the International Military Exchange Program, if they don't associate with us, if they don't pick up our better values, we don't have a chance to inculcate those values with them. So from our perspective, our national security interests are being served by being forward-deployed, interacting with those governments so they can see the benefit of what we have in our country, how we have a very wealthy country, a very open, democratic system and one in which we promote these kinds of values.

    Mr. JACKSON. We just want to make sure that many of us who have been fighting for workers' rights in our country that our standard of living is not undermined and that our U.S. forces that are committed to the area and add security to the area don't end up fighting against men and women who might be trying to organize to put food on their table and to fight for a better standard of living for themselves. That is very important to us. We see those as strong U.S. security values as well and not just protecting foreign investment.
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    I want to thank the gentleman for yielding me the time.

    Chairman LEACH. The gentleman's time has expired. I would like to ask Mr. Jackson if he would yield his full time to Mr. Bachus when it is his turn?

    Mr. JACKSON. I would be more than happy to yield my full time to him.

    Chairman LEACH. Is that fair?

    Mr. BACHUS. I only yielded to him a minute-and-a-half. Just let him run over.

    Chairman LEACH. The gentleman is correct. If the gentleman would like to ask a short question.

    Mr. BACHUS. I will ask one short question.

    It seems to me that in giving this money, we are putting all sorts of requirements and restrictions on these governments. Their people may or may not accept these restrictions. It is going to be austerity measures, devaluations. As Mr. Jackson said, it is going to result in unemployment. It is going to negatively impact the people of those countries. I think there is no doubt about that. We hear that constantly. Being politicians, I think their leaders are going to say, ''The devil made me do it.'' My concern is that we are going to be that devil, that we are going to be the scapegoat in a lot of this. So my question is, aren't we really buying ourselves a new element of anti-American sentiment in these nations?
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    Secretary COHEN. Are you addressing that to me?

    Mr. BACHUS. Yes, sir, because security and economics go together.

    Secretary COHEN. That is one possibility, of course. You could say the devil made me do it. The other possibility——

    Mr. BACHUS. I think their leaders will say that.

    Secretary COHEN. The other possibility is that the devil didn't care. We are really between those two opposite poles. What we have to show is that this is not something that is being dictated to impose hardship upon them but point to our own example. Just a few years ago, they were pointing to us as being a country in decline. We went through massive layoffs in this country and we were able to reengineer, to restructure our economy to make us the most prosperous in the world today. And so there is always a double edge to this particular sword. Yes, they could point at the government, saying ''the devil made me do it.'' But right now they are saying ''this is the best hope that we have for helping to stabilize our situation.'' I think to the extent that it is seen not as a U.S.-imposed mandate, but in fact an IMF requirement that they restructure themselves in a way that takes into account the need for restructuring their monetary policy in terms of their banking policies, the bankruptcy statutes we have talked about here before, that they have open, transparent commercial laws, that they have the rule of law and not the law of rule. All of these things that need to be done have been deferred too long. I think that it is a choice they have finally been forced to measure up to. Whether they blame us or not—and the people who are in the streets—they are going to be in the streets if we are not there. To the extent we have a chance to minimize or mitigate those people in the streets, their numbers, and the anxiety and the absolute frantic reflection they might have right now, I think we are in a better position to say we were trying to be helpful. Whatever the consequences, I think you are better off trying to help, rather than to be seen as being indifferent.
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    Mr. BACHUS. But you say they are going to be in the streets and blaming someone. That someone could be us if we are seen——

    Secretary COHEN. They are in the streets now. Some of them are in the streets now. The question is do we have an opportunity to help them stabilize the situation so there won't be more, so you have complete chaos.

    Mr. SUMMERS. Congressman, if I could I would like to just——

    Chairman LEACH. The gentleman's time has expired. If you can respond in 30 seconds. But I want out of fairness to the other Members to move forward.

    Mr. SUMMERS. In Korea, President-elect Kim Dae-Jung said as to the IMF program, ''To show you what I think about it, let me hand you a book I wrote in 1996. It calls for an end to crony capitalism, it calls for controlling government spending, it calls for controlling money growth, it calls for opening up the economy, it calls for financial liberalization. These are things we need to do. I have wanted to do them for a long time. My popularity was 41 percent when I was elected. Since I have been committed to that program''—this is what he told me—''my popularity is 80 percent now.'' I think in some cases these represent welcome changes that can command popular support.

    Chairman LEACH. Thank you, Mr. Summers.

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    Mr. Kanjorski.

    Mr. KANJORSKI. Thank you, Mr. Chairman. Gentlemen, I have been watching TV for the last week. I haven't noticed that this issue has been penetrating the American mind very much. It sort of disturbs me from the standpoint the other night I was watching the President's State of the Union speech and when the question came up I saw a lack of applause. What we are talking about, what we would like to do on—my inclination—is to favor the request of the Administration and what you are talking about, recapitalizing the IMF. But we also are politicians and have to go home. It seems to me the war can't be only won on the Hill, it has got to be won out there in America.

    There are some points I would ask that be made. One, Mr. Rubin, we have some economic policies that could assist in distressed districts across America for economic revitalization, and particularly modernization of the Federal Home Loan Bank situation. I think your department could address that in a more sympathetic light, in light of the fact that you are asking some of us to extend credit to a lot of people who our constituents are not aware of or do not understand and to the detriment sometimes of the citizenry that we represent.

    Second, Secretary Cohen, the point has got to be made here that you are asking for a $17 billion investment. That is not an awful lot of money relative to—maybe you could give us the figure. What do we spend to defend Korea? What is the Federal commitment every year to maintain the troops in the defense of the DMZ?

    Secretary COHEN. It is substantial. I would have to get you the exact figure, but it is substantially higher. In fiscal year 1996, the most recent year for which actual costs are known, the total cost of stationing U.S. military personnel in South Korea was $2.5 billion, including personnel costs. Excluding personnel costs, the cost was $1 billion.
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    Mr. KANJORSKI. I think it is closer to $38- or $40-billion, isn't it? So that on a yearly basis we are expending huge amounts of money just to maintain the forces in a still form in Korea alone. I am convinced we can make the case to the American people to win these issues, but a lot of the facts have to permeate out to our people to understand. I don't know about other districts in this country, but there aren't too many veterans left from the Korean War in my district. If there are, some of them are suffering from diseases that lack their recall. The war, that is a long time off. It seems to me we have an awful lot of refreshing to do out there if we want to carry the day. If this is just an exercise to prove that we can get 160 votes, that is OK. But if we really want to win this battle, it is getting that last 50 votes.

    I think the economic issues have to be woven in here whether in a linkage or whether it is just a separate program that we can agree to, Mr. Rubin.

    Second, to the Secretary of Defense, try and give us some examples of why it is so much more costly if civil war and revolution occurs in these countries in total destabilization? I think people understand that relationship.

    And finally, Mr. Greenspan, if we don't recapitalize the IMF, would you say there would be any reason to have irrational exuberance?

    Chairman LEACH. I think we could begin with the third question first.

    Mr. GREENSPAN. I assume that question was rhetorical.
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    Mr. KANJORSKI. I yield back my time, Mr. Chairman.

    Secretary COHEN. I think there were statements made as opposed to questions asked, but I would be happy to respond.

    Chairman LEACH. I think the main question was to Mr. Rubin, actually.

    Mr. Rubin.

    Secretary RUBIN. Just one factual comment if I may, Mr. Kanjorski. The $17 billion—actually with the NAB I guess is $18 billion that we are talking about—I have forgotten what phrase you used, but as you know, these are in effect deposits, if you will, in the IMF, for which we get back a credit against the IMF. It really does not have any cost to—we use the word ''funding.'' It is really a misnomer. We should try to find some other term.

    Mr. KANJORSKI. Out there in the country——

    Secretary RUBIN. I understand that. Let me say on the broader question you have raised, the President has been very much focused on the need to try to find a more effective means of communicating with the American people about these international economic issues. They are central to our economic well-being and yet they are very difficult to explain and there is very little understanding of them. He said the other day that as he thinks back over the last five years, it is something that he has done a great deal of, but feels he hasn't accomplished as much as he would like to. I think all of us need to be very much focused on that going forward, but it is difficult to accomplish as you know. Then clearly interweaving the security and the economic is part of what we need to do and have been trying to do.
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    Chairman LEACH. Thank you, Mr. Secretary.

    Secretary Cohen, you are certainly excused.

    Secretary COHEN. Thank you.

    Mr. KENNEDY. Mr. Chairman.

    Chairman LEACH. Yes, Mr. Kennedy.

    Mr. KENNEDY. I think Secretary Cohen made a point about the military budget in Indonesia that I find to be at odds with certainly a lot of the information that has come before this committee with regard to their military budget and just before he left, I wanted to make a point, because when it is my time for questions, I wanted to address these issues. I just wanted to make it clear to him that there is a big gap in the Defense Department's analysis of the size of the Indonesian military budget and almost every other analysis that has been done of the Indonesian military budget.

    Chairman LEACH. Let me just say to the gentleman, the Secretary has made a very strong request to leave. I would like to ask him to keep a military witness to listen when it is your turn.

    Secretary COHEN. What I would do is be willing to get back to Congressman Kennedy and rationalize the differences and why——
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    Mr. KENNEDY. I hope you don't just rationalize them.

    Secretary COHEN. Reconcile them. That is a better term.

    Mr. KENNEDY. Thank you, Mr. Chairman.

    Chairman LEACH. I would like to turn now to the distinguished Chairman of the Domestic and Monetary Policy Subcommittee, who is one of the leading experts on monetary policy. Please, Mr. Castle.

    Mr. CASTLE. Thank you for the kind introduction.

    Mr. Secretary, I think these questions are for you. You did very well in a previous life, sort of calling markets, or at least for the firm that called markets. We seem to be missing these. We seemed to miss it with Mexico altogether. As far as I can see, we didn't have much notice of what might happen. My view is that we have had the wool pulled over our eyes by countries, by banks, by large corporations in this Asian crisis. We just didn't seem to get any notice.

    I would like to know what we might be able to do to prevent that problem from happening, such as should we have an international economic rating service or something of that nature to try to bell all this so that we don't seem to continue to have this kind of continuing and revolving crisis around the world?

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    Secretary RUBIN. Mr. Castle, I think there is an unsatisfying limit to what can be accomplished with respect to prognostication. That is why you have vast numbers of people that are involved in the business, and most of them are lucky if they are right more than 50 percent of the time. I think you can identify problems and you can identify issues and certainly in Thailand we identified problems early on. But I think that—I would be interested to ask Chairman Greenspan or Dr. Summers what they think. Having lived in that world for a long time, I think the prediction of what is going to happen either in markets or economies is an extremely uncertain thing at best. The rating agencies in South Korea, for example, and these are very professional rating agencies, with large numbers of very well-paid and highly qualified people, lowered their ratings after the crisis had begun. So I don't know that you are going to get a better result by trying to put together some kind of international rating agency.

    Mr. CASTLE. Let me follow up on what I wanted to talk about anyhow, which is the whole transparency issue or lack thereof which, based on everything I have heard and read, and obviously I don't know anything near as much about this as you, but it seems apparent from all we have seen. You have talked—I don't say I was disappointed in your statement, because you are always on the money to some degree, but I am a little disappointed in what you view Congress' and our immediate American role in this is. You talked on page 4, I have your testimony, of the ''. . . global financial architecture,'' but you didn't really say there what changes we might pursue. Later with questioning you talked a little about ''. . . international bankruptcy as a possibility.'' I don't know what changes we could initiate or include. I mean, and Mr. Bereuter touched on this. We in Congress have a sort of greater sense of immediacy, I guess, because we see this as our leverage, we see us as giving you the New Arrangements to Borrow and the extra or potential expansion of the IMF, whether it is on our books or not, by giving you that latitude and all of a sudden we have lost that. I don't know what leverage we in Congress would have after the fact, but I don't know what kind of leverage the U.S. would have after the fact either, to put in the different changes to this architecture that you talk about, and some of those things might help with the notice, such as the transparency, and so forth. I just feel a sense of—I am not at ease that we have really mastered all this. I would like you to expand on that if you could, please.
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    Secretary RUBIN. Let me say we have not mastered it all. This is a new world, Mr. Castle. There is nobody who has mastered it all. I think we are fortunate in the Federal Reserve Board and United States Treasury to have a group of people who have lived this their professional lives and are extraordinarily good at it. Having come from the private sector as I did, having dealt with no finer people who are highly conversant on these kinds of issues at this time in the United States Government—I leave myself out of it, but we have got an extraordinary group of people to try to deal with these issues.

    Within the context of the existing structure of the IMF there are issues like transparency we can focus on and within a relatively short period of time maybe. I think that is something we should focus on. But the larger questions of architecture are not questions that are going to get resolved quickly or reasonably. These are mind-bogglingly complicated. Having said that, we are as intent on dealing with them as you are, I can say. We started actually four years ago when the President and the G–7 leaders met in Naples. We have made some changes. But there is a lot more to do. We are as energized and as intent on it as anybody could possibly be. I think what we cannot do, and this goes to something Mrs. Roukema raised before. I think what we should not do is hold back on funding for the IMF until these issues get resolved, because if we have a crisis in the interim, I think we are going to be in a heck of a mess.

    Mr. CASTLE. Let me follow up quickly on that. I understand what you are saying, some of this architecture may be so complex we could not do it now. But on the other hand, you have stated that some of the things that are in Mr. Leach's bill, with which I am not particularly familiar, but perhaps are of a less significant nature—not suggesting they are not important, but are of a less significant nature—and could possibly be done now and there may be other concepts or ideas we could do now. We in Congress would feel better if we were able to do at least some of these things now and know what some of the global, more significant architectural changes are that will be needed later so we have a complete picture. I just don't feel as well informed as I should. I am willing to put in the time and effort, as I think every Member of this committee is, to make sure we are at that level so we can be convinced that this is the right thing to do for America and go forward with it.
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    Secretary RUBIN. I agree with the distinction you just made and the possibilities at least of functioning in a number of the areas that the Chairman's bill addressed.

    Mr. CASTLE. Thank you. I yield back, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Castle.

    Mr. Kennedy.

    Mr. KENNEDY. Thank you very much, Mr. Chairman. I think many of us sort of grew up with the idea that there was a threat, a worldwide threat of a domino theory pertaining to communism. What I have sort of gathered from your testimony, really from the Secretary and the Chairman's testimony, is that there is now a concern that there is kind of a domino theory of economic failure. That was what we heard largely about the Mexican loan fund that was necessary, which I voted for and this committee supported—well, to some degree it supported it. I am prepared, as I said earlier, to support this package. But I wonder why in that particular region of the world we didn't take more full advantage of the Japanese government's willingness last November to really belly up to the bar here. We didn't hear the Secretary of Defense talk directly about the communist threat that could reemerge as a result of our lack of intervention. This is really a much more sort of global economic concern. If we can put—if that really is the level of the concern here, if we can put a lot more of this burden on the Japanese who after all do have—we used to hear threat after threat about how much money the Japanese had, what our balance of trade deficit is and all the rest, but why don't we ask them to stand up to this plate and have the Japanese put some of their dollars into this equation to a greater degree than certainly we have thus far?
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    Mr. SUMMERS. Congressman, we welcome Japanese support. Indeed, the Japanese contribution to the Korean second line of defense is twice as large as ours. Likewise in Indonesia. There was, as I think you know, a Japanese proposal to set up an alternative institution to the IMF that would run separate programs and provide financial support apart from the IMF. That was a proposal that I think ran into very considerable concerns among a number of Asian countries that were extremely eager for a global approach, among European countries and among ourselves.

    Mr. KENNEDY. I appreciate that. I understand that it ran into some resistance by the Asian governments. What I am trying to suggest is throw them this tar baby. Why not give it to them and why not have them——

    Secretary RUBIN. Mr. Kennedy, the problem with that proposal in a word was that if they wanted to set up an alternative mechanism to the IMF, even though it was going to have some nexus with the IMF, the danger you ran is you then had a very real possibility of in effect competing bodies of money and a lowering of conditionality and a reduction in the strength of the reform bill. That is what this is all about. This is all about putting in place effective and strong reform programs and this had a real chance of undermining that.

    Mr. KENNEDY. Mr. Secretary, hang on one second. You are telling me that you have got substantial reform mechanisms built into this? Isn't it true in fact that on the Korea loan, the IMF is going to provide money to the Korean central bank, that bank then turns around and allows the commercial banks in Korea to draw down whatever the hit is and our banks can contact a commercial bank in Korea today and draw down whatever their hit is?
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    Secretary RUBIN. Our banks, as you know, are right now in a coalescent agreement not to do precisely what you have just said.

    Mr. KENNEDY. Coalescent agreement?

    Secretary RUBIN. An agreement. They have been rolling over these loans in an extraordinarily constructive and effective way. I think fortunately Korea is not a very constructive—yes, I think these have been very strong programs. I think we would have undermined our ability to get those kind of strong programs had there been the two funds. Second, while Japan originally made that proposal, given their own circumstances I am not so sure that it ever would have come to pass even if all of us agreed to it. I do not think it was a realistic alternative.

    Mr. KENNEDY. The only point I am trying to make, Mr. Secretary, is it seems to me you are trying to get the Japanese to speed up and open up their economy. If you can get them to in fact spend a lot more of their yen in solving this problem the way we had to when Mexico had a problem, it seems me that that is all to the good.

    Mr. SUMMERS. Absolutely.

    Mr. KENNEDY. I think we should do everything we can to encourage them to do that.

    Secretary RUBIN. I could not agree with that more.
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    Mr. KENNEDY. The second issue I just wanted to come back to is this whole concern about whether or not we are allowing these countries to spend far too much money on their own military budgets, which is an issue that I don't think has been addressed. It is something that I have talked to Mr. Camdessus at the IMF about. There is great concern particularly with the Indonesian economy that there is far too much money. This number that the Secretary shared of 2.7 percent doesn't take into account any of the industries that are associated with defense, it doesn't take into account any of the security forces that are associated with defense. Everyone who has looked at the Indonesian government's—and no one believes that the Indonesian accounting mechanism for their military expenditures is accurate, either. So I just think that, Larry, you and I have worked on this, we have attempted to work on this for a number of years now. We still have yet to get a comprehensive report back which is supposed to take place between the Treasury Department and this committee regarding the level of military expenditures in this region in general, but specifically with regard to Indonesia. I think if we are going to be providing this group of folks over there many billions of dollars, we don't want to see that money diverted into military expenditures, particularly given the way their military operates.

    Mr. SUMMERS. Congressman, we will follow up with you directly. Let me just say that a major thrust to the Indonesian program was to get rid of a set of off-budget accounts the Indonesian government operated and force them to be explicitly budgeted, precisely so, and could look at the kinds of issues that you are raising. And an additional measure of thrust of the program was to require that expenditures in certain key areas, education, health care and so forth be protected. So what had been the traditional slush funds for some of the types of expenditures that with very, very good reason concerned both of us are something that is very directly addressed within the IMF program. I am sure we will have a good discussion about the respects in which it is addressed in a satisfactory or an unsatisfactory way. But I do want you to understand that this question of transparency on categories of spending is one that was central this is something that the United States very, very much supported in the IMF program and in Indonesia.
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    Mr. KENNEDY. I appreciate the response. Thank you, Mr. Chairman. I would like to find out what that agreement really says, but thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Kennedy. Per an earlier announcement of the Chair, we will now take a 5-minute break and reconvene at 12:36.


    Chairman LEACH. The hearing will reconvene. The Chair recognizes Mr. Metcalf from Washington.

    Mr. METCALF. Thank you very much, Mr. Chairman. Representing the State most dependent on Pacific Rim trade, I particularly appreciate the concern expressed by Secretary Rubin and the panel of the possible impact on the Pacific Coast States of this Asian problem or crisis or whatever we want to call it. Congressman Kennedy asked my question essentially, so I would like to follow up on it, because I have heard that this possible new monetary fund may be to the tune of $100 billion. That is a lot of money. I have to ask, isn't this an example of a regional solution to a regional problem? And is this a possible threat to the IMF? What possible threat could it be? I would like to get into that in a little more detail.

    Mr. SUMMERS. Congressman, I think there has been a lot of change in the context, and I think it would be very surprising if at this point, given the situation as it has emerged in Japan over the last several months, if Japan were prepared to provide, in fact, substantial financial support of anything like that magnitude and indeed I think it is unlikely that if such a fund had been created, it would have been possible to have had substantial disbursements to this point from such a fund, that indeed the Japanese were very eager to work with us, along with the other Asian countries, on the Manila Framework, which operated to anchor the solution to these problems in the IMF with backstop support from the Japanese. We have been very eager to see the regional countries take the lead in responding to this crisis and provide the lion's share of the financial support for responding. I might also just say that I think that operating to have a global solution really is crucial in terms of maintaining a strong American presence in Asia, which I think is profoundly important to this country for all the reasons that Secretary Cohen articulated.
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    Mr. METCALF. Do these IMF financial packages really solve problems or is it possible that they gloss over the need for fundamental structural reform? We covered that a little bit, but perhaps you could go into it more fully. Or perhaps encourage the recipients to depend upon foreign help instead of fixing what is broken at the domestic level and with the help of private markets.

    Mr. SUMMERS. Let me mention, if I could, Congressman, one innovation that the IMF adopted as part of the Manila Framework that I just referenced, which I think is very important in this regard; that is, in the context of these large programs in response to financial emergencies such as Korea. The IMF is now going to be charging premium interest rates, interest rates that will exceed market rates, exceed their borrowing cost by 300 basis points or more. What that does is precisely what I think your question properly emphasizes, maximize the incentive to return to the private market. And in the case of the emergence of liquidity situations, the new arrangements that the IMF has adopted also provide for a shorter period of repayment than has been traditional. Because I think one does have precisely the concern that you raised, that in the face of an emergency it would provide financial support in a way that would create dependence and undermine the problem. The combination of a shorter period and a higher rate is designed to minimize that risk. The third element that minimizes that risk is a set of structural measures that have as their centerpiece the objective of attracting private capital rather than public capital to fix these problems. Those include, for example, the removal of what had been very substantial prohibitions on the purchase of Korean equities by foreigners.

    Mr. METCALF. Go over it one more time. I think I got it. Why are these exceedingly higher interest rates valid and how—if there are any in trouble, how can they repay those?
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    Mr. SUMMERS. The IMF charging higher interest rates has three virtues. First, when they are paying higher interest rates, they have a strong incentive to get back to the market as quickly as they can. Second, the IMF is being more than fairly compensated for any risks that it enjoys, and since we support the IMF, that means we are being fairly compensated. This is really something that came out of our Mexico program which, as you know, produced a profit in a sense for American taxpayers of in excess of $500 million. Third, it is appropriate that if you are receiving emergency finance that the private market is unwilling to give you, you pay a premium for it. It is because these countries are not fundamentally unable to service their debts, it is that they have got a liquidity problem and they need to stretch those obligations out that make this an appropriate response and make them able to handle the interest rate.

    Chairman LEACH. Thank you, Mr. Metcalf.

    Ms. Waters.

    Ms. WATERS. Thank you very much. I would like to ask both Mr. Rubin and Mr. Greenspan to help me to understand I think a major contradiction that we have all witnessed by our major banks and financial institutions. I am often told that banks do not invest in the inner cities, and major corporations, because it is too risky. They want to know how can we guarantee that their investment will be secure. How do we explain to inner city constituents the investments of these same banks in countries with dictators, corruption, civil war and much higher risk than you will ever find in Harlem or in South Central Los Angeles? That is the first part of the question. The second part of the question is, given the very fine work that you do to put together this kind of bailout with all that you envision, including the establishment of a Federal Reserve-like bank operation, why can't you use the same creativity to help develop a plan that would guarantee bailout of these inner cities by the same institutions that are going to benefit from this bailout? For example, what power do you have to convene them to use your staff to set up ways by which they could invest in the development of these inner cities and enforce it based on the kind of thing that you are doing now?
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    Mr. GREENSPAN. I will answer the first question as best I can. What banks do is they perceive, rightly or wrongly, that there is a potentially good loan they can make on which they will get back their money at a pretty good rate of interest. They make a judgment as to whether in fact a loan is something which is potentially viable, and if they conclude that that is in fact the case they will either attract deposits or purchase funds to finance that investment. It is pretty clear to me that, in retrospect, a number of the loans that have been made to foreign banks, for example, clearly were badly misjudged and that loans which they thought were going to be rewarding have turned out to have been precisely the opposite. Banks do that in principle for all loans, whether they are for Southeast Asia or South Central Los Angeles. At least that is the principle. The difficulty arises in whether or not they are making appropriate judgments as to whether or not their evaluation of risk is consistent and their behavior is consistent. That varies from bank to bank—some do, some don't. A view which I don't think is appropriate is that there is a block of funds that sits in each bank and that if money is drained off for Southeast Asia, it is unavailable for loans in Illinois, Minnesota, Los Angeles, or any other place. That is in fact not the case, because each bank will either expand or contract depending on what it sees as its prospects for good loans. The issue of how to get people to make appropriate value judgments on risk in various different communities is something which we have been pushing with respect to CRA. That is in fact the fundamental purpose, as I see it in any event, in that law. What one does beyond that on the bailout question that you raise is a tricky question. I would pass that on to the Secretary of the Treasury.

    Secretary RUBIN. Could I add one word, Mr. Chairman, even though the time is up?

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    Chairman LEACH. Yes.

    Secretary RUBIN. I think you basically have two sets of issues and I very much relate to the second one that you have raised. I think on the one hand we have for the reasons we have all discussed enormous interest in seeing these things resolved in Asia. I think that interest affects people who live in inner cities as well as all else. On the other hand, I think you have rightly said, and you may note from other conversations we have had that I agree with you, that there may well be no domestic issue facing this Nation that is more important to our economy than trying to deal with the problems of people who live in distressed areas, particularly inner cities, and bringing these people into the economic mainstream. We have tried, I think with some effect, to take the credit and market expertise that we have, in Treasury I am talking about right now, and apply it to trying to increase the flows of capital. In fact, they have increased very substantially to the inner cities. The reform of the CRA program has had a very substantial effect in increasing flows of funds.

    I attended an event last night in which we were gathering people to support the reauthorization of the CDFI program. The CDFI program is a very good program. What we need to do now is get appropriations from Congress and continue this, build it and make it a bigger program. I think you are right that we need to focus on this with the same intensity, though I do think they are separable problems.

    Ms. WATERS. CDFI is not your private banks and while we like it, we appreciate it, we support it, I think Chairman Greenspan will be the first one to say you are never going to get the kind of investment and the kind of growth in inner cities from that kind of involvement. What I would like to know is if it is possible for each of you to identify a staff person to sit with a group of us to talk about how we use the creative time to talk about how some of these same banks that are being bailed out can in fact be encouraged to do some very direct investment in these communities to create the kind of economic infrastructure that is so needed in order to participate in this growing economy?
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    Secretary RUBIN. Congressman, we are extremely sympathetic and very strongly identify with the objective. There is somebody at Treasury, an exceedingly capable member of our staff, who has that very job. We would be delighted to do that.

    Chairman LEACH. I thank the gentlelady.

    Ms. WATERS. I will follow up with you and Mr. Greenspan on this issue and others.

    Chairman LEACH. Dr. Paul.

    Dr. PAUL. Thank you, Mr. Chairman. I have several questions. I would like to go ahead and ask the three questions and then listen for the answers. First off, I would like to remind Mr. Summers that last time you were here, I think in November, I did ask a question in writing about the real cost, whether or not the IMF funding would appear in the national debt. That is not one of my questions, but I would like a follow-up on that. We have not yet heard from you on that. I cited a CRS report that says that it is truly part of the national debt and that interest is paid on it. Most Americans realize there is a cost to it. Most American taxpayers aren't calling us. That is one of the reasons why this funding is in trouble. I mean, nobody is calling up here and saying, ''Hey, please spend the money, please refund the IMF.'' They are more concerned about inner city jobs and other problems. So the politics of this is very difficult for you.

    Recently Henry Kissinger was visiting over in Thailand. He was interviewed over there. In his interview in the newspaper it was reported that he attacked right-wing extremists that were protectionists and not supportive of this bailout. I know it has been made mention that people on the far right and far left may make strange bedfellows. I would like to make it very clear that—and thank goodness that strange bedfellows are still legal in the political process. I do not happen to belong to either right wing or left wing, so I am glad to participate in this endeavor. I do have great concern about this. I think that the solutions that have been presented are nothing more than the same old stuff that caused the trouble in the first place; that is, credit expansion. But, for instance, I think actually you are overreacting, in the sense that you are wanting this, having the Secretary of Defense come, declaring this horrible emergency coming, people like me who speak out, say, what are you going to do if a depression comes, it is going to be blamed on me. This is getting carried away. If you look at the most important way to find out how this is being discounted, look to the markets. The markets are saying—the funding is in great trouble, and the markets are doing quite well. So I think it is hard to convince everybody that we are in big trouble if the markets are saying, ''hey, forget it.''
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    There was an agreement with the Korean government; $24 billion of loans were rolled over with the banks. The banks get a high rate of interest. The banks get a special deal because they can go down to zero reserve requirement because they belong to the OECD and do the Fed regulations, and today's paper said this is a plum for the banks, this is a sweet deal for the banks. There is a lot of reassurance there. So a lot of people are asking, why do you need additional support? Why do you need even taxpayer support to back up these loans that have already been renegotiated? One question I have for Treasury is, in this $24 billion renegotiation, I would like to know whether or not the 14 merchant banks that have already been declared bankrupt, whether or not they are going to be bailed out as well. Has the Korean government assumed those loans and indirectly are we going to assume it?

    I would like to go ahead and finish my questions. The other question I have for Chairman Greenspan is in 1980 there was a significant change in the Federal Reserve Act. It permitted much more leeway in the Federal Reserve in purchasing foreign debt. Does this mean—are you allowed under today's law to buy a Korean bond in your transactions and have you or would you consider it? And also for the Exchange Stabilization Fund, in the legislation giving us the Exchange Stabilization Fund, you have the right to deal in gold. It is very explicit that you have the legal authority. Do you, have you or would you?

    Secretary RUBIN. Let me take a shot at a few of those if I may. Why don't we start with the one you addressed to Chairman Greenspan actually. He was looking too comfortable.

    Mr. GREENSPAN. We hold at this stage foreign obligations in marks and yen as part of a general reserve position. We do not buy any other foreign assets. The rules which we abide by are internal rules of the Federal Open Market Committee. Those rules have been fairly restrictive with respect to what it is we can buy. The answer to your question is we don't have authority now to buy Korean bonds. My impression is that if we brought the issue up we would not achieve such authority.
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    Secretary RUBIN. Very briefly on the other issues if I may, Dr. Paul, on the question of the markets not reflecting the issues in Asia, markets can change and change very quickly. Having lived in markets for 26 years and having done well sometimes and less well other times and horrendously still other times, I wouldn't look to markets myself—and this is my view, one person's view—I would not look to markets as a barometer of the possible risks to our interest. I think the risks are the risks that we have identified here. On the question of whether or not the bank deal in Korea is what you called a sweet deal——

    Dr. PAUL. The paper called it that. I am quoting the paper.

    Secretary RUBIN. The paper says a lot of things, including some things about me even sometimes, which I don't necessarily agree with. The short-term debt that is now outstanding I believe is 5 percent over the London interbank rate and that is short-term debt. The new debt which go out one year, two years or three years is on average I believe 2 1/4 percent over the London interbank rate. So they have actually had a substantial reduction in the interest rate and a substantial extension in maturity assuming that the banks sign up for this. At the present time all you actually have is a proposal. In addition, the banks in credit extension to the corporate sectors in Korea and throughout the rest of Asia in many cases have been taking substantial losses, thus the reference today to the $777 million reserve that Deutsche Bank set aside for its losses in Asia.

    Mr. GREENSPAN. $773.

    Secretary RUBIN. $773. I apologize. Well, I am not so sure. I bet you a nickel.
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    Mr. GREENSPAN. You are on.

    Secretary RUBIN. We have got a nickel-even odds. It is either $773, but in the neighborhood of three-quarters of a billion dollars. There is a slight side bet between the Chairman and me which he will probably win.

    Secretary RUBIN. And then as to the merchant banks, the healthy merchant banks—when it is determined who is healthy—will be eligible to swap; the unhealthy merchant banks will not.

    Dr. PAUL. The ones that have failed will not get any benefits. The Korean government hasn't assumed any risks from the field merchant banks.

    Secretary RUBIN. Now that is a different question. Larry, do you want to address that? I am sorry; that's a different question, I apologize.

    Mr. SUMMERS. The Korean government, in August, had offered a guarantee to bank deposits, so that government guarantee obliges the Korean government to guarantee deposits, including merchant banks that fail. The stretch-out arrangement that was just described——

    Chairman LEACH. Excuse me, the Chair would like to interrupt for a second.

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    Mr. SUMMERS. He would like the witnesses to come to order.

    Chairman LEACH. As a result of a private bet that is being made, we want to make it very clear that the Chairman of the Federal Reserve Board does not have the right to intervene in currency markets to slap this judgment in his favor. Please proceed.

    Mr. SUMMERS. I gave my answer. The banks that fail are guaranteed by the Korean government; the liabilities are not included in the stretch-out arrangement that is part of the international support.

    Chairman LEACH. Thank you. Mr. Sanders.

    Mr. SANDERS. Thank you, Mr. Chairman. What I would like to do is just ask a few questions and then wait for the responses. Mostly what I would like to do is pick up on a few of the points that folks like Barney Frank, John LaFalce, Maxine Waters and Jack Metcalf made and just maybe carry it a step further and maybe add one or two points from Bernie Sanders as well.

    Point number one: General Suharto is a corrupt dictator, who, among other things, happens to be worth some $30 billion. He has a habit of putting in jail political opponents of his, including leaders of the trade union movement who have the strange idea that workers have a right to organize and stand up and fight for their rights.

    Muchtar Pakpahan, who is the leader of the Indonesian free trade union movement, is now rotting in jail. Several years ago, Barney Frank and I passed legislation which said the United States must demand from recipient countries in IMF deals that they guarantee internationally-recognized workers' rights.
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    The Treasury Department has not done that. You have not obeyed the law. So, Mr. Rubin, I am giving you the opportunity now to tell General Suharto the people of the United States will not sit back and participate in loans to a corrupt dictatorship unless leaders in their country, who are fighting for democracy and for workers' rights are set free. Tell the world now that no more IMF money goes to that country, or goes to Suharto. Tell the people of Indonesia that we are on their side. Free Muchtar Pakpahan. Tell General Suharto that is what you are going to do. That is question number one.

    Number two, picking up on a point that Mr. LaFalce made a little while ago. Generally speaking, and historically, when businesses and large banks make bad loans, when they screw up, when they invest what they shouldn't have invested, and the people they lend the money to can't pay it back, what historically happens is people sit down and then the banks write off some of it, they forgive some of it. That is the way it goes.

    I find it ironic that it is the taxpayers of this country who are going to have to bail out banks that have made billions and billions of dollars investing in Asia, huge profits. I find it ironic that IMF austerity programs are not going to affect General Suharto, who is worth $30 billion—he has money abroad—but it is going to affect the poor people of Asia, who are going to see higher unemployment and lower wages.

    So I would suggest, maybe instead of coming to the people of the United States for a handout, why don't you get Chase Manhattan Bank and General Suharto in a room and help them negotiate so that these guys can take responsibility for their own bad practices, rather than the middle class and the working families of this country.
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    Third point, picking up on a point Ms. Waters made. New York Times today, it says a study done by the banks about what happened in Asia. It shows, quote, ''How foreign banks, including American banks, fell over themselves to lend more money year after year in Asia.''

    I agree with Ms. Waters; in my State of Vermont we have mayors, we have the governor, we are down on our hands and knees asking corporations to reinvest in our country. Workers today in this country are earning substantially less in real wages than 20 years ago, working longer hours. Women have got to work, rather than staying home with the kids.

    What are you doing to get these banks and corporations to reinvest in the United States of America, pay workers here a decent wage, rather than investing in Indonesia where they pay people 20 cents an hour? That is the point Ms. Waters made. I think it is an excellent point.

    Last, Mr. Metcalf touched on this point: The IMF historically does not have a good record in terms of the poor people of various countries. You mentioned Mexico, Mr. Summers, and your pride that Mexico repaid their loan and we got a big interest rate back; boy, we made money. Do you know what is going on in Mexico today? Do you know that working people have seen a significant decline in their wages? They've got millions of kids working for no money at all, and you are sitting here telling us how proud you are we made money. So the suffering children and the unemployed workers of Mexico have paid us back and we are gloating about it.

    Some of us think that maybe the function of the IMF or the United States Government should pick up the poor people of the world, and not push them down further. I would appreciate a response to those questions.
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    Secretary RUBIN. Let me try to go through some of them, if I may, Congressman Sanders. In terms of Indonesia, this Administration has an exceedingly strong commitment to human rights. The Secretary of State has rearticulated that commitment in all sorts of forms and, as you know, has a personal history of being deeply committed to these issues. As you also know, it is very complicated and difficult to accomplish the purposes that we would all have in that respect.

    Now, let me respond to your question. I think it is overwhelmingly in the interest of the Indonesian people and overwhelmingly in the interest of Indonesian workers and overwhelmingly in the interest of American workers to have an IMF program that prevents Indonesia from dissolving into financial instability, and that is what we are about in Indonesia.

    Separately from that track, because I do not think we can accomplish the purpose that you very correctly say should be accomplished on this track, very substantial efforts have been made predominantly to the State Department to try to accomplish the purposes that you have raised.

    The question of the workers of these countries bearing the cost of this, I think these countries basically face two possible tracks. One is that they put in place reform programs, they go through a difficult period—and inevitably they will—and they come back out and they get back into a mode of growth. And if you look at these Asian countries, they have had remarkable rates of growth over the last, say, 20 or 30 years; and with all the problems that exist in these countries, average incomes and standards of living in these countries have increased very substantially as a result thereof.
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    The other possibility is that these problems not be addressed, in which case the workers of those countries, and also our own workers, but the workers of those countries will be vastly worse off than they would be if in fact reform and stability are accomplished.

    On the question of inner cities, I guess my answer is the same to you as it was to Congresswoman Waters. I totally and completely agree with the importance and respect of the problems of the inner cities with respect to all of us, and I think we actually have accomplished a lot in this Administration, but I have no question there is room to continue to try to do everything more that we can possibly do, and I think we are committed to doing that. I may have missed something.

    Mr. SANDERS. Well, you did. Once again I gather you are not telling General Suharto to free the leader of the union movement who is rotting in jail now, despite the fact our law requires us to do that. You are not saying that.

    Secretary RUBIN. I can repeat what I——

    Mr. SANDERS. You are not saying that.

    Secretary RUBIN. I am sticking with what I just said.

    Mr. SANDERS. Well, I am sure the people of Indonesia do not appreciate that.

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    Secretary RUBIN. Well, you know, it is interesting, Congressman Sanders, I think there are very serious issues affecting human rights in many places, and I agree with the fervor with which you deal with them. The people in Indonesia are going to be vastly worse off if we can't, working with the international community, help Indonesia solve the problem they now face.

    Mr. SANDERS. People of Indonesia have the right to stand up and fight for their rights, and their leader is in jail now and you are tolerating that situation.

    Secretary RUBIN. I certainly agree they have a right to stand up and fight for their rights, and I think inappropriately jailing people—and I actually don't want to comment on this in particular, but inappropriately jailing people is something that is most reprehensible and we view with the greatest concern.

    Mr. SANDERS. But we are giving him billions of dollars and not asking him to free his political prisoners.

    Secretary RUBIN. Just a matter of fact: The United States did not disburse a nickel to Indonesia; the IMF has disbursed some funds and we are trying to accomplish in Indonesia what we can within the context of an IMF program.

    I think you have another issue, which has gotten enormous attention. I understand the Secretary of State and others in the State Department have raised this in many forums with the Indonesians. I don't think you can effectively accomplish that in this context.

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    The LEACH. Thank you, Mr. Secretary.

    Mr. Hill.

    Mr. HILL. Thank you, Mr. Chairman. I too will ask a series of questions and then you can answer them in order. One, there has been a lot of discussion about the impact of the Asian financial problems on the U.S. economy and employment growth, corporate profits, returns on Wall Street. But there has been relatively little discussion that I have noticed about how that might affect the Federal Government's budget. The growth above projections, particularly corporate profit growth above projections, is really what has set the stage for the Balanced Budget Agreement and the proposed budget, I presume, for 1999.

    Secretary Rubin, to what extent has the Administration or will the Administration's budget adjust its estimates for economic growth, employment growth, and particularly corporate profit growth as a result of what we currently know about the Asian crisis and where you think it is going to go?

    Secretary RUBIN. I would like to ask Dr. Summers to expand on this. We had, I think, really quite conservative estimates with respect to the GDP growth underlying our budget, and I think if you look at most private sector—the great predominates of private sector forecast, even with the problems in Asia, I think those forecasts still are above the rates of growth we were projecting; is that correct, Larry?

    Mr. SUMMERS. I think that is correct. Congressman, my judgment would be, and the Chairman can provide us with a definitive judgment, that as long as——
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    Secretary RUBIN. Well, he didn't know the loan number, so I don't know.

    Mr. SUMMERS. As long as this situation is contained, the impact on the U.S. economy is not likely to be large enough that it would be a major item relative to the other uncertainties in a budget forecast a year out.

    Mr. HILL. But it has been corporate profit growth that has substantially allowed us to balance the budget ahead of schedule; isn't that correct? It has been revenues from increases in corporate profits?

    Mr. GREENSPAN. Not fully. The answer is yes, in part.

    Mr. SUMMERS. It has been a factor.

    Mr. GREENSPAN. But the big change that has occurred in the last fiscal year is a very substantial increase in individual payments—and is not easy as yet to pin down, and we will not be able to understand all the sources until we have the full tabulations of the tax returns, which will be a few years away. But we think it is very substantially related to the level of the stock market and capital gains taxes and significant bonuses in Wall Street and other areas that are related to very large increases on 1040 tax returns. It is large income individuals, apparently, who are paying fairly substantial taxes as a consequence of the very dramatic rise in stock prices.

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    The issue of corporate profits is a crucial one, but I think we all forecast that within a reasonable degree of accuracy. Where we all missed was the extent of the non-withheld taxes, which have been substantial, and the fact that withheld taxes relative to wages and salaries have gone up significantly. This implies that it is the upper-income taxpayers who are making large amounts of money and paying significantly higher taxes than we would have expected.

    Mr. HILL. Thank you, Mr. Chairman. One of the complicating factors with the Asian crisis seems to be somewhat associated with the weakness in the Japanese banking system and Japanese banks in general. My first question is how weak are the Japanese banks? And I would ask you if you could put this into perspective. Could you relate the Japanese banks' exposure to Asia to the U.S. banks' exposure to South America in the 1980's? Perhaps that is a perspective that would allow us to understand it a little better.

    Mr. GREENSPAN. It is different in the sense that the exposure of American banks to Latin America in the 1980's was essentially foreign currency type of loans which represented very significant percentages of American commercial bank capital. The losses in Japan are more closely related to our savings and loan problem.

    Mr. HILL. Put it in that perspective——

    Mr. GREENSPAN. The size of the Japanese nonperforming loans, no matter how you measure it, is significantly greater than the savings and loan problems we had here. They have a very large problem. As I mentioned yesterday, they are aware of it, they are finally—I emphasize the word finally—coming to grips with it; and it is going to require a very substantial effort not dissimilar to the effort that we extended, in retrospect better than I thought we would, with the Resolution Trust Corporation. It is not clear yet precisely how the public funds that they have made available are going to be employed to resolve this issue, but they finally bit the bullet and recognized that unless they resolve that issue, that it is going to be a very serious overhang on Japanese economic growth.
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    Mr. HILL. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Hill.

    Ms. Roybal-Allard.

    Ms. ROYBAL-ALLARD. OK. Thank you, Mr. Chairman. And let me join my colleague, Maxine Waters in thanking Chairman Greenspan for going to Los Angeles. Although you did not have an opportunity to visit my district, which is adjacent to hers, many of the problems that you saw there are also problems and needs that are in my district, and I want you to know that your presence and willingness to go to Los Angeles made a very positive impression on my constituents and it was very much appreciated.

    Mr. GREENSPAN. Thank you.

    Ms. ROYBAL-ALLARD. The question I have really is very, very basic. I have simply been trying to understand why we even got to this point of the crisis, particularly in light of the fact that, for example, in dealing with banks, although I realize there was no single factor that contributed to this crisis, banks certainly—and what they were doing is certainly a part of it. And in light of the fact that for years, for example, our Comptroller of the Currency, Eugene Ludwig continued year after year, in 1995, 1996, 1997, to warn the banks that they were making these extremely risky investments, and they were allowed to just completely ignore it. In fact, today, William Rhodes, who is Vice Chairman of Citibank, said that bankers were aware of this and had warning signs as early as last spring, and just chose to ignore them. My question is: What did the Treasury and the Federal Reserve do to try and prevent this kind of risky behavior?
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    Mr. GREENSPAN. We have a fairly extensive set of examinations which we engage in. That is, we at the Federal Reserve, the Comptroller of the Currency, the Office of Thrift Supervision and the FDIC, all have various different depository institutions which we examine and examine for precisely this issue. Nobody makes a bad loan, in the sense that you don't consciously make a loan you do not expect will be fully repaid with interest. It is a judgment call in all respects, and no banker expects that every loan that will be made will be fully paid back. The banker knows that, on average, some will fail; he doesn't know which ones in advance. If he did, obviously, he wouldn't make those loans.

    I think what the regulators have been saying in recent years is that when you get into an environment in which credit is expanding at a fairly reasonably good pace and risks look exceptionally low, that is usually the period that the standards begin to drift and people become terribly desirous of expanding their loan portfolios because they perceive there is very little risk. History tells us it is precisely at that point when most of the bad loans are made. You almost never make a bad loan when business is bad, because bankers are very chary about lending money at the bottom of the cycle. The loans they make then invariably get paid back. It is the ones that are made up here that are a problem. I don't know what to do about that.

    The problem is called human nature, and I don't know what you do, except you have the examiners continuously put pressure on the bankers to make certain that the quality of the loans that they are making is sound.

    We do not have a banking system or a supervisory or regulatory system in this country which is a heavy enforcement mechanism. If we did, I think we would find our banking system would be very inefficient and would be very small. It is a very difficult tradeoff to make judgments of exactly how you do banking supervision and examination to solve precisely the question that you raise. I don't think we will ever solve it. I think we will always be involved in trying to find what is the appropriate balance. Sometimes I think we examiners and supervisors will get it right; sometimes I think we will get it less right.
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    Ms. ROYBAL-ALLARD. This time we got it less right; is that what has led us to this crisis?

    Mr. GREENSPAN. This crisis actually occurs for reasons which are related to this, but there are far more profound problems causing it. I was referring mainly to the general issue of lending. The causes of this crisis, which are partly bad lending, are, however, only a small part; there is a lot more that has caused this crisis. I tried to outline them in my written statement, and more particularly in the testimony I gave to this committee back in mid-November.

    Ms. ROYBAL-ALLARD. But as small as it is, it is still a factor. Are you saying that there is no way of even controlling the small factor, even in the light of years of warning?

    Mr. GREENSPAN. The problem is that if you wish to have the type of banking system which we have, it limits what we can basically do. I mean, we talk to the bankers, and effectively say that ''This particular segment of your loan portfolio has a concentration of too many loans in this type of industry. History tells us this is risky. Be careful.'' And when we do that, we probably have some significant positive effect.

    Ms. ROYBAL-ALLARD. But they can also ignore it, which basically brings us to where we are now.

    Mr. GREENSPAN. To a point they can, yes.
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    Chairman LEACH. I thank the gentlelady.

    Mr. Manzullo.

    Mr. MANZULLO. Thank you, Mr. Chairman. I have enjoyed the conversation and testimony today, but there isn't anything that has been said today that has been put in terms of the people that I represent. I represent the 16th District of Illinois; it is Lynn Martin's old congressional district. We are one of the leading exporting congressional districts in the Nation, not only for machine tools, but in agriculture. The number one dairy cattle producing counties in the State are in the district I represent, plus hay, oats, and 15 percent of U.S. exports and machine tools come from Rockford, Illinois, a city of less than 150,000, that has 1,000 factories. Rockford led the Nation in 1981 with unemployment at 26 percent because of the strong dollar and worldwide inflation.

    I am very much concerned that whenever there are problems, inflationary problems, unemployment, and so forth, that the first that get hit and the last to recover are machine tools. And what I would like to see, what I would like on testimony, is I want to know how the person working on the line, much of whose skill goes into goods that are exported and who has a pension plan that is managed with, you know, 10 to 15 percent international securities, much of their portfolio deals with the blue chip American companies that have investments abroad, I want to know how this plan that you are presenting, and IMF, is going to impact the people that I represent, both short range in terms of employment, and long range in terms of the value of their pension plans?

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    Mr. GREENSPAN. Let me say, first, the purpose of an international financial system is to finance trade of goods and services. The more sophisticated the system, the more effective it is in financing these various products. One hundred years ago, your district did not export, or could not; the physical facilities were not there, the capabilities were not there. That has all evolved because we have had a very major increase in international trade, especially in the post-World War II period, and the financial system that has been evolving in a parallel fashion has been a major force in enabling that to happen to everyone's advantage.

    What the particular program that we are discussing will do, or is focused on, is to sustain that international financial system so that it can be a major factor in assuring that trade continues in an expanding mode around the world, to everyone's benefit, particularly your district, actually.

    Mr. SUMMERS. Let me try a slightly different formulation. Not funding the IMF now would be like canceling your life insurance just when you have gotten sick. It would be exposing the workers in your district to the risk that the export markets in Asia, their products, would dry up because the countries would stop growing, not be able to attract finance, and see their currencies devalued to the point where they couldn't purchase American goods. Worse, expose your workers to the competition from goods from other countries to compete with them, being put on fire sale, because of wholesale and uncontrolled devaluation in those countries. Expose your workers in a third way, because financial markets, as we have seen, are ever more interconnected, and as we have seen, developments in Asian financial markets can and have very direct effects on the value of American markets as well.

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    Mr. MANZULLO. The pension issue; Secretary Rubin, did you want to comment on that?

    Secretary RUBIN. Let me identify with what both of these gentlemen said in the piece you have raised. In terms of the pension issue, basically I believe that, over time, markets follow fundamentals and these programs are directed toward improving fundamentals in Asia; and to the extent these funds are invested abroad, they benefit from having strong fundamentals that markets presumably will follow in the process.

    Mr. MANZULLO. So what you are telling me is that the pension plans could be at risk of losing percentage and growth, not only to those people who are already on pension and receive stock dividends, and so forth, by devaluation of American stocks, but those looking forward to pensions could actually see a diminution in value of their stock portfolio.

    Secretary RUBIN. I'm sorry; are you talking about American stocks or foreign stocks or both?

    Mr. MANZULLO. It depends on what is in their portfolio. Sometimes it is both. Mostly American.

    Secretary RUBIN. My instinct is to think—you are getting into a complicated set of questions. My view, whatever it is worth, is that equity markets around the world do affect each other, and surely the Asian equity markets have had enormous decreases in price, while at the same time American markets actually held pretty well; but to the extent they are invested abroad in developing countries, they are certainly at substantial risk if financial stability is not restored. It remains to be seen, if these conditions were to continue and then spread out, what effect it would have on American markets, but it is at least an issue.
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    Mr. MANZULLO. Thank you.

    Mr. LEACH. Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. I will try to be brief if you all will try to be brief.

    After your presentations to the committee, I went back to my office and I—in an effort to do some paperwork and also in an effort not to miss what was going on here—flipped on the television and realized that this presentation is on C-SPAN. And one of the questions that came up during the time that I was watching on television was the one that Mr. Kanjorski asked. He basically made the point that the American people don't understand this issue.

    I was reminded of two things: Number one, a lot of people come up to me when I am out in the district, saying, ''I saw you on C-SPAN,'' and so I expect that there are a lot of people who will see this presentation today on replays, live, whatever. Three o'clock in the morning is when they usually tell me they are watching these programs.

    One of the issues that it seems to me would be very helpful for the American people to understand, the people in my district to understand, is the statement that you have made, Secretary Rubin, that this is not—what we are being asked to do is not really an expenditure of money. I was wondering if you would just elaborate on that and flesh it out a little bit so that if perhaps some of my constituents are watching you, watching this program, they would better understand what you are saying.
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    Secretary RUBIN. That is a very good question, Congressman. As I said in response I think to an earlier similar question, we use the word ''funding'' the IMF. I think it is an unfortunate choice of terms, and maybe we can think of some better way of describing it. If Congress approves the quota—let's stick with the quota for the moment—there are two different arrangements. Actually, the consequence is the same either way. If the Congress approves this what we will for the moment call funding, then if the IMF—what we do is make a line of credit available to the IMF. If the IMF then calls on us to put up money, we will give dollars to the IMF and they will give us, in return, a claim on the IMF which is exceedingly creditworthy, since the IMF has, roughly speaking, $40 billion worth of gold behind it, and is interest-bearing and is liquid. So we have an asset that is deemed to be by the Congressional Budget Office, and I think rightly so, of equal value.

    So while it is true we have given dollars to the IMF, we have gotten something back of equal value, which, if we wish, we can liquidate at any time. So that transaction has not cost us a dime. The IMF can then use those funds as they see fit, and we can get our money back any time we wish. The Chairman would like to expand on that.

    Mr. GREENSPAN. I want to refer to Dr. Paul's question with respect to increasing the debt. The answer is yes, it does, but there is an offsetting asset which, as the Secretary says, is of equal value; so that unless that asset is at risk, then it is true that the debt has gone up, but it is not an increase in expenditure in that regard.

    Mr. SUMMERS. Congressman, it's like putting a deposit in a credit union where you earn interest and where the credit union is very secure because it's got gold that backs nearly two-thirds of the value of the outstanding loans. Deposit in a credit union isn't like an expenditure to buy a car or something else.
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    Mr. GREENSPAN. My credit union has got less gold than that.

    Mr. WATT. I appreciate the responses, and I think that will help my constituents understand that aspect of it. I am not saying that is the only question. I think the prior question that Mr. Manzullo asked, and Mr. Summers' response to it, will also be very helpful as we try to evaluate what impact this has on our individual constituencies. It is not an easy situation to understand, but we need to be translating that into terms that constituents can understand when at all possible. Thank you, Mr. Chairman.

    Mr. LAFALCE. Would you yield for 10 seconds, Mr. Watt?

    Mr. WATT. I am not sure I have it, but I will yield it if I have it.

    Mr. LAFALCE. I wonder if the Administration might accept a friendly amendment to change the name of the International Monetary Fund to the International Monetary Credit Union? It might be helpful.

    Mr. LEACH. Let me say, there are three of the Members of the minority side that haven't asked questions and Mr. Jackson didn't return, but we really owe a question to Mr. Bachus, so why don't I first recognize Mr. Hinchey and then suggest Mr. Bachus has some time.

    Mr. Hinchey, go ahead.
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    Mr. HINCHEY. Thank you very much, Mr. Chairman. I want to thank you three gentlemen, and Mr. Cohen as well, for your testimony. I think it is very helpful to get the insights you have provided, and I think everyone who is watching it can benefit from it as well.

    It seems to me that oversupply is among the underlying causes of this problem; first, oversupply of capital, too much capital chasing too few good loans, particularly in Japan. And as I think you pointed out, Mr. Chairman, that is in some sense similar to our experience with the savings and loan crisis. Inadequate banking regulation is also another underlying cause, which was also a feature of the savings and loan crisis, so there are some parallels in that regard.

    We are also seeing a vast oversupply of production throughout the economies in East Asia, everything from computer chips to automobiles, and that has expressed itself in disinflation and even deflationary forces in some of those economies.

    And it would seem to me that we are also, to some extent, seeing those disinflationary forces in our own economy. The consumer price index ended the year at 1.7 percent, as low as it has been in more than a decade and a full percentage point lower than it was at this time last year. Consumer prices grew more slowly last year than they have at any time in 30 years. Wholesale prices are holding steady, and durable goods demands in the most recent reporting period were down. All of this tells me that we need to prepare for the impact of what is now occurring in East Asia on our economy.

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    One way these governments are going to try to get themselves out of their troubles is to export their excess capacity and excess supply to Europe and to the United States. We are the markets of last resort.

    The European economies have their own trouble. Their banks are much more heavily leveraged into this problem than ours are, and secondarily, they are having problems conforming to the requirements of the economic community in Europe.

    So we have perhaps three months, six months, to prepare our own economy before we feel the full impact of what is now occurring in East Asia. Since real interest rates are at almost record highs, we need to make some adjustments in monetary policy to open up our economy so that we are not damaged seriously by the effects of Asian oversupply.

    I would just like your reaction to that. What steps should we be taking, given the fact that estimates indicate that the trade deficit could increase by anywhere from $100 to $200 billion as a result of what is happening, and that the loss in GDP could be anywhere from 1 to 2 1/2 percentage points? If our trade deficit increases by $100 billion to $200 billion, that means something in the neighborhood of a loss of 700,000 to 1 1/2 million jobs. What steps should we be taking now to deal with the potential disinflationary effects on our economy of the disinflation and deflation in Southeast Asia?

    Mr. GREENSPAN. If you believe those forecasts, you would do an awful lot. The trouble with the forecasts is that there is no evidence at this particular stage that they are anywhere remotely close to those types of numbers.

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    As I mentioned yesterday at the Senate Budget Committee, we are seeing just very mild effects at this particular stage. It is really quite interesting that despite the very extraordinary turmoil that is going on in East Asia, we do not really yet see the impact. We do think it is going to be there. We think it is going to be substantially less than the numbers you are suggesting; but remember that what we are looking at now is not an all-time record or close to record real interest rates.

    If indeed monetary policy were extremely tight, which is what you are implying at this point, it would be very difficult to explain why the interest-sensitive areas of our economy, like home building, automobiles, some types of capital investment, are doing exceptionally well. The sharp decline that you are referring to in durable goods is wholly in civilian aircraft, and there are lots of reasons for that. In any event, those orders, which are reflected in those numbers, are for delivery a number of years out and don't really reflect anything relevant to the short term.

    Mr. HINCHEY. Well, you are absolutely right. The decline is a result of aircraft, but everything else in durable goods is flat and consumer prices are at a 30–year low.

    Mr. GREENSPAN. That is a fact.

    Mr. HINCHEY. OK, that is a fact; I just wanted to get you to say that on the record. The consumer price index is up 1.7 percent—that is at least a decade low—so the numbers I am citing are not fanciful numbers at all, they are real solid numbers that are reflected in our economy.
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    Mr. GREENSPAN. The only number I questioned you on is your judgment about where one would put the real Federal funds rate relative to history. Aside from that, I acknowledge that your numbers are accurate.

    Mr. HINCHEY. I would like to talk to you some more, if time permitted, about the depreciation in their economy and the relative appreciation in our economy relative to the 1981–1985 experience. And if you look at the 1981–1985 experience and plot that out as to what may occur as a result of the appreciation in our economy, industry by industry, you see a rapid increase in the trade deficit. And it will be interesting when we have this discussion when you come before the committee in another six months or so, to see which of us——

    Mr. GREENSPAN. It is going to be a lot sooner than that. I think I will be back here in three weeks.

    Mr. HINCHEY. Three weeks. We may even get a chance to make some comparisons by that time.

    Mr. GREENSPAN. Splendid.

    Chairman LEACH. Well, thank you, Mr. Hinchey, and we will see you on the 24th of February.

    Mr. Bachus.
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    Mr. BACHUS. Thank you. I will address the whole panel. First of all, what is our total exposure here? Are we asking for $17 billion now, and will you be back next year asking for more; or this $17 billion, this is it?

    Secretary RUBIN. Mr. Bachus, I believe the last time an IMF replenishment was requested and approved was in 1990, and don't hold me to this, but I think it has occurred at an average of about once every five years or so. We can check that for you, but maybe I am wrong—am I wrong in that? Yes, about every five years. And it would not be our expectation to come back for a long time.

    Mr. BACHUS. What's a long time?

    Secretary RUBIN. Until we come back. No, it would be certainly our hope and expectation that with this replenishment, the resources and the capacity of the IMF would be sufficient for quite some number of years to deal with the problems of the international community. On the other hand, we are dealing a little bit with the unknown because one doesn't know what is going to happen.

    Mr. BACHUS. So you could be back in three months or six months?

    Secretary RUBIN. Well, look, I think the best way to answer that is on a best-guess basis. I think it would be quite some number of years.

    Mr. BACHUS. When these countries put this money to use, when are they going to repay it; what are the interest rates; are there terms?
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    Secretary RUBIN. Oh, yes. Larry.

    Mr. SUMMERS. Let me shed light on at least the advice I would give the Secretary, barring a substantial financial emergency. I would be very surprised if we would have reason—I would not see the need, barring a substantial financial emergency, for there to be any subsequent request for the IMF during the President's term. The terms of IMF loans vary. There are a number of different types of loans, but they range from the standard standby, which is 3 to 5 year loans, which is the basic program.

    In the case of the large financial emergencies, such as the situation in South Korea, as I suggested earlier, the loans are shorter term, 2 to 3 years, and carry a premium interest rate of approximately 300 basis points and rising above the IMF's borrowing costs. In some cases, the loans are—particularly in some of the poorer countries, are longer term, and range up to 10 years. There have been instances of arrears, historically, but there has been no default on a major loan to the IMF in 50 years, including during the Latin American debt crisis.

    Mr. BACHUS. Of course, we are talking about an awful lot of money this time. What happens if there is a default? You know, if I were a loan board, I would say, ''What is our collateral, what is our recourse, what if they have a change of government and refuse to pay?''

    Mr. SUMMERS. If a country gets into a default situation with the IMF, it is a pariah on the international financial scene. It has a very strong incentive not to do it. That is why there has been no major default.
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    In addition to that, to go back to the credit union analogy I used earlier, Mr. Bachus, the reserves, the gold reserves which act as an ultimate collateral for the IMF, are approximately $40 billion. The total loans outstanding from the IMF are a little above $60 billion, so that that reserve-to-loan ratio is, by the standards of even institutions that make risky loans, quite extraordinary, extraordinarily high.

    And it is really on that basis that I think the CBO and others who have looked at this have concluded that in a present value or credit reform sense, this is something that does not have a cost for taxpayers. And, of course, the premium interest rates that the IMF will collect on major loans in the future help to further ensure the solvency.

    Mr. BACHUS. OK. Chairman Greenspan, you spoke yesterday and you said the biggest economic threat to us at the present time might be a Congress or a President who went on a spending spree. Do you consider that this $17 billion request is inconsistent with—I mean, that is spending.

    Mr. GREENSPAN. No, it is not spending.

    Mr. BACHUS. It is not?

    Mr. GREENSPAN. It is an exchange of assets.

    Mr. BACHUS. All right.

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    Mr. GREENSPAN. In other words, there is a big difference between a budget outlay in which, for example, you are purchasing goods or services or making a transfer or something like that. These are loans. And as the Deputy Secretary says, our experience has been that everything gets paid back with interest, so it is a different type of outlay. I would certainly not include it as an example of that problem, which I raised yesterday.

    Mr. BACHUS. I accept that. Thank you.

    Chairman LEACH. Thank you, Mr. Bachus.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman. First of all, I think we are probably doing the right thing, and I think that there is a need for the urgency. I agree with Mr. Frank. I think that we should try and do everything to make labor policy and independent labor rules as important as we do to central bank policy; but I think, given the current situation, it is very difficult for us to put too many conditions on this. But I would certainly hope the Administration would pursue, with the same vigor, labor policy as they are monetary policy. I would also add, and I was with the Chairman and the others in Southeast Asia, there clearly has been a misallocation of credit, not just in how it impacts large institutions, but we met with a group of women businessowners who were stating that they would be the first to lose credit when situations got bad, not unlike what we have seen in the United States, and why we have things like CRA in the United States, because of misallocation of credit here. And that is part of the inefficiency in the market, which is why I think we need to have an IMF G–7 type bailout, and there are a number of inefficiencies.
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    Unfortunately, I agree; I think the impact is probably too great on our economy. And I think Mr. Hill raised an interesting question. I don't think we can underestimate the potential impact not just on our economy and on unemployment, but as well on our budget numbers. The GDP numbers that came in for 1997 today, of course, were far greater than what we estimated, and the economy continues to do well. I think we are assuming a 2.1 percent growth rate next year and 2.2 percent for a couple of years and then back to 2.2 in the budget resolution that we passed. So we have a little bit of breathing room. But we also have to take into consideration any rise in employment in the creation of sort of a recessionary deficit that could impact our budget caps and our budget numbers.

    Let me ask a couple of questions if I might. With respect to the—and I also think it is important that we continue to distinguish between the liquidity facility, that is the IMF package, and the private bank negotiations. But if you will answer these.

    First of all, if I understand the Korean debt rescheduling, the private debt that is being rescheduled; is that cheaper money than the money from the IMF and the money that is coming through the ESF? And if that is the case, wouldn't the Koreans be averse to using the more expensive money to back up the cheaper money; and in fact it might go the other way?

    Second of all, could you give us a detail of the security for the ESF money? You have given us an explanation of the IMF money. Can you tell us whether or not you think the Indonesian situation might require additional funding?

    Can you also tell us what you think the impact, or would there be any impact for Congress' failure to act on the IMF recapitalization? Even though the existing program is in place and Congress doesn't have to vote on that, do you perceive any impact on the current bailout program, if Congress fails to act, that there might be a negative market reaction or any market reaction at all?
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    And finally, would you comment on what Henry Kaufman wrote in yesterday's Washington Post, with the idea of the creation of sort of an international bank regulator? And I don't necessarily endorse that, but I would be interested in your comments on that.

    Mr. SUMMERS. Just to take a number of the questions, the questions you raised. If the Asian crisis took 1/2 a percent off of our GDP, which is what some people have estimated, that would translate into a Federal deficit that would be $10 billion larger, and if the magnitude was greater, it would be greater.

    The Korean bank extension is at spreads in the 200 to 300 basis points range over LIBOR. The IMF money is in a multiple currency basket, so it is a little bit hard to make the comparison, but is at a spread of 300 or more basis points over the government borrowing rates of the countries that are providing the money. So to the extent that the Koreans are able to attract private finance, that would certainly be more attractive to them, and that is precisely the idea.

    Mr. BENTSEN. If I could interject real quick. Would it be unusual that you would use more expensive money to repay cheaper money? In effect, would you take IMF money if it cost more and use it to repay cheaper bank money?

    Mr. SUMMERS. No. And that is why this program is important, because what has been established is that the bank money is being extended on—if the banks go along and sign up to this agreement—is being extended on the terms that I described. The ESF support will come from controls on conditions on the level of Korean reserves to ensure that adequate cash is maintained in Korea's reserves to respond to the ESF. Failure to provide support would not affect the finance for the existing programs, but would leave us unable to respond in the case of future emergencies and might make future emergencies more likely, because anyone thinking about withdrawing would be aware of the fact that in the event of a panic in a country, there would be no capacity of the international community to respond. So in a way, it would invite speculative attacks.
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    Mr. GREENSPAN. There are going to be an awful lot of major initiatives which people bring forth to resolve these very difficult problems that we are having. We have to be very careful about the form or structure of these very large organizations which we are introducing, because we don't know as yet precisely how this whole thing is evolving.

    I would be very concerned if we were looking at some major superregulator. Superregulators tend to overregulate and make unbelievable mistakes, largely because there is a presumption if you have a superregulator, that it will have a better insight into the nature of the problems than the markets themselves.

    Now, if we construct such a superregulator, I would suspect that I would know most of the people who would be in charge of making the types of judgments that would be required for that, and I will tell you that they don't have a clue as to what to do. I would much prefer to allow very complex market forces to tell us.

    Mr. BENTSEN. Would this superregulator theory apply both domestically and internationally? Would this apply as well to domestic financial policy?

    Mr. GREENSPAN. Indeed.

    Secretary RUBIN. What about the ''not have a clue?''

    Mr. GREENSPAN. Indeed.

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    Chairman LEACH. Thank you.

    Your comments would apply to a super-Congress, I assume.

    Mr. Sherman.

    Mr. SHERMAN. Mr. Chairman, the advantage of being the most junior Member of this committee is that I have had four hours to listen and four hours to figure out how to spend my five minutes.

    First, I want to point out that this is not a zero cost no-brainer. If the $18 billion of debentures or securities we are going to get from the IMF are really worth $18 billion, then I suggest the IMF would float them on Wall Street, where they would not run a substantial risk this House is going to turn down the whole package, and they would not face the increase and the substantial conditionality this House would impose.

    I do want to associate myself with Mr. Frank's comments, build on Mr. Kennedy's comments, by saying it would have been good for our taxpayers if we had let Japan do more, even if that gave Japan more power over what was going to be done.

    I do want to build on Ms. Roybal-Allard's comments by saying that bank examiners in Los Angeles are a lot tougher on banks that make small business loans than they are on banks that make international loans, even to countries that turn out to be overexuberant.

    The panel before us has a very tough job. They have done it well. They have helped insulate the United States from a near catastrophe in Asia. We in Congress also have a tough job, because we are so close to the American people.
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    I have to go back to my district and explain why we are bailing out these countries when not one soldier from the Army of Thailand, Indonesia, or Korea has been detailed to provide even token support for any military action we have to take in Iraq. I have to explain why the Suharto family gets to keep the $30 billion they have stolen safely in Swiss banks, while we give money to the IMF that makes Indonesia stronger and they use some of that strength to oppress the people of East Timor.

    I have to explain to workers in my district why we are bailing out countries whose predatory practices have taken a big chunk of the textile and consumer product markets while their nontransparent crony capitalism has prevented us from having the export markets that we would have had if it had been a transparent and fair system.

    Perhaps toughest, I have to explain to small businesses in my district why Korea can borrow money at 2 1/2 points over LIBOR while the small businesses in my district are lucky if they can get a loan at 5 points over prime. Part of that is, frankly, if you make a loan to a small business in my district, and you have trouble paying, there isn't $18 billion of taxpayer capital to bail out those who made the loan.

    I can explain all of that. I am looking forward to the next town hall. But I need to be able to say one thing; that is, this $18 billion investment is the total amount of taxpayer capital that is going to be placed at risk, that it is not going to be joined by $10 billion or $20 billion of capital that is taxpayer money that is put at risk without explicit congressional authorization, perhaps from stabilization funds, and that it is not going to be joined by another $20 billion in the summer, another $40 billion in the fall.
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    One thing that concerns me about our international commitments is that each international commitment is the reason to make the next international commitment. The reason we have the obligation to provide at no cost a substantial part of the security forces that make the people of Korea and Japan secure is that we did it last decade, and we did it the decade before, and it is arguably now our commitment. Likewise, will the $18 billion we put in now be the reason why we have to do more later?

    Secretary Rubin, can you assure me that if we go along, we provide the $18 billion, that that is the total amount of risk capital that the U.S. taxpayers will be asked to put up to get us out of this problem?

    Secretary RUBIN. Congressman, I don't think that $18 billion is at risk in any serious sense. I think, as the Chairman said, it is an exchange of assets, and the asset that you are getting—you as a former bank examiner are familiar with these things—is an asset of exceedingly high creditworthiness backed by, roughly speaking, $40 billion worth of gold.

    As we said a few moments ago, I think, absent some extraordinary set of circumstances, I think it is exceedingly unlikely that this Administration or the next administration will be back in the next several years for additional IMF funding.

    On the question of the stabilization funds, I think you have a different issue. I think it is absolutely central—and that is where we do take money, even though the risks are very, very slight—we have sovereign borrowers with their full faith and credit, but be that as it may, I think it is very central to being able to deal effectively with the kinds of crises we are dealing with, and also to getting other countries to respond to these crises the way they have.
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    We put up, as Deputy Secretary Summers said, in the Korean thing—we have not put it up, but our commitment is one-half of Japan's and about 60 percent of Europe's, if I remember correctly. This kind of international coalescence could not have been arranged if we could not have done our piece. So I think keeping this in place for these purposes is exceedingly important, and I don't think your IMF money for all practical purposes is at risk.

    Mr. SHERMAN. As far as we can view events in the future, you will not be back to Congress looking for additional investment authority, authorization, bailout money, special loans, IMF deposits, Asian bank deposits, and so forth? We swallow once, we swallow hard, and we are done?

    Secretary RUBIN. Absent the truly extraordinary and, I think, exceedingly remote possibility of a truly extraordinary thing, I think that is correct.

    Mr. SUMMERS. I would say this: If the IMF does not receive the support, I think there is an increased probability that this situation will spread and expand and create a situation where we will be back to Congress, and where the need will be considerably greater.

    Chairman LEACH. Just to tie down the one aspect of Mr. Sherman's question and to put it in the record, there is a movement in Congress to tie the hands of the Exchange Stabilization Fund. It is my impression that you vehemently disagree with that. Would you care to state that?

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    Secretary RUBIN. Mr. Chairman, I would agree with the comment that the Chairman of the Federal Reserve Board made in his statement. I think the Exchange Stabilization Fund is exceedingly important in promoting American economic national security interests by enabling us to respond quickly, as these crises inevitably require quick responses, in order to try to stem the instability. And I think that the Exchange Stabilization Fund needs to remain unfettered if it is going to be effective in serving our interests.

    Chairman LEACH. Thank you.

    Mr. BACHUS. Mr. Chairman.

    Chairman LEACH. Yes.

    Mr. BACHUS. I think you may have been referring to the legislation that I am introducing.

    Chairman LEACH. I did not know you were introducing it.

    Mr. BACHUS. I introduced it at the time of the Mexican bailout, which provided that on any withdrawal from the Exchange Stabilization Fund of over $1 billion, for any that was not short-term, 6 months, that you would get congressional approval.

    Do you oppose that?

    Secretary RUBIN. Mr. Bachus, I would oppose that. I think that the time it would take us to get congressional approval is probably—is very likely to be inconsistent with the time that we have to act if we are going to be effective in dealing with the situations. I think consulting with Congress——
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    Mr. BACHUS. If it were under six months, you would not have to come to Congress.

    Secretary RUBIN. That is true, but basically as you know, because I know we have discussed these things, when you have countries that have very large short-term liabilities, what you are in some fair measure trying to do is to extend those liabilities out to so the countries can get back on their feet. So very often that funding you need to provide needs to be 1–, 2–, 3–year year funding, whatever it may be, and you need to be able to do that with considerable dispatch if you are going to be effective in stemming the crisis.

    Mr. BACHUS. What about a 6-month loan of $1 billion and then come to Congress to get approval to extend it? You know, that was the reason for my line of questioning earlier, you know, where you are here asking for $18 billion.

    You say, unless extraordinary circumstances happen, you won't be back. So, you know, I am concerned about the Exchange Stabilization Fund, which was originally designed to protect our currency. Therefore, we are simply saying if it goes beyond this $18 billion, if Congress is giving $18 billion, then come to us if it is not short-term or if it is over $1 billion.

    Secretary RUBIN. You have two situations. The $18 billion would be going, as you know, to the International Monetary Fund. The Exchange Stabilization Fund are the resources that we in the United States have to use in the same situations.
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    Mr. BACHUS. That is truly taxpayer dollars.

    Secretary RUBIN. That is taxpayer dollars. I think the taxpayers have benefitted enormously from the ways that have been used to protect our interests.

    Chairman LEACH. Mr. Secretary, it is United States Government dollars, but the fund is basically derived from profit that has been made over the years, so in a technical sense they are not taxpayer dollars.

    Secretary RUBIN. That is a correct comment, Mr. Chairman. That is correct. It was also created a long time ago. It is not actually money from the taxpayers for decades, as far as I know. That is correct, Mr. Chairman.

    Chairman LEACH. In any regard, I think this is an issue that we will review. This is a thoughtful approach of Mr. Bachus'. There may be differences of judgment.

    Mr. BACHUS. I think it is something that we need to continue to discuss, particularly, as many of us have said, if there is going to be something beyond the $18 billion.

    Secretary RUBIN. Mr. Bachus, I am told that it is something in the neighborhood of four or five decades since Congress has been asked to contribute to that fund.

    Mr. BACHUS. Nevertheless, I consider those the funds of the United States people. You know, Government funds—I think that is the taxpayers' funds.
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    Mr. SUMMERS. It would be, of course, a requirement in the law that it would be used only in ways that would be scored as a zero expenditure, because that is a requirement in the way in which we use it; that in any loan we extend, there is a premium interest rate that covers the risk cost as the process assesses that. So in that sense it is a zero—it would be a zero cost in the use.

    Mr. BACHUS. OK.

    Deputy Secretary Summers, if I could just have one more minute, one reason that I think it is so important is that you have come before us today, and we have shown our frustration that there are none of these troops from these countries participating in Bosnia or Iraq. I think it gives you some leverage when you come to us for us to ask why is Indonesia not supporting us on the Iraqi situation, or why are Thai troops not in Bosnia?

    Chairman LEACH. If I could just suggest, we have gone a long time. We have Members that have other questions. We have Members not on the committee that have submitted questions. There is a question of Mr. Bentsen's that has not been fully answered relating to Indonesia. If I could ask that these questions be responded to in writing, I would be very appreciative.

    Let me also say, just in conclusion, thank you all. This is a very significant foreign policy issue, as we believe it will be the case in years to come that many significant foreign policy issues are going to be increasingly economic.

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    We have a history in this country in general of trying to treat foreign policy in a bipartisan way. There will be bipartisan support for this and bipartisan criticism. It is my own view that to give the benefit of the doubt to professionals in the Administration in foreign policy is generally worthy of doing. I am hopeful that a constructive result to the particular approach advocated by the Administration can be forthcoming. But this is going to be a very difficult decision by the United States Congress.

    In any regard, I want thank each of you for your forbearance, for your thoughtfulness on this very difficult issue.

    Secretary RUBIN. Mr. Chairman, thank you very much.

    Mr. GREENSPAN. Thank you.

    Chairman LEACH. We will now have a panel of academics, largely economists. The Chair has attempted to put together a group reflecting disparate perspectives, with critics as well as advocates as well as neutrals on this particular proposal, with as wide a range of views as possible.

    Let me ask the new panel to please take their places.

    Mr. Paul Wolfowitz, Dean of the Paul H. Nitze School of Advanced International Studies of the Johns Hopkins University. Mr. Wolfowitz was a former Under Secretary of Defense for Policy as well as a former United States Ambassador to the Republic of Indonesia.

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    Second, Dr. Lawrence Lindsey, a resident scholar and holder of the Arthur Burns Chair of American Economics at the American Enterprise Institute. Dr. Lindsey is formerly a Governor of the Federal Reserve Board of the United States.

    Our third witness is Dr. Lawrence Chimerine, Managing Director and Chief Economist for the Economic Strategy Institute here in Washington. Dr. Chimerine has served as an economic consultant to hundreds of major American corporations and is a gentleman of high repute in the economics arena.

    We also have Dr. Stephen Hanke, who is a Professor of Applied Economics at the Johns Hopkins University in Baltimore. Professor Hanke is Chairman of the Friedberg Mercantile Group of New York, a firm that engages in securities and currency trading, and is also a columnist at Forbes Magazine.

    Our next witness will be Robert B. Zoellick. Mr. Zoellick is the John M. Olin Professor of National Security at the United States Naval Academy. Prior to that Mr. Zoellick served as Executive Vice President at FNMA, and prior to that, as Counselor and Under Secretary of State for Economics.

    Our last witness is Dr. C. Fred Bergsten, who has been Director of the Institute for International Economics since its creation in 1981.

    Why don't we begin with Dean Wolfowitz? Let me say, the Dean is an extraordinary scholar as well as head of one of the really fine international relations schools in America, the Johns Hopkins University.
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    Dean Wolfowitz.


    Mr. WOLFOWITZ. Thank you, Mr. Chairman. I suppose it is not out of line to say that we are very proud to post you as one of our most distinguished alumni.

    It is a great pleasure to be able to address this very important committee on the subject of the Asian financial crisis. I very much appreciate the invitation.

    I am, as you know, Dean of the Johns Hopkins School of Advanced International Studies. I am appearing, however, in my personal capacity, and I think as much because of my previous Government experience, which included three years as U.S. Ambassador to Indonesia and four years before that as Assistant Secretary of State for East Asian Affairs. I have been trying to keep up on developments in that region in the last four years, both in the course of developing our program in Southeast Asian studies, and also as a consultant to a number of American firms interested in investing in Asia.

    I am not an economist or a financial expert, and the array of distinguished economists that appeared before us this morning and the ones that are with me on the present panel are unquestionably intimidating. However, while this is a financial and economic crisis, its causes are in some respects political, and its consequences are potentially strategic. It is those packages of the crisis that I assume you want me to address.
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    In this brief statement I would like to make three principal points, two of them of a general nature and one that is focused particularly on Indonesia.

    The first point I would like to make is that I think it is wrong to use terms like ''bailout'' in referring to the possibility of U.S. support to the troubled economies of this region. That suggests an act of pure charity, when, in fact, we have important interests as a country in helping Asia to recover as fast as possible.

    Perhaps I ought to leave to the economists the question of whether a Great Depression in Asia could threaten the extraordinary prosperity that the United States enjoys today. I am somewhat reassured that the consensus among economists seems to be that the effects of Asia on our economy are relatively small.

    But I did note in Chairman Greenspan's testimony the reference to a ''small but non-negative possibility'' that this crisis could, in fact, have, not his words but mine, disastrous consequences for our economies. And this is not a matter on which we can afford to be wrong, and our track record of predicting the course of economic and financial events over the last eight months ought to inspire both modesty and caution.

    In any case, there are dangers to consider beyond the purely economic ones. Despite its present difficulties, East Asia is already one of the most important power centers in the world. When it resumes its impressive economic growth, as it most probably will, it will become the most important center of world power perhaps as early as the first quarter of the next century.
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    East Asia also has perhaps the least well-established relations among major powers of any region in the world. The most immediate danger is on the Korean Peninsula, where North Korea's enormous military buildup creates the largest military threat to peace in the world today, and one which U.S. forces are committed to deter.

    But that is not the only danger we should be concerned about. It would be a mistake to be complacent about a peace that is so recent in a region that continues to have many latent animosities and unresolved sources of conflict.

    The United States has a large stake in preventing the kinds of prolonged economic misery that could produce domestic upheavals in key countries of the region, instability which could in turn increase both the short- and long-term dangers of war.

    Second, while there are legitimate questions to be asked about the role of the IMF, in my view, this is not the time to undertake wholesale reform of the IMF, and certainly not the time to abandon it. Many of these important questions have been addressed already by this committee, and I am sure will be addressed further in the course of this hearing.

    There is the question of whether the IMF policy prescriptions are the right ones at all, or the right ones for the countries of Asia. There are fundamental questions about whether the whole notion of the IMF as a lender of last resort creates a situation of moral hazard. There will be time enough to consider major international financial reform later, but right now there is a huge fire burning. The time to reorganize the fire department or to question whether fire insurance makes people careless is not when the whole neighborhood is burning down.
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    I was just recently on a trip in Malaysia, Indonesia, and Singapore. I would report that the mood in Asia today is indescribably grim. East Asians fear that they may be facing an economic crisis as long and as deep as our Great Depression of the 1930's. They have been important friends and allies of ours in the past, and they are likely to be even more important to us in the future. Memories are long in that part of the world, and it is important for the United States to be remembered as a partner that helped them in their hour of need, not as a fair-weather friend that neglected them or, even worse, a predatory competitor that took advantage of their weakness.

    For that reason, I would urge the Congress to consider the symbolic as well as the substantial effect of its actions. To withhold funding from the IMF because of concerns that some IMF programs may hurt the poor, help the wealthy, or even rescue individuals or institutions from the consequences of their own irresponsibility, is like using an axe to do the work of a scalpel.

    The message that would send to Asia is not that we are concerned about the poor or concerned about corruption, but that we are not concerned at all, that we are too complacent or too smug or too stingy to help them when they need it. The poor will only blame us even more for their poverty, and those, and there are many, who are struggling in these countries to make the necessary economic reforms will feel that we have abandoned them.

    For the moment at least, the IMF is the best vehicle that we have for promoting economic reforms that the region needs, and the IMF is not standing still. It does seem to be trying to learn the lessons of the past and to understand the new circumstances of Asia.
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    In the case of Indonesia, the country that I know best, there is a very broad consensus that the reforms the IMF is recommending are what that country needs.

    My third and most important point pertains most of all to Indonesia. That is that the problems of the Asian economies cannot be solved by economic measures alone. No amount of outside assistance will work if the countries involved do not help themselves.

    The problems and the solutions are political in two respects. First, in every case political will is needed to undertake the necessary reforms. Second, the financial crisis is a crisis of confidence, and financial confidence cannot be restored in an atmosphere of political instability and fundamental uncertainty. This problem is particularly acute in Indonesia, a country that I know well and admire a great deal, a country whose importance to the region and the world is very poorly appreciated in the United States. In fact, it is probably safe to say that there is no country in the world as important as Indonesia about which Americans know so little.

    I continue to be surprised at how even well-informed Americans are often unaware of the facts that make Indonesia one of the most important countries of the Pacific region. Let me mention briefly three in particular.

    First, with a population approaching 200 million people, Indonesia is the fourth largest country in the world, larger than Japan, larger than Russia, larger than Brazil. Even well-informed Americans are frequently surprised by that.

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    Second, Indonesia's location also makes it extremely important strategically. Most significant is Indonesia's crucial role as the largest country in Southeast Asia, a region of more than 400 million people, that is China's strategic neighbor. If Southeast Asia can preserve its stability and the current good relations among its members, there is a much greater chance that China will remain in peace with the rest of the world.

    Alternatively, if Southeast Asia becomes a region of instability and potential threat, China could well be drawn into that instability with consequences for the entire Pacific region, including the United States, and Indonesia is crucial in determining that outcome.

    Third, but by no means least important, Indonesia has the largest Muslim population of any country in the world, a fact that I find consistently surprises almost anyone I talk to. Muslims make up an estimated 90 percent of Indonesia's 200 million people. The Muslim population of Indonesia is almost as large as that of the entire Arab world put together. What is just as important, Islam as practiced in Indonesia is moderate and extremely tolerant. In fact, Islam is not the state religion. There is no state religion. Indonesia is justifiably proud of its record of religious tolerance.

    As one looks around the world today at the tragic effects of religious intolerance, I think it should be apparent how important it could be for the country with the world's largest Muslim population practicing religious tolerance to become a model of economic success.

    Indonesia has been independent for only a relatively short 51 years. At a time when we have been made acutely aware of important problems and challenges that Indonesia faces, it is worth mentioning briefly some of the major problems that country has successful solved in its brief history. I want to mention four in particular.
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    First, Indonesia's economic development over the last 30 years has transformed the country. Where 30 years ago poverty and malnutrition were endemic, and thousands of people literally starved to death on the idyllic island of Bali, over the last 20 years tens of millions of people have moved out of poverty. That is one of the achievements that is in jeopardy today.

    Second, there probably are as many different languages in the groups and religions in Indonesia as all of Europe, yet Indonesia today is impressively unified and stable. In a world where internal ethnic strife has caused and continues to cause such terrible crimes and bloodshed, this peace and unity is also a significant achievement.

    Third, as I have already noted, Indonesia has achieved a degree of harmony and tolerance among very diverse religious groups that ought to serve as a model for the rest of the world. In a world where so many people are still persecuted and even killed because of their religion, Indonesia's religious tolerance is the third great achievement.

    Fourth, it was not historically inevitable that the largest country by far in Southeast Asia would choose to take its place as an equal partner among its neighbors, rather than seeking to dominate them. In fact, under its first President, Sukarno, Indonesia took the opposite course, and President Suharto deserves credit for Indonesia's very decisive turn toward cooperation, a policy course which is a major factor in the peaceful condition of the Pacific region today.

    These very important achievements owe a great deal to the leadership President Suharto has provided his country. However, all of these achievements are to some degree in jeopardy unless Indonesia can emerge relatively quickly from the economic crisis it is facing, a crisis that will surely get much worse before it gets better.
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    That crisis cannot be overcome simply through economic and financial measures. It requires restoration of political confidence as well, and that cannot happen unless President Suharto can add one last achievement to his historical record by preparing Indonesia for a new generation of leadership in a way that he has not done so far.

    I am about to offer some comments, and I do so with a sense of humility and respect. Americans need to be careful about telling others how they should run their affairs. However, in the comments that follow, I am not simply stating my personal desires, but, rather, reflecting on what I believe to be two facts: First, that these comments reflect the views of a rather broad range, a very broad range, of Indonesian opinion, views on which both supporters and critics of the government would agree.

    Second, I believe that the judgment of the markets will depend on how these issues are addressed. I have spoken to a great many American investors and others who would like to invest in Indonesia, and I find that none of them will do so unless a much greater measure of political confidence is restored.

    There is much speculation in Indonesia and among the international financial community now about who will be chosen as the next vice president of the country when the People's Consultative Assembly meets in early March. This is a very important question, particularly when a 76-year-old president begins his seventh term in office, but I believe it is only part of a much larger question, whether the government can broaden its base of support so that the country can face its developing economic crisis with as much unity as possible, and so that the process of succession will be a smooth one.
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    I believe there are three ingredients that are critical if that ambitious goal is to be achieved and confidence to be restored. I would like to conclude by mentioning each of them.

    First, there is a need to develop the new generation of leaders. It is important to choose a vice president who inspires confidence among the whole society and among the international investment community, but that is only part of the solution. It is equally important to give that person real experience and authority in the day-to-day functioning of government, something, I would point out, that the vice president of Indonesia does not normally do.

    It is also important to develop leaders at other levels. There is enormous talent in that country, but that talent needs a chance to demonstrate itself. It would also be useful, I think, if some of the grand old figures who contributed to Indonesia's past successes could be brought back into government to help impart their experience to a new generation. But the most important thing is to give new leaders a chance to be tested, not only in the vice president's office, but in the equally important decisions that will be made in selecting a new cabinet.

    Second, and perhaps most difficult, but I believe perhaps most important, is broadening participation in government by all elements of society. Developing national unity is just as important as dealing with the issue of succession.

    South Korea today has the enormous advantage that Kim Dae Jung, the new President, enjoys the broad support of the entire country. That gives President Kim the legitimacy that is crucial for making the difficult decisions that he confronts even before he formally takes office.
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    President Suharto has the challenge of producing the same degree of unity and support for a regime that is very old, not one that is brand new. That can only be achieved by broadening the base of the government, by reaching out even to critics and disaffected elements, not by narrowing the base of the government with strict tests of loyalty. It means listening to the views of all elements of Indonesian society on the most important issues facing that country today, including even the choice of the vice president, and giving even critics a chance to be tested by real experience in government.

    Third and very important is promoting reconciliation and avoiding scapegoating. Indonesia cannot be unified, no country can be unified, unless people resist the temptation to assign blame. President Kim Dae Jung has set an extraordinary example of reconciliation for Koreans by urging his predecessor to pardon former Presidents Chun and Roh. Reconciliation is even more important in Indonesia, which does not enjoy Korea's advantage of an ethnically homogeneous and unified population.

    Indonesia cannot afford a return to the ethnic and religious scapegoating that was a hallmark of the Sukarno era. Some of you may remember seeing television pictures of boatloads of Indonesian Chinese under Sukarno being shipped out back to China, back in the sense they never came from there, but they were Chinese. Indonesia cannot afford to scapegoat Chinese or anyone else. The government must take the lead in discouraging attempts to scapegoat ethnic and religious minorities, and critics of the government need to be careful about blaming individuals for problems that are common to the whole region, and for which I am afraid responsibility must be shared widely, not only among Indonesians and Asians, but even among the creditor nations.

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    That is a tall order, but I believe it would go a long way toward avoiding a calamity in a country that does not deserve to have one and should not have one. There is great talent in Indonesian society, and there is still a broadly felt desire for social harmony.

    President Suharto has shown in the past that he is capable of great things. A distinguished diplomat from the Philippines told me not long ago that one of the great differences between Ferdinand Marcos and President Suharto is that Marcos was despised by the Philippine people, whereas Suharto is admired by Indonesians. He will earn their lasting admiration if he can rise successfully to the challenge of the present danger.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Professor Wolfowitz. Let me just say before turning to Dr. Lindsey that from an American perspective, that statement might seem fairly esoteric, but it is a very profound statement of the closest observer of Indonesian affairs in the United States, and I think reflects the values and views of this Administration and the public at this time.

    I want to thank you for focusing on that particular element of the problem that we have before us.

    Mr. WOLFOWITZ. Thank you.

    Chairman LEACH. Dr. Lindsey.

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    Dr. LINDSEY. Thank you very much, Mr. Chairman. It is a pleasure to be back before this committee, this time as a private citizen.

    Let me begin with a basic statement about what I believe the objectives of American policy should be. First, I think we have to minimize any downside risk of the current crisis and be prepared to take actions to prevent the widespread collapse of global trading and banking relations.

    Second, we must pursue policies which quickly get Asian economies into working order as parts of a free and open international market for goods and capital.

    Third, we must establish new institutional arrangements which minimize the chances that events of this magnitude happen again; if they do recur, that they are resolved in a more expeditious manner than the current crisis has been.

    I would like to begin with some uncharacteristic good news. Thanks to the actions taken over the past decade, including some with the support of this committee I would add, the United States economy and its financial system are in great shape. Our financial system is far better able to weather the current difficulties than it was 10 years ago, and it is far better positioned than any of its competitors.

    This is not the result of luck, but a lot of hard work by our Nation's regulators and banks. The country has paid a price. The economic headwinds which afflicted the United States economy in the early years of this decade were in large part the result of the actions taken to strengthen our banking system so that it could be healthy today. Our banks have substantial capital and loan loss reserves as a result of legislative and regulatory requirements.
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    We made sure that any bank losses would be carried by the stockholders of the institution and not by the taxpayers. This process was a major cause of the economic slowdown in the early 1990's, but it laid the groundwork for the current economic expansion.

    Second, the Federal Reserve, under my former colleague, Governor Susan Phillips, worked closely with major global U.S. banks to develop highly sophisticated computer models of banks' balance sheets. It all sounds very technical when you discuss it, but it has had a big practical payoff. Bank managements and the Fed have a much better understanding of the actual risks in their lending portfolios than the banking systems of other countries. Our banks are far less exposed to the Asian crisis than those of Europe and Japan, who did not do this hard work.

    Third, our monetary authority has spent the last 17 years building credibility. It was mentioned in the previous panel that in 1978 the U.S. had to go to the IMF for a loan. That is unthinkable today.

    The process of building credibility was not an easy one. It was a major factor in the recessions of 1982 and 1990. Today though the dollar is the undisputed king of the world financial community. As a result, it would take an unlikely series of catastrophic policy errors to produce the kind of banking crisis in American banks that now exists in Asia.

    I stress this is good news because understanding it is key to pursuing the objectives I mentioned earlier. Our banks could now absorb the losses they face in Asia without seriously impairing their capital position or ability to function, or have a large impact on the U.S. economy.
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    This fact should have strengthened the bargaining position of our Government in international negotiations. I find it amazingly frustrating that rather than pressing home the advantages of the U.S. economy, we have timidly been seeking cover in multilateralism. Perversely, this has meant maximizing the risk to U.S. taxpayers, while minimizing the negotiating power inherent in the U.S. position.

    As came up earlier, for example, throughout 1997, the Japanese government was pressing for an Asian-financed solution to Asian problems. The United States Treasury spent its time blocking such an effort, insisting, in effect, that U.S. taxpayers and not just Japanese taxpayers be on the hook for the Asian bailout.

    Later, and as recently as last November at the APEC summit, the President even declared this to be a mere glitch in the road, producing widespread incredulity at the U.S. grasp of Asian economic reality.

    I think we should leverage our negotiating power. The U.S. effectively has all the cards in the current crisis to advance our principles of the working of the global economy. We should do so because we have made the sacrifices to do the right things while others have not. The taxpayers of Europe and Japan and the hard-working people of Asia would be much better off today if their governments had imitated the actions taken by the United States with regard to reforming its financial system and deregulating its economy. We should be using the present crisis to insist that other nations take these actions now, and make those actions a precondition for our assistance.

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    To get the Asian economies functioning again in a way which is helpful to America and the global economy, we must make sure that the existing crony-based systems in those countries come to an end. Firms there are never allowed to fail. They take advantage of protected capital markets to finance huge projects at artificially low cost, and then face no adverse consequences when they have problems. Firms are protected against international competition by limits on foreign investment and ownership.

    In spite of talk about conditions, or a word that I don't think exists, conditionality, the IMF has simply not been aggressive enough in advancing our long-run interests in this regard. By its nature, the IMF does not represent the successful American model of the past two decades, but a conglomeration of interests, which include the less successful models of Europe and Japan. Because of our inherent negotiating strength in the current crisis, we gain very little by relying on such a multilateral agency to represent our interests.

    Further, it is far from clear that the IMF is successful at even advancing the interests of people of this planet. For example, it was reported in the New York Times that the IMF admitted in an international memo to making matters worse in Indonesia, not better. Their commands effectively closed down the Indonesian banking system, making the monetary conditions there impossible. All too often, the IMF simply strengthens existing power elites.

    A final important point to make regarding the IMF is that the IMF is not hastening an economic recovery in Asia. The stated reluctance of the congressional leadership to approve more funds for the IMF has actually helped force the banks and debtor nations to sit down and negotiate. The efforts of the IMF and the Administration to create an early role for the IMF, rather than one of lender of last resort in this crisis, has had the effect of delaying negotiations between the parties directly involved.
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    Now, this is a matter of straightforward self-interest. Both parties involved in the dispute, the banks and the borrowers, stood to lose money, and they knew it. Both are also aware that a protracted dispute simply increases the economic damage and increases the total losses which must be covered. But both also saw that the injection of IMF funds was a way of minimizing their individual loss. Thus, as long as it seemed as though the IMF was going to keep injecting funds, neither party had any incentive to resolve the dispute. It was only in late December, when it became clear that the IMF was running out of money and would not be replenished in a timely manner, that an effective rollover of Korean debt occurred.

    I believe that an immediate increase in the IMF quota would not be helpful to meeting the objective of a speedy recovery of Asian economies, which we all agree is the right objective here. Approval of the IMF quota simply would signal to those parties most directly involved that the world's taxpayers will cover a substantial portion of the losses brought about by said parties' behavior.

    On the other hand, an actual rejection of a quota increase might destabilize Asian markets at this very delicate moment. Thus, I believe the best course for the Congress is to defer consideration of the issue while studying the situation carefully and monitoring how events unfold.

    I also believe that this will prompt the Administration to represent more aggressively America's long-term interests and, in the process, strengthen its bargaining hand in any such negotiations. America has the most to gain from a global economic order in which capital investment, including equity investments, can be made anywhere on the planet.
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    With regard to direct investment, our long-term objective should be that a company headquartered anywhere on the planet should be able to invest in a factory anywhere else, and receive the same legal protections as others. I frankly find it amazing that America has tolerated a situation in which any Korean firm could have made an investment here in the United States, but no American firm was allowed to make an equity investment in Korea.

    With regard to lending, our long-term objectives should be putting bankruptcy mechanisms in place which allow lenders to repossess the collateral which underpin the loans. We need an international bankruptcy ''best practices'' standard, and are now in a sufficiently strong negotiating position to bring one about. However, we must act now and use the advantages of the current crisis in order to achieve this.

    We have also made a serious mistake in effectively converting loans from various international banks to various Asian companies into loans effectively between American and other taxpayers to the Korean and other governments. A lender should be able to foreclose on a borrower without it becoming an international issue. By effectively nationalizing these economic arrangements, we expand the moral authority and the security commitment of the United States in the interests of private parties which may not even be American.

    America gets the blame for the harsh macroeconomic conditions which the IMF demands as conditions for its loans. At the same time, the IMF does not represent American interests, so the United States bears a disproportionate share of the foreign policy costs without achieving its share of foreign policy benefits. From a foreign policy perspective, a world in which an international bank, even an American-owned one, could foreclose on a Korean company in default must be infinitely preferable to one in which this Government and this Congress, with or without the IMF, is forced to impose macroeconomic policies borne by the entire Korean nation.
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    We are at a critical juncture where the global economic and security policy interests of the United States happen to coincide with the interests of the great majority of the population of the planet. A free international economic order in which one doesn't need connections with the government to be able to run a business is as much in the interests of individual citizens of Asian countries as it is in the interests of American citizens and firms.

    The sooner we make it clear that we are not interested in bailing out crony capitalists and the banks which lend to them, the less likely it will be that we will ever face an economic crisis like the present one again.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Dr. Lindsey.

    Dr. Chimerine.


    Dr. CHIMERINE. Thank you, Mr. Chairman. It is nice to be back before this committee and nice to see you again. I assume our full statements will be included in the record?

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    Chairman LEACH. Without objection, they will, and that will apply to all the statements.

    Dr. CHIMERINE. I will be brief, Mr. Chairman. I know this has already gone on for quite a while. I will try as best as possible to avoid repeating what has been said by others.

    Let me start with some of the causes of the current crisis and then move on to the IMF financial assistance packages, and then some other thoughts about U.S. economic policy to deal with the Asian crisis.

    The specific factors which have caused the crisis in Asia, while not forecast by most or anticipated by most, have now be widely discussed: loose banking practices, overvalued currencies, crony capitalism, excessive reliance on debt, and a number of other factors.

    But I think the bigger, overriding factor has not received enough attention at this point. That is, in my judgment, to one degree or another, most Asian countries have been simultaneously pursuing export-led growth strategies. The methods they use I think are well-known to all—policies designed to hold down consumption and boost savings in their economies; funneling those savings through their banking system, which in turn gets loaned to corporations to finance new capacity; measures designed to attract foreign capital, which also supports the building of more capacity; all of which—or most of which—is designed to support a high and rising level of exports, and, of course, a lot of that is aimed at the United States market.
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    In fact, some of the specific items or factors that have been discussed, like loose banking practices, in my judgment reflect the fact that in most of these countries the banking system is simply an instrument of industrial policy, as are many of the other measures that are essentially designed to support exports. And as everyone knows, to one degree or another, these are just variations of the old Japan model that was successful in generating very high rates of growth in Japan in the 1970's and 1980's.

    The problem is that all of them doing that at the same time has resulted in huge overcapacity. Very simply, there are not enough exports to go around for everyone, particularly since we are the really only large open market. I heard someone say this morning that we are the market of last resort. Well, we are the market of first resort, second resort, last resort—every resort. But, we are just not big enough to absorb it all. In fact, in recent years, these countries are increasingly competing against themselves for the same export markets.

    So, for example, when the Chinese devalued their currency several years ago, I don't think any of us realized at the time that the impact on countries like Thailand and Malaysia for low value-added exports would turn out to be as significant as it has been. Some of the current account deficit problems or trade deficits in these countries in recent years reflects to some extent the loss of markets to Chinese competition.

    The same is true with Korea and Japan. These two countries compete very aggressively in the same industries: semiconductors, steel, autos, and several others. As the Japanese yen has gotten weaker in recent years, the Korean currency became overvalued, and they have lost some of their markets as well. As a result, operating rates in many industries in these countries are extremely low. Since a lot of that capacity was financed with short-term borrowing, they are not able to service many of those loans. And in some cases—semiconductors being a prime example—prices are so depressed because of overcapacity, it just has further reduced the profitability in these industries and jeopardized many of the companies, many of the manufacturing companies in these countries.
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    In fact, they have built so much capacity in many of these countries that it is way beyond any reasonable estimate of internal or domestic demand any time in the future. It has led to a serious problem of global overcapacity.

    How will this affect the U.S. economy? You have heard this morning about some of the estimates. I would probably agree. If you force me to give a number, I would say that the trade impact and the deflationary impact of the crisis in Asia on the U.S. economy probably will be in the range of 1 percent, mostly through a huge increase in our trade deficit, both on the export side and on the import side, although I think some of the imports that will come in from Asia will displace some imports we get from other regions, so the net impact will not be as large as the gross effect.

    Nonetheless, when you take that into account, as well as some squeeze on profits in many industries in the United States resulting from deflationary pressures, and cutbacks in business investment as a result, I think 1 percent is a reasonable estimate.

    Given the other fundamentals now which are driving the economy, particularly the forces impacting consumer spending, are long-term interest rates, which are generally favorable, I would guess that instead of growing at 2 1/2 to 3 percent this year, 1 1/2 to 2 percent looks like a decent guess. But I think it is clear that the risks are largely on the down side.

    If the crisis is worse than we anticipate in Asia, particularly if the recessions are deeper than we expected, and if the dollar appreciates further or the other currencies decline in value by more than we now expect, obviously the impacts will be greater. And if the crisis spreads to other countries, obviously the effect on the United States economy will be more significant. It seems to me this is a risk we ought to avoid if possible, and we ought to take out whatever insurance we can to make sure that the spillover effects on the United States are well contained.
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    That gets me to the IMF. I look at it differently than most people. I think a lot of people are viewing this as a potential burden on the United States. In my judgment, properly structured IMF bailout or loan packages or financial assistance packages actually represent an opportunity for the United States, an opportunity to minimize the short-term spillover effects and the risk that they would be substantially greater than we now expect; and second, an opportunity, and perhaps the best opportunity, to bring about some of the reforms, particularly market opening, which are clearly in the long-term best interest of the United States economy, because they would give us more access to those countries, and as everybody knows, right now that access is very, very limited.

    So if the IMF goes about its business in a way that is consistent with achieving these objectives, and I will lay that out more specifically in a moment, I think we should clearly support or approve U.S. funding for the IMF.

    What should these guidelines be, or how should these assistance packages be structured? First, with respect to the short term, I think everybody would agree that most Asian countries are now not suffering from the same kind of problems that previously bailed-out countries have in the past, like Mexico a few years ago, and many of the Latin American countries in the 1980's.

    They don't have high and rising inflation. They don't have big structural budget deficits in most cases. Conditions do vary country to country. But in general, they don't overconsume. If anything, they underconsume and overinvest. Monetary policy has not been consistently loose. So as a result, the austerity measures designed to reverse these conditions in the short term, which generally create deep recessions in the short term, strike me as being inappropriate.
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    If anything, in fact, the opposite is the case. As I mentioned earlier, they underconsume and overinvest, and it seems to me, therefore, that restrictive fiscal policies should not be a condition for IMF support in most of these countries. Quite the opposite. For countries that don't have large structural budget deficits, if, in fact spending cuts are forced, they ought to be aimed at austerity for investment or for producers, such as eliminating subsidies and eliminating preferential lending. And, in fact, those spending cuts ought to be offset by tax cuts, not tax increases, aimed at stimulating consumer spending.

    Don't forget, imported inflation by itself is going to squeeze real incomes. Spending is already quite low in these countries. Jobs will be lost. So it seems to me the normal approach of raising taxes in many of these situations doesn't apply right now in many of these countries.

    We ought to try, to the extent possible, to make certain that none of the IMF loans go to support capacity expansion in these countries. Quite the opposite. To the extent possible, we ought to try to force a cutback in some of the excess capacity that already exists.

    I think to the extent possible, and this seems to be already happening, we ought to try to force the existing lenders, the foreign lenders, particularly the commercial banks, to roll over current loans, instead of pulling that money out, as a way to limit the interest rate increases that would otherwise occur, which by themselves would also cause bigger recessions than I think are necessary in these countries.

    So it seems to me from a short-term perspective the conditions attached for IMF support ought not to produce deeper declines in their economies and deeper declines in their currencies. Quite the opposite.
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    As for the long-term factors, as I think Larry mentioned a few moments ago, it is clear that the objective ought to be to push them more toward internal or domestic demand-led growth in the future, by market opening, by reducing the incentives to save and by stimulating consumer spending.

    Clearly, the banking reform measures that other people have talked about are necessary, including, by the way, introducing modern consumer lending practices, not just banking designed to lend money to corporations. Eliminating subsidies, welcoming foreign direct investment, and all the other measures we have talked about, which would not only strengthen these economies in the long term, but give us more access to them, and go a long way toward reducing the huge bilateral trade imbalances we have with a number of Asian countries, are also necessary.

    I think one of the key issues in structuring the IMF programs is the issue of monitoring and enforcment, making sure that the commitments they make, the conditions that are attached to these loans, are monitored carefully. I don't have all the answers. But some mechanism has to be put in place to make sure that they are enforced, otherwise there is a strong chance of recurrence sometime down the road, and we won't be achieving our long-term objectives.

    Let me conclude by making just a couple of other comments about a few other policy issues, in addition to supporting an IMF—or U.S. support for the IMF, conditional on the IMF structuring the bailout packages along the lines I have just discussed.

    Second, there is Japan. I think Japan has to play a key role here. It is far and away the biggest economy in the region. Not only is it important for Japan to be a locomotive for growth, to the extent possible, but it is necessary for them to set an example. Most important, in my judgment, the Japanese will not get out of its current long period of stagnation unless they, too, move away from export-led growth more toward consumer-led growth.
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    In my opinion, the Japanese save too much. Thrift is a virtue, but like everything else, it becomes counterproductive if it gets too high. In my judgment, the Japanese absolutely have to adopt measures designed to remove some of the current incentives and structural forces which generate high levels of savings; open their markets; deregulate their industries to bring down their extraordinarily high price structure, which is a major factor underlying their high saving and low consumption rates; enforce their antitrust laws; land reform, and a number of other changes designed to stimulate consumer spending.

    In fact, the current talk now is they ought to be adopting a tax cut in the short term. I think tax cuts are almost useless. The marginal propensity to consume in Japan is so low, particularly now with the uncertainty that exists and the temporary nature of these tax cuts, that they will have only a very small stimulative impact on their economy. While it would be useful, it does not address the long-term issue of stagnation.

    Third, I think we ought to make it clear to China that if they devalue their currency, we will not support their accession to the WTO, because that will create a new risk of additional downward pressure on other currencies in Asia and competitive devaluations, which clearly would exacerbate the current crisis.

    Fourth, Chairman Greenspan was here before. I don't think there is much risk of him tightening right now. But real interest rates are high. I think at the earliest opportunity the Federal Reserve should be cutting interest rates, because, in my view, there is no way long-term rates, which have come down recently and will cushion some of the negative effects of the crisis in Asia on the U.S. economy—there is no way they are going to stay at these levels unless short-term interest rates come down. The yield curve is almost now a yield line, it is so flat. It won't stay this way. If short rates don't come down, long rates will likely go back up, and that could cause additional negative effects on the U.S. economy as we move through the rest of this year.
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    The last point is this issue of budget surpluses. Forgetting pay-go for the minute, which I assume is still in place and valid, there is lots of talk about new spending programs and new tax cuts. It seems to me the biggest threat to the economic expansion in the United States right now is trade and competitiveness, not only because of Southeast Asia, but the strong dollar against the yen, the strong dollar against other currencies, slow growth in many parts of the world, recessions now in Asia, as well.

    It seems to me, therefore, our budget policy over the next year or two should be geared toward improving U.S. trade and competitiveness, to the extent possible. That to me means running surpluses if we can to keep interest rates down and increase national savings. That means increasing funding for some selective programs like the USTR.

    We talk about enforcing the IMF agreement. We have negotiated dozens, probably hundreds, of trade agreements in recent years. None of them ever get enforced. Most of them are not even being monitored. We have nobody at USTR to do it, and we are talking about millions of dollars, not billions of dollars.

    It means increasing our funding for export promotion and export financing programs. We are already way behind our foreign competitors. It means looking again at dual-use technology programs and other competitiveness-related programs. Selective tax cuts, extending the R&D tax credit—these are small items in the budget—but probably have a big payoff in trade and competitiveness and economic growth.

    These are real supply-side programs, in my judgment. This is what we ought to be looking at. We ought not to be looking at big tax cuts and other big spending programs that will not help our trade and competitiveness, and as a result, will not address the real threat to economic prosperity in the United States.
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    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Dr. Chimerine.

    Dr. Hanke.


    Dr. HANKE. Thank you, Mr. Chairman. I will try to beat that red light if you can turn on the green one. I will summarize my main points.

    I think we first of all have to look at what is a problem in Asia, and at least for the economies that the IMF intervened in in 1997, we are really in the middle of a hot currency crisis. So the problem is the currency crisis. That is the immediate problem that has to be dealt with.

    There is only one foolproof solution to solve a hot currency crisis I am aware of. That is to do what Hong Kong did in 1983.

    Most people don't realize that in 1974, Hong Kong floated its dollar, it didn't float on a sea of tranquility, it was highly volatile and depreciated steadily against the U.S. unit. Then in 1983, in the summer of 1983, the Chinese started making noises about what they were going to do about the lease when it came due in 1997, and panic literally hit the markets in Hong Kong. There was terrific capital flight in August of 1983 until September 24 of 1983, the Hong Kong dollar lost 25 percent of its value and you had literally the same kind of thing going on in Hong Kong in 1983 as you had in Jakarta earlier this month. They were cleaning out all the supermarkets, hoarding toilet paper, rice, cooking oil, that sort of thing. The solution was imposed by Mrs. Thatcher when they reinstituted the currency board system of exchange rates, fixed exchange rates in Hong Kong on the 25th of September, 1983.
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    Now, that system is a simple system. The Hong Kong dollar, in this particular case, is the domestic money. It is backed by 100 percent reserves. The reserves are in U.S. dollars and the Hong Kong dollar trades in an absolutely fixed exchange rate with the U.S. dollar. So it, in effect, is as good as the U.S. dollar.

    Under this kind of system, unlike the linked exchange rates that were fatally flawed and blew up in Asia earlier—last summer, actually, when they blew up—this type of system is one in which you fix the exchange rate and there is no monetary policy. The monetary policy is literally on autopilot with the money supply being determined by the balance of payments. The old link systems that everyone is totally confused on, including 99.9 percent of the economics profession, the old link grades they had in Asia were inherently flawed because they managed the exchange rate and simultaneously managed domestic monetary policy.

    These two came into conflict, you see, last summer when they started expanding in an activist way domestic monetary policy instead of allowing it to just be totally passive and be determined by the balance of payments.

    In any case, the results of these currency board systems really are quite remarkable. Back to Hong Kong in 1983, of course it stopped the crisis literally overnight and capital started flowing back into the then-colony. Also, the point on stability is that you have to remember, stability might not be everything, but everything is nothing without stability. So that is the first thing that has to be done.

    And that is why I say, you have got a currency crisis. It is hot; you have got to stabilize the situation immediately. These currency boards are the only way to do it. We had a good lesson in Hong Kong's 1983 experience. They also provide you a transparency. Secretary Rubin was talking about that earlier. The accounts of the monetary authority—since you have no monetary policy, there is nothing to hide. So the currency board puts its accounts up every day as they do in Argentina, Estonia; even Bulgaria, which put in a currency board in July of this year, issues its accounts on a daily basis. So everything is transparent.
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    This tends to also limit corruption, because a currency board system can't issue credit either to the banking system or to the fiscal authority. So you really minimize dramatically corruption under this kind of a system where you are really tying the politicos' hands completely.

    The other thing, back to Secretary Rubin, he was emphasizing the point about a strong currency, you have to have a strong currency in these countries. Well, you have a currency with a currency board system that is just as strong as the anchor that you fix your currency to.

    Let me jump, then, to kind of conclusions on the IMF and the IMF funding. You might not be aware, Mr. Chairman, but on October 6, 1992, the U.S. Congress passed legislation that directed the IMF to use U.S. quota contributions to establish currency boards, if appropriate. In my prepared testimony, I refer to that law. You can check that out. This legislation was definitely, in my view, a step in the right direction, because it did make the IMF switch from a rather hostile position vis-a-vis currency boards to a more currency board-friendly posture.

    However, it really didn't go far enough, because if these things are foolproof and they work every time out, the IMF should be doing more than—as far as I know, they have only mandated once that a currency board be installed, and that was in Bulgaria this past year. They said, ''No currency board, no credit lines.''

    This should be exactly what I think the Congress should mandate that the IMF do if you are going to add this replenishment funding, because anything else they do in the region, they have done nothing but make mistakes. They never warned us a crisis was coming. They diagnosed the patient incorrectly; they have obviously given it the wrong medicine. They were even celebrating that the exchange rates had become more flexible and started floating. Well, they floated straight down.
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    The IMF has just been completely off base on this Asian thing. The only way they can fix it is by going right to the source of the problem. The only solution that we are aware of that really, literally is foolproof is to get stability, and that is one of these currency board-type arrangements. We have a good history of it in Hong Kong with a 1983 experience.

    That ends my formal remarks, Mr. Chairman.

    Chairman LEACH. I thank you.

    Dr. HANKE. I think I did beat that light. Maybe it's broken.

    Chairman LEACH. Mr. Zoellick.


    Mr. ZOELLICK. Thank you. Mr. Chairman and Members of the committee, it is a pleasure to be with you today.

    My written statement addresses four questions. What happened to the economies of East Asia; what are key developments to watch in the future; why do these events matter to Americans, your constituents; and what should the U.S. be doing?

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    In the interest of time, I am going to skip the first question and only list the key items that I would watch and focus on why events in East Asia matter to Americans and what I think the United States should be doing.

    Looking ahead, I suggest attention to five topics. First, will Asian currencies devalue further? If countries believe they must devalue to catch up, their actions are likely to trigger another round of attacks on weak currencies. Today that devaluation question focuses on China most of all.

    Second, will Japan take the steps, especially through tax cuts, to spark Japan's domestic demand and growth? Japan is playing the same role in Asia today that the United States played in the world economy in the 1930's, and that is not a compliment.

    Third, will Japan clean up its financial sector and do so in a transparent fashion? Japanese banks are afraid to lend and investors are wary of giving the banks money. As a result, many Japanese businesses are facing a credit crunch. Japan needs to reestablish confidence in its banking system.

    Fourth, will Korea and Indonesia follow through on their IMF plans, avoid debt moratoria and begin to reestablish confidence? Korea is the eleventh largest economy, sitting on one of the most dangerous military fault lines in the world. A further collapse in Korea would fuel negative psychology in Asia and beyond, as well as posing a major political crisis for Korea's newly elected president, who takes office in March.

    I am particularly concerned that expectations have risen, perhaps unreasonably, that the president-elect's influence with Korean unions will enable him to maintain labor peace while businesses lay off large numbers of workers. Indonesia is influential, as Paul said, because it is the fourth most populous country in the world giving it extraordinary political weight in the region. It is also the largest Islamic nation. Indonesia's president has been in power for 32 years. As viewers of the movie ''The Year of Living Dangerously'' will recall, Indonesia does not have a history of peaceful political transition.
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    Fifth, will the U.S. be willing to support and, where appropriate, lead efforts to stabilize markets, press for reforms and revive growth? This body will obviously help determine the answer.

    I suspect that Members of this committee have been asked and will themselves ask how these events in Asia affect their constituents. Why does it matter to us? My reply would have three parts: the big risk, the economic effects, and the political security effects.

    When markets slip into free-fall, no one knows where they will stop and what havoc might be wreaked along the way. Sometimes markets bounce back; yet, at times, big declines become panics, setting off massive, destructive chain reactions that extend far beyond the initial explosion. Such waves of financial and economic destruction were not uncommon in the 19th Century, even though the world was less interdependent than it is today.

    After the international debacle of the 1930's, the U.S. led the way in creating international institutions to cushion the blows, to contain their effects and to increase the probabilities of recovery. The U.S. has used this system over the past 50 years for just those purposes. Circumstances differed in each case, and remedies varied, too, but the fundamental decision was to activate the insurance policy so that a crisis did not become a calamity.

    East Asia is important to the U.S. Over the past 60 years, East Asia was important enough to warrant three American wars, 100,000 deaths and billions of dollars of defense expenditures. U.S. interests in the region have not lessened over time.
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    I hope the financial situation in East Asia will stabilize, but no one can assure you of that with certainty. That doubt sets up the big risk, a loss of confidence that leads to a greater collapse of currency and markets with ripple effects turning into waves that lead to more bankruptcies and bank failures and to deeper recessions.

    Even the events to date, however, will affect the United States and world economies. The consequences include the following:

    First, the Asian economies will buy less from the U.S. and others, hurting U.S. exports and increasing the U.S. trade deficit.

    Second, East Asia's financial problems will spill over to other developing country markets, making it harder for them to get investment.

    Third, the devaluations and excess production capacity in East Asia will lower prices for many tradable goods—steel, petrochemicals, electric goods, semiconductors, footwear, textiles—many. This competition is going to hurt exports from other developing countries, particularly in Latin America and Eastern Europe. Some U.S. firms will benefit from lower prices for imports. Others will face price cutting for their goods.

    Fourth, I suspect the drop in U.S. exports and low import prices will squeeze the earnings of some U.S. companies, especially when combined with slowly increasing U.S. labor costs.

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    Fifth, investors fleeing foreign securities have turned to the U.S. as a safe haven through dollar securities, especially the debt of the U.S. Government. This influence helped hold down U.S. interest rates and increase the value of the dollar. Over time, however, if the U.S. trade deficit grows to a size considered unsustainable, investors are likely to move out of U.S. dollars, reversing the drop in interest rates. These events will be significant for individual businesses and sectors. Given the strengths of the U.S. economy at present, however, the changes should be manageable from the viewpoint of the whole country.

    If the Asian crisis deepens, the risks of greater damage to the United States increase considerably. The political and security effects of the economic crisis in East Asia are also likely to be wide ranging, and I believe they are only starting to be perceived.

    This crisis has severely squeezed, and in some cases wiped out, middle classes that have been developing in Asian countries for over 25 years. Historically, such trauma to the middle class unleashes perilous forces. Asia's trial will be heightened because many Asian political leaders have based their domestic legitimacy on records of improving their citizens' prosperity.

    One possible recourse is for people to challenge their political leaders, either promptly or during the next transition to power. Countries might move toward more open political systems and against corruption and crony capitalism. But powerful established groups usually do not cede their authority gracefully.

    Since the Vietnam War, the countries of Southeast Asia have come to recognize that each would be better off if all prospered. But short-term crises and the risk of losing control at home can blind countries to their common regional interests. The combination of excess capacity and rounds of competitive devaluations could lead Asian nations down the blind alley of 1930's-era policies.
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    The countries of Asia are now openly depending on the U.S. for help, in striking contrast with some of the rhetoric of recent years about the decline of the U.S. economy and its decaying society. Although it might be tempting to some to teach Asia a lesson, I believe a policy of spite would leave a terrible legacy. Indeed, the United States would be ignoring its own successful lesson from the farsighted approach it chose after 1945. Further economic and political unraveling could lead to breakdowns that would threaten American security.

    Great powers cannot ignore upheavals in regions of vital interest without giving up the influence that compensates for their labors. Specific political and security issues that could be triggered by the economic events include the following:

    First, Indonesia's continuing difficulties, I believe, are based in significant part on uncertainty about President Suharto's future and who will follow him. The ethnic Chinese in Indonesia, comprising an estimated 3 percent of the population, control much of the country's wealth, with some reports guessing the percentage at about two-thirds. During the upheavals of 1965 and 1966, hundreds of thousands of Indonesians were killed, many of them of Chinese origin. The slaughter has been traced to fear of Communism and of China, but also to resentment of local Chinese wealth.

    Ominously, China recently issued a warning against threats to ethnic Chinese in Indonesia. Traditionally, non-Chinese peoples of Indonesia and other countries in the region have been highly sensitive to Chinese possible intervention on behalf of overseas Chinese.

    Second, Korea's president-elect, Kim Dae Jung, has been an outsider in Korean politics. Most of his statements since the election have signaled plans to implement serious economic reforms. But he will certainly face serious resistance from the traditionalists in bureaucracies and corporate conglomerates. Moreover, as Secretary Cohen noted, Korea's northern neighbor remains a heavily armed economic basket case.
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    No one should be complacent about North Korea's political stability. It has the capability, even just with conventional artillery, to reduce the southern capital of Seoul to rubble.

    As you know, the United States has about 37,000 troops in Korea. In the questioning period, I noticed some Members properly asked, ''what have these countries done for us?'' Paul Wolfowitz and I played some small role in putting together the Gulf coalition, and I do think it is interesting to note that at that time Korea did contribute half-a-billion dollars and other types of support to the efforts. Of course, Korea also provided troops with U.S. troops in Vietnam.

    Shortly after his election, president-elect Kim signaled his interest in reviving North-South talks, but the South now has many fewer resources to—quote: ''to assist in the North.'' Indeed, I expect that we had better prepare for Korea, and perhaps even Japan, to ask the U.S. and others to help them cover the billions of dollars they pledged to build the nuclear facilities in the North under the framework agreement that the U.S. negotiated with North Korea.

    Third, the new Thai government appears committed to cleaning up both the current symptoms and underlying causes of the country's financial collapse. But the Thais have been troubled again, as Secretary Cohen mentioned, by the perception of the lack of U.S. support.

    Fourth, because China's currency is not freely traded in world capital markets, it has been spared financial assault. But China faces enormous economic problems. Indeed, China's bad debt and banking problems dwarf those of the countries that have been badly hit. And now they will face tougher export competition and the prospect of less investment from Asia and elsewhere. Both changes are going to make it harder for China to close inefficient state-owned enterprises and open new businesses that will create jobs.
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    Fifth, Hong Kong, in the aftermath of its return to China, is struggling to maintain the confidence that is fundamental to its special status. If the Hong Kong dollar loses its peg to the U.S. dollar and, I believe, if China devalued, it would—market confidence and Hong Kong's confidence in itself will deteriorate sharply.

    Sixth, across the region political tensions about open trade and foreign investment will be rife. Some Asians do believe that openness, competition and deregulation will counter crony capitalism, corruption and mistaken decisions by economic bureaucracies. But others will argue that Western capitalism is a conspiracy aimed at achieving U.S. domination, or that open markets leave their economies too exposed to market whims.

    Similarly, some Asians recognize that foreign investment will help restabilize markets and, over time, link their economies to more knowhow, technology and competition. But purchases of Asian assets at fire sale prices will also spur resentment and tales of conspiracy, even as it has at times in U.S. history, including in the 1980's.

    In sum, the economic events of East Asia are triggering a host of even political and perhaps security consequences. These developments pose risks and opportunities for U.S. policy. In considering whether to offer financial support, I suggest one should consider how many risks one is willing to multiply, given those potential consequences.

    So what should the United States be doing? Broadly conceived, the U.S. response needs two stages: first, stopping the financial contagion that makes all the other problems harder to solve; and second, laying the foundation for the economic and political reforms that can only be achieved over the longer term.
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    More specifically, I have ten suggestions:

    First, the U.S. should organize an informal coalition with the European Union and countries in Asia to press Japan to stimulate its economy and to clean up the bad debts of its financial sector in a transparent fashion. Japan's political system appears unwilling to take these steps on its own, but there are constituencies in Japan that will be supportive. If internal advocates combine with broad-based foreign pressure, there is some chance Japan might assume self-interested responsibility.

    Second, the U.S. should support international efforts to help countries stabilize currencies and markets if the countries are willing to take actions to reestablish confidence and to start to address the underlying problems. Markets can and do overshoot. Financial panics can crack the real economic foundations of manufacturing, services, agriculture and other sectors. I hope the United States will be particularly attentive to the prospects of nations whose turmoil might create security dangers and of countries led by reformers who have been propelled into office by the crisis.

    Third, the U.S. should continue to signal its close attention to the security of the region. This posture might help deter problems from arising or rash moves by parties seeking to position themselves in the absence of U.S. power. Indeed, I believe U.S. security leadership will enhance America's leverage on political and economic topics.

    Fourth, the United States should continue an ongoing high-level dialogue with China about economic events in Asia, focusing on Chinese actions, especially devaluation, that would fuel the fire and those steps China can take to help stabilize the situation. This interaction may provide the basis for deeper U.S.-Chinese cooperation in resolving China's bad debt and financial problems while gradually opening China to the international economy.
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    Fifth, the United States should demonstrate its ongoing commitment to an open trading system. Without dynamism in world trade, the countries of East Asia and developing economies around the world will have a hard or impossible recovery task. In terms of growth, price stability, employment, innovation and national wealth and power, the United States has benefited enormously from a liberalized global trading system. But if the United States now hesitates or, worse, retreats, how can we expect others to stand up to those who oppose competition?

    So I believe the President should follow up on his statement in the State of the Union by renewing his request of Congress for trade negotiating authority. Congress should grant it, and the U.S. should propose a liberalizing agenda in the G–7, WTO, APEC and elsewhere to maintain the momentum for reducing barriers to trade. This agenda could provide the multilateral context and justification for Asian countries to open their markets in concert with the IMF and World Bank reform programs.

    Sixth, the United States should be willing to provide financial support for stabilization and reform through the IMF, World Bank and complementary buying arrangements. In effect, these arrangements provide an international lender of last resort, like the Federal Reserve does within the United States, for countries facing a liquidity crisis. In exchange for the temporary loans, the countries must agree to take various actions.

    Although large financial institutions coping with crises inevitably will be subject to criticism, these tools are vital for coping with international financial panics. That is one reason why the U.S. of all countries urged the creation of the IMF and World Bank over 50 years ago.
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    In particular, I urge the Congress to grant the IMF the additional resources negotiated through the quota increase. I also believe Congress should authorize the New Arrangements to Borrow. Given the risks in the world economy today, this is not the time to add to them by leaving the lender of last resort short of funds.

    It is also important to recall that the U.S. funding for IMF is like a payment into a credit union. These comments were made earlier today. The IMF and the U.S. should condition their loans on the cooperation of private lenders. Private lenders could ease the payments crisis by rolling over their debts in Asia as the banks have done for Korea.

    As part of the bargaining, lenders have sought various guarantees and higher interest rates in return for extending their riskier debt. Given the general belief that lenders should pay for their errors with losses, these financial institutions would make a mistake by overreaching in these negotiations.

    Seventh, a primary focus of the IMF and World Bank should be to help the Asian countries restructure their financial systems and institute safety and soundness supervision. The establishment of confidence in financial intermediaries and the resumption of lending is critical to prevent the crisis from spreading into a depression.

    Eighth, the IMF emergency packages have also focused on macroeconomic targets such as budget deficits and interest rates. You don't hear a lot of complaints on this.

    Frankly, the IMF has to strike a fine balance. On the one hand, high interest rates can be necessary to keep up the value of the local currency and big deficits, funded by printing money, might trigger hyperinflation. On the other hand, high interest rates and fiscal constraint can impede a rebound in growth. In my view, the United States should support steps to prevent hyperinflation while otherwise push for sufficient IMF flexibility to enable countries to focus on the underlying financial sector problem.
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    Ninth, while coping with the immediate crisis, the U.S. should be leading an effort to determine what changes in the international financial system might make future crises less likely. We should also consider how to enhance the ability to deal with these situations. One possibility is to develop international bankruptcy system to cope with such problems as Chairman Leach has suggested.

    A global bankruptcy mechanism would, however, subject American investors and businesses to controls that might be burdensome. I would remind the committee that after the 1987 stock market crash, President Reagan established the Brady Commission to review and make recommendations to deal with concerns voiced at that time.

    Given the importance of this topic and the need to develop broad-based support for a workable agreement, I believe the Executive branch and the Congress should establish a serious commission of outsiders to review possibilities and propose alternatives. This U.S. effort might then contribute to similar work prepared by the G–7 and perhaps other countries. This analysis might also examine the performance of the IMF and World Bank.

    Finally, given the potential scope of the East Asian problems, it is critical for the President and senior members of his Administration to discuss with the American people what is happening and why it matters. Secretary Rubin's recent speech at Georgetown was a good effort, although I believe it would have been advisable to begin the serious education a month ago. But Secretary Rubin needs to be joined in an ongoing and concerted way by the Vice President, Secretaries Albright, Cohen and Daley and Ambassador Barshefsky. Perhaps Members of Congress will join them in explaining the importance of events in East Asia to their constituents.
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    If the United States expects to have an effective foreign policy after the Cold War, its Government is going to have to engage its citizens on the changing dangers and opportunities. This crisis involves many elements I expect we will see again in various forms in East Asia and around the world.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Zoellick. I think you have given us ten reasons to turn to C. Fred Bergsten.


    Mr. BERGSTEN. Thank you, Mr. Chairman. It is a great pleasure to be back before the committee after your last hearing in November.

    I would like to try to do four things: Address the state of play—where does the crisis stand, what's the outlook?

    Second, what are likely to be the implications for the American economy and the world economy; more broadly in that context, I would like to submit for the record a new study that we have just produced, by my institute earlier this week, called ''Asian Competitive Devaluations,'' that tries to analyze the impact of what has happened on each of the major countries' trade positions;
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    Third, what is now required to overcome the crisis?; and finally, a punch-line for this committee, what about the role of the IMF and should the U.S. contribute in the way you have been asked?

    First, what is the current state of play with respect to both the markets and the real economies?

    I would submit that the markets—by which I mean the exchange rates and the equity markets in the Asian countries—may have hit bottom, or at least come close to doing so. The exchange rates certainly have overshot wildly. We need to anticipate that, as the situations play through, those exchange rates will rebound substantially.

    However, we must be patient, because it takes time. Even in Mexico, which we now know in retrospect adjusted very successfully to its crisis, and has resumed 7– or 8–percent growth only two years later, it was six months before the exchange rate began to stabilize and at least began to come back to some semblance of the kind of market situation we would like to see.

    It is a little hard to know when to date the Asian starting point from. Thailand began over six months ago with a crisis in July, but it really hit its nadir with the Korean near-moratorium on Christmas Eve and the Indonesian meltdown earlier this month, which may still to some extent be going on.

    So we have to expect, probably for the remaining first half of this year, market instability, and no clear sign of a restabilization, although I do suspect we may have hit bottom in terms of market effects.
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    I want to distinguish that carefully, however, from the impact on the real economies, because that is only beginning. The impact of all this Asian turmoil on their real economic situation has just gotten under way. By that I mean the millions of job losses, of layoffs, that are going to occur, the hundreds, if not thousands, of bankruptcies that are going to occur in all of the countries both in and outside IMF programs in the region. That means that the year 1998, and possibly beyond, is going to be very bloody in economic terms, hopefully not beyond, but as others have said here, it could be that way, too. At my institute, we have studied 125 crises in emerging market economies since 1970. One of the lessons is that the average recovery period is 2– to 2 1/2–years, by which I mean it takes 2– to 2 1/2–years for the problem country to resume something like the average growth rate of the two precrisis years.

    Of course, we don't know whether that norm will apply in Asia. Some might say the Asians will come back faster because their underlying strength is greater.

    On the other hand, the Asian adjustments are probably more difficult than the average adjustments in the past. The average crisis in the past has been due to excess budgetary spending, profligate monetary policy, big trade deficits. There has been relatively little of that in the Asian cases. Their problems have been microeconomic and structural—crony capitalism, faulty and even rotten banking systems, incredibly bad corporate governance.

    Those micro and structural problems may turn out to be a lot more difficult to adjust than your more typical budget and monetary difficulties. This, after all, gets to who determines who does what, who orders whom around, relations between government and business and the like. It may be more difficult to do that than to get budgets in order, bring money supply growth down, change exchange rates and, therefore, external balances.
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    Therefore, my suspicion is that we are going to have at least a couple of years of lost growth in Asia. We had a lost decade in Latin America in the 1980's. I don't think it will be that bad. But I do think 1998–1999 will essentially be years of zero or even negative growth in most of Asia. China, which I will come back to in a moment, will probably be a partial exception to that, but even their growth will be slowing down substantially. That means the region as a whole could be perilously close to zero growth or less.

    That leads me to my next question. What about the effects on us and the world? It is critical to keep in mind that Asia has accounted for almost one-half of all world economic growth in the 1990's. That is partly because Europe and some other places have been slow. But Asia has been literally one-half the locomotion for all world growth. If it dips to zero or anything close to it, it is a big dampener on the world economy, including ourselves.

    This new study of ours that I mentioned applied a CGE model, a computable general equilibrium model, to the currency changes that have taken place so far. In fact, we assumed there would be some bounceback and that the eventual effective real devaluations would range between 10– and 30–percent in all the countries.

    I hope we were not too optimistic, but it could be that the results turn out to be worse because we are assuming more bounceback than happens. Even on our basis however, the result would be a deterioration in the U.S. trade balance in nominal dollar terms of about $50 million, and in real terms, more like $100 billion.

    The difference is so great—this is a technical point—because our terms of trade improve a lot. With the dollar strengthening and all the Asian currencies weakening, we can now buy their goods much more cheaply. But in terms of the disruption to domestic demand and domestic output here, it is more on the order of $100 billion—well over 1 percent of GDP, even if there are no further disruptions, market instabilities and the like.
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    The Europeans suffer about as much as we do, if not more. That is an important point, both in terms of burden-sharing and because the Europeans are not expecting it. Most comments out of Europe these days are saying that they will be minimally affected by the crisis. They must not have run their numbers. Our model, in fact, shows Europe will be hit a little bit worse than the United States, which is logical because Europe exports more to the problem countries of Asia than the United States does. Each will take hits roughly on the order of $100 billion.

    For us, that of course makes a huge trade deficit even worse, though our economy is strong, as Larry Chimerine said. For the Europeans, it gets rid of a big trade surplus they have, but it exacerbates an unemployment situation which is already very poor. That means that the Europeans might react even more negatively than we here because of the adverse trade swing. That is something to be watched very carefully in terms of trade flows, trade policy and the like.

    If these are the implications, what is needed to get recovery? I will only mention five elements to Bob's ten. There are, in fact, a lot of similarities between them.

    First and foremost, the problem countries obviously have to implement fully and faithfully and effectively the programs they have put in place. That is especially true with stabilization of their financial sectors. It is also critical with respect to their corporate governance. In the case of Korea with the chaebols and Indonesia with the crony capitalism, this is going to be politically tough.

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    Even where the governments, as in Korea, are without doubt committed to the program, it will be tough politically to see it through for the reason I mentioned earlier. There is going to be blood in the streets. There are going to be massive layoffs, bankruptcies and the like. We have not even begun to see yet the pressures on these internal economies.

    Second, Japan must recover. If you ask me what country is the number one villain in this whole crisis, I say Japan. Not Indonesia, not Korea, not Thailand, but Japan. Japan accounts for two-thirds of the economy of Asia. It has been dead in the water for seven years. Japan has until recently lived in the world's fastest growing neighborhood; it has had fiscal stimulus programs of one-half a trillion dollars in the last five years; it has had zero interest rates for three years; it has had a huge trade surplus. With all that, how could a country conceivably achieve zero growth even if they tried? Japan has done it.

    Something is fundamentally wrong. I think it is the financial system, which the Japanese even now are not coming to grips with. They are talking about bailing out all the banks. Top MOF officials have even said it was a mistake to let the Hokkaido bank go bankrupt last month. They are finally putting up public money, for the first time, but they seem to be going about it the wrong way and they may perpetuate the problem rather than resolve it.

    In addition, Japan has an extremely restrictive fiscal policy in the face of seven years of recession. This is unbelievable. It is the worst economic policy in the world. Japan is the major villain in the crisis.

    Even if the other countries do everything right, it is going to be very difficult for Asia to recover with Japan still in the doldrums. That is why we need the upcoming G–7 meeting to put maximum pressure on Japan, to do something to get them to act.
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    The third requirement is that what I call the ''strong center'' must hold. You may remember when I testified to you in November, I said there are three groups: the Northeast Asians, the Southeast Asians and what I call the ''strong center''—China, Taiwan, Hong Kong, Singapore. Taiwan, as I testified to you then, was the second villain because they devalued when they didn't need to. But China has held and Hong Kong has held. As Bob Zoellick said, it is critical for that to continue.

    I think it will continue. The Chinese know that if they devalued, they would set off a whole new wave of currency declines everywhere else. In fact, they probably wouldn't gain very much. So there is no net benefit to them even from trying it.

    What our study shows is that the Chinese don't need to devalue. All it would take would be a 10 percent change in their currency to get them back to the starting point before the crisis began. That was quite a strong surplus with high reserves; they don't even need it. So I think the prospect is that they will not go ahead in that direction. But the strong center has got to hold or else all hell could break loose again.

    Four, the debt restructurings have to work out. It looks like the Korean one has done so, at least in the initial stage. Something similar is going to be needed for Indonesia. We don't know yet about others, but private debt restructuring with losses taken by the private creditors is an essential part of the drama, both for economic and political reasons.

    Finally, the United States and the other industrial countries, notably including Europe, have to accept temporary increases in our trade deficits to enable the developing Asian countries to correct their situations. That is for two reasons. One is simply to let them achieve the adjustment, but the other is so that we continue to signal them that outward-oriented market liberalization strategies are the norm of the day. If we were to retreat, even to fail to pass Fast Track, the signal will go out to Asia that the Americans, the strongest country in the world, who are calling the shots in this, are themselves backing away from open markets.
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    What is that going to do to the internal debate within the Asian countries as the blood flows in the streets? What will they determine? Will they stick to their outward-oriented market strategies or will they hide behind us and go backward if we do so as well?

    Finally, what does all this imply for the IMF and U.S. support for it? It seems to me it all boils down to one simple issue. The financial crises themselves demonstrate clearly that external pressures are necessary to reform the policies of the countries in this region, as in other regions in the past. The question is whether that external intervention should be left solely to the markets or whether there should be intervention, as well, by governments outside the region.

    Markets obviously have a critical role to play, but they also clearly overshoot and they overshoot by lots. If we left it purely to the market, we could be almost certain to get excessive devaluations, excessive recessions, excessive use of trade controls, excessive use of capital controls. It would be bad for the countries involved and it would be bad for us.

    The alternative is for external governments to come in with financing to try to minimize the disruption, obviously linked to conditions to eliminate the sources of the problem. Then the question is, should that external governmental intervention be bilateral? Should the U.S. be coming in? Should Japan be coming in? Or should it be multilateral through the IMF and the other international institutions?

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    It seems to me that is a simple question. It virtually answers itself. The IMF is absolutely pivotal to this. We should support it. I think all the other critiques frankly boil down to second-guessing or Monday morning quarterbacking. I would be happy to go into them if you would like, but I will just close with one.

    I think Mr. Castle was onto the most important point for reform of the IMF and its system. That is the failure so far of the IMF and the G–7 and the U.S. Treasury and everybody else to accurately forecast crises and to do something preventively.

    Some crises have been anticipated. Thailand was anticipated by the IMF and by our own Treasury, to at least some extent. But Thailand didn't move. Why not? Nobody put pressure on them to move. You can't force a sovereign country to do it. But you can be much more aggressive in applying peer pressure and external pressures, including public statements, to affect market perceptions, and so forth.

    I think APEC has taken a very constructive step in this direction, with our own Treasury people much involved, when it agreed to the so-called ''Manila Framework'' in November. It sets up a regional surveillance mechanism in which the finance ministers of APEC will meet at least twice a year and the deputies more frequently, in an effort to monitor the countries in the region, try to anticipate the onset of future problems, and try to head them off by getting the countries to take preventive action.

    The G–7 used to do this among the industrial countries; it has given it up in recent years. It has recently been a total failure. That is one reason why Japan has been allowed to fester for so long: there has been no effective peer pressure and regional surveillance within the G–7.
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    It seems to me that this is the most important area in which we should be leaning on the IMF and working ourselves: trying to develop and build on existing mechanisms to try to prevent crises in the future. Once they break out, you can tinker with the crisis response devices, but they are going to be fighting uphill. The issue is to try to head them off.

    I think IMF reform of that type ought to be a centerpiece of the discussion.

    Chairman LEACH. I thank this distinguished panel.

    First, a couple of observations, beginning with Dr. Bergsten. Based on a recent trip to the region and discussions with a number of bank analysts, another problem Europeans have much more than Americans is not only their greater trade flows to the region, but their banks have greater loans and more quality loans, partly for the reasons Dr. Lindsey indicated, that U.S. banks have higher standards. That is going to be a surprisingly large cost for European banks; these are very substantial numbers involved.

    Second, in terms of the center holding, it is possible because of the dubious statement of C. Fred Bergsten, the center is more likely to hold. That is, Dr. Bergsten in our last hearing asserted that the Taiwanese devalued their currency for the reason that they wanted to undercut the peg. That is not believed in Hong Kong; it is not believed by most experts in the United States. Nonetheless, Dr. Bergsten's comments were cited by Chinese officials to us, among others. If the Taiwanese are attempting to lower the Chinese currency, that is an extra reason for the Chinese not to allow it to happen.
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    So, Dr. Bergsten, you have achieved a result based upon a dubious premise.

    Mr. BERGSTEN. I am always eager to utter self-denying prophecies, Mr. Chairman.

    Chairman LEACH. Fair enough.

    I can also say with regard to Dr. Bergsten, I think maybe we ought to be thinking through on any comments of yourself, or of the panel, maybe in writing later, about refurbishing the IMF in a more activist role on assessments of regional problems. Possibly something analogous to the State Department's human rights reports might be something we ought to develop to a greater extent. If anyone has any judgments on that, I would like to hear it.

    Finally, let me just ask a query of the panel. Interestingly, with people that are political experts as well as economic, one of the hardest things to get a feel of, and one thing that has been commented upon by this panel and also earlier panels, is something about crony capitalism, but is the general subject of corruption and the cost of corruption and how quantifiable it is and how deeply embedded it is and what can be done to diminish it.

    I have a kind of philosophical belief that more decentralized competitive systems are perhaps less likely to be corrupt and, therefore, a heavy dose of Teddy Roosevelt trust-busting might not be a bad idea for some of Asia. But I would be very interested in a direct response to the question of, how pervasive is corruption and how costly. And is it conceivably quantifiable? I mean, can one take a system and say it is robbed of one-half of 1 percent of its GDP because of corrupt practices or is it 10 percent? Or is it de minimis?
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    To my knowledge, there has been no capacity to do very much of an accuracy-related study of this subject. If anyone would like to comment—Dr. Bergsten, you have raised your hand.

    Mr. BERGSTEN. We published a study on that topic last year which did quantify the relationship between corruption and economic growth. Transparency International pulls together a lot of estimates of the degree of corruption in different countries and ranks them 1 to 10. We correlated those corruption rankings against economic growth levels. The results were very robust. It showed that, everything else equal, if you could improve your standing in the corruption index by two levels, you increased your economic growth rate about 1 percent a year. This included all the Asian countries with their, until recently, high economic growth and high corruption. It suggests they would have done even better without the corruption.

    I would be very happy to submit that paper to you for the record.

    Chairman LEACH. Without objection, then, we will put that paper in the record.

    Mr. Zoellick.

    Mr. ZOELLICK. Mr. Chairman, I think it is an exceptionally good point. My sense is that it is very pervasive, it is costly. It stems in part from any economy that has an excess of rules that can be interpreted by bureaucracies and thereby create the opportunity for corruption to occur, particularly if it is combined with lower compensation in salaries and lack of a strong legal system or culture in dealing with it. Therefore, my own view is that the solution goes toward deregulation and openness of information and competition as the key devices.
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    As you may know, the United States has pressed in the OECD for a code on corruption. I think that is a useful measure. However, I just make one point that I think will be important on this issue and many other issues facing the Congress over this year related to this, and that is, there is a natural tendency to want to require change—a change in labor, a change in environment, a change in corruption, a change in civil service standards, so on and so forth. That's understandable. At times I would like to try to do that myself. But I think to make it most successful, we should try to build on homegrown efforts, so that the requirement doesn't seem as imposed as a cost of survival and thereby almost delegitimate it.

    The reason I stress that is, this crisis has thrown to the forefront some new leaders as in Thailand, as in Korea; and I think in evaluating the actions the U.S. Government takes, it has a particularly strong interest in trying to see that those people succeed, because they recognize these same issues. They are trying to address them. If they succeed then planting those seeds in home ground and nourishing them, it will be a much stronger result than whatever we require.

    Chairman LEACH. Mr. Wolfowitz.

    Mr. WOLFOWITZ. Mr. Chairman, if I could make two comments. One is about corruption, the other is about transparency. In Indonesia, where they don't like to call corruption by its actual name, they call it the ''high-cost economy.'' Everyone knows exactly what they mean.

    I think the costs are twofold. In the first place, it is a kind of hidden tax on doing business. In the second place, it is a tax that is collected incredibly inefficiently, and frequently it is done by holding up goods in port until the bribe is paid or, worst of all, creating a monopoly that favors a special interest. So you distort the economy at the same time that you are draining some wealth off of it.
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    I don't know how you quantify it. I think the numbers that Fred Bergsten mentioned are, if anything, underestimates is my own feeling.

    It wasn't so long ago that a major leader in Southeast Asia was saying, ''If we are so corrupt, if we are so bad, how come we are growing at 6 or 7 percent a year?'' I felt like saying, ''Well, maybe if you cleaned it up you could grow at 9 or 10 percent a year.'' Obviously, they are not growing at 6 or 7 percent right now.

    But I think, in many ways, the real Asian miracle, if there is one, is that they have turned in these growth rates with these kinds of burdens on their economy; and I think there is a distinct possibility, if this scenario works out the right way and if the problems are really addressed and confronted, instead of swept under the rug for seven years as they are doing in Japan, we could emerge with economies that are much, much stronger than they were before; and they were very strong before.

    The other point is, on transparency, I am going to venture into an area I should perhaps know more about, but it seems to me on the one hand, as I have said, I think when the neighborhood is burning down is not the time to reorganize the fire department; and I think it is very important to make our support for the IMF clear. But I think it is fair to hold the IMF more accountable than it is. We go around the region, properly, I believe, lecturing people about transparency, and we can't find out very much about what the people giving the lectures are actually saying.

    I am familiar with an American company that has, from best I can tell, a perfectly legitimate investment in Indonesia that was put on the list of projects to be postponed, presumably because it had favoritism involved, and it clearly didn't. If this project is canceled, the American taxpayers, through APEC, are going to be out $200 million.
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    As far as I can tell, although they are told they are on the list of projects to be canceled, nobody seems to have a list. Nobody will release it. I don't think that is the right way to do business, and I think if we are going to debate very important policy issues that may lead to large-scale unemployment in these countries or that we will have serious consequences on the structure of the economies, I think some openness would be in order on our end as well.

    Chairman LEACH. I apologize. I have others that want to ask questions. If the two of you can just be very brief—you wanted to say something.

    Dr. Hanke first.

    Dr. HANKE. Well, just two points. One, I would like to submit a Forbes Magazine column I wrote, because I ran the same relationships that Fred was talking about. I think they predated——

    Chairman LEACH. Without objection, we will put your column in the record.

    Dr. HANKE. The other thing is, I had some firsthand experience with dealing with corruption, as I was Domingo Cuvala's adviser in Argentina; and one thing that really dropped the corruption level dramatically in Argentina was the installation of their currency board system in April of 1991.

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    Chairman LEACH. We like the win-win solution.

    Dr. HANKE. It is a good first step, Mr. Chairman; and if you don't get the first step right, you usually have trouble with a second one.

    If you think about it, what you do with the systems is tie the hands of the politicians. Because a central bank, the monetary authority, cannot extend credit to the fiscal authorities or the banking system; and that tends to reduce a lot of interruption, a lot of the things we have been talking about at these hearings.

    The other thing I would mention is, beyond that—so that is a practical thing. As a farm boy from Iowa, Mr. Chairman, I am kind of practical, so that is why I like these silver bullets to be fired on occasion.

    The other thing I could say, beyond the monetary authority, is that corruption really is a tough nut to crack. The only example I know going, beyond the kind of monetary setup I was talking about, is the police force in Hong Kong was very corrupt. They had a big problem several years ago, and they actually cleaned it up. They got a gaming plan and cleaned it up. But the problem was, Hong Kong wasn't a democracy at the time.

    So we are operating kind of in a different sphere in these other places where we start talking about corruption, point number one, because they are democracies; and, point number two, as far as I know, no democracy has ever come up with any kind of game plan to root out deeply imbedded corruption and pulled it off. I am just not aware of it.

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    This is great to talk about. Everybody is against corruption. And, again, from somebody with experience in Argentina, when it comes down to what is the game plan, how do you implement, there is no one who has a game plan.

    Chairman LEACH. I am sorry, Dr. Chimerine.

    Dr. CHIMERINE. Very quickly, Mr. Chairman. This is a natural outgrowth of a heavily managed economy; and, despite the correlations, it is very difficult to convince people they are doing things wrong when they are growing 7– or 8– or 9–percent year after year.

    The Japanese have had seven years of stagnation, and we still can't convince them to make some fundamental changes. The real issue is, is this crisis going to represent the starting point of being able to make some changes that are probably in their own best interest? But I think the lesson we have learned from Japan is that it is very, very difficult; and I think that is the issue we have to deal with.

    Chairman LEACH. Thank you, Dr. Chimerine.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman; and I thank the panel. I would hope with such a distinguished panel we might get graduate course credit for the time we have been here.

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    I have a couple of observations, and I was with Mr. Leach and the others in Asia last week.

    First of all, Dr. Chimerine, it is interesting, when we were in Japan, we met with some analysts. One analyst was suggesting—he was a rating analyst—was suggesting that, in fact, Japan tax policy was such that it was anti-consumption, too, with far too much savings, in fact, that they should go in the reverse and institute a tax subsidy to encourage home building and home construction and home purchasing, almost opposite the argument that you hear on tax policy in the United States. And I just point that out.

    But it obviously has been a problem—and, Mr. Zoellick, good to see you in your new capacity.

    One of the things that we found when we were in Korea and we met with the president-elect as well as legislators from both the ruling soon-to-be opposition majority and the soon-to-be ruling minority in the assembly, I think we were all struck by the level—the sense of the level of cooperation between the two coalitions and between the current president and the incoming president. They seemed to realize they are in deep trouble. Of all the countries we visited and what we learned on the other countries that we didn't, Korea seemed to be one we could be most optimistic about.

    In addition, I understand your concern about that by opening up to more foreign direct investment and the opportunity for the United States, which could lead to some anti-Americanism, at the same time I think we found that American prestige was quite high; and even in Beijing there was a feeling that they wanted the Americans to be there.
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    In Hong Kong, in a luncheon where I was sitting next to the past president of the Hang Seng, the Hong Kong stock exchange, he commented to me that ''Not so many years ago the feeling had been the American century was over and the Asian century was beginning''; and he said, ''Perhaps the American century hasn't ended yet.'' It could be all talk today and next year it could be, ''Get out.'' But, nonetheless, I thought that was encouraging.

    The two questions I have, one for Dr. Lindsey and one for Dr. Hanke. For Dr. Lindsey, two things.

    One, you suggest that perhaps we should have taken up the Japanese on their offer to put together an all-Asian fund, but my understanding was that our opposition to that was we didn't feel the Japanese fund would be sufficient in requiring the reforms that I think everybody on this panel feels are necessary to make sure that this bailout or liquidity facility is at all successful, rather than just being a short-term fix that we will have to come back and deal with.

    Second of all, my reading of the IMF package, as it relates to South Korea, seems to list a great number of reforms that are in there and, in fact, raises some questions about—there are questions about South Korea's ability to deal with it. For instance, they would have to end the labor policy of full employment and allow for layoffs. At the same time, they are facing a balanced budget requirement, which I believe is in their constitution, and yet they are going to need to create an unemployment compensation system, which they really don't have.

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    The second question for Dr. Hanke would be—and I may be misunderstanding this—I understand the currency board—and in Hong Kong we met with the currency board, and they are very much in favor of that theory. Hong Kong has also suffered not necessarily rampant inflation, but pretty significant inflation and run-up in real estate prices, and when we were over there they declined rapidly, and discounting was at the 30 to almost 50 percent level. Consumer interest rates are abnormally high, but I guess what you would expect, if you are getting near or heading into a recession, to combat inflation and the concerns about currency.

    This may be unique to Hong Kong. Corporate lending rates were still abnormally low, so there is an unusual differential between corporate and consumer rates, far greater than you would find here. Is that a by-product of a currency board or is that just unique to Hong Kong?

    Mr. ZOELLICK. It is not a by-product of the currency board system. Generally, the general level of interest rates tends to equalize over time between the currency board country and the anchor currency country; and, ultimately, the difference can only be between country at risk, between the two parties. Hong Kong has a fairly unique kind of microstructure in their credit market, and that is why you find those differentials existing between the commercial and——

    Chairman LEACH. If I can interrupt just fractionally, Mr. Wolfowitz has an appointment, so he is excused. Please go ahead.

    Mr. WOLFOWITZ. Thank you, Mr. Chairman.
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    Mr. ZOELLICK. Does that respond adequately?

    Mr. BENTSEN. I don't know. I was just curious as to why, because the prime is really—their prime is really below market, their consumer may be applicable market.

    Dr. HANKE. The structure of the credit market itself in Hong Kong—not the monetary system itself, but the credit market itself—it really suffers a little bit from this, shall we say, crony capitalism we have been referring to. It is a cartel. There is a banking cartel on Hong Kong, and that is why the differentials are so dramatic. But it doesn't have anything to do with the monetary setup they have; and the monetary setup, I assume you found out, is something they plan to retain and will be able to defend it, because there has never been one of these systems that has ever suffered a fatal blow by a speculative attack.

    Dr. LINDSEY. As I understand the question, Congressman, it comes down to a choice of how you want to initiate reform.

    Let me start with the question is the IMF package sufficient at reform? I have always had trouble getting my hands on a copy of the IMF agreement. It tends to be a rather movable feast with all these countries. It has to be.

    The Ambassador was speaking earlier, and I had the same anecdote, with regard to an all-equity investment by an American company in Indonesia which is being blocked by the IMF; and they have no idea how to go about moving it forward. It is not a dead investment. It has nothing to do with these problems. They simply can't do it.
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    We have a complete lack of transparency on that side, yet we turn around and lecture on transparency. I think that we all agree on what the target reforms should be.

    The only system I know of, and it was the one Chairman Leach mentioned, that really guarantees the labor rights in the kind of system we want is not one where you have a multinational panel on the one side and a group of the elite on the other side of the negotiating table working something out. It is a competitive market system. And what we must insist on is not micromanagement of each specific issue but instead a system where individual economic actors in those countries have a choice, where equity investors and debt investors can move in and out and the market can work, without it becoming an international incident. That is the one thing we can insist upon in this package.

    Mr. BENTSEN. I know my time is up; but from what I have seen from the IMF, as it relates to South Korea, for instance, is I think they are fairly specific about financial reforms, disclosure reforms, which, even in today's Wall Street Journal, we are still working on disclosure in the United States. But labor reforms—in fact, when we were there, we learned they were allowing for class action securities lawsuits to become part of the body of law, which we are curbing here, but there is no shareholder activism in those equity markets right now.

    I guess maybe you haven't seen what I have seen or maybe what I have seen is changing, but it would seem those are pretty significant reforms they are talking about putting in place in South Korea.

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    Dr. LINDSEY. I think the reforms are significant. I think they have been ramped up as time goes on, as pressure come from this body. For example, the original reform packages weren't enough on foreign ownership.

    It seemed, again, from the papers, which is the source we have of what the IMF is proposing, that foreign ownership thresholds in Korean companies went up and up and up during the month of December as pressure from this body grew. So I think that we have a lot of leverage here.

    Mr. BENTSEN. But would we have gotten that if we had allowed for the all-Asian fund?

    Dr. LINDSEY. With regard to Japan, I think the all-Asian fund offers two advantages. First, we have all been talking about how the Japanese have too contractionary a fiscal policy, and they have trouble stimulating their economy with tax cuts. They also have a problem stimulating their economy with spending because of the nature of the system there.

    Writing a check to bail out Asia is a great way of stimulating aggregate demand, and I can't think of a better country to ask to do it. So that is one thing that we simply refuse to ever let happen.

    Second, even if they had written the check, we would be back very soon to a situation where the best practices that an open system like the United States has to offer would still be required in Asia. So, I think you would want some time to have a macroeconomic stimulatory effect, and it would have done no harm on the macroeconomic side because I think we would be back to exactly where we are today.
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    Chairman LEACH. Thank you.

    Mr. Bereuter.

    Mr. BEREUTER. Thank you, Mr. Chairman. I want to thank you for the excellent hearing that you put together today, and the array of talent we have on this panel is very impressive. It is rare that we get to devote most of a whole day to a hearing, but it has been very beneficial thus far.

    I want to put on the record some of the most severe criticism of the IMF I have seen. It is from Dr. Hanke; and it is an August 25, 1997, article that is Dow Jones copyrighted.

    He says, among other things, ''Since the breakup of the Bretton Woods system, the IMF has been busy touting the glories of central bank and fine tuning for lesser developed countries. Just look at the result: Average annual inflation in less developed countries has been 8.6 times higher and the variability of that inflation has been 106.8 times higher than the comparable figures in the developed countries.

    ''Not surprisingly, IMF's record for promoting sound banking is not any better. Since 1980, more than 50 developing countries have witnessed a complete loss of their banking systems capital; and in some this has occurred more than once. In a dozen of these countries, more than 10 percent of the annual gross domestic product has been used to clean up the accompanying banking crisis. Just since 1980, the total clean-up cost in developing countries has been a staggering $250 billion.''
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    It goes on to say, ''At the very least, we should stop the policy of rewarding the IMF for failure by providing it with new jobs and more money after every crisis.''

    I thought we ought to put that in here for some context of what I am going to direct next to Dr. Lindsey.

    Dr. Lindsey, I made reference to your testimony before when I addressed some questions many hours ago to Secretary Rubin; and I mentioned, I think, at that time, that you had indicated that the IMF does not represent the successful American model of the past two decades, but a conglomerate of interests which include the less successful models of Japan and Europe. And you say in an earlier part of the paper, ''I believe we should use our negotiating leverage, the United States has effectively all the cards in the current crisis, to advance our principles about the working of a global economy.''

    Finally, you have a very specific recommendation, which may be in the order of what Mr. LaFalce and I were talking about earlier, quote: ''We need an international bankruptcy best-practices standard and are now in a sufficiently strong negotiating position to bring one about. However, we must act now and use the advantage of the current crisis.'' And you go on with a couple of other specific examples.

    Could you enlarge upon what you think we should do now with respect to the longer term, the reform of the IMF? And perhaps then some of your colleagues at the table will want to respond to what you have to say. I would like more detail, if you could.

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    Dr. LINDSEY. As I believe was mentioned in the previous panel, the United States has been attempting to get these kind of policies in place for quite a while, for four years, in fact. We failed, and we failed largely because our supposed allies in Europe have chosen not to go along, as has Japan.

    I agree completely with Fred Bergsten's comments, and I believe it was Chairman Leach's as well, that the Europeans are in a much, much worse situation here than we are, largely because their banks are much deeper in the hole than ours are. As a result, I think we have enormous negotiating leverage here.

    I think that we now have an opportunity to implement the kind of bankruptcy proposal that the Administration laid on the table years ago,
if not by international fiat, then maybe by the big stick principle or whatever it is.

    We have all the cards, as I mentioned. I am very surprised that we have not implemented or compelled our trading partners and allies through these international organizations to go along with something along the lines of what the Administration has proposed in the past. That is with regard to the debt side.

    With regard to equity, again, I would say that we have opened our economy. I am a great believer in global economy and opening our economy, but I think it is not only a question of the free movement of goods, it should also be a free movement of equity capital. And I don't think that it is that onerous or complicated a precondition that countries who are going to benefit from these kind of arrangements open themselves up to equity investment.

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    So, the kind of proposal that I would suggest is that the condition Congress attached to approval of IMF funds would, in addition to the many fine suggestions that Chairman Leach has had, would make sure at some date in the future that national legislation exists in all these countries to allow equity investment and that national legislation exists in these countries to allow debt resolution mechanisms along the lines of bankruptcy. I think this would go a long way not only to opening up these economies, but to reducing corruption and improving the labor market.

    Most important, it would mean that future economic crises would not be of these global dimensions. Instead, they would be of a company-by-company, case-by-case situation.

    The reason things build up and we have such a crisis is because you couldn't put Firm A in Korean bankruptcy, you couldn't put Firm B in, and eventually the word got out that a lot of Korean firms couldn't pay their debts. So all of a sudden you have a tidal wave of market sentiment. This is what causes markets to crash.

    The way you prevent disasters, the way you prevent market crashes, is to allow the tectonic plates of the economy to move slowly and incrementally, rather than in one giant leap. So putting equity provisions and bankruptcy provisions for debt in place, I think, is the one action we could take which would minimize the chance of crises in the future, as well as getting the economies working again very quickly.

    Mr. BEREUTER. I know my time has been exceeded; but if I have the right example here to explain this, in Korea, investment opportunities from abroad were almost impossible, very difficult, at least, so the chaebols financed their expansion primarily by debt. And oftentimes, unfortunately for them, it was short-term debt; and this is, in part, why they have the problem in the private sector.
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    On the other hand, if we had foreign investors there, perhaps there would have been greater scrutiny about the kind of practices the chaebols were involved in. That would be a secondary advantage, it seems to me, of opening it up. Am I misreading that?

    Dr. LINDSEY. I think that is absolutely true; and now that there is a problem in paying back your debts the best way of covering your losses is to let American firms, Japanese firms, European firms buy in and buy up these surplus assets. That would be the other key advantage here.

    Mr. BEREUTER. Thank you.

    Mr. BERGSTEN. Could I just add a factual point? You are probably aware of this, but one of the key elements in the IMF program in Korea is to open up to foreign equity investment. That is one of the most dramatic elements I think in the whole——

    Dr. LINDSEY. But——

    Mr. BERGSTEN. Assuming they implement it——

    Mr. BEREUTER. The finance minister said you could buy 100 percent.

    Dr. LINDSEY. But the number has changed. That is the key point.
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    It is very interesting to watch the IMF statement increase the percentage ownership as this Congress drags out the consideration of IMF replenishment. It went from 26 percent in early December, then it went up to 51, then to 55, and now we are nearing 100.

    Again, we don't have pieces of paper we can compare here. I am just reporting newspaper accounts.

    Mr. BERGSTEN. No, but you are absolutely right. I looked at the pieces of paper.

    But there was one other variable, Larry. The Korean crisis kept getting worse and worse and worse. It wasn't only the Congressional debate. It is that Korea came within 24 hours of a debt moratorium and had to make the more far-reaching changes. In any event, they have been made; and I do think this is one of the most constructive and promising aspects of the whole——

    Dr. LINDSEY. Does that mean it was not the IMF, but the depth of the crisis that forced the Koreans to act? Can we agree on that?

    Mr. BERGSTEN. Absolutely.

    Chairman LEACH. We have been generous with time in this, and I think we ought to continue to be. This is a terrific question by Representative Bereuter, and so I want to go to Dr. Hanke and then Mr. Zoellick.
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    Dr. HANKE. Back to the issue that keeps popping up about the bankruptcy, and this comes back to what Fred was talking about, the length of time for recovery.

    One thing you get that is a little bit different than maybe some of these other 125 crises Fred's groups looked at is, with bad bankruptcy procedures, it is like the situation in the former Soviet Union, roughly; and that is it is so murky that it stretches a time period out before the thing can possibly get settled and creditors can get in there and settle things up.

    Now what happens during that time period and the reason it is stretched out is there is looting going on. The debtors, the people who are there, on-site, are looting the company and stretching it out. So this whole thing is going to go on and on for a long period of time due to the fact that there aren't good bankruptcy procedures in place.

    Now this comes back a little bit, Mr. Chairman, to this monetary thing and the silver bullet a little bit. What happens if you have this bankruptcy thing going on and festering and the current owners, the debtors, are looting the thing, they will go after the central bank, if you have a central bank with no hard budget constraints on it, to give them money and stretch the thing even further so they can loot more and clean the thing out before the creditors get in there on them. So this is another reason why you have got to have a hard budget constraint and a firewall around the monetary authorities you set up.

    And I was delighted the Congressman mentioned something that I had written in August about this issue, because I think it is just absolutely essential, and if you don't get it right, you are just spinning the wheels, throwing the dice; you don't know what they are proposing, which one of these policies may or may not work.
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    The record at the IMF is a very mixed bag on these things. The only thing that has worked is where they put in these currency board kind of operations. So I would hold them to it and keep their feet to the fire. Otherwise, you probably won't get much return on your money.

    Chairman LEACH. Thank you.

    Mr. Zoellick.

    Mr. ZOELLICK. This might be a slight difference in information and tactics, but I think it could end up being a critical point for the Congress, so I would like to draw it out.

    As you have observed, I think many of us would agree on the type of changes we would like to have in many of the East Asian economies. Perhaps the difference in information is that few people have accused me of being a whiz with a computer, but checking out the IMF website did produce a long list of items, as Congressman Bentsen mentioned, that are part of these agreements. So I am surprised others had a hard time finding them. If you can't, I would suggest a phone call to Stan Fisher's office, which will get you an even longer list.

    So I think there are a lot of these things that have been done. Now would we like more, yes, we always would. And this goes to the tactical question, and I think this is where perhaps where Larry and I have a fundamental disagreement. He talks about deferring. Well, how long and how do you lead in these institutions? One, if you defer in this context, you are running risks.
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    As Congressman Bentsen mentioned, things now look more comfortable in Korea, where you just visited, but keep in mind Fred Bergen's point: What you have seen so far are the financial issues, you haven't even seen the economic issues, and once the economic calamities really start to hit a place like Korea, Korean democracy will operate in the streets, just like it operates in France, and at the same time you have a new president taking over and expectations.

    We are by no means finished with the uncertainty in Korea. My sense is, remember the United States contributes 15– to 18–percent of IMF funds, so, yes, we have a lot of influence, but we may not always get everything we want. So the question is, how do we lead effectively in those institutions? And my worry about a deferral strategy for too long is, it is very hard to lead from the back.

    Larry has had a more extensive economic experience. I may have had some considerable experience from international institutions, from NATO to the U.N. to APEC, and, in my experience, the U.S. tends to lead most effectively from the front, and I am afraid if Congress delays too long on this IMF issue, the type of things we are all talking about are less likely to be pushed.

    Chairman LEACH. Mr. Bachus.

    Mr. BACHUS. Thank you.

    You gentlemen have been here all day, and you have heard some of the questions. I asked the earlier panel, one of my main concerns is that with these requirements and restrictions that go with the funding, the governments are going to be required to do things that people are not going to like, and there is going to be an adverse reaction, they are not going to be popular, the austerity measures and just the currency devaluations are going to have a very negative impact on the average person in these countries.
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    Is this—and you may have recalled that I said they are going to look for someone to blame and that the leaders of these countries may have an easy way out, is to blame the IMF or to blame the Americans. I would just like to start, maybe, with you, Larry, and go down and tell me what chance you see of that happening.

    I know one comeback may be, if we don't do anything, there will be an adverse impact, but if we don't do anything, at least we are not a part of the measures being taken by those governments.

    Dr. LINDSEY. Well, again, my friend Bob Zoellick and I may have some tactical disagreements, but I do think American leadership is crucial, and what is disappointing to me is that American leadership has been so delayed. In late September, with the Korean economy clearly on the ropes, the Administration imposed Super 301 rules on the Korean auto industry.

    In the second week of October, with the crisis deepening, we actually shut down oceangoing trade between the United States and Japan for 24 hours. This is not the kind of leadership that I think has been helpful in the Asian crisis.

    I have no question at all of the new leadership. What I think we should be doing, in order to improve our public perception of the United States, is to have the United States aggressively pushing reforms. I think that market opening initiatives, such as we all agree on, would be enormously popular in those countries, and having the U.S. out there leading this, I think, would be useful.
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    The reason that I think we particularly have to insist on equity and bankruptcy rules is that we run the risk of exactly what you are talking about, of being criticized for imposing sanctions. When you have a dispute between Chase Manhattan and Samsung, they should be able to work it out. We should have rules so that does not turn into a dispute between the U.S. Government and the Korean people, and if we are going to avoid that in the future, if we are going to build credibility for the U.S., I think the reforms I suggested are minimum prerequisites to move forward.

    Dr. CHIMERINE. Congressman, let me try to be brief. You are right, we probably will be blamed or the IMF will be blamed, and when the crisis began, it was the foreign investors and the currency speculators who were blamed. The truth of the matter is, there is going to be plenty of blood flowing in the streets, as Fred mentioned earlier, as a result of what has already happened there, even before any conditions placed on these countries by the IMF.

    But, as I think all of us have said, there are those of us that support an IMF program if it is struck properly, which could potentially reduce the short-term impact. Even though it may not be pictured that way and they may get blamed, nonetheless, it could do that.

    Second, we are doing this anyway for what is in the best interest of the United States. It is in our best interest to reduce the spillovers onto our economy, not only the direct spillovers on our trade and profitability of our own corporations directly, but through the impacts on Europe and everywhere else.

    Third, getting to Larry's point, with all due respect, we have tried unsuccessfully for years to force markets open in Korea, to force not only markets open for our exports, but for direct investment in Korea. I think this gives us more leverage, going through the IMF, particularly if we can find some way to tie it into the WTO, and probably gives us a better opportunity to achieve these objectives than we have just going on our own.
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    Dr. HANKE. I think, in a nutshell, our tactics have been a complete disaster by using the IMF as what is perceived to be, at least, a stalking horse for U.S. foreign policy in the region. And given the strong nationalist influences in these various countries—which I am certain, Mr. Chairman, you picked up on on your recent visit of last week—I think we are dancing on a volcano with this thing.

    So I am not as sanguine as the two Larrys at all. I think we have just done the wrong thing, we have been too visible, and we are being perceived as using an international institution as a stalking horse for particular U.S. policies.

    Mr. ZOELLICK. I think this is an exceptionally good question, Mr. Bachus, and it is one I have pondered from different angles when thinking about this, and I will share my conclusions.

    One, we will face significant blame if we fail to act, because that is what happens when you are the greatest power in the world. You heard Secretary Cohen and others talk about that. We will face blame for pushing liberalization. My conclusion is, we are going to face blame no matter what, so what the real focus has to be is on what outcome produces the best results for us, for them, and for the rest of the world. That has to be the satisfaction we have in this area or, frankly, other topics like the Gulf or Europe or others.

    Given that, I think it is entirely appropriate for us to influence the IMF. I hope and believe that we are. But it was also striking that the message that many of you came back from is the message I have heard, which is that people are looking to the United States in an unparalleled—well, not unparalleled, but in a very strong fashion. That is why, to pick up on Secretary Cohen's word about the Greek origin of the word ''crisis,'' this could be an opportunity as well, if we use it properly.
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    One idea I tried to push today, which I frankly think the Administration has not been as active on: We all talked about the role of Japan, and we all know Japan is resistent, but some of us who have also worked with Japan politically know if there is an internal constituency in Japan, sometimes outside pressure can help.

    Now there has been a problem about U.S. pressure alone, Diahatsu, but in this case if you had U.S. pressure, European pressure, Chinese pressure, Southeast Asian pressure, not perhaps done as a monolithic force that backs the Japanese in a corner and gets their nationalism up, but gives an additional leverage to those who want to try to make some of the changes we have talked about, I think that is something we should be doing, and I am not sure we are mobilizing that sort of coalition response.

    But the final point is, to be able to play that role, the United States not only has to do what, in my view—and I agree with Larry—it did a little bit late with Secretary Cohen's trip and Secretary Summers' trip and others, but it now needs to follow that up.

    And I think the one real danger we face is problems on the home front, whether it be Fast Track authority, whether it be other debates in Congress and in the public. It is critical the United States not send a message, whether in trade or elsewhere, that we are pulling back. And, again, one of the reasons I think it is very important the President not only talk about Fast Track authority, but fight for it at this time is that these countries will say, ''You have got 4.7 percent unemployment, you have the lowest inflation in 26 years, your stock market is at an all-time high, you are afraid to do further liberalization, then how can you tell us?''
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    I think the most effective way to pursue some of these things we want is not only IMF packages with words written on paper but through measures like the WTO and some of these other actions that show everybody is willing to move in the same direction.

    Mr. BERGSTEN. Four quick points. First, you are right, we will be blamed for action, but we will clearly be blamed more for inaction. Secretary Cohen rightly said we are still being blamed for not participating actively in the initial Thailand support package. Secretary Rubin tried to come in and cover that. He was not correct. The U.S. did cop out. That continues to burn us today. That is an example that it is worse not to be in there than to be in there.

    Second, we can't escape being blamed. We are the world's superpower. It goes with the territory. One of the elements of our role for 50 years has been the scapegoat. We accept the blame; we are big boys; we have to be able to do it. You are right, it will happen, but we can't let it deter us.

    The third thing, however, is that the Asians want the Americans to lead. It is not just recently; this goes back quite a ways, and it is structural. Who do the Southeast Asians, the Chinese want? They don't want a Japanese lead. One reason this Japanese idea failed had nothing to do with the economics of it. It was because of the rest of the Asians were horrified at the thought of a Japanese-led all-Asian fund.

    If you wanted to hear scathing reaction to it, which I did, talk about it in Beijing. China was not about to accept the idea of a Japanese-led Asian fund; they want the Americans in. When they agreed on this Manila Framework I talked about, about trying to get better regional peer pressure to avoid future crises, they—the Asians—said, ''The U.S. has got to be in that, because they are more likely to tell it like it is and they are more likely to take a broad view.''
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    None of the Asians are ready to turn themselves over to the tender mercies of either Japan or China. We are a little farther away; we are a distant power. They put in the new terminal in Singapore. They do the New Arrangements to Borrow in the Philippines that Secretary Cohen talked about. They want the U.S. They may bitch and moan, but they want us to lead.

    It does depend critically on how we play it. If we display too much hubris and try to rub it in too much, as I am afraid some of Larry Lindsey's approaches would do, that would make it worse and could tilt the balance in the direction we are talking about. That is why, at the end of the day, it is crucially important for us to have the IMF as the front runner.

    The IMF doesn't do everything we want, but it is pretty hard to draw too big a distinction between what the IMF is promoting and what the U.S. is promoting. We get most of what we want. They pursue most of what we, as a collective here, believe in. And for them to be in front, rather than us bilaterally to have to do it, is absolutely critical.

    That, I think, also provides an important guideline for you here in the Congress. If, in passing the IMF legislation—which I am confident you will do—you load it with too many conditions, and then the Administration has to do them, it is going to exacerbate the problem, Mr. Bachus, you quite rightly raised.

    So we should maintain some moderation, some subtlety, in doing it informally rather than formally and publicly. I think is very important to minimize the cost that you rightly point to.
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    Mr. BACHUS. Let me ask one other follow-up, just one other question, if I could.

    Chairman LEACH. One.

    Mr. BACHUS. It is a major concern. This world leadership thing, if they do want us to be a leader, I see this as an excellent opportunity for us to get more help out of that region on Iraq and on Bosnia, and I have seen, really, very little movement on the part of the Administration.

    You know, these countries, at the very time we are considering funding, they voted against this in the U.N., and yet, you know, you say they want us to lead, but when we take leadership in Bosnia and Iraq, it is not a question of, we are willing to lead, but we seem to have a lack of followers.

    Dr. CHIMERINE. These aren't either/ors, and if we can do all or if they are separate issues, I don't see how that affects what we should be doing about the IMF.

    Mr. BACHUS. I don't know; are they separate? If we are willing to come over and help them with that problem, you know, but they are not willing to support us in Bosnia or Iraq, I mean, should we consider them as totally separate issues? I mean, I think that is a good topic of discussion.

    Mr. ZOELLICK. I understand very much how you feel, Mr. Bachus, because when I was at the State Department, after the Treasury, this was the whole range of issues I dealt with, and I felt many of the same frustrations. But let me tell you the conclusion I reached. These countries have their politics as well. Sometimes it is democratic; sometimes it is emerging democratic, so it is even more rough and tumble; and even where it is not democratic, there are various other interest groups.
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    One of the things I also think is an important opportunity today is, the politics will be changing with these events and there are those who do want to try to institute the type of changes all of us are talking about. But, therefore, I think we have to be somewhat subtle and careful in how we get the support we want, because what we don't want to create is an impulse of others who want to resist the changes. And, as you said, there will be pain, so there will be people who are pointing to who brought these changes to the fore, to say, ''You are a lackey of the United States, you are doing this just because the United States demanded it.''

    But I can point to you that in the Gulf War, for example, Malaysia was on the Security Council, and it was very important we tried to get their vote at that time to try to create the sort of coalition we sadly see we don't have now. And those sorts of relationships when the chips are down do show up, but you have to be a little careful so as to allow them some room in their own politics.

    I think you will see, depending on how we handle this, that the United States can actually strengthen its follow-up position in East Asia, whether it be the Singapore basing example, whether it be in dealing with problems of Korea that are still going to come, and I also think some of the issues that may be the case, for example, in Bosnia, may also start to get into Islamic politics in their sense of what we did for those groups.

    But I think the point is correct, and I think all that Fred and I are urging that particularly related to this issue is, if it is too blunt, it can be counterproductive, particularly at a time of political flux.

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    Mr. BACHUS. I have one other question, because it has been mentioned by the panel. Let me ask. We have talked about the fact, and I think I have read several things, there is excess capacity in Asia. Yet devaluation doesn't really address that, does it? I mean, we are still going to have excess capacity. Are we addressing that issue?

    Dr. LINDSEY. Congressman, I think that the link between currency crisis and excess capacity is an important one, and the way I would approach this is by thinking about the various real estate bubbles that always happen. Chairman Greenspan said earlier, this is human nature and we are not going to repeal it, and I think that is why I would focus on it that way.

    What happens is, everyone says, ''Gee, there is money to be made in chip manufacturing.'' So everyone altogether goes into chip manufacturing, and they go out and borrow to build chip plants. But when everybody does it, the price of chips falls and those plants are non-economic. It is just like when we have real estate booms in the cities. Everybody says, ''we need more offices,'' so we go out and everybody puts up an office building, and when they get built, the rents fall and there are lots of bankruptcies. This is going to be part and parcel of the economic system. I don't think there is anything you can do about it.

    What you need in place are mechanisms to resolve those disputes easily. The excess capacity in Asia is enough that, within 18 months or 2 years of normal world growth, it would be absorbed. What we want to do is have the smoothest transition possible for those factories, and the smoothest transition possible is achieved by the mechanisms that I described.

    I concur with my colleagues on the other side of the table that there is a risk of hubris, I do think, where one could have a list of 22 conditions to be put in, and that would be viewed as rubbing it in. I don't think asking for a country to have allowed external investment on a reciprocal basis is rubbing it in, nor is suggesting they have a bankruptcy procedure. Those are two very simple reforms that would move this process along very quickly.
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    Dr. HANKE. Can I make a quick comment. The crisis may end before the hearing does, but this is one of the reasons I think it is important, in structuring the IMF's financial assistance packages, that there not be too much additional short-term austerity, because the last thing we need now is to exacerbate the overcapacity problem.

    Second, the last thing I think we wanted them to do was make more loans to industrialized companies in those countries who are now planning on adding more capacity, and, in fact, to the extent possible, we ought to be forcing them to shut down capacity that is now in place that is not economic.

    And, fourth, hopefully the long-term reforms, more domestic demand growth and so forth, better banking practices, and so forth, will stop this trend toward overcapacity on a long-term basis. So it gets back to the conditions that are attached for IMF support, and I think it is the key issue.

    Mr. BERGSTEN. Just to underline that last point, I think it is fair to say the IMF programs already do attack the problem that you raise. They attack them by trying to open up and marketize the system, particularly to change the corporate governance and lending practices of the past. Those have led to blatantly uneconomic investment. They have led to this ''crony capitalism.'' You produce things because it is somehow viewed as strategically desirable for the nation, the Indonesian aircraft, or everybody has to go into semiconductors or whatever it is. To the extent the IMF programs work in pushing the financial systems, and the corporate governance structures, toward more sensible economic decisionmaking, you will indirectly but very powerfully help to avoid creating that kind of problem in the future. That indeed is the central purpose of the program. If they work, even imperfectly, they ought to improve the situation on that count quite considerably.
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    Mr. ZOELLICK. One other point to relate this to something else that we have talked about that I think is critical to also keep in mind is, one reason that the Treasury is concerned about the IMF funding is that that overcapacity you talk about is not simply a U.S.-East Asian issue. I think, frankly, where you will see it as much as anywhere else is with some Latin American economies and some Eastern European economies that are the true competitors in some of those sectors.

    And one of the concerns here about the economic contagion, as opposed to the financial contagion, is they have the capability to deal with that shock over the next year, and, if not, where does that leave the IMF when, really, it has funds roughly for one more Korea, is what it has.

    Chairman LEACH. Dr. Hanke had one more comment.

    Dr. HANKE. Very briefly, and back to my comments about fixed exchange rates, this ties back to the excess capacity problem. You have to stop the free-fall of these currencies, because excess capacity is one thing, but how potent it is is a function of how undervalued the currencies are in those countries. So you really have to put in a currency board system and revalue the currencies up to some appropriate level, Fred, so we are correct for that overshooting, and then the excess capacity that is real, that they have, obviously isn't going to be quite as potent and as deadly as it will if you remain in these free-fall situations where the currency floats.

    Chairman LEACH. Let me thank you all. This is an extraordinary panel, and everyone has brought a degree of truth, even with conflicting statements. The hubris of Dr. Lindsey, the enormous modesty of Dr. Bergsten, we very much appreciate it.
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    And let me just say, speaking in a process way, we had some difference with some of the panelists. I am personally convinced this is an issue Congress has to come to grips with in a very timely way, and it is my intent, from the committee's perspective, to move very forthrightly, and I do not believe Congress should be playing games with this issue.

    I do believe, however, as Dr. Lindsey has suggested, that the United States is in a strong leadership role and that there are a series of issues that we ought to be making very clear that are in the United States' national interest, but they are realistic because they are profoundly in the vested interest of the peoples in the region, although some of them are to the disinterest of the elites in the region.

    So when there are certain aspects of controversy, in my judgment, the United States Government should be standing with the peoples against their elites, and that there is an element of literal populism in the good sense and judgment that, generally speaking, is the consensus of the United States economics perspective.

    In any regard, let me conclude by saying I personally am convinced that the cold shoulder approach at this time would be not in the national interest and that not only is it in the national interest to act, but it is in a longtime framework of good neighborliness, and it is a tradition of the United States and that we should move forward.

    In any regard, I thank you all for your thoughtful testimony. The hearing is adjourned.

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    [Whereupon, at 5 p.m., the hearing was adjourned.]

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