Segment 3 Of 3 Previous Hearing Segment(2)
SPEAKERS CONTENTS INSERTS
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INTERNATIONAL ECONOMIC TURMOIL
WEDNESDAY, SEPTEMBER 16, 1998
U.S. House of Representatives,
Committee on Banking and Financial Services,
ashington, DC.
The committee met, pursuant to notice, at 1:05 p.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.
Present: Chairman Leach; Representatives Bereuter, Baker, Bachus, Castle, Royce, Lucas, Metcalf, Kelly, Paul, Snowbarger, Manzullo, Redmond, Fossella, LaFalce, Vento, Frank, Kanjorski, Kennedy, Roybal, Allard, Velazquez, Hinchey, Bentsen, Kilpatrick, J. Maloney of Connecticut, Weygand, Lee, Goode, and Sanders.
Chairman LEACH. The hearing will come to order. Today, we resume our hearings on the international economic circumstance. This is the third day of hearings on this subject. In the last two days we've heard from experts on Russia, experts on emerging markets, as well as experts on the subject of corruption in general. Today, we're going to hear from the Secretary of the Treasury, his deputy, Mr. Summers, and the Chairman of the Federal Reserve Board, Alan Greenspan.
I would only like to make one point—two points, and one is that this hearing is called because the international circumstance has elements of gravity. It's also called because there are elements of gravity in other issues before the Congress and this committee wants to make it very clear that the governance of the United States goes on in a steady and orderly fashion whatever other circumstances may be confronting the country and the Congress.
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At today's hearing, we are limiting opening statements to two minutes for myself as Chairman, which I have just completed, and two minutes to the Ranking Minority Member and then two minutes to the distinguished Chairman of the subcommittee of jurisdiction as well as the Ranking Member of the subcommittee of jurisdiction.
Mr. LaFalce.
[The prepared statement of Hon. James A. Leach can be found on page 341 in the appendix.]
Mr. LAFALCE. Thank you very much, Mr. Chairman. Because of the two minute limitation I ask unanimous consent to put my full statement in the record.
Chairman LEACH. Without objection, so ordered, and the full statements of all Members, including the Chair's, will also will be placed in the record.
Mr. LAFALCE. First of all, I want to thank most especially the Chairman of the Federal Reserve Board and the Secretary of the Treasury for simply being Chairman of the Federal Reserve Board and Secretary of the Treasury. These are extremely difficult, troubling economic times. I don't remember a time in my public service when the world economic picture has been more fragile. We are fortunate to have the two of you in your present positions. You have a difficult job.
The Congress has a job to do too. The House Banking Committee did its job; the U.S. Senate did its job. Our committee reported out very good IMF authorization legislation; the Senate has passed the authorization in appropriations; the House of Representatives must act also. This may be a small component of what is necessary to deal with the totality of this fragile world economic picture, but it is such an important ingredient, at least to maintain the present international financial architecture that's necessary to deal with the problem and also, very importantly, to give confidence to the rest of the world, the public and the private sector, that the United States is there; that the United States will do its part, not just our Central Bank, not just our Executive Branch, but our Legislative Branch. It would be shameful if this Congress adjourns, whether we adjourn sine die or whether we recess. Without acting, we would default and those responsible for recessing or adjourning without passing it would have to bear the burden of whatever world economic difficulties might then ensue. I look forward to your testimony. Thank you.
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[The prepared statement of Hon. John J. LaFalce can be found on page 356 in the appendix.]
Chairman LEACH. Thank you, Mr. LaFalce.
We will now turn to Secretary Rubin.
STATEMENT OF HON. ROBERT E. RUBIN, SECRETARY, DEPARTMENT OF THE TREASURY
Mr. RUBIN. Thank you, Mr. Chairman. Let me start by saying that I greatly appreciate the opportunity to be here today and to discuss what I agree with you, Mr. Chairman and Mr. Ranking Member, are extraordinarily important subjects relating to the global economy and issues that have and will continue to significantly affect and possibly even profoundly affect American workers, farmers, and businesses and also to discuss America's role with respect to these issues and the leadership we have exercised and discuss thoughts with respect to going forward.
From the beginning of this crisis in Thailand a little over a year ago, we have been intensely focused on precisely this issue. Although the circumstances in each country differ, I do think there are some commonalities. Usually, but not always, the problems in these countries center around badly flawed financial systems, and then what happens in our judgment is that the problems in these countries combine with large flows of capital that too often were excessive, because of an under-focus on and under-weighting of risks which often happen when times are good for a sustained period of time. The combination of the problems in the countries and the excessive flows of capital turned out to be combustible.
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Mr. Chairman, about a year-and-a-half ago, Deputy Secretary Summers came to me and he said that if he looked at risk premiums or risk premia, I suppose, in asset classes of all kinds, they had shrunk to remarkably low levels. Those of us discussing it said that that certainly suggested that this was a function of excesses that were going to have to work their way out, and when they worked their way out there was going to be a very difficult period that we would all have to work our way through, and I think that is precisely what is going on. I think that period has been going on for some time, and at least in my judgment will likely go on for some time in the future. The objective that we all have is to do everything possible and sensible in the face of that unwinding in order to minimize the difficulties that that unwinding creates.
Just as capital flowed into emerging countries indiscriminately, and that was a mistake, capital is now flowing out indiscriminately, and that is also a mistake. Credit and investment decisions need to be made with careful analysis of risks, rewards, strengths and fundamentals of an economy in a manner unaffected by the mentality of the moment. While the fundamentals in the American economy remain strong, as a consequence of this crisis we have seen substantial impacts in some sectors, particularly agriculture, and we have seen corporate earnings in many areas be adversely affected. Moreover, there was always the risk of broader effects.
As this crisis so clearly demonstrates, the well-being of the United States is significantly impacted and I would say inextricably linked to the economic well-being of the rest of the world, and that is precisely why we have been so intensely focused on this crisis since its beginning in Thailand.
The most important contribution that the United States can make is to continue to pursue policies that provide financial stability and growth in the United States, which in turn contributes to financial stability and growth in the world. In addition, the other major industrialized nations need to achieve and maintain strong, domestic demand-led growth, and this is a subject of regular consultation in the G–7 process, particularly with respect to Japan. I don't think there's any question but that central to this crisis has been the fact that the second largest economy in the world—and Asia is the largest economy by multiples—had very slow growth at the beginning of this crisis and now has been in recession for three quarters. Swift, strong fiscal action and immediate sufficient measures to strengthen the financial system are urgently needed in Japan to resume strong, domestic demand-led growth that is good not only for Japan but imperative for the rest of the world.
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Our approach to this crisis in addition to these matters I've just mentioned has also included working with developing countries around the world from before the crisis actually began in Thailand to implement reforms to limit their vulnerability. Throughout this situation, the United States has strongly supported the International Monetary Fund as the central institution in addressing financial crises. The IMF is focused on promoting reform in countries in crisis, reforms that are directed toward the problems that gave rise to the financial instability, combined with financial assistance when necessary.
The IMF is the right institution to be at the center of this international effort for three important reasons: first, it has the expertise to effectively shape programs; second, as a multilateral institution it can obtain reforms that no single bilateral assisting nation could obtain, and, finally, the IMF internationalizes the burden.
The programs of the IMF have been put in place in the face of an unprecedented situation of enormous complexity. There are no simple answers; there are no sure answers; and in our view, the judgments of the IMF have been largely sensible with subsequent adjustments when changes and circumstances warranted. It is also very important to remember that the problems in these countries do not derive from the IMF programs; they derive from the underlying crisis that the IMF programs are designed to address.
Countries that have adhered to IMF-led reform programs—specifically, the Philippines, Korea, and Thailand—have begun to see signs of stability. In Korea and Thailand currencies have appreciated substantially from crisis lows and interest rates have jumped down to pre-crisis levels. The original IMF target on short-term interest rates in Korea was 25 percent, and rates are now approximately 10 percent in the short-term. I also have no doubt that the situation over the past year would have been much worse without the work of the International Monetary Fund.
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One area, as you well know, Mr. Chairman, where the IMF has played an active role in trying to promote financial stability has been Russia, and Russia is in great difficulty. A democratic and prosperous Russia is obviously very much in the interests, economic and national security, of the United States, and that is precisely why we supported the IMF's reform program for Russia, which in our judgment offered a sound program for stabilization. However, the political situation in Russia was such that Russia proved unable to put in place the kinds of reforms that were necessary to move forward. The international community, the United States, the International Monetary Fund all knew that there was a real risk that this program would not work, but it was a risk that all felt was very well worth taking given the enormous stakes that were involved. When Russia is prepared to continue reform, the international community, including the United States, is prepared to support it.
Indonesia is another example of a country that simply did not take ownership of reform. I think one of the great lessons of this past year—and it was a lesson that we knew going into the year, but I think it's been emphasized by what has happened—has been that for international assistance to be effective and for the IMF to be effective it ultimately comes down to the country itself and its political system working in such a way as to take ownership of reform.
We have also been focused for some time now on reforms within the IMF. Your committee has been at the forefront in this effort, and we look forward to continuing to work with Members of this committee and Members of Congress more generally. At the present time, resources at the IMF are at historic lows. Every day the Congress does not approve the request for IMF funding increases our vulnerability to a crisis and decreases confidence in global markets. The Senate, as Mr. LaFalce said, has approved IMF funding twice by large, bipartisan majorities, but it is still held up in the House of Representatives. I don't think there has ever been a time when the importance of IMF funding, full IMF funding, and an adequately funded IMF is greater than at the present moment, and I think it is imperative that Congress act and act now.
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Mr. Chairman, as the crisis has spread and world economic conditions have deteriorated, we have expanded our response, working with our G–7 partners, and that expansion has focused on several key areas: First, recognizing that with inflation low or falling in most parts of the world and with a consequent shift in the balance of risk in the global economy, the G–7 finance minister and Central Bank governors this past Monday put out a statement emphasizing their commitment to global growth. Second, there's increased focus on financing for countries that have pursued sound policies but are nonetheless being significantly affected by contagion. Third, we are looking at ways to accelerate corporate debt restructuring in countries where there is a systemic problem, and that is predominantly countries in Asia. Fourth, we are working with the Multilateral Development Banks to provide greatly increased social safety nets in countries in crisis.
In addition to dealing with the enormously complex and unprecedented conditions involved in the immediate crisis, for the longer term it is absolutely imperative that if we are going to preserve the market-based economic system that we all believe in, the international community must develop better preventive measures to reduce the frequency and severity of systemic financial instability and better ways to deal with such instability when it occurs. Under President Clinton's leadership toward these ends in the G–7 roughly three years ago, the President called on the international community to focus on changes in the global financial architecture. Last year, the President intensified this effort by asking us to convene a meeting of 22 nations, including key developing and emerging economies. On Monday, in his speech in New York dealing with the global financial situation and the global economy, he asked that within 30 days Chairman Greenspan and I chair a meeting of finance ministers and Central Bank governors to continue the work undertaken by these 22 nations to expand the reach of our efforts to strengthen the international financial architecture.
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Although this effort at reforming financial architecture involves enormously complex issues that will in their entirety only be worked out over a substantial period of time, there has been a great deal of work done, and I think, there have been real accomplishments focusing on three areas: strengthening financial systems in developing countries and emerging markets; increasing transparency in disclosure; and involving private investors in the resolution of these crises. Also, it is very important—and I would like to emphasize this is very important—that countries do not embrace unilateral actions on debt as a substitute for reform and cooperation.
As I said at the beginning, the world has experienced over the past several years a new period of enormous pressures, complexities, and challenges in the global economy. Many of the countries in crisis have deep underlying strengths, and the key is for these countries to draw on those strengths, deal with their problems, and get back on the track of stability and growth. There are no easy answers; there are no sure answers, and it will require a tremendous amount of political will and cooperation in affected nations and in the industrial nations.
But I do know this for certain: American leadership has been absolutely critical during this crisis and will continue to be, and our economic well-being and national security are critically at stake. We have pursued a sound and coherent strategy in concert with the other nations of the G–7, the global community more generally, the International Monetary Fund and World Bank, while at the same time adjusting judgments and programs when circumstances warrant it.
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Looking forward, the key is for all countries to work together and meet our respective challenges. For the countries in crisis, that means sustained adherence to sound reform programs. For the major industrialized nations, that means providing assistance when appropriate; working to help countries in crisis and the IMF on programs of reform, and, very importantly, it means achieving and maintaining sustained solid growth, and that is an issue that exists particularly with respect to Japan. To the United States, this means continuing to pursue sound policies at home to maintain our strong economy. More immediately, it means the imperative of approving full funding for the International Monetary Fund, which is now needed urgently for our own prosperity as well as the financial stability of the rest of the world. Thank you very much, Mr. Chairman.
[The prepared statement of Hon. Robert E. Rubin can be found on page 374 in the appendix.]
Chairman LEACH. Well, thank you very much, Secretary Rubin, for your thoughtful comments.
Chairman Greenspan.
STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. GREENSPAN. Thank you very much, Mr. Chairman and Members of the committee.
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As I testified before this committee in the midst of the Mexican financial crisis in early 1995, major advances in technology have engendered a highly efficient and increasingly sophisticated international financial system. The system has fostered impressive growth in world trade and in standards of living for the vast majority of nations who have chosen to participate in it.
But that same efficient financial system, as I also pointed out in that earlier testimony, has the capability to rapidly transmit the consequences of errors of judgment in private investments and public policies to all corners of the world at historically unprecedented speed. Thus, problems that appeared first in Thailand more than a year ago quickly spread to other East Asian economies that are relatively new participants in the international financial system, and subsequently to Russia and to some degree to Eastern Europe and Latin America. Even long-term participants in the international financial community, such as Australia, New Zealand and Canada, have experienced the peripheral gusts of the financial turmoil.
Japan, who is still trying to come to grips with the bursting of its equity and real estate bubbles of the late 1980s, has experienced further setbacks as its major Asian customers have been forced to retrench. Reciprocally, its banking system problems and weakened economy have exacerbated the difficulties of its Asian neighbors.
The relative stability of China and India, countries whose restrictions on international financial flows have insulated them to some extent from the current maelstrom, has led some to conclude that the relatively free flow of capital is detrimental to economic growth and standards of living. Such conclusions, in my judgment, are decidedly mistaken.
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The most effective emerging East Asian economies, despite the sharp contraction in their economic output during the past year, have retraced, on average, only one-sixth of their per capita growth over the past ten years. Even currently, their average per capita incomes are more than two-and-a-half times the levels of India and China despite the unquestioned gains both have made in recent years as they too have moved partially to join the international financial community.
Moreover, outside of Asia, several East European countries have made significant progress toward the adoption and implementation of market systems and have increasingly integrated their financial systems into the broader world context to the evident benefit of their populations. Latin American nations, though currently under pressure, have largely succeeded in opening up their economies to international financial flows, and more rapidly rising living standards have been the result.
It is clear, nonetheless, that participation in the international financial system with all its benefits carries with it an obligation to maintain a level of stability and a set of strong and transparent institutions and rules if an economy is to participate safely and effectively in markets that have become highly sensitive to misallocation of capital and other policy errors.
When domestic financial systems fail for lack of adequate institutional infrastructures, the solution is not to turn back to a less turbulent, but also less prosperous, past regime of capital controls, but to strengthen the domestic institutions that are the prerequisite for engaging in today's international financial system.
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Blocking the exodus or repatriation of capital, as some of the newer participants in the international financial system appear inclined to do after they get into trouble, is, of course, the equivalent of the economy receiving a subsidized injection of funds. If liquidity is tight, the immediate effect of controls can be relief from the strain of meeting obligations and a temporary sense of well-being. This is an illusion however. The obvious consequence of confiscating part, or all, of foreign investors' capital and/or income, is to ensure a sharp reduction in the availability of new foreign investment in the future.
The presumption that controls can be imposed temporarily, while an economy stabilizes, and then removed, gives insufficient recognition to the imbalances in an economy that emerge when controls are introduced. Removing controls subsequently creates its own set of problems, which most governments, inclined to impose controls in the first place, are therefore loathe to do. Indeed, controls are often employed to avoid required—but frequently politically-difficult—economic adjustments. There are many examples in history of controls imposed and removed, but rarely without great difficulty and cost.
To be sure, any economy can operate with its borders closed to foreign investment. But the evidence is persuasive that an economy deprived of the benefits of new technologies, and inhospitable to risk capital, will be mired at a suboptimal standard of living and slow growth rate associated with out-of-date technologies.
It is often stipulated that while controls on direct foreign investment and its associated technology transfer are growth inhibiting, controls on short-term inflows do not adversely affect economic welfare. Arguably, however, the free flow of short-term capital facilitates the servicing of direct investments as well as the financing of trade. Indeed, it is often difficult to determine whether certain capital flows are direct investments or short-term in nature. Chile is often cited as an example of the successful use of controls on short-term capital inflows. But in response to the most recent international financial turmoil, Chile has chosen to lower its barriers in order to encourage more inflows.
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Those economies at the cutting edge of technology clearly do not need foreign direct investment to sustain living standards and economic growth. The economy of the United States in the 1950s, for example, needed little foreign investment and yet was far more dominant in the world then than it is today.
That was a major change from our experiences of the latter half of the nineteenth century, when the vast amount of investment and technology from abroad played a significant role in propelling the U.S. economy to world-class status.
Even today, though we lead the world in many of the critical technologies, we still need to borrow a substantial share of the mobile pool of world savings to finance our level of domestic investment. Were we unable to do so, our standard of living would surely suffer. But the inflow of foreign capital would be much reduced if there were uncertainties about whether the capital could be freely repatriated.
While historically there could be considerable risk in American investments—for example, some nineteenth century investments in American railroads entailed large losses—the freedom of repatriation and the sanctity of private contracts were, with rare exceptions, secure.
Our experiences, and those of others, raise the question of the sustainability of free international capital flows when the conditions fostering and protecting them are impaired or absent.
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Specifically, an economy whose private and/or public sectors have become heavy net debtors in foreign currency is at risk of default, especially when its exchange rate unexpectedly moves adversely. Clearly, should default become widespread among a number of economies, the flow of international capital to other economies perceived as potentially in similar circumstances will slow, and in certain instances reverse. The withdrawal of the ongoing benefits of free flowing capital, as recent history has so amply demonstrated, often can be abrupt and disruptive.
The key question is obviously how do private sector entities and governments and, by extension, economies as a whole allow themselves through currency mismatches to reach the edge of insolvency? Indeed, where was the appropriate due diligence on the part of foreign investors?
Investors will, on occasion, make misjudgments, and borrowers will, at times, misread their capabilities to service debt. When market prices and interest rates adjust promptly to evidence of such mistakes, the consequences of the mistakes are generally contained and, thus, rarely cumulate to pose significant systemic risk.
There was some evidence of that process working in the latter part of the nineteenth century and early twentieth century when international capital flows were largely uninhibited. Losses, however, in an environment where gold standard rules were tight and liquidity constrained, were quickly reflected in rapid increases in interest rates and the cost of capital generally. This tended to delimit the misuse of capital and its consequences. Imbalances were generally aborted before they got out of hand. But following World War I such tight restraints on economies were seen as too inflexible to meet the economic policy goals of the twentieth century.
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From the 1930s through the 1960s and beyond, capital controls in many countries, including most industrial countries, inhibited international capital flows and to some extent the associated financial instability—presumably, however, at the cost of significant shortfalls in economic growth. There were innumerable episodes, of course, where individual economies experienced severe exchange rate crises. Contagion, however, was generally limited by the existence of restrictions on capital movements that were at least marginally effective.
In the 1970s and 1980s, recognition of the inefficiencies associated with controls, along with newer technologies and the deregulation they fostered, gradually restored the free flow of international capital prevalent a century earlier. In the late twentieth century, however, fiat currency regimes have replaced the rigid automaticity of the gold standard in its heyday. More elastic currencies and markets, arguably, are now less sensitive to, and, hence slower to contain the misallocation of capital. Market contagion across national borders has consequently been more prevalent and faster in today's international financial markets than appears to have been the case a century ago under comparable circumstances.
As I pointed out before this committee almost a year ago, a good part of the capital that flowed into East Asia in recent years—largely in the 1990s—probably reflected the large surge in equity prices in most industrial economies, especially in the United States. The sharp rise induced a major portfolio adjustment out of then-perceived fully priced investments in Western industry into the perceived bargain-priced, but rapidly growing, enterprises and economies of Asia. The tendency to downplay the risks of lending in emerging markets, reinforced by the propensity of governments explicitly or implicitly to guarantee such investments in a number of cases, doubtless led to an excess of lending that would not have been supported in an earlier age.
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As I also pointed out in previous testimony, standards of due diligence on the part of both lenders and borrowers turned somewhat lax in the face of all the largess generated by abundant capital gains and all the optimism about the prospects for growth in the Asian region. The consequent emergence of heavy losses and near insolvency of a number of borrowing banks and non-financial businesses engendered a rush by foreign capital to the exits and induced severe contractions in economies with which borrowers and policymakers were unprepared and unable to cope.
At that point, the damage to confidence and the host economies had already been done. Endeavors now to block repatriation of foreign funds, while offering temporary cash flow relief, have significant long-term costs and clearly should be avoided, if at all possible. I recognize that if problems are allowed to fester beyond the point of retrieval, no market-oriented solution appears possible. Short-term patchwork solutions to achieve stability are presumed the only feasible alternatives. When that point is reached, an economy is seen as no longer having the capability of interacting normally with the international financial system, and is inclined to withdraw behind a wall of insulation.
It must be remembered, however, that the financial disequilibria that caused the initial problems would not have been addressed. Unless they are, those problems will reemerge.
As I implied earlier with respect to the nineteenth century American experience, there are certain conditions precedent to establishing a viable environment for international capital investment, one not subject to periodic systemic crises.
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Some mechanism must be in place to enhance due diligence on the part of lenders, but especially borrowers individually and collectively. Losses of lenders do on occasion evoke systemic risks, but it is the failure of borrowers to maintain viable balance sheets and an ability to service their debts that creates the major risks to international stability. The banking systems in many emerging East Asian economies effectively collapsed in the aftermath of inappropriate borrowing, and large unhedged exposures, in foreign currencies.
Much will be required to bolster the fragile market mechanisms of many, but certainly not all, economies that have recently begun to participate in the international financial system. Doubtless at the head of the list is reinforcing the capabilities of banking supervision in emerging market economies. Conditions that should be met before engaging in international borrowing need to be promulgated and better monitored by domestic regulatory authorities.
Market pricing and counterparty surveillance can be expected to do most of the job of sustaining safety and soundness. The experience of recent years in East Asia, however, has clearly been less than reassuring. To be sure, lack of transparency and timely data inhibited the more sophisticated risk evaluation systems from signaling danger. But that lack itself ought to have set off alarms. As one might readily expect, today's risk evaluation systems are being improved as a consequence of recent failures.
Just as importantly, if not more so, unless weak banking systems are deterred from engaging in the type of near reckless major international borrowing that some systems in East Asia engaged in during the first part of the 1990s, the overall system will continue at risk. A better regime of bank supervision among those economies with access to the international financial system needs to be fashioned. In addition, the resolution of defaults and workout procedures require significant improvements in the legal infrastructures in many nations seeking to participate in the international financial system.
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None of these critical improvements can be implemented quickly. Transition support by the international financial community to those in difficulty will, doubtless, be required. Such assistance has become especially important since it is evident from the recent unprecedented swings in currency exchange rates for some of the emerging economies that the international financial system has become increasingly more sensitive than in the past to shortcomings in domestic banks and other financial institutions. The major advances in technologically sophisticated financial products in recent years have imparted a discipline on market participants not seen in nearly a century.
Whatever international financial assistance is provided must be carefully shaped not to undermine that discipline. As a consequence, any temporary financial assistance must be carefully tailored to be conditional and not encourage undue moral hazard.
It can be hoped that despite the severe trauma that most of the newer participants in the international financial system are currently experiencing, or perhaps because of it, improvements will emerge to the benefit, not only of the emerging market economies, but, of the long-term participants of the system as well. Thank you, Mr. Chairman. I'm available for questions at your leisure.
[The prepared statement of Hon. Alan Greenspan can be found on page 398 in the appendix.]
Chairman LEACH. Thank you, Chairman Greenspan and Chairman Rubin. Did Secretary Summers say anything at this point?
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Mr. SUMMERS. No.
Chairman LEACH. Thank you, but we welcome you.
I have two questions, the first for Secretary Rubin, and it relates to the interrelationship of dollars, barter, and food. There are clearly implosions economically and in the agriculture community in the world's third and fourth largest countries—Russia and Indonesia—and the dollar that we've provided we know has been subject to some rather large elements of corruption especially in Russia. But with food disasters in Indonesia, because of a drought and Russia, because of different kinds of poor weather and blight, particularly potatoes, my question relates to a statute. We have a statute that's somewhat abstract called the International Economic Powers Act, and it's been used historically to put sanctions on countries. Is that a statute that you can use to open up emergency food assistance to countries in need?
Mr. RUBIN. That's a good question, Mr. Chairman. It has been our view, as you know, with respect to Indonesia that there should be humanitarian aid, and in fact we supported the World Bank in providing humanitarian aid. I think that that's something that we will be continuing to support and focus on its support with respect to Indonesia. We have not reached conclusions about where to go with respect to Russia, although, as I said, we support reform in Russia.
I don't know the answer to your question, but I think if there is a possibility of using that statute for that purpose that could be very useful. I don't know if Larry Summers knows anything about that or not, but I will tell you this, Mr. Chairman: if it has a possibility of working, that is a very useful contribution and we'll take a look at it.
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Chairman LEACH. Mr. Summers.
Mr. SUMMERS. I am told by our counsel behind me that—and we'll obviously look at this carefully—that it is his impression that there's nothing in that statute that would permit us to act without congressional authorization and appropriation for funds for any food assistance that's to be provided, but we will obviously study that very carefully.
If I might make just one very brief other observation. I think meeting food needs in these countries is crucial, but a lot of study of problems of food needs suggests that the problems very often go to hoarding in the distribution mechanism, and those in turn have to do with the consequences of currencies that are not viable. So, a great deal of what needs to be done if there is to be food availability is the establishment of sound currencies which takes us very much back to our central concerns here.
Chairman LEACH. My second question is principally to Chairman Greenspan, but also to the Secretary. There is an understanding that there may be discussions among G–7 parties on coordinated interest rate policies. Obviously, legislature is always tilted a bit toward lower interest rates, but I think it would be fair to say at this time that there wouldn't be any great criticism of the Administration if there was a movement in a lower interest rate direction, but would anyone care to comment on any coordinated approaches that may be under discussion?
Mr. GREENSPAN. Mr. Chairman, I think that I can safely say that at the moment there is no endeavor to coordinate interest rate cuts. I will say this: that we are in fairly extensive conversation among the G–10 Central Bank governors, and we are clearly exchanging views on all the various different aspects of our economies and our views of the overall international situation.
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Chairman LEACH. Would Secretary Rubin care to comment?
Mr. RUBIN. Not particularly.
[Laughter.]
Mr. FRANK. Mr. Chairman, would it be in order to ask for a translation from Central-Bankese into English at some point on the record today?
Mr. GREENSPAN. If I spoke in English, you wouldn't understand me.
[Laughter.]
Chairman LEACH. Well, I appreciate what you're saying, and I think the answer is that it's an open question.
Mr. LaFalce.
Mr. LAFALCE. Thank you, Mr. Chairman.
Chairman Greenspan, let me pursue the Chairman's question, but in a different way. You were Chairman of the Central Bank for the United States of America, not the Central Bank of the world.
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On the other hand, you are Chairman of the leading Central Bank in the world, and in your meetings with the G–10 Central Bank governors certainly the decisions that you and the U.S. Central Bank, for example, the Fed, make are going to have profound significance, and leadership, and give guidance to the Central Banks of the rest of the world. How do you balance those two hats that you really must wear?
Mr. GREENSPAN. Congressman, I don't think there is a balancing act involved here because, as I've communicated to this committee previously, our central mandate is to the economy of the United States of America.
Mr. LAFALCE. ''Which cannot forever be an oasis of prosperity in an increasingly integrated global economy,'' I think someone once said.
Mr. GREENSPAN. You've quoted me with some degree of accuracy.
[Laughter.]
The evaluation that we are required to make of the economy cannot be done without attention to what is going on in the rest of the world. And we are fully aware of the interaction between what goes on here and what goes on there. And, in a sense, there is such a thing as a global economy in that there is very considerable interaction. Indeed, harkening back to the opening remarks I made a few moments ago, the very sophisticated international financial system has pretty much assured that the international economic system is increasingly becoming integrated, and, indeed, the proportion of trade across borders is increasing faster than domestic consumption.
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So even though we at the Federal Reserve perceive that our actions must be focused at the end of the day on the American economy, we also recognize that there is no way that we can do that without significant awareness of all the interactions that are going on around the world, and what our actions do to the rest of the world.
Mr. LAFALCE. Thank you. Mr. Secretary—and let me also say, as I praised the Secretary and the Chairman of the Board, let me also praise Mr. Summers, our Deputy Secretary, because he has carried on so much of the work of the United States Government and the Treasury Department as a partner with Secretary Rubin.
Mr. RUBIN. Almost all of it, Mr. Ranking Member.
[Laughter.]
Mr. LAFALCE. I spoke with some degree of accuracy for you and some degree of accuracy for Chairman Greenspan, good.
Mr. Secretary, we must arrest the devaluation of the currencies that are taking place. We'll have to draw the line and our farmers are getting killed because they can't export because they're threatened with imports now that are much cheaper than they ever were before so that they can't compete. And that's just one small example.
Can we draw the line now in Brasilia, can we arrest any further devaluation? What can we do to help, say ''That's it?'' Not just for Brasilia but for MERCOSUR, and so forth, you know?
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Mr. RUBIN. Let me try to answer in a rather general way, if I may, Mr. LaFalce. Clearly if you look at what we and the IMF and others in the G–7 have done over the last year in the face of all of this, sound currencies have been absolutely critical, or soundness of currency has been critical in terms of an objective of our strategy. And in many cases we have, as you know, supported fixed-rate regimes. On the other hand, the question of exactly what exchange rate regime is going to be most effective in each situation is a pragmatic judgment that one has to make.
I think with respect to Brazil itself, Mr. LaFalce, the best answer I can give you is that Brazil has done a great deal with respect to reform. What happens in Brazil is obviously enormously important to this country—in Latin America—but also to this country. We have been very focused on this, actually for quite some time, but particularly over the course of the past week. I think it is probably premature to comment on specifics, other than to assure you that this has been the subject of intense focus through last week, the weekend, and up to the current moment. And to agree with your general comment about the extreme importance of soundness of currencies.
Mr. LAFALCE. Thank you.
Mr. RUBIN. Could Mr. Summers comment on that?
Mr. SUMMERS. I think it's obviously difficult to speak in more detail about Brazil going forward, but I would just add that I think since President Cardoso's election, the Real Plan has been of enormous significance in bringing about far-reaching and fundamental change in Brazil, and creating a kind of economic environment in Brazil that Brazil had not seen in many years, and that it has been our policy in the past to be enormously supportive of the Real Plan. And I expect that our actions in the future would be in the context of recognizing the enormous benefits that the Real Plan has brought, and the central role of currency stability in that Real Plan.
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Chairman LEACH. Mr. Bereuter.
Mr. BEREUTER. Thank you, Mr. Chairman.
I want to thank our three distinguished witnesses for being with us today, and helping us sort through this issue and the incredible array of problems that face us. Let me say preliminarily that I have always supported the authorization and appropriation of the IMF, but I have fundamental questions about the efficacy of what the IMF has been doing lately. I think, for example, in Thailand and in the Republic of Korea, they treated them like fiscal basket-cases, given the usual prescription. They were not fiscal basket-cases. I believe they complicated the problem there.
I would say with respect to Russia, Mr. Secretary, you said that, ''This summer the Russian government proved unable to adequately carry forward the necessary reforms. We knew there was a real risk.'' I would suggest there was almost a certain failure, a high probability of failure. I think our policy with respect to Russia is based on wishful thinking. I don't believe that there is a central government there as we know it today. The basic problem is one of governance to ensure that there is a functioning of democracy, that there is an opportunity for Russia to begin to integrate itself into the world system of market economies.
And I think there's a high degree of skepticism on the part of the Congress that any additional funds should go to the central government of Russia, because it's clear that a large part of it was squandered or stolen.
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And I noted with interest and appreciation the fact, Mr. Secretary, that you and Chairman Greenspan will be soon asked to chair a meeting of finance ministers and central bankers of the Group of 22 to expand the reach of our efforts to ''strengthen the international financial architecture.'' I think that's a good interim step, and I wish you well. I think it's very important, but it seems to me the world is so fundamentally different from 1944 that we need to have a total, a fundamental re-examination of the Bretton Woods institutions, especially the IMF. And I'm concerned that this look will be too conservative and too traditional, and that we need to have a very fundamental re-examination, whether mandated by Congress or something the Executive Branch tries to push in the world community.
I will invite comments on those points, gentlemen, but I would like to ask one other additional specific question. And it relates to some of the main line of criticism of the Fund's performance in Asia from people like Professor Jeffrey Sachs, that basically the IMF should have treated the crisis as pure panic, completely unjustified by the fundamentals. It, therefore, should have acted as a pure lender of last resort, making credit lines available to Asian nations without an insistence on major structural reforms. Is this critique valid in any part? What would be your reaction to that line of criticism that we are seeing enunciated now? Thank you.
Mr. RUBIN. You know, I'd like to, if I could, Mr. Chairman, just briefly comment on each of these. Let me just start with the last one. Dr. Summers could obviously comment at length on it. He was at one time a colleague of Jeff Sachs.
It is interesting there are those who criticize the IMF for having too much structural reform—like Jeff Sachs. There are many others who criticize them for having too little structural reform. And I think it makes an essential point here which is I think they—the IMF—sort of got it right. And I think these were very structurally focused programs. I think that the prevailing view, at least in my impression I think it's the right view, is that there were very serious structural problems in the interlink between banks and the corporate sector, directed lending and the rest that needed to be addressed. But it does suggest the complexity of the issues the IMF is dealing with.
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Let me run through your comments real quickly, if I may. On Thailand and South Korea, the fiscal programs, I think may have been somewhat more stringent than they should have been, but the fact is—the IMF, as you know, has adjusted these. And they now have in both countries allowing them to have larger deficits than, in fact, they're actually able to accomplish. But both of these programs were predominately, and I think rightly, or very largely at least, structurally oriented. It seems to us that that was right. You've heard Jeff Sachs' comments. And I think that the essence of recovery in these countries is dealing with these structural issues, as well as their macroeconomic questions.
In terms of Russia, it's a very complex set of issues. They clearly are enormous. And I agree with some of the things you said. There are enormous deep-seated problems in Russia that go into areas like corruption and the like that are deeply troubling. On the other hand, we have an enormous stake in Russia being successful, both for economic, but even more for national security reasons. I actually think we've been pretty realistic about the problems, but we have weighted very heavily our stake in success, and so we have been willing to take substantial risks.
I can't read my note on your—oh, I see, additional funds to Russia. Well, we discussed Russia. I think we are going to work very carefully and try and see if there is some way to re-engage with Russia in support of reform. But what you said is correct about the problems.
And I can't read——
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Mr. BEREUTER. Bretton Woods new rounds.
Mr. RUBIN. Oh, it might be too traditional, too conservative. Let me agree with your overall comment; however, I'm not quite as concerned as you are. I think we have, take the three of us and many others that we work with, I think we have a high degree of awareness of how much the world has changed over the time from, for example, when I first started in the investment banking business to the present date. I think if we sit down and talk further about it, I think you will see people whose vision, and point-of-view, and objectives have the scope and reach that you're referring to. A lot has been done in certain areas, but as the President said Monday in his speech, the reach needs to go much beyond that.
In terms of Jeff Sachs, I gave you my comment, but maybe Larry would like to add something.
Mr. SUMMERS. I guess I would just say, Congressman Bereuter, that I think this point the Secretary made about the degree of dissatisfaction coming in many ways from inconsistent perspectives is important to keep in mind. I certainly agree with you on the need for a profound review of the way in which the system operates. I don't think it is politically or financially or economically tenable for the incidence of major crisis to be as high as it seems to have been in recent years. And, therefore, I think a far-reaching look is warranted.
You, in quoting Jeff Sachs, referred to one of these issues, which is the question of lender of last resort financing. And there are certainly those who believe that there need to be much larger and credible, strong lender-of-last-resort institutions, disbursing larger amounts of money more quickly, with less emphasis on conditionality. There are also many people who believe that the source of these problems is insufficient conditionality, too much disbursement of money, and excessive moral hazard.
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One has to make judgments about what is right, but I think it is important to understand that on most of the crucial issues, moral hazard versus last resort, structural reform: too much or too little; the criticisms are in many ways such as to lead the IMF somewhere in the middle with critics on both sides. And I think we do need that profound look, but I think it's important to remember that.
And it is also important to remember the problem that is the reason there is so much distress. The reason these countries have IMF programs is because the markets created a situation in which they were facing economic calamity, and efforts have been made to palliate those situations with differing degrees of success. But I think it is very important not to confuse the treatment and the response with the underlying malady which was what brought them to the IMF in the first place.
Chairman LEACH. We've gone on fairly long in this question. It's a very important one. Chairman Greenspan wanted to comment as well.
Mr. GREENSPAN. I just wanted to point out, Congressman, back in early 1995 when we were confronted with the Mexican crisis and what I then characterized, as I recall, as a new twenty-first century-type of financial system which we really did not understand. The characteristics had evolved in very recent years, to a very significant, high-tech, sophisticated structure. And I said back then, and I would repeat today, that it's a long learning process of how this system works. We have learned a great deal, basically in the last couple of years, and obviously, with the most recent crisis.
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But it's also important to recognize that the learning experience that we were going through was also the same learning experience that the International Monetary Fund was going through. I think they misread the depth of some of the really fundamental problems that were involved in the crisis that evolved. Their actions were somewhat misguided in the early stages. But I think they learned a great deal. And it's quite important to distinguish at this particular stage whether or not we fund them at this point to go forward to try to resolve the existing crisis which we have, or basically to shut them down at this point and restructure them. A fundamental restructuring is unquestionably needed, and one need not go all the way back to Bretton Woods to recognize all the differences since then. You only need to go back four or five years.
When we and our colleagues in the G–7 and the G–10 and others who are interested are reviewing the whole structure of these institutions, it will be necessary for us to think of them in the terms of the context of how they best fit in and add value to this new international financial system that we have. And I see no way of doing it other than, as you point out, to start from square one.
Chairman LEACH. Mr. Frank.
Mr. FRANK. Thank you, Mr. Chairman. I would say to the Deputy Secretary I know the IMF has been criticized from both sides, but taking comfort in the fact that one is criticized from both sides really does not seem to me to be a very useful position. Almost everybody is going to be criticized from both sides. And so let me give you a consistent criticism, at least on my part, and part of the problem we have, I think, is there has been a tendency to look at this to some extent as a technical problem, and to particularly stress the important thing is to facilitate the mobility of capital without fully understanding both the social consequences in the short-term and the consequences of those consequences.
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I was especially pleased in what I thought was an excellent speech that the President gave on Monday to the Council on Foreign Relations because it did seem to me implicitly to promise some new emphasis. And in particular, the President said, on page 6 of the text, page 5, rather, which suddenly disappeared from my desk here, but what he said was if you did not pay attention to peoples' needs, the needs of people who are poor, the people who are getting hurt, not only is that going to be socially inequitable, but you're going to engender the kind of resistance that's going to make this impossible. And one thing that we have to be clear on is that we have had two goals.
Here is the exact quote: ''If we want these countries to do tough things, we have to protect the most defenseless people in the society. Wrenching economic transition without an adequate social safety net can sacrifice lives in the name of economic theory. And, I might add, can generate thereby so much resistance that reform grinds to a halt.''
And there has clearly been an insufficient recognition of that until recently, especially when you consider that we've been trying to do two things. We've been trying to get them to implement a market system, and also get previously authoritarian and repressive regimes to become democratic. So we're in the position of asking people simultaneously to implement democracy and begin by getting the electorates to do things that electorates generally don't like to do. And I think there has been insufficient attention to that. That's why I was pleased, again, by the emphasis in the President's speech.
And, Mr. Greenspan, in your own comment, I hope I'm not misinterpreting it or being too optimistic when you say on page 9: ''Transition support by the international financial community to those in difficulty will be required.'' What you've got to do is deal with the short-term social consequences. And I agree with some of the criticisms the gentleman from Nebraska made about the IMF, about being unduly austere. There was, I think, an insufficient recognition of the social pain being caused, part of the reason being, of course, is if your focus is on making investors happy in the near-term, yes, in the end, there will be more of the pie. But in the near-term the investors are going to get a bigger piece of the pie. An inadequate attention to that social consequence has been a problem. I take the President's speech on Monday to be a pretty firm statement that we are acknowledging and plan to correct these areas. But it's not just morally important to deal with these social consequences, it becomes politically important, both for those countries, and, frankly, to get the coalition you need here.
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One of the things that ought to be made explicit is the death of communism cost the IMF about 50 votes in the House of Representatives. The fact is if you can't scare people into voting for the international economic system, that took a lot of strength from the fear of communism. And an Indonesia that might have gone communist 30 years ago had more votes here than an Indonesia where that threat doesn't apply. So I think you need to put together a new coalition that pays some attention to those consequences.
And then one question in that regard, because one of the problems is the broader economy in the world, and there has been a lot of concern about the problems of deflation and liquidity. I was happy enough with what we got on the question of interest rates so I'm not going to ruin a good thing by raising it again. I'll leave well enough alone. I would like to say, Mr. Greenspan, I am now particularly happy that you've succeeded in the past in opposing successfully those in the Federal Reserve who wanted to raise interest rates. Tell them it's a good thing they listened to you in the past. But now the issue becomes beyond just interest rates. Do we have a need for more liquidity in the world? Is there a deflationary problem? Obviously, that exacerbates the social question as well.
And you've had Jack Kemp talking. And I've asked you this before, Mr. Greenspan, Jack Kemp and some others have pointed out, you've always put a lot of stock in the gold price, the gold price is now at a very low level it would seem. Is that an indication, along with other problems, dropping commodity prices, that in addition to the technical problems, the kind of flow problems, that we are in a deflationary period that requires some attention beyond some of these things we've talked about?
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Mr. GREENSPAN. I would certainly say that in East Asia, and increasingly in the rest of the world, deflationary forces are continuing to emerge. There's no evidence of which I'm aware which suggests that the process which began somewhat over a year ago has stabilized. And, indeed, I think this process clearly has been moving in our direction, and, indeed, as your colleague quoted me earlier, it is not credible to perceive that we can remain the oasis of prosperity that we have been, or for that matter, can Europe, with the rest of the world under increasing stress. So I think there's very little question that those processes are continuing. And I would certainly say that despite the still very solid American economy as of now, there are all really the first signs of erosion at the edges, especially in manufacturing.
To refer to the comments that the Secretary made very early-on, we are beginning to see risk spreads open up, which is a signal that the effect of the East Asian, and now the Russian effect, on our financial system has increased and, indeed, has been a factor in some of the——
Mr. FRANK. I appreciate, I just wanted to learn quickly the policy implications of that? Does that mean that there ought to be some effort to increase liquidity here and elsewhere? Or what are the policy implications of the fact that this is spreading?
Mr. GREENSPAN. The policy implications are that, as the Secretary said, that it is important to stabilize the system, because unless and until it gets stabilized, the erosion will doubtless continue.
Chairman LEACH. Mr. Baker.
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Mr. BAKER. Chairman Greenspan, I have equal concern about the residual consequences of our international instability on our own domestic market, but within the market there has been significant utilization of a relatively new investment strategy that I'm concerned may take on the implications of earlier identified problems from junk bonds to derivatives to whatever might be the concern of the moment. And that is with regard to the unregulated hedge fund market which is, at least from my view, allowing individuals and institutions to jump markets rather quickly. I am concerned that we do not have the ability to have a decent assessment of our hedge fund loss exposure. Do you feel that you have the ability or the resources available to you to adequately identify the risk exposure that might be in the market today due to hedge fund activities?
Mr. GREENSPAN. Let me say, Congressman, that hedge funds are very strongly regulated by those who lend the money in the sense that the major vehicle for supervision of lending is really from those who make the loans. When I was involved in the private sector and heavily involved in the banking industry, the amount of oversight of hedge funds was very large. In other words, there was a considerable amount of effort to understand what was a safe loan and what was not a safe loan. They are not technically regulated in the sense that banks are. But they are under a fairly significant degree of surveillance. And, importantly, I should point out, they have very great visibility, but they are not all that large in the total context of the system.
But why am I talking about this when the Secretary of the Treasury, who had to deal with them in much greater detail, will probably tell you far more than I can possibly do?
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Mr. BAKER. Thank you.
Mr. Secretary.
Mr. GREENSPAN. You're welcome.
[Laughter.]
Mr. RUBIN. Thank you, Alan.
Mr. BAKER. You tee that up well, sir. Thank you.
Mr. RUBIN. Yes, he really did.
Mr. BAKER. And let me phrase my concern in this regard. There have been recent announcements either for the current quarter or coming quarters of significant write-offs based on certain investment strategies. Although not clearly identifying hedge fund loss, it was my presumption that to a large measure this was a contributing factor.
Mr. RUBIN. I gather—there's an article in the New York Times today, I haven't read it yet, but it talks about large hedge funds losses. I think what the Chairman said is basically right. Hedge funds and other bodies of money of that sort are, in effect, regulated by the creditors. Of course, that assumes the creditors are careful. I think one of the problems you have when in a time like this, we have had five, six, seven years of good results and profit margins are being squeezed in a lot of areas, people who extend credit tend to get a little less careful. And I think that's one of the problems in our system.
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And I think the much broader question actually that you very rightly raise is are there things that can be done in the system that will create incentives for extenders of credit, and for that matter all sources of portfolio capital as well, to maintain the kind of rigor with respect to analyzing risks that they need to maintain if our system is going to work with the discipline that the Chairman was talking about? I actually think that's a very serious issue, and a very serious matter that we need to look at in the context of Mr. Bereuter's correct call for a thorough re-examination of the system.
In terms of unregulated flows of capital from hedge funds as a more general matter, I think I'd agree with the Chairman. I think the effect of those flows, though they can be substantial in some instances for a short period of time, probably has been substantially exaggerated. But I do think the whole question of flows of capital is yet another question, a legitimate and important question to be part of the kind of examination we talked about.
Mr. BAKER. My only follow-up at this point is that the derivatives transactions were not inherently bad. It's only when the derivatives trading partners were not fully informed as to the risks they were assuming that we saw significant losses. And given the fact that we are in a particularly positive earnings environment, at least recently, I'm concerned that perhaps a little exuberance in the marketplace may result in hedge funds being improperly invested. That was my point. Thank you. I yield back to the Chair.
Chairman LEACH. Well, thank you for that very interesting question.
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Mr. Kanjorski.
Mr. KANJORSKI. It was interesting to hear one of the Members of the committee, Mr. Greenspan, talk about your ''bankerese.'' It is sometimes difficult not only for Members of the committee to quite understand what you're saying, but I'm sure the American public.
One thing that disturbs me in the Asian situation is that when the second largest economy in the world, Japan, seems to be politically paralyzed and not realizing how severe their economy is. I was listening and reading some reports recently that defaults now are somewhere about 30 percent on performance of. And that to do a RTC bailout would be somewhere in the nature of trade in dollars which would represent about 10 percent of all the Japanese savings of the Japanese people. And all those factors being true, and that's a factor of about eight times more severe than what our savings and loan disaster was here which was ten years ago. And there still seems to be in Japan a political paralysis, either because people don't understand or they still have a good feeling as to the nature of their economy relative to other economies of the world. That being the one factor.
And then drawing back to the United States, I now tend to understand what our problem is. We're not too far away from the Japanese people, it seems to me, in terms of all the IMF funding is just a tool, just a partial tool, that obviously this Government needs, and then certainly the impact nations of the world may need. It seems at this point it's very important for our central banker and our Secretary of the Treasury to stand up and answer some very direct questions to the American people so that as we prepare to leave these hallowed halls in the next three weeks, someone should have to answer the question: Would it be irresponsible for the Congress of the United States to recess for re-election purposes without passing IMF reauthorization?
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Mr. GREENSPAN. As I said before, the IMF really requires a fundamental review in all of its aspects, but not now. We need the structure of the IMF and its funding procedures and its conditionality because that's what we've got. If you have to go to work in the morning and all you've got is a bicycle, and you think you want a limousine, a bicycle is better than nothing. And it may be that the IMF is a bicycle. It will work. It will get us there. It won't do it as well as I think it should in the future, but the failure to authorize the requests that are being made to fund the IMF, considering the context of the type of problems which we have in the rest of the world, I think would be a serious mistake.
Mr. KANJORSKI. Mr. Secretary, do you want to tell us whether it's irresponsible for this Congress to go home without funding, or authorizing the funding for the IMF?
Mr. RUBIN. Well, let me just identify with what the Chairman said. There obviously are a lot of issues with respect to exactly what the IMF does—how it should function and what its programs ought to be. I actually do think on balance they have done a good job in the face of extremely difficult circumstances. But I also agree with the Chairman, there's a lot of work to be done. I think it would be critically against the economic interest of the United States for Congress to go home without fully funding the IMF.
Mr. KANJORSKI. I appreciate that. We're having such a difficult time it seems to me. I've been home in my district over two weekends now talking to an awful lot of people. It seems so many unimportant things are affecting peoples' attention as opposed to what I would consider probably our greatest international crisis, financial crisis that's existed in my lifetime. And we're almost sitting here fiddling while potentially the spark is starting to take place around the world. So for the benefit, we have votes on this committee for IMF funding. We have a lot on one side of the aisle in the House of Representatives, but if need be, we would make this a political issue. The American people have to tell their Representatives they're going to hold them responsible for a financial and economic crisis existing in this world if they don't act responsibly before we adjourn this Congress. Would that be a reasonable conclusion I could draw?
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Mr. RUBIN. I'd like to stay out of the politics if I could and stay with the substance. But on the substance, I agree with the Chairman. I think while there are a lot of issues to be addressed, it is critically important in this context to get full funding. I agree with the Chairman on that. It's critically important in the interest of American workers, businesses, farmers, and our economy more generally.
Chairman LEACH. Thank you, Mr. Kanjorski.
Yes, Mr. Bachus, who by the way has chaired a very serious hearing on part of this subject matter. Spencer.
Mr. BACHUS. Thank you, Mr. Chairman.
Secretary Rubin, I looked at Sunday's, September 5, New York Times. Let me quote from that, it says: ''In reference to the speed at which hundreds of billions of dollars have flowed into and out of emerging economies,'' Secretary Rubin was quoted as saying, ''. . . the inflow of money into those economies occurred because 'investors got progressively less rigorous about risks'. '' Is that true?
Mr. RUBIN. Well, if that's what it says. When you say, ''Is it the truth?'' I'm sure it's true if that's what it says. Let me tell you what I think. I think the Chairman, and to my recollection, Dr. Summers, said the same thing. I think the large flows of capital that are going to developing countries in the global financial markets are a source of great strength in our financial system and have been enormously helpful and beneficial to many of these countries. I think the problem is not the large flows of capital. I think that's good. I think the problem is the combination of things the Chairman said, which is countries that really aren't prepared to receive them and use them effectively. And the problem that I alluded to a few times, and this is always true in markets—I've been involved in markets for a long time—when you've had prosperity for a while, people get careless with respect to evaluating risks. And then it isn't just a question of large flows, but it's excessive flows. And that's the issue that I was focused on.
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Mr. BACHUS. And I did not take it as you saying that the flows of money were necessarily in and of themselves bad. In fact, I would take it that we'd all say that they can be very economically beneficial when there are flows of capital. But I think what you were saying, maybe I'll give you my characterization, that there was a flow of money without investors being sufficiently rigorous concerning risks.
Mr. RUBIN. Yes, too much of the flow had that characteristic, exactly.
Mr. BACHUS. Now, with that in mind, doesn't that raise some serious questions about the IMF reducing these risks?
Mr. RUBIN. Mr. Bachus, I think—look, this whole question of moral hazard, which is what you're raising, is a very important, I think, critically important question as we get into the area of what the system should look like. And I think that you're absolutely correct in that. I have said on other occasions, I think I've even said in testimony, and I'll say it again: I personally wouldn't spend a nickel to help a banker or an investor if they're having difficulties with respect to investments they've made. But I think this is really a different issue. I think this is a question of trying to help countries, and not predominately because of concern for those countries, though we do have that, but because of its effects on us. And as a byproduct of that, we are, in fact, helping investors and creditors. And, in some cases, people who, because of their carelessness, don't deserve to be helped. And I think that is a problem, and I think it is a problem that needs to be addressed. But I at least don't think that we should take the risks of the crisis that now exists and the risks of not dealing effectively with that because of this problem, though I think this problem clearly exists and needs to be addressed.
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Mr. BACHUS. And Chairman Greenspan, would you like to comment? Does that appear to work at cross-purposes when you have people investing without assessing risks sufficiently and then coming in and taking action which relieves some of that risk?
Mr. GREENSPAN. Yes, Congressman, I don't think there's any question that we think that moral hazard is potentially a very difficult problem, and, indeed, a very counterproductive type of lending if it becomes a major issue. The trouble, unfortunately, as the Secretary said, that what we're given is the ability to, one, simultaneously support an economy at a certain level of activity, and, as a consequence, partially bail out the mistakes of foolish investors, or allow that economy to go down, punishing the investors as indeed they should be punished, but at the same time creating punishment to those who really don't deserve it, or those who are really innocent bystanders. And, secondarily, it has a major contagion effect in other parts of the world, which, on balance, puts us in the very odd position of we don't have that choice. There is no way to be of assistance in an international framework without creating some moral hazard.
As I said in my prepared remarks—I said, ''to give assistance without unduly increasing moral hazard, we have to recognize we have no way of fully eliminating it. Just keeping it at a minimum is all we can effectively do.''
Mr. BACHUS. Chairman, let me have one follow-up question then. Let's just suppose that we do say it's necessary to prop up these economies—I'm using your words—''support these economies.'' I've always heard that money is the way that economies keep score. I mean, investors, or speculators, or corporations, or economies, or even the world economy, they keep score with money. And decisions affect money. Risk affects money. Instability affects money. Uncertainty affects money. Now, money is going to move back and forth based on a lot of factors, but it is really going to move back and forth based on just a temporary infusion of money into an economy?
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Isn't what is driving that money in or out of, say, Russia, is corruption, or inefficiency, or uncertainty, or instability of the government, and won't that continue? And the fact that we have a short-term fix, won't that just simply delay the process?
Mr. GREENSPAN. Congressman, you are raising the issue of the types of considerations that are required before you make liquidity loans to nations. That is, the basic purpose is to recognize that the loan will do some good. And it usually is the case that it is observed that the company, if it's a company loan, or an economy, or a Central Bank, that the economy is essentially illiquid. If additional temporary funds are made available, the economy, or the bank, or something can be liquified and restored to health.
But merely giving money for money's sake is a terrible mistake for exactly the reasons you're suggesting. It will, if improperly done, continue the imbalances in the system, will create nothing of a positive nature of which I'm aware, and it's very important to make certain that when you lend, that it be done correctly. Because if you lend poorly, you create even more problems than you had before.
Mr. BACHUS. That is why I'm so concerned about Russia and Japan. Maybe the Japanese government is going to move. But in Russia, we have a new government, which may be worse than the old government and we don't see any promise of fundamental change.
Mr. GREENSPAN. Congressman, remember that the Japanese situation is really quite a different one in a sense that they don't need international funds. Their problem is a corroding banking system in which yen capital, deposits, and assets are their difficulty.
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And what they need, as they fully understand, is to effectively clean out the nonperforming loans and replace them with taxpayer funds. It's essentially what we did in the savings and loan situation. It's most unfortunate that taxpayer funds are required to do that, but you get to a certain point, as we did in the savings and loan situation, in which there is no alternative. I think the Japanese recognize that.
They don't need money from the IMF, from us, from anybody else. Their problem is not dollars, or Deutschmarks, or Swiss francs; it's yen. And yen they can produce at will. It's a political, not an economic, problem.
Mr. BACHUS. I appreciate that. I'd just like to say—this is not a question—but I think it's important for the committee to bear in mind that not all these economies are the same, not all these crises are the same, and not all these markets are the same. So we do have to distinguish, as the Chairman has so well done. Thank you.
Chairman LEACH. Thank you, Mr. Bachus.
Mr. Kennedy.
Mr. KENNEDY. Thank you very much, Mr. Chairman. First of all, I want to welcome the three witnesses before the panel. The three of you have gained a great deal of acclamation, deservedly so, from not only the Congress, but from the people around the country and the world for the tremendous growth that the world economies have experienced over the course of the last several years. And there aren't three people that have worked harder and perhaps received more credit for the ride up. And now you're suffering from the fact that the elevator's now going down a little bit.
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There was sort of a fundamental policy that you put in place that said that open markets plus free trade would equal prosperity for the American people. And if we did that it would create prosperity for people overseas. Then we would have democracy and things were working rather well.
We're now, interestingly enough, in a situation where you're back here before the committee, when I recall just a few months ago when we were talking about a loan package for the Far East countries. We were talking about the fact that the IMF was reasonably effective, that we were going to put into place these loan packages, that we were going stem the outflow of capital that was taking place, and stop the collateral damage that was supposed to be taking place. Some of us had concerns about it. Now you're in here saying, ''Well maybe the IMF isn't working as well as it should, or maybe the World Bank isn't working as well as it should.'' We're nibbling around the edges of this thing.
I really just wonder, what do you mean—what is it that you recommend that we do if it's not free trade? Are we saying that we want the markets—that you want the G–8 to move in and intervene in these marketplaces, and stop the flow of capital out, thereby protecting some of these interests, Mr. Greenspan? We heard George Soros in here talking about some kind of credit facility. When Jeff Sachs made a similar proposal a few months ago, it was ''dissed'' [sic] pretty badly by a couple of you.
So I'm just trying to understand what it is that we want to do differently. What should the IMF do? What should our policy be when we have a downturn in these economies, and you see everybody trying to get their money out, without having to suffer additional damage?
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Mr. GREENSPAN. I have been observing over the last six or seven months, maybe more, all sorts of solutions to what is undoubtedly a very well researched problem. The best way to generally characterize it, perhaps somewhat unfairly, is ''we must act now.'' And that's page 1 right on the front page of the article. Then, on page 2, ''OK buster, you're on your own.'' Unfortunately, this is an extraordinarily difficult issue. And if there were very simple means to come to grips with it, I think it would have been done long ago.
As I indicated earlier, we have a substantial new, very sophisticated, and very effective international financial system, which essentially results from the major increases in microchip technology and telecommunications technologies, which are really awesome and overall, properly functioning. That is a very major contributor to standards of living, as indeed we have seen over the last decade or so.
What we have effectively, and which we will be focusing on in some considerable detail with our colleagues in the G–7, or the G–10, or the G–22, whichever particular forum we're involved in, is how to address the problems which have clearly emerged and were not readily visible in the very early stages of the development of this new international financial system.
Mr. KENNEDY. Mr. Greenspan, that was terrific. But you didn't even come close to answering my question.
[Laughter.]
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That was as big a wiggle as I've seen around here in some time. Come on, just give me a little something.
Mr. GREENSPAN. Let me put it to you this way. I have a number of ideas, which I hope, some will be feasible. I do intend to discuss them with our colleagues and hopefully vet them through fairly detailed processes. I think it would be a mistake to just conjecture in general.
Mr. KENNEDY. I wasn't thinking it was conjecture, Mr. Greenspan, but whatever. I kind of get where this is going. Can I get anything more?
Mr. GREENSPAN. Let me just say that—I know I can speak for my three colleagues—we're really going to miss you—I personally.
[Laughter.]
Mr. KENNEDY. Mr. Greenspan, what's happening to your nose?
[Laughter.]
Mr. SUMMERS. But he certainly does believe that it won't be the same without you.
[Laughter.]
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Mr. GREENSPAN. No, the truth of the matter, Joe, is I really will miss you.
[Laughter.]
Mr. KENNEDY. And I you, Mr. Greenspan. Thank you very much.
Mr. RUBIN. Could I add just one sentence to that, Mr. Chairman?
Chairman LEACH. Mr. Rubin, if it's gracious.
[Laughter.]
And not too wiggly.
Mr. RUBIN. Thank you. I identify with everything that the Chairman said, whatever it may be that he did say.
[Laughter.]
Mr. GREENSPAN. I'm just trying to be helpful.
[Laughter.]
Mr. RUBIN. But let me say that I don't think that, Mr. Kennedy, any of us have one iota of question about the relative advantage of a market-based system, if that's what you are suggesting in your question.
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I think the issue, at least for all of us—I don't want to speak for anybody else, I'll speak for myself—but I think this is correct for all of us—is how do we put in place the kind of international architecture that will avoid these sorts of convulsions which then create all kinds of problems for a market-based system and run the risk, which I think the Chairman mentioned, of people turning against the system.
Because, I at least—and I'm reasonably confident that I speak for the other two as well—believe very deeply in a market-based system. But in order to sustain it, and have it work most effectively, and not run the risks of substantial backlashes, we have to look not only toward the immediate issue, which involves the IMF and all the rest we talked about, but changes in the architecture so it's better able to prevent and deal with these sorts of problems.
Mr. SUMMERS. Thank you. If I could just add briefly, I think the President in his speech yesterday pointed to a number of the directions. Frankly, when we testified before you several months ago, we made it clear that we were struggling, as the institutions were, to contain these problems to the maximum extent possible and that we were quite uncertain as to what the future would hold. And certainly there has been substantial spread since that time.
I think first, the emphasis on growth is imperative at this stage in the United States, in Europe, and very much in Japan—that's the first part.
Second, I think we have seen in the Asian countries particularly, that the web of problematic debts held by problematic companies to problematic banks is something that is less amenable as it has grown to a case-by-case solution than one might originally have hoped. And that more comprehensive approaches are needed, and are needed quite quickly, quite possibly with increased international financial support, and that that has to be a priority going forward.
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Third, I think we have seen that the problems are more severe than one had first hoped that they would be, and that in that context, adjustment of IMF programs is appropriate. And those adjustments have taken place. And in that context, substantially greater attention to the social safety nets become important, and that's why the President called for significantly increased funding from the multilateral development banks.
Fourth, it is important that we find the best ways, and this goes back to the IMF increase and it goes back to the way IMF functions, to assure that what the Chairman referred to as transitional financial assistance can be available, and it's important that we put that in place.
Then, I think it is important that we focus on making sure that these kinds of events don't happen again. And I think the crucial elements that are necessary, though they may well in total not be sufficient, are a substantial increase in transparency so people know what they're lending to and markets can respond; a very substantial increase in the improvement in bank supervision the Chairman emphasized in his testimony; and improved approaches to combining public and private sector efforts when crises happen.
There are to be sure more fundamental questions—whether there should be the capacity to provide transitional finance; whether there should be, as Congressman Bereuter's quotation suggests, more last resort financing capacities that will have to be worked through over time. But I think those are some of the areas that are most important to pursue in the short run.
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Mr. KENNEDY. I appreciate it. Thank you very much. I'll miss you too, Mr. Chairman.
Chairman LEACH. Mr. Castle.
Mr. CASTLE. Well, thank you, Mr. Chairman, and I would assume that the reason for this hearing is partially to discuss the world economic turmoil, but the other part is to try to jump start the IMF funding in Congress, which everybody seems to be concerned. I really am becoming concerned about what effort is being made and where we're really going. And even what I'm hearing here, and have heard at other times—I believe that the House should approve full funding for the IMF. I think it should be linked to significant reforms and that's part of a statement which I have submitted. And yet I hear some resistence with respect to that here.
But it's a little more than that. I mean, I think if we're going to do this, if we're going to make these reforms, and even though Secretary Rubin believes that the IMF's done pretty well, and others may feel less inclined that way—Jeffrey Sachs doesn't think they've done well at all—obviously he's not here—but in any event, if we're going to do this, we're going to have to do this with the full engagement of the Executive Branch, as well as the full engagement of the Legislative Branch, which may not be anywhere near as sophisticated on this subject as all of you are.
I read with interest though, in the New York Times, in spite of all this urgency of replenishing the IMF, the President has yet to make personal calls on this. Of course, it's long past due he would do that. It's been several years now, I guess three-plus years, since Mexico—and there's some criticism over it then. Likewise, three years after the Halifax II Initiatives for reforming the international financial architecture took place, we're still looking forward to the Administration's presentation of benchmarks, or concrete proposals.
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And today, Secretary Summers said: ''We need a profound review of the way the system operates.'' Chairman Greenspan said, ''We're going through a learning process in the IMF. Fundamental restructuring is needed,'' and then said, ''. . . requires a fundamental review in all of its aspects, but not now.''
This particular piece of legislation that we're dealing with—in this crisis, we're dealing with analysis that's been going on for a matter of one-half-a-year or more in terms of the Congress itself—actually, more than that, in terms of a crisis—and yet the changes which a lot of Members of Congress are looking for, which we're hearing about from our constituents in terms of how the IMF is working, don't seem to be very rapidly forthcoming and I don't see full engagement from the White House in terms of this IMF funding either.
So I get concerned about all of this. I mean, it's very nice to say all these things need a full review and everything, but is it that you don't really believe they need a full review, you just want to tell us that, so we'll vote for it and go away? I don't know. I don't mean to be cynical when I say that, but I'm getting concerned. I really am getting concerned that we keep hearing that this is needed, but nothing really, in my judgment, seems to be forthcoming. I throw all that out to you to handle any way you wish, but I really think we do need to do something and I hope that is your plan. I'd like to hear about it.
Mr. RUBIN. Mr. Castle, let me take a first shot at that, and then others may wish to respond. In terms of—this is not necessarily the order that you did it in—but in terms of the full support of the White House, or involvement of the White House with respect to the IMF, I think as somebody said—I don't remember who in the panel said it—the President gave a very, very thoughtful and serious speech on Monday, at the Council on Foreign Relation in New York, on the issues that the world now faces. And the context of that speech spoke very, very strongly about IMF funding, and that's something that he has done in innumerable statements going back over the course of this debate on IMF funding.
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In terms of reform, I have a feeling that our concern about the kinds of issues that the Chairman talked about, the conflict between moral hazard on the one hand, and the need for funding, on the other hand, if we're going to avoid collapse of countries and all the impacts it has on us, is at least the equal of that of people like yourself, who I know are very much committed to the issue of reform.
I think that it's the complexity of these issues is such that this is not going to happen overnight. I will tell you that over the course of—it's almost a year now—I think it's roughly a year now—since we set this—maybe a little less, actually, since we set this G–22 process in place—there has been an enormous amount of work not only in this country, but around the world on these issues.
And it is our hope, at least, and our expectation, that within a month or a month-and-a-half or something like that—I guess within about one month—we will have pulled together the strands of that work. Having said that, I don't think that work reaches nearly far enough in terms of the kind of thing that Mr. Bereuter is talking about, which we all agree with.
I don't think that there is any lack of commitment though—any lack of commitment at all, Mr. Castle, because the commitment is grounded in our own concerns and I think our concerns are no less than yours about the problems in the system. I think actually the Chairman expressed them very well.
In terms of reforms with respect to this legislation, we have worked with this committee, we've worked with various Members of the Senate, other House representatives, and so forth. I think the key with respect to the reforms is to have provisions that look toward doing the kinds of things that are sensible, and you all came with a whole—I think at least, a very good program in this committee. But it can't be done in—at least I would suggest—that it not be done in such a way that in effect moots the provision of the money. Because the international system needs this liquidity and it needs it now.
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And that's the kind of thing that we did work through with this committee, particularly Mr. Leach and Mr. LaFalce. But let me assure you, unequivocally and without reservation, that we are as committed to this as the kind of commitment that you've just expressed in your statement.
If I missed anything, I apologize, but I think that covered your points.
Mr. CASTLE. Well, I appreciate that. And I don't doubt liquidity now. I understand that we do need to deal with the aspect of this at this time. But my problem is I've been sitting in these hearings for a few years now—my own hearings, my own subcommittee—and I just sort of keep hearing about what we're going to do, and I haven't personally seen it all. And I am concerned about the future, and your answer does reassure me. You guys do a great job. But at some point we've really got to start moving on this.
Mr. RUBIN. Let me suggest something. As you don't doubt the need for the funding, we have zero doubt—well, I have zero doubt about it, and I think we all have zero doubt about the same concern that you've expressed. I think it wouldn't be a bad idea if we sort of gave you a little briefing as to what we've been doing in this Halifax II process. I think you'll find it both useful and interesting in response to the kind of things you're talking about. Though let me assure you, there's a lot more that needs to be done to reach the objective the President set forth on Monday, which is a more far-reaching look at the issues around the global architecture.
Mr. CASTLE. Thank you, Secretary Rubin. I yield back, Mr. Chairman.
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Chairman LEACH. Thank you. Mr. Sanders.
Mr. SANDERS. Thank you, Mr. Chairman. You're probably not going to miss me, but I think I'm coming back.
[Laughter.]
Mr. RUBIN. And Mr. Sanders, we look forward to it.
Mr. SANDERS. Mr. Chairman, in all due respect to my friends Mr. Greenspan, Mr. Rubin, and Mr. Summers, their testimony, which is similar to testimony that we have heard from them in recent years is coming from an ''Alice in Wonderland'' perspective. It just doesn't have anything to do with reality.
Mr. Chairman, whether anyone likes it or not, and I hate to break this to you, the IMF has failed and failed dismally. Given the horrendous record of the IMF in making life worse for the people of Mexico, worse for the people of Asia, worse for the people of Russia, not to mention all of the austerity programs in Africa and Latin America, and the misery that those programs have caused, why in God's name would anyone want to continue along the incredible path of failure that has been the record of the IMF? That, to my mind, would be insane.
Mr. Chairman, that's my view. But let me mention to you and quote the point of view of a number of other people whose opinion is not normally mine. This last Sunday's New York Times—and I quote, ''It's only a bit of an overstatement to say that the free market, IMF, Bob Rubin, and Larry Summers' model is in shambles,'' said John S. Wadsworth, Jr., who runs Morgan Stanley's operations in Asia.
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According to a Wall Street Journal editorial from July 20, 1998, ''The IMF helped create the very crisis that Mr. Camdasu he now needs more money to solve.'' And the Wall Street Journal, not noted to be a progressive organ that I have a lot in common with, has constantly talked about the failure of the IMF and the issue of moral hazard.
Now let me quote from a very important letter that we received in Congress from 126 delegates to the Mexican Congress, from the PRD party, the second largest political party in Mexico. ''Contrary to the view promulgated by the Clinton Administration and the U.S. media, the packaging of $12.5 billion from the exchange stabilization fund and $17.8 billion from the IMF to bail out Mexico, benefited only foreign investors and a small group of already wealthy Mexican investors, while wreaking havoc on our national economy.''
[The letter referred to can be found on page 366 in the appendix.]
A letter from 140 American and international environmental groups, labor unions, and development organizations, says, ''The disastrous impact of IMF-imposed policies on workers' rights, environmental protection, and economic growth and development, the crushing debt repayment burden of poor countries as a result of IMF policies, and the continuing secrecy of IMF operations provide ample justification for denying increased funding for the IMF.''
[The letter referred to can be found on page 369 in the appendix.]
Let me say a word about Russia—poor, tragic Russia. When communism fell in 1991, the Russian government received the attention, and the policy guidance, and $20 billion from the IMF. And it is fair to probably say that never in the modern history of this world, has one country which started off as an industrialized nation with an inefficient economy to be sure, never before have we seen an economy decline in seven years, like the Russian economy has declined under the guidance of the brilliant advice of the IMF, not to mention $20 billion in taxpayer money. And I don't have to tell you, you know that. This is a country that used to manufacturer. They don't do it anymore. Their children are hungry, their old people don't receive pensions, they used to produce food, now they import food. But meanwhile, they now have a handful of billionaire oligarches who have made a fortune illegally, having a substantial role in running that country.
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So, Mr. Chairman, it is fine for all of us in a very congenial way to be laughing and chatting about what's going on, but I think we are blind not to recognize that the IMF has failed, and while we do not, and must not, turn our backs on what's going on in this world. And please do not hear me to say that.
And I think, Mr. Chairman, your suggestion about thinking about providing food to Russia when this winter is coming, is a very important suggestion. We must not turn our backs. But any major league manager that has a pitcher who's won 3 games and lost 20, you know what you say to that pitcher? ''Thank you, you're going down to the minors.'' We're trying a new strategy; your strategy has failed.
So I would simply like to ask Mr. Greenspan, or Mr. Rubin, or Mr. Summers, how, given the horrendous record of the IMF in Russia, in Asia, in Africa, in Latin America, and all the suffering that it has caused to poor people, while rich people in almost every country have become richer, how with a straight face can you come before the taxpayers of the United States and say, ''Hey, we want $18 billion to continue this failed policy''? Mr. Greenspan? Mr. Rubin?
Mr. GREENSPAN. Congressman, if we agreed with your appraisal, I think we would agree with your conclusion. I think the problem is we don't agree with your appraisal.
Mr. SANDERS. Yes, you think that the IMF has been successful in Russia after $20 billion and guiding that country since the fall of communism?
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Mr. GREENSPAN. I think I stipulated the conditions under which I think they have failed or succeeded. I would not characterize the IMF does anywhere as an unmitigated success, but I scarcely would conclude the wholly negative view which you have adduced.
Mr. SANDERS. Mr. Greenspan, your testimony goes around the world very quickly, and I think that maybe the people of Russia today who are suffering so terribly, who have seen such a major decline in their economy through IMF guidance over the last seven years, would love you to tell us, and tell them, about the successes of the IMF in Russia.
Mr. GREENSPAN. I would say that the IMF had very little to do with the decline that existed in Russia. I think that if you start off with a centrally planned economy in which a goodly part of what they are producing is not available to be sold in the market, that very rapidly dissolves.
I'm not arguing that they moved from a centrally planned economy to a free market economy. That's scarcely the case. I've argued elsewhere that indeed the type of markets that they have is scarcely the type that we support, that is, a rule of law, and an institutional structure which enables exchange to be viable, and production and productivity efficient. Russia has scarcely been able to do that. And I would suggest to you that if the IMF never existed, we'd be looking at very much the same sort of problems that they have.
Mr. SANDERS. But we put $20 billion of IMF money into Russia. My next question is one that has not been—just one more question, Mr. Chairman. I think others have had as much time. And this is a perspective that we're not hearing too much from this committee today.
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Chairman LEACH. You're true on the perspective, you're true that others have gone over. You're over about ten minutes. We have a lot of Members. If you could ask it very briefly.
Mr. SANDERS. Sure. We've learned recently through the subcommittee that Mr. Bachus is the Chairman of, and I'm the Ranking Member, that in fact, despite all the resolutions and amendments passed by the United States Congress urging our representative to the IMF to use his or her voice and vote to protect workers' rights or moral hazard, guess what? We have learned that our representative never asks for any votes at the IMF, and virtually all of the important decisions are taken without votes. Now what does this tell about IMF and the Treasury Department's respect for the will of Congress? Mr. Summers, or Mr. Rubin.
Mr. RUBIN. Let me, if I could, respond to that, Mr. Sanders. I think actually it makes the point in the opposite direction from that you've suggested. There are very few votes taken. Most of this is resolved through informal conversation and discussion. No, that's precisely the point. And it's voice and vote. And let me assure you that we are exceedingly mindful of Congress' directions with respect to the use of the voice and vote, and have used that voice very powerfully in the consultation.
So that while it is true, relatively few of these decisions reach a vote, we are much more effective on behalf of that which Congress has directed us to do through a consultation process in which we can exercise intellectual and moral suasion than we are in a vote, where we're only 1 of 182 nations, although we, I think, have something like 18 percent of the vote.
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Mr. SANDERS. But we have veto power. Can you give us that discussion about our role, or is that closed discussion?
Mr. RUBIN. Excuse me?
Mr. SANDERS. Can you provide us that evidence—the testimony—about the role that we play within these IMF discussions, or is that closed information?
Mr. RUBIN. We would be happy to come and discuss it with you, if you'd like.
Mr. SANDERS. But it's secret information, it's not published.
Mr. RUBIN. Let me say, we are very much in favor of increased transparency in IMF, if that's your point. We agree with that.
Mr. SANDERS. Thank you.
Mr. RUBIN. But we're also very happy to come and discuss the issue with you.
Chairman LEACH. Mr. Lucas.
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Mr. LUCAS. Thank you, Mr. Chairman. And gentlemen of the panel, I'd like to state for the record, since we're on this topic, that probably contrary to the expectations that perhaps my wife, my mother-in-law, my opponent, I do intend to be back here next year also.
[Laughter.]
That said, for the sake of my constituents who may be watching this at 3:00 a.m. in the morning, since we're here to examine the implications of economic stability, let's focus for just a moment on those bystanders here at home, and gain your insights if you could for a moment. I know there's a tendency out there to say that this is all high finance mishmash, and it's irrelevant to the day-to-day citizen.
But just from the perspective of the impacts that it has on real people out there, if by example you continue to have instability, or worse instability, in places like the Western Pacific region countries, or East Asia, as an example, you impact their consumers, their ability to acquire the goods and services they need, literally, their demand for products, as in perhaps agricultural goods.
That being done, there is a direct impact then on countries that produce for export agricultural goods or other goods that potentially go to those regions. So you have a reduction in the demand for products from countries like the United States. But isn't there also another side effect that countries that compete for those agricultural sales, who might be more dependent on agricultural sales, then see the values of their economy decline, their currency values decline, their position to compete enhanced? Aren't these kind of scenarios reality out there if we just let things run their course by themselves, so to speak?
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Mr. GREENSPAN. I don't think there's any question that that is correct, Congressman. Just take the wheat market, for example. We compete with both Canada and Australia for the world wheat market, and it's fairly apparent that as they are also major commodity producers and have been affected quite significantly in the sense that their exchange rates have fallen relative to the American dollar, and their cost structure has gone down relative to ours.
And their ability to compete in the wheat market is very evident to our wheat growers, who have clearly been most concerned about the decline in overall demand in East Asia, which has taken a big chunk out of world demand, and is very clearly affected in exceptionally low prices, not only of wheat, but of corn and soybeans. In fact the whole structure of agriculture has been very significantly impacted.
Mr. LUCAS. And not just in agriculture, say in an area like energy production, doesn't it have a direct impact on energy producers? Because if their demand for their portion of what would have been the overall consumption say of oil and gas is reduced, that lowers worldwide demand, which consequently brings down prices, even in areas where we don't say directly export to that region.
Mr. GREENSPAN. That's certainly the case, Congressman. We've observed in the United States a very dramatic rise in crude oil and oil product inventories to the point where our facilities are being stretched to the limit. And we have even heard of instances where we're storing crude oil in tankers, not at sea. And what this basically comes from is taking a big chunk of oil demand represented by the expected increases in demand in Asia out of the system, and that was enough to bring the oil price down quite significantly, and I might add, make quite an important impact in many areas of the United States. And that has been, as I think we've indicated, a major factor in the weakness in Russia, difficulties in Mexico, certainly in Venezuela, and even in the Middle East.
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Mr. LUCAS. So while we debate the nuances of how we participate in the outside world and certainly I think, as is clear within this committee, there are a wide range of opinions and concepts on that, nonetheless, we are tied to the world. And our prosperity directly relates to the world's prosperity also. Is that a fair statement, gentlemen?
Mr. SUMMERS. Absolutely, Congressman. In addition to the export linkages and the jobs linkages, which I think go to the jobs associated with tens of billions of dollars of exports that you emphasized in your questions, I would also emphasize that workers' savings are very much involved through investments in U.S. companies that do business substantially abroad. And I think it's no secret to anyone who has watched what has happened over the last year, that the fate of all of our savings, our 401(K)s, our IRAs, are very much related to what happens in the global economy.
Mr. LUCAS. So whether it's the fate of individuals in this room, or someone who happens to pass through Union Hole in South Oklahoma City, or some farmer in a coffee shop in Western Oklahoma, this is of the greatest importance to everyone.
Mr. RUBIN. Yes.
Mr. LUCAS. Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Frank.
Mr. Vento.
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Mr. VENTO. Well, thanks, Mr. Chairman. I don't have anything to report to you about my reappearance or reincarnation here next year. All I know there's someone running around saying bad things about me. I'm not trying to help him very much.
But I am pleased to see you here, and you clearly have not spoken about some of the specific problems, but one of the reoccurring themes I understand that occurred—and I apologize for being late, but I was off trying to raise some money for some kids that are in drug prevention—but the issue that has reoccurred is initially with the IMF and some of the other programs, there was a tendency to look pretty much at the economic side of the ledger—the interest rates, the regulators, the transparency in terms of investment, not just in terms of the disclosure of the agreements, which, incidentally, do have the other factors in that my colleague from Vermont was talking about.
But there has been a tendency now to start looking at some of the political and some of the social consequences of the action. And I think that this is an evolution for the IMF, but a very important one. Because obviously, the sustainability of certain types of economic practices that we would refer to as free market mechanisms, modeled I guess after our free market type of economy, or mixed economy, I might say, that in fact these social factors, the environment, labor rights, human rights—are becoming more important in terms of being able to have a sustainable policy in place. Because at the end of the day, this is a political will.
This is one of the consequences that we see in—you referred, Chairman Greenspan, to Japan—and is principally a political problem there, although they're not an IMF country, but Indonesia, Malaysia, in a sense some of the events that are taking place in other Pacific Rim localities, such as Hong Kong and China. There are some political and social consequences. Russia certainly is an example of that that's been on the radar screen for some time.
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And these other factors are becoming more important, are they not, Chairman Greenspan?
Mr. GREENSPAN. That is most certainly the case, Congressman. I think that there's an increasing general awareness of the integration of the world, not only with respect to the economies, but with respect to a whole variety of issues other than economics.
Mr. VENTO. So what impacts capital flows is not just what interest rates are. I mean we could lower interest rates here theoretically, and that would not cause more capital available in Indonesia?
Mr. GREENSPAN. Well, it may or may not. I'm basically saying that the integration of the world is such that where, for example, stock prices are in the United States and interest rates are in the United States, do have a significant effect on places around the world because we're such a big player. And in that regard, what happens here affects them, and what happens there affects us as well.
Mr. VENTO. Well, perhaps there is some hope for the direction of interest rates then from my perspective, Mr. Chairman, whatever that might be. Mr. Rubin, did you want to comment about that? I was listening to my colleague from Vermont, but most of the codicils that he's talking about, with regard to labor and others are included in the agreements themselves, are they not? And there are measures that are utilized as a template to judge the performance of what's taking place in these countries. How forcefully that's done, well, it's not as easy to measure as how many regulators you have or what interest rates are.
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Mr. RUBIN. I think your basic point is right though, Mr. Vento. One of the lessons certainly in the past year has been that politics has to, in effect, keep pace with reform, if you will. That is to say, there has to be support in these countries for taking ownership of reform, and that does require—social safety nets, core labor standards, and various other kinds of provisions that will result in broad-based support for reform.
Mr. VENTO. My time is already running out. Obviously there has to be coordination here. It isn't just the IMF, it's the Bank of International Settlements issue, and how that functions. Of course, that could evolve to be something different than what it is today, just as the IMF has evolved through and with our Congressional participation, and the partnership of 185 nations that belong to it. But in addition to that, the World Bank and these other institutions—I mean, one of the questions that raises to my mind is, in this type of globalization, do we have enough institutions; do they have the capacity? I mean, we're looking at the IMF here, but the question is, is the World Bank really stepping up to the plate? I mean, I look at what we had to do in the 1940s in terms of the Marshall Plan. I'm wondering what are we doing with problems in this particular day and age at least as big or larger than that? So we may be trying to solve a problem here with a tool that simply hasn't the capacity.
I think it's a good tool. I like the analogy of the bicycle. The IMF isn't the problem; the IMF is a solution. And that doesn't mean that every decision they make comes out of Rome; it isn't infallible. Eugene McCarthy was in the other day. He said, ''The Pope has given up being infallible.'' Now it's the New York Times.
[Laughter.]
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Mr. RUBIN. But, without addressing that, let me say that——
[Laughter.]
Mr. VENTO. You're not the right religion anyway.
Mr. RUBIN. No. Without your—I just don't want to make a comment on it. But about the World Bank—the discussion is focused on the IMF. The World Bank has played a very important and very constructive role in this as well, although that certainly needs to be part of the review that Mr.——
Mr. VENTO. Well, I don't want to pick on the World Bank, but I'm just—I understand the importance. I think Members here may not realize the importance of them. The other question, Mr. Chairman, very quickly—and I just think regarding all of these international institutions that if we began looking at this, we'd be talking as much about the World Bank as we are about the IMF and what its capacity is, where its loans are, and what it can do. I just think we ought to be thinking about capacity. But right now, this is the tool that we have.
The other question is: Are we concerned about actions that are taking place in Hong Kong where the Chinese have decided to enter the market, the stock market, and take some of these actions which are really—it seems to me—counterproductive to the type of market forces that we have or the issue where the Soviet—where the Russians are not, in fact, living up their agreements and yet we're extending additional credits there.
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I'd just like to have some comment from our two leading experts here, the Chairman and the Secretary, on these particular phenomena of this nature and any concerns you might have—or observations.
Mr. GREENSPAN. I don't think it would be a mystery to find that I think that the effort on the part of the Hong Kong authorities to try to jack up their stock market was an unwise effort. One, I don't think it can succeed. And, two, I think that the consequences of doing that erode some of the extraordinary credibility that the Hong Kong monetary authorities have achieved over the years.
It's a small city which has done extraordinary things and it's done extraordinary things because the currency was solid and trustworthy. The policies were solid and trustworthy. And once you begin to veer off and do things which do not make any sense, I think you lose a little bit of credibility, and I hope that that was an isolated episode. Indeed, I have every reason to believe it was.
Mr. VENTO. Mr. Secretary, do you have any comments on the issue of that, or the lack of compliance by the Russians with the IMF agreement to date? What would you say, that we need to have a policy, I guess, with regard to IMF that recognizes that certain changes take place and they have to readjust their programs on occasions? Isn't that accurate?
Mr. RUBIN. Well, that is correct and, Mr. Vento, earlier in the discussion we discussed Korea and Thailand where, in fact, the IMF very substantially adjusted the macro-economic parameters I think in a very sensible way as circumstances changed. In Russia, you simply had a political system that didn't take ownership of reform. I think that's a somewhat different situation and, as a consequence, there's a real question now as to where Russia goes next and where the world goes next with respect to Russia.
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Mr. VENTO. And then, on the general magnitude of the IMF, World Bank, and other international institutions, do we really have to, in a sense, look to expand these? I mean, is that what's going to come out of this Halifax II? Are we really going to be looking at expanding some of these functions or——
Mr. RUBIN. Well, what is sometimes referred to as G–22 really is a focus on a different set of issues: financial systems and matters of that sort. I think the immediate thing is to get the funding for the IMF that's been requested, which I think is imperative. Beyond that, the question of what size institution you should have, its funding, and all the rest is part of what I think the President referred to when he said the focus on financial obligations needs to go beyond the kind of issues that the so-called G–22 has been dealing with so far.
Mr. VENTO. Thank you.
Chairman LEACH. Well, thank you, Mr. Vento. And, so there's no misunderstanding, I think there's general consensus that infallibility is a religious, not an economic, precept. Mr. Summers, we hope you recognize that.
[Laughter.]
Dr. Paul.
Dr. PAUL. Thank you, Mr. Chairman. I can't say that I'm leaving because I had already gone away and I'm back, so—but, I appreciate the opportunity to discuss this issue, because I don't think there's any doubt that everybody considers what's going on in the world rather serious. So far, I've only heard two proposals to try to get us out of the mess. One is to come up with $18 billion appropriation for the IMF, which I don't think a whole lot of. The other is to increase liquidity and lower interest rates.
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These seem to be the only two options that are given any serious thought. I think both of them are detrimental to my constituents and to the taxpayers of America and will serve them no benefit whatsoever. And the beneficiaries may be out there, but sometimes I wonder if there are any beneficiaries. Maybe some who have made unreasonable loans might get some benefits, but I don't think the evidence is very good that this is a helpful situation.
But I do want to urge my colleagues and others to be careful about the lowering of the interest rates as a panacea. The lowering of the interest rates means that you have to increase liquidity and you have to inflate a currency. You have to debase a currency which, in the long run, can be detrimental. Interest rates are unpredictable.
Here we have interest rates of 1 percent in Japan. It's not doing a heck of a lot of good. So there's no easy way to interpret what will happen and Japan—this stock market is 36 percent of what it was nine years ago. So that's a rather serious problem. Brazil, this past week, they took a discount rate. Took it from 20 percent, put it up to 50 percent, boom, boom, their stock market went up. Last week we had a hint that our rates maybe dropped. Little hint, little teasing of the market, our stock market goes up. But I don't think that has anything to do with long-term solutions to our markets and that's what I think we should be thinking about.
I found the language in Mr. Greenspan's testimony rather clear, clear English. I was pleased with some of the things I read in there. But I also was pleased with it because it sort of brought out some of the nostalgia he has for the gold standard. And I want to make a comment on that and see if I can get a follow-up.
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I was particularly interested in what occurred in what you wrote on page five when you, I thought, very clearly identified some of the real benefits of the gold standard. When you talk about the 19th and the 20th century international capital flows were largely uninhibited. Losses, however, in an environment where the gold standard rules were tight and liquidity constrained were quickly reflected in rapid increases in interest rates and cost of capital generally. And the key sentence: ''This tended to delimit the misuse of capital and its consequences. Imbalances were generally aborted before they got out of hand.'' I think that is so crucial.
And then, again, later on: ''More elastic currencies—those type of currencies we have today—are arguably now less sensitive to, and hence slower to contain, the misallocation of credit.'' I think that is crucial. ''Market contagion across national borders has consequently been more prevalent and faster in today's international financial markets than they had been under the gold standard.''
To me, this demonstrates so clearly the advantages of the gold standard and, of course, where we are today is a long way from the gold standard. And I would like to ask and see if we can get a suggestion—I know there are many countries visiting—the G–22 countries—getting together and talking about revamping our system, but I don't think they're close to thinking about new currencies, a new method of evaluation. We have had no definition for the dollars for 27 years.
Ian Mesus, the great Austrian economist, predicted that the conditions that we have today would come from a fiat monetary standard. But he also stated that fiat currencies finally self-destruct and, eventually, we will be forced to return to putting value behind our money. And that you can't take a ruble and just declare that the government's going to put trust in the ruble. It doesn't work. Or the rupiah or, if the peso gets out of hand, just fiat by government will not restore trust.
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When will the time come—do you perceive in the next two, three, or four years of any chance that we would ever have a serious discussion about putting real value behind our money once again?
Chairman LEACH. Well, excuse me. If I could intervene for a second. I would like to give the panel only one minute to respond and then the Chair will make some other announcements. We have some real timing problems on the Floor. First, Dr. Greenspan.
Mr. GREENSPAN. I would just say that, Dr. Paul, you and I have had this conversation previously and I don't want to prolong it for more than the one minute. There are very considerable advantages in having the type of structure that the gold standard was. There are also considerations perceived by large numbers of people, economists, legislators, and the like, who found that the—precisely what I was referring to—namely the sense of restriction, is too restrictive to the development of economic growth and stability. And I think that that's an argument which has been going on for quite a considerable period of time.
I also tried in my remarks to indicate that there were ways of simulating the positive aspects of the gold standard without actually going to it and that's where I think the evidence suggests a goodly part of discussions have been going in the last decade or so, and I think correctly so.
Chairman LEACH. If I could—I thank you, Dr. Greenspan. We have about 40 minutes of voting before us. And what I would like to do, at the risk of great presumption. We have five Members present. I would like to give each of them an opportunity to speak for a minute and then to ask that questions be responded to in writing, if that is all right.
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Mrs. Velazquez.
Ms. VELAZQUEZ. OK. Just one question for Mr. Rubin—Secretary Rubin. How great is the threat caused by the imbalance of trade—increasing imports and declining exports—in terms of adversely impacting business and, ultimately, causing extensive job loss?
Chairman LEACH. Thank you.
Mr. Redmond.
Mr. REDMOND. Thank you, Mr. Chairman. First of all, I wanted to thank Mr. Greenspan for lowering my monthly mortgage rate. My wife appreciates that. Just very quick comments here. John Maynard Keynes, when discussing the whole concept of ''priming the pump'', was criticized for saying that, ''in the long-run that won't work.'' And his response was, ''in the long-run, we'll all be dead.'' So I would like for us to, once this initial crisis is over, sit down and discuss what are the possibilities, in the long-run.
I think that we need to return to the concept that was introduced in 1776, vortex of freedom. We have political freedom in the Declaration of Independence and economic freedom in the wealth of nations. We need a return to those basic concepts, because what made America wealthy will be the same principles that make Russia and other countries at risk right now, wealthy.
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In terms of questions, number one, are there models that demonstrate a balance between food, aid, and currency stabilization? If there are, I'd like to see those.
Number two, I'm happy to entertain a discussion concerning restructuring the IMF and what kind of restructuring, time length of restructuring, and the degree of restructuring.
And, number three, what are the clear, measurable goals that we're anticipating by the infusion of this capital through IMF?
Chairman LEACH. Mr. Hinchey.
Mr. HINCHEY. Thank you, Mr. Chairman. The beginning of these hearings on Monday and the coincidental speech that the President gave in New York that same day is just that, a coincidence. But no less, I think, very, very significant. And I thought it was an excellent speech and I hope that the President will continue to be engaged on this particular issue because it is one of—as we all know, now—very significant proportions. It's been with us now for almost a year and it is only recently that many of us are beginning to appreciate its full dimensions and are taking actions which will, in some measure, mitigate it to some extent.
The issue of interest rates has been discussed here on a number of occasions today. I think it's important to observe that the interest rates in our country are at a nine-year high. Inflation is virtually nonexistent and something really needs to be done about that, because that has to be seen within the context of what is likely to be a coming credit crunch associated with the situation of banks in this country and in other places around the world.
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And, if I'm allowed time to ask just one question, it would be one that would relate to that. What seems to be the coming credit crunch and, particularly, the credit crunch associated with the derivative market, the absence of regulation in the derivative market, and the need for us to pay some additional attention to all of those circumstances? The notional amount of funds in a derivative market right now is somewhere in the neighborhood approaching $30 trillion and we are already beginning to see very substantial losses in that area.
And the credit crunch is particularly important in terms of our own economy, obviously, because if it impacts on us the way that it might, then money is not going to not be available for some of the essential things that we need to do, for businesses and things of that nature. And that, of course, is going to only exacerbate the impact of this problem when its full dimensions strike us some time next year.
Chairman LEACH. Thank you, Mr. Hinchey.
Mr. Bentsen.
Mr. BENTSEN. Thank you, Mr. Chairman. And thank you all for this thrilling hearing we've had this afternoon. I notice a few of the news people are still awake, but I had—what you had to say was very important. I would like to clarify, or disagree with some of my colleagues on a couple of points.
Mr. Bereuter raised the issue of the Republic of Korea and deficits. And I think, Mr. Chairman, when we were there that, in fact, it's Korean law that you have to have a balanced budget. And so this was something they had imposed upon themselves. I would appreciate some clarification of that, but I'm not sure that was an IMF-imposed issue. In fact, the argument was that the IMF prescription was forcing them to raise taxes in order to maintain what was statutory under Korean law, which raises questions about the whole concept of balanced budget amendments in times of crisis, even if you're not in a full recession, but just a very low growth-rate, as in Korea. But that's a whole 'nother topic.
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And I think also Mr. Greenspan is correct in the issue with respect to Russia—and we heard this from Mr. Soros yesterday—that it's very hard to pin the Russian crisis on the IMF. In fact, even when the Russians have gone so far as—some former Russian ministers have gone so far as to say that they, in fact, lied to the IMF about whether or not they were following through with the reforms that were agreed.
So, while the IMF has not been perfect, right now it's the only game in town and I think we would be far better off doing it and I would just urge you—and I would appreciate, for the record, Mr. Greenspan, because I know where Rubin stands. But we have a number of colleagues who have become convinced that the greatest international economic issue we should be working on is Fast Track trading authority, which I happen to support. I would argue that it might be the reverse, that dealing with the world economic situation is probably a little more urgent than Fast Track trading authority and it would nice if—I know you don't like to get involved in the political debates we have on the Hill—but it'd be nice if maybe you could enlighten some of our other colleagues with respect to that.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Bentsen.
Ms. Lee.
Ms. LEE. Yes, Mr. Chairman. Thank you. During the course of the hearings, we've had a chance to hear of the massive corruption and criminal activities which are taking place in Russia. We also have heard and learned that there were very few requirements imposed on the billions of dollars of IMF loans to Russia. In essence, these monies could have gone, de facto or otherwise, to support the criminal and corrupt activities that are taking place.
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But what I want to know is—and I've asked this question before of other witnesses—is how do we explain to the American public that the next billion dollars, if we appropriate that, will not allow for this to continue? That, in fact, there are controls and measures that will be imposed upon countries now to ensure that our money is not going to support the type of criminal activity of which we heard earlier this week?
And we also heard that, of course, there were thoughts that maybe closer coordination between the IMF, Treasury, and law enforcement would be necessary; but I still think that we need to hear it from you—and I'm glad we may have a chance to get this in writing. What type of real thought has been put into making sure that no more money goes to support what we see has transpired now in Russia?
Thank you, Mr. Chairman.
Chairman LEACH. I thank you, Ms. Lee. And I apologize for being so unfair, given the clock and the voting on the Floor.
In conclusion, let me just ask unanimous consent to place the President's very thoughtful statement in New York in the record. Without objection, so ordered.
[The information referred to can be found on page 343 in the appendix.]
Second, let me conclude with one private-sector observation. We have dealt for two days with this issue of corruption. And it strikes me what contrasts America with the rest of the world is the basic integrity of our institutions and that we have a national vested interest in expanding American financial practices abroad. Now this committee has passed out a bill on financial modernization and the Senate is seriously considering it. I think it is very important in the context of corruption around the world that America's financial institutions be given incentives to move abroad in as practical and pragmatic a way as possible. And I recognize there are differences of judgments in many regards from regulation to nuances in a competitive sense, but I just hope that the Administration bears seriously in mind this is a time of great opportunity for America to lead and a failure to lead in the private sector, as well as the public, would be a major mistake.
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Mr. VENTO. And that the Federal Reserve Board would too, Mr. Chairman, recognize that opportunity.
Chairman LEACH. Of course. Yes. In any regard, let me thank our three panelists. And I would also assert, just from a very strong personal dimension, my personal respect for each of them and the enormous dedication that they've brought to their positions of authority.
Mr. RUBIN. Mr. Chairman, could I possibly make one statement? I would like to have something on the record?
Chairman LEACH. Of course.
Mr. RUBIN. There is a debate right now in the Diet over the question of Japanese banking policy.
Chairman LEACH. Yes.
Mr. RUBIN. And I'd just like to express in a formal forum the very strong view that is held around the world that it is critically important that the opposition and the majority party work through this problem in such a way as to make provision for substantial public funding for Japanese banks as they, in addition, deal with the issue of weak banks and bad loans and particularly with respect to weak but solvent banks.
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Chairman LEACH. Well, that's an important addition to this hearing and one from which there's no divergence on Capitol Hill. Thank you very much and I thank the three of you.
[Whereupon, at 3:33 p.m., the hearing adjourned, subject to the call of the Chair.]
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