[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
THE STATE OF THE
INTERNATIONAL FINANCIAL SYSTEM
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
APRIL 19, 2005
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-18
U.S. GOVERNMENT PRINTING OFFICE
24-399 WASHINGTON : 2005
_________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government
Printing Office Internet: bookstore.gpo.gov Phone: toll free
(866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail:
Stop SSOP, Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North HAROLD E. FORD, Jr., Tennessee
Carolina RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
VITO FOSSELLA, New York STEVE ISRAEL, New York
GARY G. MILLER, California CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio JOE BACA, California
MARK R. KENNEDY, Minnesota JIM MATHESON, Utah
TOM FEENEY, Florida STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina AL GREEN, Texas
KATHERINE HARRIS, Florida EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas
TOM PRICE, Georgia BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK,
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
Robert U. Foster, III, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
April 19, 2005............................................... 1
Appendix:
April 19, 2005............................................... 39
WITNESS
Tuesday, April 19, 2005
Snow, Hon. John W., Secretary, United States Department of the
Treasury....................................................... 7
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 40
Pryce, Hon. Deborah.......................................... 42
Waters, Hon. Maxine.......................................... 44
Snow, Hon. John W............................................ 46
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written questions to Hon. John W. Snow....................... 56
Snow, Hon. John W.:
Written response to questions from Hon. Michael G. Oxley..... 60
Written response to questions from Hon. Brad Sherman......... 59
Written response to questions from Hon. Maxine Waters........ 58
THE STATE OF THE
INTERNATIONAL FINANCIAL SYSTEM
----------
Tuesday, April 19, 2005
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The Committee met, pursuant to call, at 3:02 p.m., in Room
2128, Rayburn House Office Building, Hon. Michael G. Oxley
[chairman of the Committee] Presiding.
Present: Representatives Oxley, Pryce of Ohio, Royce, Paul,
Manzullo, Biggert, Hensarling, Pearce, Davis of Kentucky,
McHenry, Frank, Waters, Sanders, Maloney, Watt, Baca, Scott,
Davis of Alabama, Green, Cleaver, and Moore of Wisconsin.
The Chairman. The Committee will come to order.
Mr. Secretary, it is good to have you back again this
afternoon and welcome back to the Committee.
We are glad to have you here for the Financial Services
Committee for another annual testimony on the state of the
international financial system. We meet as the group of seven
countries strive to make structural changes identified in the
Agenda for Growth. Global imbalances are global challenges that
all parties need to meet in order to safeguard continued
economic growth around the world. At the same time, G-7 leaders
are considering how best to fund development and manage the
IMF's assets.
U.S. leadership in the G-7 has generated innovative
approaches for addressing the challenges and opportunities
presented by China's growth. I hope that real progress on these
issues can be made in time for the G-7 summit later this
summer.
I note that this is the Secretary's first testimony since
Congress passed and the President signed the Intelligence
Reform and Terrorism Prevention Act. That Act included a
requirement authored by my colleague, Mrs. Biggert, that this
annual testimony include an assessment of international
cooperation and coordination from the IMF, World Bank and other
multilateral policymaking bodies in the fight against terrorist
finance. I look forward to your testimony on this topic.
Economic resilience and continued growth are critical
components to providing peace, stability and freedom around the
world. As President Bush has noted, economic and political
freedom gives hope to millions who are weary of poverty and
oppression.
As your testimony rightly points out, a 5 percent expansion
in sub-Saharan economies over the next 2 years would lift
nearly 30 million people out of poverty. One important method
for promoting economic development is to foster conditions for
more balanced growth worldwide. Stronger economies create more
demand, promote economic opportunity and ownership and provide
a foundation for political stability. I look forward to hearing
your ideas for how we could support European efforts to make
the necessary labor and other structural reforms that are so
needed.
I continue to support the President's efforts to express
America's compassion for the world's most vulnerable people
through a wide range of development initiatives. I also support
the increase by $100 million for multilateral development
assistance for the International Development Association and
the African Development Fund and the increased proportion of
grants.
The UK's presidency of the G-7 is wisely spent focusing on
development issues. I commend our cousins across the Atlantic
for their vision, even as I question whether all the proposals
make sense. I will be interested to hear your views on the
proposed International Financing Facility. I expect we will
evaluate the IDA and ADF replenishment requests in light of
progress made to implement performance-based assessments as
well as efforts to increase transparency anti-corruption
programs and accountability.
We need to make sure that development dollars are allocated
efficiently and are going to the people who need it most. I
hope the new president of the World Bank will adopt as a high
personal priority continuation and expansion of the bank's
anti-corruption efforts.
This could help counterbalance potential bureaucratic
backsliding and competitive pressures among other regional MDBs
to lower standards. Regarding proposals to mobilize some of the
IMF's gold reserves to fund debt relief, I note that U.S.
negotiation to sell IMF gold cannot be conducted without
Congressional authorization starting with this Committee. We
have not received such a request, and I understand there is no
consensus, at least at this time, in favor of gold sales within
the G-7. Therefore, I assume that no such negotiations are
underway.
In the area of trade liberalization, at all levels can be
more effective than development assistance in fostering
economic growth. Trade is not a zero sum game, and all
participants benefit from liberalization. I look with cautious
optimism at the broader Doha round of negotiation in the WTO,
as well as efforts within the group of 20 to support progress
on the global trade agenda.
I would urge you, Mr. Secretary, to be actively and
personally engaged to move along the financial services
negotiations.
Last, but certainly not least, I focus on Europe and the
Financial Markets Dialogue. We meet as the U.S. and the EU for
forging a reinvigorated relationship following the President's
successful visit to Europe last month. The Treasury Department
has done an excellent job of leading this informal forum in
which regulators from the U.S. and Europe can discuss
regulatory differences.
Finally, concern exists that the Treasury Department may
not be appropriately staffed internationally. Consequently, I,
together with Chairwoman Pryce and Ranking Members Frank and
Maloney, commissioned a GAO study yesterday to assess
Treasury's international staffing structure and whether changes
can facilitate the Department's conduct of international
economic policy.
We at the Committee share with you an interest in insuring
that the Treasury Department has adequate staff and a good
structure to meet the strategic economic policy challenges of
the 21st Century.
I now yield to the gentleman from Massachusetts,
Mr. Frank.
Mr. Frank. Thank you, Mr. Chairman.
Mr. Secretary, welcome again, and I will, in the question
period, get into the debt relief question, because I think this
is an important opportunity for us. But I want to talk about
here is the issue you that affects both the international
economy and our own, and it is obviously the number one issue
for us, and that is our own economic picture.
I am troubled. We have had, in the past couple of years, a
good degree of economic growth. What is troubling to me is that
this economic growth has been accompanied by less job creation
than historical standards would have predicted. The best job
creation that the Administration has predicted and even with
the job creation, a stickiness in wages, stickiness being a
nice word for they ain't going up. What we have seen
consequently is an erosion of the position of a large number of
average Americans.
I have problems with that from the standpoint of equity. I
think it is troubling when the country grows but inequality
also grows. I welcome for the fact that, for instance, Chairman
Greenspan of the Federal Reserve agrees that that is a problem.
But growth can be an economic and political problem. It can
be a economic problem if we begin to see kind of a slowdown in
consumer spending, which could be the result of this lack of
income in those categories. It is clearly already a political
problem. You have now an increasing degree of resistance on the
part of a lot of Americans to the kinds of things you advocate
in the international field, because they see themselves as the
victims of globalization rather than participants in the
benefits.
We are reaching an unhealthy state in the country, not just
internationally but domestically, where there are more and more
people who feel that they read good news but they are not
getting much of the action.
Now, let me document what I am talking about. I want to
talk about some statistics on job growth the ups and downs of
job growth.
In June of 2003, the Council of Economic Advisors in this
administration said that we would get job growth of 305,000 per
month--305,000 jobs. They do pay a little bit more than the
dollar. 305,000 jobs per month. That was the prediction in June
of 2003.
Then in October of 2003, Mr. Secretary, you were the more
realistic than the Council of Economic Advisors. You said
everything you knew about economics said we would get 200,000
per month.
Then the CEA decided you were a piker, and they raised you
and themselves in the 2004 economic report to 325,000 a month.
This year's economic report, suddenly, you are the optimist
again, 175,000 a month.
So, on the projections from the Council of Economic
Advisors, it is very troubling, and there is no explanation of
this. I read the Council of Economic Advisors report, and maybe
you have to wait for the DVD to come out, but we have gone from
a projection from the Council of Economic Advisors to 325,000
jobs created a month to 175,000 jobs created a month a year
later. We lost 150,000 jobs a month just looking at the CEA
report.
Now the problem is that with all of those, and you were the
low man in the prediction until the CEA came out again at 175,
you were 200. But, in fact, for the five quarters since we
started this recovery, and since you made your prediction in
October of 2003, the actual total has been 165,000 a month.
There have been a couple of good months, but there have been a
couple of really lousy months.
You said, Mr. Secretary, that everything you knew about the
economy said, we would get 200,000 jobs a month. Well, we have
had 165,000 a month since then. That is troubling. I don't
think it is you learned the wrong things, I think it is that we
have new things in the economy. I think what we are doing is we
are seeing a situation in which what is good news can become
bad news, the bad news is that productivity is going up and
that we are able to make more things. We are able to provide
more services. We are able to create more wealth with fewer
people.
But because of our social arrangements, we are turning that
good news into bad news for some people so that we appear to be
getting fewer jobs per unit of increased wealth than we used
to. Again, your number was 200,000. We had 165. The Council of
Economic Advisers--this has not been very well noticed, but the
Council of Economic Advisors--I would have thought this would
have required a little bit of explanation when you go from
projecting 325,000 jobs per month in 2004 and a year later you
project 175,000 jobs per month.
Now, I think that is an implicit recognition that things
have changed in the economy. There are limits to what
government can do. I will close this briefly. There are limits
to what government can do to undo that trend.
But here is the problem. We are in a situation where it
does appear, contrary to all the predictions that have been
made, that things have come about in the economy, where wealth
is less evenly shared than it used to be. What it would seem to
me appropriate would be for the public sector in that situation
to try to mitigate the consequences of this increased
inequality. Instead, and this is where I fault our public
policy, we have exacerbated it.
So we have a national--we have economic trends, national
economic trends, globalization, productivity, information
technology which tend to exacerbate inequality, which tend to
allow us to create more wealth with fewer jobs. Public policy
has unfortunately been reinforcing that tendency rather than
trying to slow it down. The consequence is a country which is
becoming increasingly hostile to many of the measures you want
to think--I will be supporting debt relief for the highly
impoverished highly-indebted poor countries.
I am very glad we don't have a national referendum on this
subject, because while I think it is a very important thing for
us to do, I don't think we could carry a referendum nationally
on that because of the kind of resentment that is building up
because of these kinds of figures, so I hope you will help us
figure out what we do if not to stop this trend, to at least
mitigate its effects.
The Chairman. The gentleman's time has expired. The
gentlelady from Ohio, the chairwoman of the subCommittee.
Ms. Pryce of Ohio. Thank you, Chairman Oxley, and welcome,
Secretary Snow. Thank you very much for taking the time to
discuss with us the state of the international financial
system. We all know that the health of the U.S. and the EU
economies are inextricably bound together in trade and cross
border investment flowing and linking our capital markets.
The recent historic enlargement of the EU, through the
accession of 10 new Member States, only magnifies that region's
importance. The increasing closeness of the U.S.-EU
relationship has underscored a growing trade in financial
ideas, talent, technology and capital across the Atlantic.
I commend you, Mr. Secretary and your staff, for opening a
dialogue with the EU dedicated specifically to financial
services issue. I hope to hear more during this hearing on how
the Treasury is working to improve trade in financial services
between the U.S. and the EU.
Mr. Secretary, as you know, U.S. and international
financial regulators have been negotiating the capital
requirements for banks in the Basel Committee over the past
several years. Many of us are concerned about the seeming lack
of transparency in this process as well as cooperation among
our own regulators.
I know other members on this Committee share my concern and
would appreciate your thoughts on the Basel II process,
specifically first noting how the U.S. regulators are working
together, and, second, the competitive impact Basel might have
on banks that do not opt in.
Additionally, the G-7 recently made a political commitment
to provide ``as much as 100 percent debt relief'' to relieve
the debt burdens of the poorest countries in the world, but
they failed to provide a view on how this could be funded. In
light of the G-7's agenda on development and debt relief for
this year, I am hoping you will touch on recent discussions to
have the IMF sell some of its gold stock and use the
anticipated profits to relieve the highly indebted poor
countries debt.
As you recall, the last time this idea was raised in 1999,
the initial creation of the HIPC program brought it about, gold
prices plummeted to a 20-year low. News of the G-7's proposal
to sell gold from the IMF stockpile to pay debt relief sent
gold prices down again last October, not only affecting the
gold-rich United States, but also the developing countries that
depend on their own gold for export revenues, the very
countries that we are trying to assist.
Finally, as the Chairman noted, and I am sure you are
aware, U.S. law prohibits the Treasury from engaging in
negotiations on this matter without consultation and approval
from the Congress. So we will be waiting to hear from you or
not to hear from you either way on that.
I do thank the Secretary for his appearance today. I look
forward to your testimony.
With that, Mr. Chairman, I am happy to yield back any
balance of my time.
The Chairman. The gentlelady's time has expired.
The gentlelady from New York.
Mrs. Maloney. Thank you, Mr. Chairman and welcome,
Secretary Snow, and thank you for being here. Given the time
constraints, I want to highlight three areas of great concern
to me. The deficit, a debt relief and international cooperation
in the war on terror. Mr. Secretary, as you are well aware,
this Administration holds the absolute record for debts and
deficits. Over the last 4 years of the Clinton administration,
President Clinton reduced the national debt by a total of $453
billion, and he turned over to President Bush a $236 billion
surplus and a national debt of $3.3 trillion.
Yet the budget that the President has sent Congress for the
coming year projects a deficit of over 390 billion, a record
high, and a debt of 5.1 trillion, another record high, and this
Administration has voted three times to raise the debt ceiling
to over $7 trillion.
This budget does not include the future costs of Iraq or
Afghanistan missions, nor does it include the CBO estimated 1.9
trillion cost of making the President's tax cuts permanent, and
it does not include the projected 2 trillion more dollars that
the Republicans want to borrow from foreign countries for the
private accounts that will change and undermine Social Security
as we know it.
Just this month, we learned we had another record, another
unfortunate record, and this was with the trade deficit and
goods and services of well over 61 billion in February, again,
a record high for a single month. The goods and services
deficit was a record of 617 billion for all of 2004, again
another unfortunate record for deficits that this
Administration has given to us.
The broader current account deficit, which is the best
measure of how much we have to borrow from the rest of the
world, was a record 655.9 billion in 2004 and it hit yet
another record 6.3 percent of the GDP in the fourth quarter of
2004.
I am concerned that should foreign investors lose
confidence in our economy and reduce their investments, our
constituents could face serious consequences, including a
dangerously weak dollar and increased credit card, home
mortgage rates and a sluggish economy, to say the least.
While the Administration claims its new budget will address
the situation, the Bush record is consistently rosy predictions
followed by a consistently ballooning deficit and debt. The
budget put forth by the Administration for fiscal year 2004
which allows similar proposed caps to nondefense discretionary
programs would seem to be more of the same.
I am also interested, as are my colleagues on both sides of
the aisle, and your comments on the Administration's support
for the heavily indebted poor countries. I strongly support the
HIPC program. I personally authored a debt relief bill for Iraq
with Chairman Leach just last Friday.
I joined with other members of the Committee, too, Mr.
Secretary, in urging you negotiate over the past weekend
multilateral debt cancellations to poor countries.
I am also very, very concerned and look forward to the
update from you on the cooperation the Department is receiving
on the international effort to track and cut off terror
financing. I am concerned by the news in many of the financial
papers today of the third day slide in the stock market, the
continuing slide in the dollar, and what does that mean for our
country.
I, likewise, join this Committee in its joint effort on the
Basel decision to make sure that our financial institutions are
not disadvantaged in capital requirements in the world global
market in the competition that we face in the global economy.
So we have many challenges ahead of us. I am deeply, deeply
concerned over a never-ending debt deficit, trade deficit, all
record highs.
One of my constituents has given the country what he calls
a debt clock, and is placed on 42nd Street and 7th Avenue.
Every day it puts up the debt which every man, woman and child
in this country owes to the Federal budget, the debt that each
of us carry. It is well over $26,000 per individual. This is
extremely troubling to me, and very strong indicators of
trouble ahead in the economy.
So I hope--I look forward to your testimony today, and your
comments. Thank you.
The Chairman. The gentlelady's time has expired. We now
turn to our distinguished witness, Treasury Secretary Snow, and
I know that technically you are not here voluntarily, because
you are required under the law to testify before this august
Committee once a year. Actually, in the first quarter,
according to statute.
So that time is running out on that first quarter, and we
appreciate your appearance here today, Mr. Secretary, and look
forward to your testimony.
Mr. Frank. Time has run out on the first quarter.
The Chairman. Yes, I guess we have--by the way, the energy
bill keeps an extension of daylight time by 1 month on one end
and 1 month on the other. So I guess if we can do that, we can
effectuate your testimony in the second quarter.
STATEMENT OF HON. JOHN W. SNOW, SECRETARY, UNITED STATES
DEPARTMENT OF THE TREASURY
Secretary Snow. Thank you very much, Mr. Chairman, Ranking
Member Frank, Ms. Pryce, Mrs. Maloney--Congresswoman Pryce,
Congresswoman Maloney. It is always a great delight to be up
here before this Committee, and whether I was required to or
not, Mr. Chairman, I would welcome the opportunity to share
thoughts with you on the important subject of the international
economy and where things stand, where we see it going and
trying to take it, what some of the pressure points are and
what we are trying to do with them.
We just concluded the spring meetings of the IMF and World
Bank, where finance ministers, development ministers, Central
Bank, governors convene; we also held a meeting of the G-7. And
I think it would be a fair assessment of the conclusion of
these meetings that the world economy seems to be in good
order, in sort of a sweet spot. We have seen high world growth
rates, the highest growth rates according to the IMF and World
Bank in 30 years.
The United States is leading the way with the highest
growth rates among the industrialized world. There are no
recessions in any major economies anywhere. There are no
financial crises in any major economies anywhere on the globe.
A marked contrast to circumstances we have seen in the past.
We think good policies promoted by the United States
government are helping to contribute to higher growth, greater
prosperity and more stability in the world economy. There are
three principal goals of the Bush administration when it comes
to our international economic agenda, and it won't surprise
you, increasing economic growth is a critical part of it,
raising standards of living and reducing poverty across the
globe.
Secondly, stability, increasing economic stability,
allowing for steady growth in the economy and reducing the
hardships and sufferings that result from financial crises.
As I say, I think the world is in a much better order today
than has been the case in the past. Thirdly, we want to use our
international economic policy to advance our foreign policy
objectives, combating terrorism, promoting the reconstruction
in Iraq and in Afghanistan, spreading economic freedom
throughout the Middle East, through the broader Middle East,
North Africa initiative, things like that.
I think we are making pretty good progress on a lot of
these fronts. As I say in the developed economies, the United
States is leading the way. We grew at 4.4 percent over the past
12 months, creating 2.4 million jobs over that 12-month period,
coming in at about 200,000 jobs a month, as Mr. Frank
indicated.
It is the result, I think, of the inherent strength of this
economy. It is resilient, it is responsive, it is adaptive. But
it is also the result of well-timed monetary and fiscal policy.
I give high marks to Chairman Greenspan and the Federal
Reserve. I think they pursued a set of policies that were
appropriate, accommodating higher growth levels that were
needed in job creation. I give credit to the Bush
administration and the Congress for acting on the fiscal policy
front, reducing tax rates that clearly, in our view, helped
stimulate the economy and move it forward.
We can't rest; we can't be complacent. As Mr. Frank
indicated, there are problems. We need to deal with them. We
need to keep pressing forward to improve the performance of the
economy. To do that, I would agree with you. We are reducing
the deficit which, Congresswoman Maloney, has to be a priority.
We are focusing on that and want to talk to you about that.
There are other things that are important, dealing with these
large unfunded obligations for the future, represented by
things like Social Security, while preserving and protecting
the promises of the system are important.
You know, the President has called for broad-based tax
reform, appointed a panel, a panel that appoints reports to the
Treasury Department here in a few months, the end of July. I
would see us engaging with you in broad-based tax reform later
this year. Regulatory reform is very much on the agenda, as is
energy legislation.
As I look at our trading partners in the G-7, I am struck
by the fact that we in the industrialized world are suffering
from what can only be styled a growth deficit. That has serious
implications for the developing world, as well as for the
United States and the trade deficit itself, which is directly
related to lower growth rates in the rest of the world.
Japan, the second largest economy in the world, is showing
improvement but it is still growing at a rate that is well
below its potential. The same is true of Germany. The Euro zone
as a whole is lagging, growth rates less than half the United
States. That means they are creating less disposable income
there, compared to the disposable income we are creating, which
directly relates to this question of the current account
deficit.
At the G-7, we have established something, and this is
joined in by all the members of the G-7, something that we
initiated, called the Agenda for Growth, where recognizing the
need for more growth in the global economy, each of us is
committed to take on in our own countries and through our own
political, administrative and regulatory processes, the things
that most stand in the way, the things that most impede growth
in our economy.
There is a real commitment to do that. Progress is slower
than we would like to see, but progress is real. There is a
commitment. It is not a commitment just of word, it is a
commitment of actions. We put a clock on ourselves and we audit
our open results, and that audit process will be the subject of
the October meeting of the G-7.
In the emerging market countries, I think the most notable
things there that I would remark on is the fact that economic
growth is very, very strong. Latin America came in last year at
about 6 percent. The emerging Asia countries came in at over 7
percent. The emerging European--the so-called succession
countries--the emerging European countries came in at well over
6, 6.5, all in the absence of financial crises and all with
spreads on paper that are moderate and all with inflation down.
This is a truly stark contrast to the 1990s,
Mr. Chairman. Why has this happened? I think it is because
better policies are being put in place by these countries,
through the leadership, the political leadership and economic
leadership, better economic policies make a difference. We are
seeing better economic policies applied, better fiscal policy,
better monetary policy and there is no better example of this
in my view than what President Lula and Finance Minister
Palocci are doing in Brazil, which has turned the corner and is
producing really strong and very good results.
Let me comment briefly on China. I know that is on the
minds of everybody. Our policy, with respect to China, clearly
calls for them to move to a flexible exchange policy. We have
urged them to take the steps to get their economy ready for a
flexibility exchange rate. They have taken a lot of steps, we
can discuss them later.
They are now, in our view, ready to move to greater
flexibility on their exchange rates. My colleagues and I at the
G-7 have called on China to move to greater flexibility. We did
so in the communique that was issued just over the weekend.
On the developing countries, in the poor developing
countries, we also see significant progress in lifting people
out of poverty. Clearly the prime cases here are China and
India, which are moving at a rapid pace with very substantial
growth rates, 7, 8, 9 percent. Millions, actually tens of
millions of poor people have been lifted out of poverty because
of the progress in those countries.
In sub-Saharan Africa, which is still a troubled part of
the world, with population rising and concerns about growth
rates rising fast enough to sustain higher standards of living,
I am pleased to say that growth is now estimated to have been
about 4.5 percent over 2004. It can be better, it will be
better, if we follow the right policy. We want to support those
policies. 4.5 percent is a nice pickup from where they have
been.
That is a result of their policies and the stronger, the
stronger world economy. One of the Committee Members asked me
to comment on the reforms of the international financial
institutions. We are pressing them hard for reform agenda. We
have called for a strategic review. We have asked for them,
working with the G-7 and the other board members to think
through their mission.
The fundamental conditions have changed dramatically from
the time they were put in place. The World Bank was put in
place initially to deal with the post-conflict situation in
Europe, reconstruction of Europe after the Second World War and
quickly moved off into other arenas.
The IMF was put in place to deal with a balance of payments
adjustments in the context of a fixed exchange rate. Now, of
course, large parts of the world have flexible or floating,
freely floating exchange rates.
So we are working to make sure the missions of these
agencies are appropriate to the current conditions of the world
economy.
We are pressing those multilateral development banks, I
think you would agree we should, to produce measurable results
to put greater focus on grants rather than loans, to end this
cycle of give, forgive, give, forgive. The paradigm of it
creates the unsustainable debt levels.
We are also encouraging on the subject of using private
sector-led growth of nurturing the private sector as the best
engine of long-term growth and of creating an environment of
respect for law and property, anti-corruption regimes, that
will encourage foreign capital coming in, and, of course,
importantly, encouraging transparency, encouraging real
accountability.
One area where the United States is taking the lead, an
area I know is very important, Mr. Chairman, to you and to the
Committee, is on the effort to reduce the debt burdens on poor
countries.
We have a proposal to reduce the debt, cancel the debt up
to 100 percent for the HIPC countries. I think we made some
progress over the weekend in building support for our 100
percent debt cancellation proposal with our colleagues in the
G-7, a subject we will return to at the G-7 meetings in June.
The subject of trade has come up in your comments,
critically important that we continue to push for open markets,
trade liberalization, for financial services. This is a
priority for us in the Doha Round trade talks and in our
bilateral FTAs. It is important that we make progress here for
ourselves, for the rest of the world and for the global
financal system.
Finally, I think we are making, real progress on the
subject of antiterrorist financing. We will come back to that,
I am sure, as we go forward. The World Bank, the IMF, the
multilateral development banks now have active participants in
this effort to set standards, to audit, to be vigilant, to
shape the global effort to deal with antiterrorist financial
activities.
At every meeting of the G-7, we have a session on that at
every meeting of the APEC, at every meeting of the G-20. This
is very much a matter of intense focus on part of the finance
ministers and central bank governors of the world. I was
pleased by the legislation last year to strengthen Treasury's
hand, as you mentioned, and we have now appointed an under
secretary, Stewart Levy, who is playing a critical role in
overseeing the terrorism and intelligence functions of the
Department.
In that sense, the Department is really on the front ranks
of dealing with anti-terrorism and national security.
With that, Mr. Chairman, I am delighted to try to respond
to your questions.
[The prepared statement of Hon. John W. Snow can be found
on page 46 in the appendix.]
The Chairman. Thank you, Mr. Secretary, for your testimony,
and particularly at the end when you talked about the anti-
terrorism activities on the part of the Treasury. And really,
in many cases to the point of the spear as it relates to
terrorist financing and the IFI issues. We met with Mr. Levy
last week, and certainly he is energetic and focused on the
task at hand.
Let me ask you about the G-7, since it is a recent meeting
that took place. I think our country has shown great leadership
in including first Russia and China in some of the G-7 events,
and I think that perception clearly is also the reality that
bringing in those two large countries, at least in part, has
proven to be very effective, as has our work in the Middle
Eastern countries as well. Other models with Brazil and Mexico,
and the G-20 record for sustained growth, I think have all
shown, as your testimony indicated, some real progress there.
On the other hand, there are those out there who have
expressed concern that the G-7 is ineffective and is badly in
need of reform.
Do you agree with this in a general sense?
Secretary Snow. Mr. Chairman, I think the G-7 continues to
be a very important component of stability and progress in the
global economy and in the global financial order. We recognize
that other countries are growing more rapidly, China, India,
Brazil, and there needs to be outreach to them. But the G-7
remains the largest component of GDP in the world, and it is
playing, I think, a true leadership role.
As you mentioned, we have tried to embrace other countries
to broaden the dialogue. We have done that through having China
come, Russia comes, other countries have come. We have tried to
keep the agenda relevant, focused on the things that really
count, global growth, risk to the global economy, stresses in
the global economy, things, financial, the war on terror.
So I think it is a very important but can't be the only
fora for bringing thoughtful consideration of these large
issues that face the global economy.
The Chairman. I was, this morning, in New York at a
conference sponsored by the EU dealing with the Euro and with
the new regulatory structure in the EU. Will the EU enlargement
going from 15 to 25 affect the EU members participation in G-7
meetings in any way?
Secretary Snow. I don't think so, Mr. Chairman. It might
affect some of the policies that are reflected in their
comments. I am very positive about the accession. I think is
going to add an element and dynamism and energy to the G-7. I
think the Euro people, the Euro side of the G-7 feel that as
well. But I don't think it would lead to a change in the
composition of the G-7 itself.
The Chairman. Let me ask you about diversified capitalize
flows, Mr. Secretary. Mexico and Canada last year purchased
55.4 billion in U.S. Treasuries, agency securities, corporate
bonds and equities. China purchased only 47.3 billion and Euro
zone purchased 45 billion.
These numbers would seem to indicate that we have a fairly
diversified pool of capital coming into the U.S. market. Would
you agree with that assessment?
Secretary Snow. Yes. Yes, I would.
The Chairman. Do these statistics indicate that gradual
diversification by Asian central banks of their U.S. dollar
asset holdings might not be as significant as headlines might
suggest?
Secretary Snow. Oh, I think there have been a lot of
misplaced headlines.
The Chairman. Well, that is a new one.
Secretary Snow. Those headlines should have been in other
parts of the paper or not occurred at all, given the factual
content of the stories that followed.
The Chairman. Yes. I couldn't agree more. The statistics,
then, do you feel fairly comfortable with them given the
diversity out there? The diversification?
Secretary Snow. Absolutely, Mr. Chairman. I am confident
that the U.S., we know it is, and I am confident that it will
remain an attractive place to invest. We have the deepest, the
richest, the broadest, the most efficient capital markets in
the world, and the best risk-adjusted returns. Our job is to
keep them that way so we can continue to attract capital.
The Chairman. Finally, let me ask you, your testimony
includes an impressive statistic, I thought, that I wanted to
focus in on. That is: 5 percent expansion in sub-Saharan
economies over the next 2 years would lift nearly 30 million
people out of poverty. That is quite extraordinary, and I think
we all share that commitment to what we are trying to do. Can
these kinds of growth rates be achieved through development
assistance and debt relief alone, or do we need to continue to
push for trade liberalization?
Secretary Snow. Oh, I think, Mr. Chairman, trade
liberalization is really critical here. I had a meeting over
the weekend with 6 or 7 of the finance ministers from the
region, and was encouraged by their commitment to these good
policies, by their commitment to routing out corruption. It
happened just within a week or 2 that the President of Nigeria
had, in effect, removed two or three members of his parliament
and criminal sanctions were brought against them and against
the Speaker of the House. Here is a country with a population
that represents 20 to 25 percent of all of Africa adopting
really good policies, committed to the right things. Minister
Megosi is on the front of doing--of driving results, and there
are other ministers and presidents in the region. It is
something we just have to continue to reinforce.
Debt forgiveness will help. The financial support from the
world community will help. But it will only happen, in my view,
if good policy and trade opportunities continue to be the order
of the day. We knew trade liberalization is awfully important
for continued growth and prosperity in that region.
The Chairman. The gentleman's time has expired.
The gentleman from Massachusetts.
Mr. Frank. Mr. Secretary, I agree with you on the
importance of stressing anti corruption. I am not sure you
picked the example most likely to appeal here when you cited a
President moving criminal prosecution against the Speaker of
the House and indicting members of the parliament. Maybe there
are some other examples you might want to put forward in
another context.
The debt relief question is important, obviously going
forward with any corruption. Two words, I kind of perked up
when you said we are for debt relief up to 100 percent. I want
to help you get up to it.
There are a couple of issues here. One of the problems, I
understand, is that some of the debt is IMF debt. I understand
it is a smaller percentage overall. But I also understand that
if you look at when it comes due, debt payments, debt service
payments, IMF debt is a much greater percentage than 10 percent
in the near term. It is also the case, while it is 10 percent
across the board, that doesn't necessarily mean it is 10
percent for any one country.
What is the problem with also doing IMF debt? Now, I
believe that we ought to go ahead with gold sales. I think we
can do that. I think the gold sales we did previously were
useful moneys, I will put in the record, Mr. Chairman,
unanimous consent, a description of some of the benefits that
came around from the last round of HIPC debt relief. We did
this in a bipartisan way, was supportive and it had a good
impact. Why not include the IMF debt?
Secretary Snow. Well, Congressman Frank, the reason we are
focusing on IDA and the African Development Fund is that is the
great proportion of the debt.
Mr. Frank. Why not do both?
Secretary Snow. Well, I think we are building towards a
consensus on the HIPC for IDA and the African Development Fund.
I don't see a consensus at the other side of the IMF yet. We
have had discussions on it. We will continue to have
discussions. But we are right on the verge, right on the cusp,
I think, an historic coming together, a meeting of the minds on
the need for----
Mr. Frank. I hear that, but I don't think there is a
contradiction to working on that. To the extent there is
arbitrary reluctance to do gold sales again, I think that is a
great mistake, particularly if I am wrong, you can correct me,
but according to the people with the data, who have generally
been accurate, always accurate to me is, in terms of the debt
service payments, about 50 percent right now is going to IMF
debt, so even though the overall debt is less, given the timing
of the debt, so that you really are only putting out a
significant chunk by guarding that weight.
Secretary Snow. As I say, Congressman Frank, whatever the
merits of moving on the IMF side of the debt, we don't have
anything close to the consensus, and we are focusing our
efforts now----
Mr. Frank. Well, you ought to tell----
Secretary Snow.--on getting this done.
Mr. Frank. You ought to negotiate with them. I think you
ought to tell those people, whoever we weren't able to get a
consensus, I hope you will be able to convey there will be
considerable unhappiness if people think that is where we stop.
Simply with regard to IDA, and I appreciated Under
Secretary Taylor, who has done a very good job with this, was
very useful, and I agree that in addition to forgiving the
debt, we should go to grants instead of loans. I disagree with
people who for some reason don't agree with that.
But I then do--there is a fair question. What do we do
about the future? Yes, you can deal with this in terms of the
period of debt. You can do it by testing the debt relief. But
what do we do to make sure that IDA is in a continued position
to make those grants?
I agree with you that grants are better than loans, but to
the extent that the loan flows were some of the source of
revenue, are we committed to replacing that or are we making
sure through our appropriations process that there will be
funds going through for IDA?
Secretary Snow. Yes, we indicated there would be no--under
our policy, Congressman, there would be no reduction in net
resource----
Mr. Frank. Even if that would require appropriation going
forward?
Secretary Snow. Yes. We have said that we want to make sure
that there is no reduction in the net, net flows.
Mr. Frank. All right. I appreciate that, because I think,
with that, then there shouldn't be a problem. Let me go back
now to the job creation issue, because you said that--you had
used the figure 200,000 again, but the problem has been
beginning in the third quarter of 2003 when things start to get
better, unfortunately the average is only 165,000 a month.
Now, you would have said 200,000 a month. But 35,000 jobs a
month, as you know is quite significant. It makes a difference
between getting to whittle down the unemployment rate and not,
you are in that range. I know you are not responsible for the
Council of Economic Advisors report, but aren't we entitled to
some explanation of nearly a 50 percent drop in their
projection about jobs.
In 2004, the Council of Economic Advisors said, it almost
looks like there is randomness here. June of 2003, job
projection by the Council of Economic Advisors, 305,000 per
month. October of 2003, you say 200,000 a month. January of
2004, they are back up to 325. Now they are down to 175, and,
of course, the reality has been below everything.
I mean, are people supposed to have confidence in this kind
of bouncing around. At the very least, is there some reason why
you are aware of that we have dropped in their projection from
325,000 jobs a month to 175,000 jobs a month in just under a
year?
Secretary Snow. Congressman, no, I am not an authority on
how those estimates get made. As I recall, going back to my
conversations with Dr. Mankiw, when he was chairman of the
council--he has now returned to academic life.
Mr. Frank. He took 150,000 jobs a month with him. Can we
get them back?
Secretary Snow. As I recall this, the job number that comes
out of the----
Mr. Frank. Black box.
Secretary Snow. Well, out of this process, they call it the
Troika process, is a residual. It is sort of what comes after
you figure growth rates and inflation rates and interest rates
and all sorts of other things in the macro economic model, and
this is a residual of that. So it is not so much an active
forecast as the result of other things in the model.
Mr. Frank. Let me give you, Mr. Secretary, and I will
finish, as someone who studied economics, I think about when
you did, I share what I intuit is your nostalgia for the days
when there were less formulae and more thinking and more words
and fewer numbers when we did this economics stuff.
But I don't think it is truly--therefore, it does seem to
me, looking at what you said, we do have to confront the
prospect that we may be getting fewer jobs per unit of
increased wealth than we were getting. We have to address that.
I mean, the fact is that during the period in which the
economy has been growing and growth has been good, over five
quarters, job growth has averaged 165,000. It has bounced up
and around. But I think 5 quarters, 165,000, it is been
bouncing around, there has been no trend one way or another.
That is a pretty solid set of numbers. I think it leaves us
with fewer jobs than you reasonably expected.
I think when you said that in October of 2003, you were
reflecting historical experience. A year and a half later, it
looks as if you were too optimistic, not because you were wrong
then, but because of changes in the economy. I think we have
got to begin to think about ways to address that. Thank you,
Mr. Chairman.
The Chairman. The gentleman's time has expired. The
gentlelady from Ohio.
Ms. Pryce of Ohio. I thank you, Mr. Chairman.
Mr. Secretary. Chairman Oxley and I wrote to you on March
17th regarding our concerns that there is a looming crisis in
the WTO services negotiations. Strong services provision in the
Doha round are critical in our estimation. We were very happy
that the services sector was finally given equal billing with
agriculture and goods, thanks to a strong push by the U.S. and
the EU back in July.
But what can we do to convince developing countries of the
benefits of services liberalization and how can we get them to
do the internal political machinations to develop offers? Free
trade and financial services is as important as free trade in
goods or agriculture, as anything else. I just would appreciate
your perspective.
Secretary Snow. Congresswoman, of course, I agree with you,
it is absolutely critical. We were disappointed that more
offers didn't come in earlier in the year, and Dr. Taylor and I
and Mr. Quarles all reached out to our counterparts to suggest
that, you know, you should accelerate your efforts here. I
think that produced some results, some additional offers came
in.
We are intent on making broad-based liberalization of
financial trading, a key feature of the Doha round. I have
talked with Mr. Mandelson, Peter Mandelson, who referenced Mr.
Levine. I look forward to talking to Congressman Portman, as he
takes on that new role.
We think it is absolutely essential and going beyond WTO,
it is absolutely essential that the developing countries begin
to do it with themselves and trade with themselves. Because
when you look at the picture, an awful lot of restrictions are
within the developing countries on trade with themselves.
But I want to assure you that this is absolutely a priority
with us. I am going to be meeting tomorrow with EC Commissioner
Troy on the subject of the dialogue and we will get into the
subject of the services and opening up the transatlantic
market. Mr. McGreevy and I will be talking about opening up the
transatlantic dialogue on services. It is a priority for us.
Ms. Pryce of Ohio. Well there is a growing impression, I
think, in some circles, that this is a hostage to agriculture
issues, and do you share that opinion?
Secretary Snow. Well, agriculture is really certainly the
main act here. That financial services, we are going to make
sure financial services doesn't get forgotten.
Ms. Pryce of Ohio. Thank you, let me shift gears.
Ironically, the sale of IMF gold would impose a hardship on the
very nations that the G-8 wishes to help, going back to that
issue. Of the 38 HIPC nations, more than 30 are gold producers
or potential producers. The falling gold prices in 1998 and
1999 resulted in the loss of 150 million in annual exports
earnings to these nations, and it turned into job losses, wage
decreases and tax disruptions, all kinds of things. So given
that, why are the IMF gold sales considered by anyone to be a
credible alternative for debt relief?
Secretary Snow. You know, there is no consensus on this
among the G-7 or the board of the IMF. I think that if you did
a vote now, I haven't ever taken a vote count, you would have
as many or more against than in favor of the gold sales. There
simply isn't a consensus to move forward. The U.S. position is
clear on that. It is inadvisable and not a course of action we
could support, and we have made that clear. Why others continue
to push for it, I don't know, but I don't see how they will
ever be successful.
Ms. Pryce of Ohio. Well, I don't either, but each time it
comes up, it shakes the market and I just wonder what is behind
it.
But thank you very much, Mr. Secretary, for your appearance
here today and your candid answers, I yield back.
The Chairman. The gentleman from Vermont, Mr. Sanders.
Mr. Sanders. Thank you, Mr. Chairman.
Mr. Snow, good to see you again. Mr. Secretary, I find it
hard to understand that, given the fact that last year we had a
$617 billion trade deficit, that we had $162 billion with
China, that any sensible person could continue saying that our
trade policy is working when in fact the last number of years
we have lost millions of decent-paying jobs because of PNTR
with China and the NAFTA agreement.
Coincidentally, Mr. Secretary, this morning I was at an
event in Winooski, Vermont, where many people have lost their
jobs. I want to ask you a very, very simple question. Up here,
we make very good salaries. You make a good salary. You are a
former CEO. If you were a worker in Winooski, Vermont, and you
made $10, $12 an hour--and, yes, there are people in America by
the millions who make $10 or $12 an hour--and if the Secretary
of the Treasury of the United States of America said, in
essence, that it is appropriate, it is okay, it is right for
American workers to compete against desperate people in China
who make 30 cents an hour and who go to jail if they try to
form a union or stand up for their political rights, do you
think that that is right? Should American workers have to
compete against folks that make 30 cents an hour and go to jail
when they stand up for their rights? Yes? No?
Secretary Snow. Well, the reality is, of course, as you
know, the United States lives in a big global economy; and
probably the worst thing we could do for living standards of
the American people is to seek to pursue isolationist policies.
Mr. Sanders. Nobody is talking about isolationist policies.
Do you think I should be telling those workers that the
Secretary of Treasury says that it is right and moral for them
to have to compete against desperate people who make 30 cents
an hour?
I am hearing you say that that is globalization.
Globalization didn't just happen. It happened because corporate
America spent millions of dollars trying to get this Congress
successfully to pass permanent trade relations with China and
NAFTA, which is a disaster. It doesn't just happen. It happens
because of policy.
I want to ask you another question. We hear a lot of talk
about patriotism and love of country. When the CEO of General
Electric, a fellow named Jeff Immelt said, I quote, when I am
talking to GE managers, I talk China, China, China, China. You
need to be there. I am a nut on China. Outsourcing from China
is going to grow to $5 billion, end of quote. What do you say
to Mr. Immelt? Do you say, that is good? That is what we want
American CEOs to do? We want you to move to China? Or do you
say show some respect for American workers and the people who
have made you a great corporation?
What do you say to people like Mr. Immelt--and it is not
just him--for all of corporate America that is selling out the
American people that have made their corporations great and
given them huge salaries? What do you say to those guys?
Secretary Snow. I haven't had a conversation with Mr.
Immelt on that subject, but it is clear that we need to keep
this economy of ours flexible, adaptive, open, so we can create
all the jobs possible so that everybody who is looking for work
can find a job, so that Americans continue to prosper in this
new economy.
Mr. Sanders. You know as well as I do that large
corporations like GE are employing fewer and fewer Americans.
My next question would be, given the fact that corporations
like GE, IBM, Boeing, you name it, are throwing American
workers on the street and heading to China, do you think they
should be coming in to the Congress and asking for billions and
billions of dollars in taxpayer subsidies and tax breaks or
would you agree with me that if corporations are throwing
American workers on the street they shouldn't get welfare from
the American taxpayer?
Secretary Snow. Often, I guess, we are dealing here with
the eye of the beholder, but as a general proposition I am not
in favor of corporate welfare.
Mr. Sanders. And you would share my concern, therefore,
that in programs like the Export-Import Bank, we have given
billions of dollars to large corporations who have thrown
American workers out on the street and moved abroad?
Secretary Snow. I don't know the specifics of that, but I
am not a fan of corporate welfare. Now I qualify that by saying
corporate welfare is often in the eye of the beholder. But as a
general proposition, no, I am not a fan of corporate welfare. I
think it results in a misallocation of resources and burdens
that aren't justified by the benefits.
Mr. Sanders. I look forward to working with you on some
legislation.
The Chairman. The gentleman's time has expired.
The gentleman from California.
Mr. Royce. Thank you, Mr. Chairman.
Mr. Secretary, nice to have you back. We are here today to
discuss the international financial system, and GSE debt has
become a major source of investment in the global marketplace.
In fact, Japan and China together own close to $200 billion in
GSE debt. So, clearly, risk management practices of the GSEs do
have global implications in terms of the effect on the markets.
I wanted to get some of your opinions on the current
legislation facing our Committee. In my mind, there is a
significant difference between a regulator task to oversee
safety and soundness and one focused on systemic risk in the
entire global financial system. I know you and Chairman
Greenspan are concerned about the potential systemic risk of
the GSEs. What does the Administration think about the language
authorizing the regulator to limit portfolio growth in the
current Baker-Oxley bill in H.R. 1461?
Secretary Snow. I would like to look at the specific
language. I support the intent to limit portfolio growth beyond
what is required and necessary to sustain the primary mission
of the GSEs, which is to make the secondary market.
Mr. Royce. Let me ask you this, Mr. Secretary. What kind of
specific guidance is necessary for the regulator in this
regard?
Secretary Snow. Well, what I would propose is that the
regulator operate in a statutory framework where there is
recognition that systemic risk needs to be managed and dealt
with; that systemic risk grows out of the ability of the GSEs
today to grow their loan portfolios, which they have done in
very significant--taken on substantial debt over the course of
the last 15 years or so and invested in--in effect, arbitraged
their low borrowing rate with MBSs and mortgage-backed
securities and mortgage paper. And therein lies the potential
systemic risk. The regulator needs to be alert to that.
I would hope the statutory framework, the legislative
language, the report language would frame the issue that way
and then direct the regulator to limit the holdings of the GSEs
in their investment portfolios to the amount of MBS and
equities and other mortgage assets, hold them to a level not
greater, maybe with a cushion--obviously, with some cushion--a
greater level that is necessary to enable the entities to carry
on their specific statutory mission in their charters to create
liquidity for the secondary market.
They would be allowed to hold all the cash they wanted,
would be allowed to hold all the near cash and the treasuries,
but I think they need to be limited in their ability to invest
in interest-priced paper beyond treasuries.
Mr. Royce. Thank you, Mr. Secretary.
Another question I wanted to ask you about, I chair the
International Terrorism and Nonproliferation SubCommittee over
in International Relations; and there was a report released
last Thursday on the IMF on its technical assistance program to
assess country implementation of the Financial Action Task
Force standards. What this report says is that the IMF has been
hampered because expected donor funding largely did not
materialize. This is a pretty important area.
So I was going to ask you, why did the IMF expect
additional funding for these reviews? Was the United States
Executive Director to the IMF aware of these problems? And what
can the United States do to ensure that implementation of these
standards for the Financial Action Task Force is supported
worldwide in the event that the IMF cannot serve as a partner
in this effort due to their argument about resource
constraints?
Secretary Snow. This is a subject that is regularly under
review with us and the IMF and the G7 and the other finance
minister meetings. I have not reviewed that report yet, but I
do know that there is enormous effort going into this standard-
setting engagement and to building broad-based support, not
just for signing up but for actually doing the implementation
through the banking system and financial institutions and the
bank regulators that is essential to make it work out. I will
send you some comments on their report, but I have not seen
their report.
The Chairman. The gentleman's time has expired.
Gentlelady from New York.
Mrs. Maloney. Thank you, Mr. Chairman.
Mr. Secretary, a strong economy at home is going to help
the world economy; and, as a New Yorker, I am deeply concerned
about the need to act promptly to extend the Terrorism Risk
Insurance Act. After the attack on 9/11, the one program that
helped New York move forward more than any grant, more than
anything, was the joint effort by the Chairman and Ranking
Member with the leadership and support of the President and the
Administration that created the Terrorism Risk Insurance Act.
It expires at the end of the year.
I know you will be coming out with a report in June, and
that will add greatly to the debate. But, right now, the
financial service industry, the real estate industry and the
business community at large are very, very concerned. They are
knocking on the doors of Congress, wondering if we are going to
move this program forward and reauthorize it.
And my question to you, what is your view on the need to
extend TRIA? Will you be providing leadership? This is
essential to the economy of New York City and I would say every
major urban--Washington, D.C., and every area that is mentioned
as a terrorist target.
Secretary Snow. Yes, Congresswoman. We are moving along
well with the study that you have asked us to do. I think the
deadline for the study is the 8th of June. We plan to have the
study up certainly by that date, hopefully even sooner.
I know it is an issue of enormous importance. We have had
tremendous volume of input from both sides of the market, the
insurers and the people who buy the policies. We are going to
give it the best analytical effort we can. The support from the
industry and the users of insurance policies has been terrific.
But I better wait until we finish our report because I am not
sure quite yet.
Mrs. Maloney. Thank you, and keep a deep concern and focus
on it. It is important.
If your explanation of the trade deficit is correct, that
it is an imbalance of payment between exports and imports, why
hasn't the weakening of the dollar caused the trade deficit to
improve? It has gotten worse. With the weakened dollar, by that
definition, would it not improve the trade deficit?
Secretary Snow. There are a lot of things that affect that
current account balance: differential monetary policies,
differential savings rates, differential growth rates,
differential rates of creating disposable income and differing
expectations for currency values in the future and so on. It is
maybe the single most complex set of economic relationships and
impossible to model or really predict with any accuracy.
What we have tried to do is lay out the things we think are
most important in that adjustment process. One is growth rates
that I have talked about.
Second, higher growth rates in our trading partners so they
will generate more disposable income and buy more from us.
Second part of it, though, is the U.S. savings rates. We are
saving too little. We know that and acknowledge it. The deficit
is too high, as you suggested earlier, and I agree with you,
and we have to bring the deficit down both short term and long
term. We are trying to encourage higher household savings
rates. They are nearly zero. We just don't save very much in
the United States. So higher savings rates would help us.
Thirdly, we are intently focused on currencies that aren't
flexible; and that is the Asian zone, primarily China. We have
indicated that it is time for China, in our view--China has
taken the steps to fix their financial infrastructure and time
for them to move to a flexible currency.
The combination of those things is what it takes to address
this global imbalance. People talk about the U.S. current
account deficit. It is a shared deficit. And the other side of
the Capitol dubs it that the current account deficit is the
large capital account surplus. We have to view this as a shared
responsibility.
Mrs. Maloney. To finance our trade deficit last year, we
had to borrow over $650 billion from the rest of the world.
What would be the consequences for the U.S. economy and the
world financial markets if foreigners suddenly decided to dump
our dollars? Is it good for the U.S. economy to be borrowing so
much from abroad? You testified earlier, it is shared with
various countries, China, Japan and Mexico and Canada. But
won't the repayment of that debt and the associated interest
costs be a drag on our future and our future standard of
living? And isn't it troublesome? This is the first time that
we have borrowed so much from the rest of the world. And your
comments.
Secretary Snow. My comments are, I wish we had higher
savings rates in the United States, wish our deficit would come
down. I am confident our deficit will come down. We have
proposals pending before the Congress to help savings rates go
up. Sure, I wish we had higher savings rates. I also wish the
rest of the world was growing a little faster so they would
create more opportunities to use their higher savings for
investments in their countries. And I wish China would move to
a flexible exchange rate soon so that the adjustment that that
would introduce to the global economy would be allowed to play
out and it would have a beneficial effect, I am sure.
The Chairman. The gentleman's time has expired.
The gentleman from Texas, Mr. Paul.
Mr. Paul. Thank you, Mr. Chairman.
Welcome, Mr. Secretary. I want to make one real quick
comment about something you had in your written report that I
found fascinating. Seemed like you were praising the Japanese
for moving to privatization of their post office, and I was
wondering if that was a subtle suggestion to us that maybe we
ought to consider the same thing.
But I am interested in your comments dealing with the need
for international financial stability as well as economic
stability; and, obviously, I think we all are. In answer to one
of the questions, you talked about why the lower dollar so far
hasn't sorted out our current account deficit. But the one
issue that wasn't mentioned, that I think is important, that
someday we have to think about, and that is the special status
that the dollar has.
As a remnant of the gold exchange standard which ended in
1971, we still have a currency that is recognized as a reserve
currency. So, therefore, it gets a bonus and people are more
willing to hold dollars than any other currency. So we don't
save. We supplement our savings with the creating of credit out
of thin air, and then we spend it. In some ways, the
instability or the lack of the arrangement we want with the
Yaun is actually a tremendous benefit for us because we print
money and then we spend it over there and we get cheap goods.
When the day comes when finally there is a flexible
exchange rate between the Yaun and the dollar, some people are
going to be unhappy because interest rates may go up and it may
have a cascading effect and others may want to raise their
currency in relationship to the dollar.
So I think we are far from stable. When you gave your
optimistic report at the beginning, I hope it is all true, but
I was tempted to knock on some wood in hopes that it truly is
that positive. But I just think that the nature of the
currencies, when every country is putting money at a different
rate, there is no anchor to it. It is naturally unstable, and
we have a lot more to deal with than any of us realize.
In talking about debt relief, I am interested in this
subject as well because we talk about selling gold and getting
the currency to help debt relief, and we talk about
appropriations. But I would like you to comment on this when
you get a second. Why is it we need to appropriate money? Why
don't they just default? This whole idea that you have to first
loan them the money, then they don't pay it back and we have to
appropriate money so they can pay their debts off. It seems
like they ought to default and there should not be any need to
sell gold and should not be any need to appropriate more money
from the American people.
I assume from your comments that there is not going to be a
request from the Congress to agree to sell the gold. Is that
more or less what I should expect?
Secretary Snow. Yes.
Mr. Paul. No request. But gold essentially by the financial
community and our governments and international monetary fund,
everybody has agreed that gold no longer is money. Either the
money was stolen from the American people and was taken from
them at $20 an ounce--we defaulted on the bonds. We defaulted
with the foreigners at $35 an ounce in 1971. That is stolen
money. Why isn't it just returned to our government? And why
doesn't our government that no longer wants to use gold as
money, why don't we sell this gold? Why is this clinging on to
gold when it is no longer money? How do you look at this gold
issue?
Secretary Snow. The gold is part of the financial reserve
of the IMF. It is, in effect, a balance sheet item at the IMF.
They have very substantial gold reserves which they carry on
their books, and it represents a substantial part of the basic
assets of the Fund. So it affects their financial condition.
Mr. Paul. Why do we have to appropriate money to pay off
debt? Why can't they just default on the debt they owe? Why
would we have to sell the gold?
Secretary Snow. It is because of the way we budget debt.
When we take on these obligations, it becomes a budget item in
the U.S. accounts.
Mr. Paul. We just can't write it off?
Secretary Snow. Well, we need, basically, Congressional
approval.
Mr. Paul. Is the debt owed to the government or to banks,
private banks?
Secretary Snow. The debt we are talking about here is owed
to the multilateral development banks, to basically IDA, which
is a part of the World Bank, and to the African Development
Fund. Those two entities hold most of the debt we are talking
about.
The Chairman. Gentleman's time has expired.
The gentleman from Georgia, Mr. Scott.
Mr. Scott. Thank you very much, Mr. Chairman.
Welcome again, Mr. Secretary. Always a pleasure. Going to
ask a series of questions, if I may, so work with me in my 5
minutes.
First, it is true that the G7 is going to be meeting in
Scotland in July and on that table will be the issue of a plan
to ease the debt particularly to the impoverished nations.
Given the concern that terrorists are one of our biggest
concerns in the fight against terrorism, these impoverished
countries are basically incubators because of that poverty.
With that understanding and background, knowing we have an
extraordinary obligation to deal with this, where is the
problem between Great Britain and the United States that is
preventing at this point an agreement on how we are going to
come up with a plan to deal with world debt as it affects these
impoverished countries and what do you expect to happen coming
out in July?
Secretary Snow. Congressman Scott, I can give you an
optimistic answer there. I think the U.S. and the U.K. are
narrowing their differences as we develop a better
understanding of each other's approach. I am talking about IDA
and the African Development Fund. We are really getting close.
I had a good chance to talk with Chancellor Brown over the
weekend, and Dr. Taylor talked with people in the British
delegation. We are in continuing discussions with them.
I think we can narrow the differences to the point that we
are almost in agreement. I think we now agree on 100 percent
forgiveness. I am not sure they are fully to where we are in
going forward saying it is all grants and not loans. In other
words, for a long period, you don't make any more loans, you
just give grants. But I think there is a movement there.
I think we have narrowed our thoughts--they keep talking
about additionality, more money going in. We keep saying, let
us make sure there is no net reduction in resources going into
the HIPCs over this time. We are understanding them better, and
they are understanding us better. I think really good progress
is being made. I look forward to meeting with the Chancellor
and our British counterparts in June when we are in London this
time in anticipation of the heads of state meeting. I am
encouraged, and so are our British counterparts.
Mr. Scott. Is the point of contention in the fact that we
all agree in alleviating the debt but that the United States is
balking at wanting to give more aid?
Secretary Snow. That issue is part of the difference, but
we have indicated that there may be a misunderstanding there.
We are committed to making sure that the net transfers remain
the same, that there is no reduction for the HIPCs and for the
other non-HIPC poor countries in the resources available to
them. I think there may have been confusion on that score. We
don't think you have to put more money in. We are prepared to
talk about that.
But if you forgive all the debt, and that means the debt
service goes as well and you don't take on additional debt for
this extended period of time--I think it is 2010 we are talking
about--I mean, 2015--and during that time grants occur, the
balance sheets of those countries will improve dramatically and
the reflows, that is the payments on the debt service, are not
required, it is going to put the HIPC countries in a much
better position.
Mr. Scott. I have a little bit more time, and I have two
more questions I wanted to get to. We have been receiving some
complaints from foreign countries doing business in this
country on being able to follow the rules with the Sarbanes-
Oxley law. We will be having hearings coming up on Sarbanes-
Oxley. Do you recommend--in relationship to responding to these
complaints from foreign countries, do you recommend any changes
be made in Sarbanes-Oxley?
Secretary Snow. No, I wouldn't; and I think the SEC has
shown--I don't think you need changes in the basic law. It is a
matter of implementation. I think the SEC has shown some good
flexibility here, some good accommodating behavior on the part
of the regulator to deal with the problems of--that our
European counterparts have had.
I am sympathetic to some of their concerns. We have a
notion of independence in a director that is somebody who has
no major stake in the firm other than being a director. He is
not a consultant and not being compensated by the firm, is
disinterested. Some of the European countries have a different
conception of a corporation, where suppliers of services to the
company are like labor and expect to be on the board. We have
to find a way to get convergence, and that is the very subject
of the U.S.-E.U. dialogue that the Treasury is chairing.
Mr. Scott. I want to get this last point in. We are
involved right now in trying to provide leadership on
simplification of the Tax Code and tax reform. You mentioned
the commission the President has put forward, and later this
summer we are coming up with recommendations on that. Wouldn't
this be an excellent opportunity to address one of the issues
that you pointed out we need to for the future of this country,
for the economic health of this country, which is increasing
our savings and our investment, if we could find a way as we
are addressing reformation of the Tax Code that we put
incentives into the Tax Code to encourage savings and
investment?
Secretary Snow. Absolutely. Absolutely. I think the
Administration has come forward with some proposals along that
way. There may be better ways to do it, but absolutely.
Mr. Scott. We have legislation moving in that direction.
Would you support us on that?
Secretary Snow. I support the broad idea of encouraging
savings, and one good way to do that is to allow investments to
build up in accounts in a tax-free way or go into the account
in a tax-free way so that the tax bite on savings is lower.
Yes, that broad idea is something that I certainly support. The
details we would have to look at, but the broad concept I
support.
The Chairman. The gentleman's time has expired.
The gentleman from Georgia, Mr. Price.
Mr. Price. Thank you, Mr. Chairman.
I appreciate the opportunity to ask you a few questions. I
welcome you back, Mr. Secretary; and I want to comment how
judicious it was for you to respond to the inquiry about
changes to Sarbanes-Oxley in the manner in which you did. I
noted the smile on the face of the Chairman.
Oftentimes, we hear comments from folks who you would think
that they were Chicken Little and the sky was falling as it
relates to our debt and our deficit. And although neither are
exactly where we want them to be, I wouldn't mind if you would
please share with the Committee your comments about our debt
and deficit level vis-a-vis the world economy, the
international economy, and how it is viewed in that light.
Secretary Snow. Well, you are right. I mean, we are working
hard to bring our deficit down and our debt to GDP levels down,
because they are higher than we would like to see them. But we
are in a pretty good spot relative to most of the rest of the
world. Japan has debt levels that are over 100 percent of its
GDP. We are in a much better position than most of the rest of
the world. We can't be complacent about it. We have to continue
to focus on it. But I am confident, as we do, we are going to
find our deficit level come down to a level which will be low
by historical standards, below 2 percent of GDP, and that is
going to occur because we keep the economy strong and revenues
come in and spending--tight spending controls as you are doing
in the Congress. I feel very good about the path we are on for
the fiscal deficit. The larger issue seems to me to be those
outyears with the unfunded obligations.
Mr. Price. What about in your conversations with financial
leaders from around the world and the bigger picture of them
looking at us? What kind of comments are they making to you
regarding our debt and deficit?
Secretary Snow. The G7 ministers and the IMF people, the
central bank people I have talked to take us at our word that
we are committed to bringing the deficit down and we will bring
it down and they applaud us for that. And they recognize that
the United States has gone through a tough time. We have had a
recession. We have had the terrorist attacks. We have had
corporate scandals that led to the Sarbanes-Oxley legislation.
All of this had its effect on the revenue side of the
government, reducing the revenue government revenue stream. We
are now getting the revenue stream coming back up; and that
combination of the economy strong and the revenue stream coming
up and some decent controls on spending--I think we will
clearly get us to where we need to be. The rest of the world
wants us to get there.
Mr. Price. Is it fair to say that the rest of the world
hasn't lost confidence?
Secretary Snow. It is fair to say that the rest of the
world still has confidence in the United States and depends on
the United States as the strongest engine of growth in the
world economy. I think we have got their respect and confidence
that we are committed to dealing with the deficit issue and
putting it on a path which is the right path to be on.
Mr. Price. I will yield back my time.
On the issue that Mr. Scott raised and others have raised
and you raised about our savings rate, which is woeful, I think
we had Chairman Greenspan here awhile back, and he commented on
the types of mechanisms to attempt to increase savings in our
Nation. One of the manners in which that can be most successful
would be to move toward a consumption tax, as opposed to our
current structure. Would you have any comments about whether or
not a consumption tax increases the rate of savings?
Secretary Snow. By its very nature, that is what our
consumption tax does.
Mr. Price. A consumption tax by its very nature would
assist in our debt and deficit, or as it is viewed in
relationship to our global economy?
Secretary Snow. The idea behind the consumption tax is that
you don't tax savings and investment. You tax consumption. And
the nature of such a tax system would be to tilt towards more
savings and more investment.
Mr. Price. Which is a good thing.
Secretary Snow. I think we need more savings in this
country. I don't want to comment on what is going to come out
of this panel. I want to wait for the results of this panel.
But, clearly, that is the argument for a consumption tax.
Mr. Price. The gentleman yields back.
The gentleman from California Mr. Sherman.
Mr. Sherman. Thank you.
I would like to identify myself with the comments of the
gentlelady from New York on terrorism insurance and say that we
also ought to look at disaster insurance being treated the same
way. If this country suffers a 10 or $20 billion catastrophe,
it doesn't matter to many whether it is a manmade or a natural
catastrophe.
We do, I think, have huge problems with Sarbanes-Oxley
affecting smaller public corporations, but I know we are going
to have hearings on those in this Committee. I won't take your
time with those.
My first two questions, I will ask you to respond for the
record. The first is on the World Bank, which has provided over
recent years $1 billion of concessionary loans to the Iranian
government. We are subsidizing the very government that is
building nuclear weapons, that will either use them or threaten
to use them against the United States or its allies. I have
offered legislation to give the Administration the power to
take money appropriated from the World Bank and instead use it
on AIDS worldwide. Secretary Powell praised the legislation,
but, unfortunately, your Department has failed to embrace it. I
would hope we would do more than just have tea and crumpets
after voting no each time the World Bank votes to lend money to
Iran.
Second, when it comes to China, it flabbergasts me that we
have, in effect, acquiesced to many years of wrongful currency
manipulation as if China will eventually stop shafting us, that
is okay. I hope you come to the San Fernando Valley and talk to
people who have lost their jobs and families and became
addicted to alcohol and lost their lives and explain to them
that it is okay because China will stop doing to thousands of
American families eventually when it finally is begged into
ceasing its wrongful currency manipulation.
But I do want to focus on the huge trade deficit. The world
economy is built on a house of cards or a house of dollar-
denominated security certificates, built like a house of cards
in the vault rooms in Europe and Asia. And these huge trade
deficits result from three major causes: a failed trade policy
in both the Clinton and Bush Administrations, our enormous
Federal deficits in the last 4 years, and currency values which
have adjusted a little bit. But it is your Department, Mr.
Secretary, that puts forward the strong dollar policy. We have
seen an end to the slide of the dollar. And while the slide of
the dollar doesn't fill us with joy, it is the most benign
possible outcome of this terrible circumstance where we have
borrowed and borrowed abroad.
I would urge you to change these three major policies, but
I know you are not going to. Instead, what I would ask you is,
are you willing to explore a plan to deal with a possible
catastrophe, that is to say D day, the day the dollar drops--
and I don't mean by one quarter of 1 percent in a day; I mean
like 10 percent in a day or 30 percent in a week--the day the
house of cards collapses? Will we be in a position, perhaps
working with others, to freeze currency markets that are in a
free fall, to freeze stock markets that are in a free fall?
I will point out that it is perhaps unlikely that things
will unravel this particular way, but it is unlikely we would
have a tsunami in the Indian Ocean, and we just did. Given the
fact that this could be more destructive than that tsunami, are
you working not to embrace the idea that the dollar would crash
or to suggest that it was even a significant possibility but
rather to know that we are prepared to deal with a tsunami if
it hits us?
Secretary Snow. Did you want me to offer verbal comments on
Iran and China or just for the record?
Mr. Sherman. I would for the record on Iran and China.
Because, unless the Chairman yields more time, I would like you
to focus on some sort of circuit breaker and emergency policy
if the dollar declines suddenly, which is a possibility if not
a probability.
Secretary Snow. What we are trying to do is make sure that
we have stability in the global economy and we don't confront
disruptions.
Mr. Sherman. Mr. Secretary, we can't continue forever to
borrow half a trillion dollars and call it stability. That is
the stability of building a house of cards. It looks stable
until it caves in.
Secretary Snow. What we are saying is we want to build the
forces of adjustment in the global economy that will lead to,
over time, the current account deficit getting into a better
posture; and the things I talked about are the very things that
need to be focused on.
The Chairman. Congressman's time has expired.
The gentlelady from Illinois, Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman; and thank you for
being here, Mr. Secretary.
The OECD's Financial Action Task Force has announced 48
recommendations for how countries should structure their
efforts to combat money laundering and terrorist finance, and
currently our pilot program is under way within the IMF and
World Bank that assesses each country's financial sector
standards and laws. The G7 recommended making permanent the
pilot program, and this is your first testimony on these
matters since last year's reform of the intelligence community.
So I would like to know how important this World Bank IMF
program in the fight against terrorist financing is and what
role did the Treasury Department play in the formulation of the
standards and their use within the IMF and World Bank?
Secretary Snow. I am glad to have that question, because we
have played a very active role through our representatives,
Executive Directors and deputy Executive Director at both of
those institutions, and this is something we very much support.
We want to see a more robust role for both of those entities in
the war against financial terrorism. We think the standards are
an awfully important way to go and strengthens our hand in
dealing with terrorist finance, and I think the United States
yields to nobody in that whole effort. In fact, we yield to
nobody on the whole effort on a global basis to build the world
community support for these initiatives. The U.S. has task
forces and technical teams all over the world helping build the
competencies on terrorist finance that otherwise wouldn't
exist.
Mrs. Biggert. Well, some have suggested that the FATF may
have reached its limits to prescribe standards for fighting the
money laundering and terrorist financing and should focus on
implementation in the near future. Do you agree with that?
Secretary Snow. Well, I think both--I think we can still
broaden and deepen the effort, but we are at the point where
the standards are largely in place. Competency levels have been
developed, and the focus has to be implementation. Absolutely.
I agree with you.
Mrs. Biggert. I understand that a number of regional-style
FATF groups have been created and there has been a recent
meeting that occurred in the Middle East, North Africa region
and the agenda included how to address the link between the
Muslim charities and possible terrorist funding as well as
trade-based methods for funding the terrorist activities
through falsified trade documents. Did the United States
participate in these meetings directly or on an observer basis?
Secretary Snow. I am not sure whether we did directly. Our
presence was certainly felt, because we have engaged with all
of the countries in the region on that subject. I have held two
or three--Dr. Taylor and I have held three or four conferences
with the ministers and central bank governors of the region in
which the subject of anti-terrorist finance, dealing with
charities, dealing with couriers, dealing with bank regulation
to get at the problem has been the primary subject of our
engagement. So, yes, whether we were there or not our presence
was felt because of all these far-reaching engagements we have
had on this subject.
Mrs. Biggert. What do you think about the assessment the
progress that is being made by this type of FATF body?
Secretary Snow. I think there is good progress. There has
clearly been a heightened understanding of the problem, a
heightened commitment to it. Many more resources going into it,
much higher competency level in going at the problem, but we
are not satisfied. There is still a lot to be done, I would
grant you that. But the difference between now and two years
ago is really night and day in terms of the commitment to the
issue.
Mrs. Biggert. Do you think there are new tools that the
international financial system may need to detect funds that
finance terrorist activities?
Secretary Snow. Yes. I think we have got to continuously
adapt as they adapt. They are continuing to change. As we
harden up and tighten up in one area, they find routes around
it, and we are continuously learning and responding. This is a
integrative process, and now E-commerce is becoming a vehicle
for the movement of funds. We can never rest.
The Chairman. Gentlelady's time has expired.
Gentlelady from Wisconsin, Ms. Moore.
Ms. Moore. Thank you, Mr. Chairman.
I am always stunned that I have the opportunity to ask a
question; and thank you, Secretary Snow. It has really been a
great hearing, and I really have appreciated your animation and
really engaging on these questions.
My questions relate to your written testimony on the
current trade imbalances, and I sort of want to pursue some of
the line of questioning that Mrs. Maloney raised with you
earlier. Your analysis in your written statements say that--
basically, you have said that the economic policies of
countries, good and bad, really contribute to the global
economy. And one of the things that you said in your testimony
is that there is a gap, obviously, in the investment
opportunities in the United States and the levels of savings in
our economy. I am wondering if there is any connection or tie
between the tax cuts that we provided and those beneficiaries
not saving or investing in foreign instruments rather than in
the United States instruments? Do you have any insight--that is
my first question--into whether those tax cuts did or did not
contribute to this gap?
Secretary Snow. Ms. Moore, I don't think the tax cuts had
much effect on--they certainly left people with more disposable
income.
Ms. Moore. What did they do with it or didn't do with it?
Secretary Snow. Left the government with less money and
left people with more money. The tax cuts, it seems to me
pretty clearly, have helped get the American economy growing
faster.
Ms. Moore. Did they save it?
Secretary Snow. They clearly didn't save a lot of it, as
indicated in our savings rates, but we have much higher growth
rates. Those growth rates have given people more disposable
income; and some part of that disposable income, given our high
propensity to spend, has been spent overseas to purchase
imports. And certainly that has contributed to this imbalance.
Our faster growth rate versus our trading partners has
contributed to this imbalance.
Ms. Moore. We give tax breaks and then they spent it
overseas.
Secretary Snow. Well, they spent it here and spent some
part of it overseas.
Ms. Moore. You also mentioned during the questions that
many of our Members have given on both sides of the aisle that
raised important issues--you said, in response to a question
about what we could do in those poor countries, that if there
were some private sector investment in those poor countries
that would obviate this borrow-and-then-we-bail-them-out cycle
and borrow-and-bailout cycle. Were you talking about private
sector investment from inside those countries or from
Americans?
Secretary Snow. Well, successful economic development
requires investments, and it is often led by foreign direct
investment, where investors from outside the country bring
capital to the country and expertise with it.
Ms. Moore. Wouldn't it put these same countries in the same
predicament? Right now, we are the strongest economy in the
world; and perhaps that is the only thing that is keeping us
afloat. But isn't our essential problem--I mean, to quote you,
you say really, at the most fundamental level, the problem that
we are facing is that we have a lot of investment opportunities
and very low savings. Is this a formula for failure to say to
very, very poor countries who are not developed, just open
yourself up to all these foreign investors versus things like
grants and loan forgiveness and other things, to have foreign
investors basically come in and put them in a debt situation
with their private investments?
Secretary Snow. What I am talking about, that is where a
foreign investor comes in and builds a plant and creates
physical assets that invest in some cases in roads or in the
textile manufacturing or in agriculture and that will
strengthen the economy of that poor country. It will create new
jobs, and it will raise their GDP.
On the debts that I was talking about, those are primarily
the debts that come from the lending of the World Bank and the
other multilateral development banks that was intended to help
the countries but has created nonsustainable debt levels. In
our view, it is very simple and straightforward. These
countries are getting buried in debt, and we want to help them.
One way to help them is remove that debt.
The Chairman. The gentlelady's time has expired.
The gentleman from Illinois.
Mr. Manzullo. Always good to see you and appreciate your
patient attitude towards the Chinese with regard to floating
the renminbi. We have talked about this in the past, and you
have said it, and correctly so, that you can't move too quickly
on it because the Chinese structure was simply not in place to
handle a floating currency. In your written testimony on the
bottom of page 5 you state: the Chinese are now ready to adopt
a more flexible exchange rate. They have sufficiently prepared
their financial system to live in a world of greater
flexibility and need to take action now.
Members of Congress are grumbling. They are grumbling
because now there is another free trade agreement that is being
set before us, CAFTA; and there is resistance coming among the
free trade circles, which is where I am, that the
Administration has to do two things: One, there has to be
dramatic decisive action to force the Chinese to float their
currency; and, second, that China must be treated as a market
economy so that when they subsidize their companies we can get
countervailing duties against them.
What do you think about attaching legislation to CAFTA or
as a prerequisite to satisfy Members of Congress and I guess to
satisfy yourself, Mr. Secretary? Because you have done
everything you can. You waited it out. And the Chinese are
experts at delaying. They have 6,000 years of recorded history.
We have about 225. What can be done to now force the Chinese,
because they are ready to float, what can be done to force them
to float their currency?
Secretary Snow. Congressman Manzullo, the decision to float
a currency is a sovereign decision. We have had long, intense
discussions with the Chinese over a period of time. They have
committed to do it. They have taken a lot of steps to put their
financial system in place to enable the financial system to
function well with the floating exchange rate, with a flexible
exchange rate. And having taken all those steps, we are clear--
we are telling them directly, you know, you made enough
progress here. We commend you on the progress. That progress
now should lead to the next step, which is the flexibility.
I don't support, as you know, the legislation that is being
talked about that would impose a tariff on everything coming
out of China by an amount that is estimated to be the
difference between the current exchange rate and what the
exchange rate would be if it floated.
Secretary Snow. I mean, I know, I am sympathetic to the
ideas----
Mr. Manzullo. Even the author does not support that.
Secretary Snow. But I am concerned it will not be
effective. I want the result that I think you want, and that is
flexibility in their currency. I just do not think that is the
right way to get it.
Mr. Manzullo. I agree that tariffs, tariffs will not work.
But what are you going to do? I mean, it has got to be in this
dynasty. Otherwise, it will just continue the way it is now.
That seems to be what they are doing.
I mean, we are at the point where the folks back home are
saying, Congressman, how can you even consider another free
trade agreement when we are locked into this horrible mess? I
mean, what about a Section 301 or what about legislation that
would allow the US to bring an action under 301 for the
currency imbalance?
What about those remedies?
Secretary Snow. Well, we have looked, you know, in the
past, at the 301 option and did not find it appropriate as a
vehicle to deal with the currency, with the currency issue.
Clearly, China is going to have to move here. The time has
come, it is overdue.
Mr. Manzullo. They are not. Their hands are going to be
forced so we will have to find a way to do it. I do not expect
to have an answer within the next 15 seconds, but I think that
is what Congress is really asking for is some solid concrete
solution to get it done, and they will appreciate your
leadership on that.
Secretary Snow. Well, thank you, we want to see it done.
You know that.
Mr. Manzullo. Thank you, I yield back.
The Chairman. The gentleman yields back. The gentleman, the
very patient gentleman from California, Mr. Baca.
Mr. Baca. Thank you, Mr. Chairman.
The Chairman. Please turn your mike on.
Mr. Baca. Thank you very much, Mr. Chairman. Thank you, Mr.
Secretary for appearing before us.
As you know, Mr. Chairman, one of the most important things
for insuring the health of international financial systems is
preserving the soundness of the U.S. economy. Many foreign
governments have invested in our bonds, and it is important
they continue to be able to have faith in the integrity of our
system.
Based on that and based on the opening statements, you
indicated that the world economy is in good condition, no
recession, no crisis, but yet you continue to indicate that we
are at a deficit that is too high, and there needs to be more
control on spending, I do agree with you there.
In light of that, it seems like this Administration--we are
very much concerned with this Administration's budget. It
continues to underestimate the cost of the war that continues
to be high, somewhere around $400 some billion that we spent on
the war. Now we are talking about Social Security and
privatization.
Before I get into that, you also indicated that we have
created about 2.4 million jobs. Well, we do not know what kind
of jobs were created and how many jobs were created two or
three times, because we could have counted two or three times.
We actually have lost about 2 million jobs.
We have lost about 550,000 jobs in outsourcing, so we have
lost alot of jobs. So it makes it very difficult as we look at
another trade agreement, see if we can get another trade
agreement because we are looking at the President's plan to
look at Social Security, privatizing, yet we know that the jobs
that are created here pay into the system. Yet if we continue
to outsource, we will not have those jobs out here.
I want to hear your opinion in reference to what we should
do to make sure the economy grows strong here in the United
States, and we do not create jobs outside of the United States,
because many of those manufacturers are leaving our areas. Just
as Mr. Sanders said earlier, in Vermont, I am faced with the
possibility of losing--my District in Ontario--163 jobs from
General Electric that may be going overseas. I am very much
concerned about this.
Could you please address that?
Secretary Snow. Well, I would be delighted to. We want to
create as many jobs as we can in the United States. I am with
you 100 percent. We want to make America the best place to
invest. So capital comes in here and----
Mr. Baca. If we do have that, then those people are able to
pay into the Social Security system to make it solvent so we
would not be in a--you would say in a crisis, you know. We
would be in a challenge. That is basically what we are doing
now is we are creating a situation by having these jobs leave
the United States and not having those jobs that are created to
pay into the system.
Secretary Snow. We have got to keep the American economy
capable of generating jobs. That means, in my view, keeping it
innovative, keeping it focused on the principles of enterprise
that have always been the strength of our country. Rewarding
initiative, rewarding risk taking, rewarding innovation and
entrepreneurship.
I am confident, if we do all of that, we are going to
continue to attract capital, to build innovative businesses and
to create lots of jobs. That is our whole history.
Mr. Baca. I hope we do that, because one of the other
things that you stated in your opening statement is you
indicated that raising--the standard of living has gone up. I
am wondering for whom, because there are a lot of people out
there that are unemployed right now, that their standard of
living has not gone up.
Then when you look at the estate tax and the tax breaks,
yes, for them, the standard of living has gone up. But for
those middle income and working families and others, they are
unemployed and looking for skills and looking for jobs that
they do not have here.
Secretary Snow. Well, let me assure you, we are not
satisfied. There are some 3 million additional people working,
according to the Bureau of Labor Statistics.
That is good, but we are not satisfied. The unemployment
rate has come down to 5.2. That is good, but it can do better.
Mr. Baca. It depends on how we are accounting. If sometimes
we are accounting double or triple the same person now having
to work two or three different jobs--because the manufacturers
that used to be here, they used to get paid $25. Now that
person has to work two jobs or three jobs, and yet sometimes, I
believe we are double counting. Is that so, could it be?
Secretary Snow. Well, this will be a long discussion if we
got into it in any detail, which we can do otherwise. But there
are two different surveys, as you know. There is the household
survey, and there is the more widely used employment survey
called the establishment survey.
The household survey does look at multiple jobs and counts
multiple jobs, and the other one does not. So there are some
differences in the way the indices, the surveys are conducted.
But basically, I think they both agree that we are creating
a lot more jobs than was the case for 3 years ago.
The Chairman. The gentleman's time has expired.
Mr. Baca. I hope they are in the United States and not
outside of the States.
The Chairman. Mr. Green.
Mr. Green. Thank you, Mr. Chairman. It is a privilege to be
in your company, Mr. Secretary.
Secretary Snow. Thank you very much, Congressman.
Mr. Green. I represent the Ninth Congressional District in
Houston, Texas. To many of my constituents, free trade is not
free. Free trade, in fact, is, in their opinion, quite
expensive. In their opinion, free trade is costing jobs and is
impacting their lives adversely. Free trade is costing about
$61 billion and a trade deficit. That is an expensive
proposition.
So when free trade is costing as much as it appears to be
costing, to them, it is not fair trade, and that is why that
term fair trade has gained momentum. People want to be treated
fairly. They do not think they are being treated fairly with
reference to our relationship with China.
While we can be patient here and wait for change, I sense a
growing impatience among my constituents. I suppose the
question becomes, what do we do when flexibility is not
demonstrated? How do we manage the relationship when
flexibility is not demonstrated?
I have a follow-up, if I may, once I hear the answer.
Secretary Snow. Well, Mr. Green, I am not satisfied with
the pace of progress here. We are disappointed that they have
not moved.
I do feel that the best way to get them to move is to
pursue this financial diplomacy, if you want to call it that,
that we have been engaged in. There are very visible signs that
they are moving.
They have taken any number of steps to prepare the way.
They put in place a very strong bank regulator. They are taking
on the nonperforming loans. They are capitalizing the banks.
They are allowing people to take more money out of the country.
They are allowing firms that earn profits out of the country to
leave it out of the country.
All of these are steps in the right direction, including
the transaction they have negotiated with the Chicago
Mercantile Exchange to put in a hedging arrangement for their
currency. We are going to continue--let me show you, we are
going to continue to press them.
There are a lot of things that we are not happy about, such
as intellectual property rights. Trade has got to be a two-way
street. The counterfeiting that goes on is terribly unfair, as
you are saying.
All of that is on the agenda with the Chinese. We are
focusing primarily on the currency side, but others in the
Administration are focusing as well on taking the lead on other
sides. It has got to be fair, it has got to be a two-way
Street. I agree with you.
Mr. Green. I will forego the follow up and just make a
comment. You indicated earlier that the world economy is in
good order and that we are in a sweet spot. But there is
something that is unusual about this in that--and I would like
to relate this to people right here in this country.
We have this notion that a rising tide raises all boats.
Unfortunately, in our country, women still make about $0.76 for
every dollar a man makes, unless you happen to be an African-
American woman, and then you make about $0.66; or you happen to
be a Hispanic woman, and you make about $0.55.
So there are some people who find themselves living in a
paradise, but they seem to be strangers in paradise. It is very
difficult sometimes to be a stranger in paradise. I would hope
that as we focus on all of these means by which the world
economy is in a sweet spot that we can do something about a
systemic problem right here in our own country.
I do not expect you to solve that problem or to give me a
response, to be quite candid with you. I just think that it is
good for us to note that in these times of great prosperity
that there are some who have stagnated and are not really
benefitting to the extent that many others are.
The Chairman. The gentleman's time has expired.
The gentleman from Alabama in the back, clean up.
Mr. Davis of Alabama. Thank you, Mr. Chairman.
Let me say, Mr. Secretary, I am the only thing stopping you
from getting out the door. I will try to hit on two or three
topics with you.
Let me go back for a moment to Mr. Manzullo's line of
questions. He asked you--and you talked at length--about the
anti-devaluation bill that is pending before the Senate. You
responded to that.
I do not remember you responding to his question about the
countervailing duties bill. Senator Bayh, as you know is the
Senate Democratic lead sponsor in the Senate.
As you probably do not know, I am the lead Democratic
sponsor in the House on that measure.
Briefly, is the Administration opposed to legislation that
would subject China to the same standards as the market
economies?
Secretary Snow. Congressman, I wish I knew the legislation
better. I am not really familiar with this legislation.
Mr. Davis of Alabama. Are you opposed to it in principle?
If I can summarize it to you. What it does is very basic. It
states that, as you no doubt know, market economies, if they
subsidize their industries or are deemed to be in violation of
the WTO's anti-subsidization rules, they are subject to
countervailing duties. Right now, the nonmarket economies which
shine as the most conspicuous are not subject to such duties.
As a matter of theory, is there any reason in terms of
fairness or equity or basic economics why the nonmarket should
not be subject to the same rules as the markets?
Secretary Snow. Subsidies, of course, are not good policy.
Mr. Davis of Alabama. And more reason why----
Secretary Snow. Yes, as a general proposition, they are
sometimes defended with respect to developing countries on the
grounds of, if an industry is--you know, I think even the great
Alexander Hamilton defended some protection for domestic
industry in the United States for a time as we became a
developing country.
Mr. Davis of Alabama. Does China fit in the developing
country scenario at this point?
Secretary Snow. They are--they are certainly, that is the
terminology that is applied to them in these trade circles.
They are a developing, not yet a developed country.
Mr. Davis of Alabama. Do they appear to be a country that
is hampered and incapable of competing with the rest of the
world? Just what do you mean by developing?
Secretary Snow. Well, it is a very uneven story with China,
of course. Some parts of their economy are doing well, and
others are still very rudimentary.
Mr. Davis of Alabama. Let me try to move you along a little
bit, because I am last, and my time is still limited. Does the
Administration oppose or support or have any position on the
countervailing duty bill right now?
Secretary Snow. You know, I am going to defer to my
colleague, who is responsible for this, Mr. Gutierrez?
Mr. Davis of Alabama. Okay. Let me move to the second
question to use the time more effectively.
Another thing that you were asked about repeatedly today
was the low savings rate.
Secretary Snow. Right.
Mr. Davis of Alabama. There certainly is no dispute on
either side of this aisle that we have not been nearly as
effective as we want to be in terms of generating savings.
One theory that some economists have, as you know, is that
part of the reason why people save so little in this country is
because we have an exceptionally generous credit card industry,
and the credit card companies are very, very quick to extend
credit to high-risk individuals who are not good candidates to
pay back the loan and often have to result to more borrowing to
pay back the credit when they get credit.
Does it stand to reason that we would do something to
improve our savings climate if we made it harder for credit
card companies to lend credit to high-risk individuals?
Secretary Snow. I think we do a lot to deal with that
issue. It is an issue, I agree with you. If we would advance
financial literacy. And one of the things----
Mr. Davis of Alabama. Well, that is a good question----
Secretary Snow. We have to do is lead this effort on
financial literacy.
Mr. Davis of Alabama. Let me cut you off for one second, I
do not mean to be rude. I just want to make the best use of my
time. That is one strategy. I did not ask you to comment on
that one.
I will ask you to comment on the particular one I
mentioned, which is making it harder for credit card companies
to do what they do, which is to target low-income people. You,
for example, may be aware they often target people after they
file bankruptcy. They target college students. They target a
variety of people, and that pushes them away from a savings
mentality.
So, short answer--short question, hopefully, short answer,
doesn't it stand to reason that it would be good for our
economy and would allow us to make some dent in the savings
problem if we made it harder for credit card companies to
extend credit so generously to high-risk people?
Secretary Snow. Congressman, I am reluctant to get into
that, because I just do not know enough about it. I am fearful
that giving a broad answer, yes or no, to a detailed question
like that might leave inferences that I am not--create
implications for which I am not aware.
Let me think about that, and I will get back to you.
What I do know is that we have a real problem with
financial literacy. We need to focus on financial literacy. We
have got to make people aware of what happens with compounding
interest, when it is in your favor and when it is not in your
favor and that a lot of people are taking on credit card debt
that they should not take on. I will agree with you on that.
The Chairman. The gentleman's time has expired.
Let me say to my friend from California.
Ms. Waters. Thank you very much.
The Chairman. He has to catch a plane.
Ms. Waters. I know he has to catch a plane.
I am going to submit my questions to the record for you to
answer. I want to know the progress of negotiations and what
you are doing to help provide the 100 percent debt cancellation
and some information about the IMF and how you see that and how
the off-market gold sales are something that you can share
information with us about. You do not have to answer.
Secretary Snow. Thank you.
The Chairman. Without objection, that would be the case.
Mr. Secretary, we thank you so much. I would make one
request. The chair requests that you provide the Committee, for
the hearing record, a list of all of the reforms undertaken by
China in the last 2 years to prepare for a flexible exchange
rate.
Secretary Snow. We will be delighted to do that, Mr.
Chairman.
The Chairman. Thank you, Mr. Secretary, and again, thank
you for your appearance.
Secretary Snow. Thank you very much.
Ms. Waters. Mr. Chairman?
The Chairman. The gentlelady from California.
Ms. Waters. Mr. Chairman, I would ask unanimous consent to
enter my statement into the record.
[The prepared statement of Hon. Maxine Waters can be found
on page 58 in the appendix.]
The Chairman. Without objection. Thank you.
The Committee is adjourned.
[Whereupon, at 5:15 p.m., the Committee was adjourned.]
A P P E N D I X
April 19, 2005
[GRAPHIC] [TIFF OMITTED] 24399.001
[GRAPHIC] [TIFF OMITTED] 24399.002
[GRAPHIC] [TIFF OMITTED] 24399.003
[GRAPHIC] [TIFF OMITTED] 24399.004
[GRAPHIC] [TIFF OMITTED] 24399.005
[GRAPHIC] [TIFF OMITTED] 24399.006
[GRAPHIC] [TIFF OMITTED] 24399.007
[GRAPHIC] [TIFF OMITTED] 24399.008
[GRAPHIC] [TIFF OMITTED] 24399.009
[GRAPHIC] [TIFF OMITTED] 24399.010
[GRAPHIC] [TIFF OMITTED] 24399.011
[GRAPHIC] [TIFF OMITTED] 24399.012
[GRAPHIC] [TIFF OMITTED] 24399.013
[GRAPHIC] [TIFF OMITTED] 24399.014
[GRAPHIC] [TIFF OMITTED] 24399.015
[GRAPHIC] [TIFF OMITTED] 24399.016
[GRAPHIC] [TIFF OMITTED] 24399.017
[GRAPHIC] [TIFF OMITTED] 24399.018
[GRAPHIC] [TIFF OMITTED] 24399.019
[GRAPHIC] [TIFF OMITTED] 24399.020
[GRAPHIC] [TIFF OMITTED] 24399.021
[GRAPHIC] [TIFF OMITTED] 24399.022
[GRAPHIC] [TIFF OMITTED] 24399.023
[GRAPHIC] [TIFF OMITTED] 24399.024
[GRAPHIC] [TIFF OMITTED] 24399.025