[House Hearing, 111 Congress]
[From the U.S. Government Printing Office]
FOREIGN POLICY IMPLICATIONS OF U.S. EFFORTS
TO ADDRESS THE INTERNATIONAL FINANCIAL
CRISIS: TARP, TALF AND THE G-20 PLAN
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION AND TRADE
OF THE
COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JUNE 10, 2009
__________
Serial No. 111-37
__________
Printed for the use of the Committee on Foreign Affairs
Available via the World Wide Web: http://www.foreignaffairs.house.gov/
______
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COMMITTEE ON FOREIGN AFFAIRS
HOWARD L. BERMAN, California, Chairman
GARY L. ACKERMAN, New York ILEANA ROS-LEHTINEN, Florida
ENI F.H. FALEOMAVAEGA, American CHRISTOPHER H. SMITH, New Jersey
Samoa DAN BURTON, Indiana
DONALD M. PAYNE, New Jersey ELTON GALLEGLY, California
BRAD SHERMAN, California DANA ROHRABACHER, California
ROBERT WEXLER, Florida DONALD A. MANZULLO, Illinois
ELIOT L. ENGEL, New York EDWARD R. ROYCE, California
BILL DELAHUNT, Massachusetts RON PAUL, Texas
GREGORY W. MEEKS, New York JEFF FLAKE, Arizona
DIANE E. WATSON, MIKE PENCE, Indiana
California JOE WILSON, South Carolina
ADAM SMITH, JOHN BOOZMAN, Arkansas
Washington deg.Until J. GRESHAM BARRETT, South Carolina
2/9/09 deg. CONNIE MACK, Florida
RUSS CARNAHAN, Missouri JEFF FORTENBERRY, Nebraska
ALBIO SIRES, New Jersey MICHAEL T. McCAUL, Texas
GERALD E. CONNOLLY, Virginia TED POE, Texas
MICHAEL E. McMAHON, New York BOB INGLIS, South Carolina
JOHN S. TANNER, Tennessee GUS BILIRAKIS, Florida
GENE GREEN, Texas
LYNN WOOLSEY, CaliforniaAs
of 3/12/09 deg.
SHEILA JACKSON LEE, Texas
BARBARA LEE, California
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
MIKE ROSS, Arkansas
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
JIM COSTA, California
KEITH ELLISON, Minnesota
GABRIELLE GIFFORDS, Arizona
RON KLEIN, Florida
Richard J. Kessler, Staff Director
Yleem Poblete, Republican Staff Director
------
Subcommittee on Terrorism, Nonproliferation and Trade
BRAD SHERMAN, California, Chairman
GERALD E. CONNOLLY, Virginia EDWARD R. ROYCE, California
DAVID SCOTT, Georgia TED POE, Texas
DIANE E. WATSON, California DONALD A. MANZULLO, Illinois
MICHAEL E. McMAHON, New York JOHN BOOZMAN, Arkansas
SHEILA JACKSON LEE, Texas J. GRESHAM BARRETT, South Carolina
RON KLEIN, Florida
Don MacDonald, Subcommittee Staff Director
John Brodtke, Subcommittee Professional Staff Member
Tom Sheehy, Republican Professional Staff Member
Isidro Mariscal, Subcommittee Staff Associate
C O N T E N T S
----------
Page
WITNESSES
Damon Silvers, Esq., Associate General Counsel, American
Federation of Labor and Congress of Industrial Organizations
(Deputy Chair of the Congressional Oversight Panel)............ 8
Mr. Kevin L. Kearns, President, United States Business and
Industry Council............................................... 24
Nancy Birdsall, Ph.D., President, Center for Global Development.. 33
The Honorable Terry Miller, Director, Center for International
Trade and Economics, The Heritage Foundation (former Ambassador
to the United Nations Economic and Social Council)............. 44
Mr. Roger Robinson, Jr., President and Chief Executive Officer,
Conflict Securities Advisory Group (former Senior Director of
International Economic Affairs at the National Security
Council)....................................................... 53
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Damon Silvers, Esq.: Prepared statement.......................... 11
Mr. Kevin L. Kearns: Prepared statement.......................... 26
Nancy Birdsall, Ph.D.: Prepared statement........................ 35
The Honorable Terry Miller: Prepared statement................... 46
Mr. Roger Robinson, Jr.: Prepared statement...................... 55
APPENDIX
Hearing notice................................................... 80
Hearing minutes.................................................. 82
The Honorable Donald A. Manzullo, a Representative in Congress
from the State of Illinois: Prepared statement................. 83
FOREIGN POLICY IMPLICATIONS OF U.S. EFFORTS TO ADDRESS THE
INTERNATIONAL FINANCIAL CRISIS: TARP, TALF AND THE G-20 PLAN
----------
WEDNESDAY, JUNE 10, 2009
House of Representatives,
Subcommittee on Terrorism,
Nonproliferation and Trade,
Committee on Foreign Affairs,
Washington, DC.
The subcommittee met, pursuant to notice, at 1:05 p.m. in
room 2172, Rayburn House Office Building, Hon. Brad J. Sherman
(chairman of the subcommittee) presiding.
Mr. Sherman. In advance of the Group of 20 meeting in
London, this subcommittee held a hearing to explore the foreign
policy implications of the possible commitments that would be
made there. President Obama then went to the G-20 where, along
with other G-20 summit leaders, he committed $500 billion in
contributions to the IMF, roughly $109 billion of that to come
from the United States. He also committed us to joining a $250
billion expansion of special drawing rights, monetary reserves
for all members.
I should point out that nearly $2 billion of this $250
billion will go to Iran. Hundreds of millions will go to Sudan,
and Sudan has already used its prior receipt of special drawing
rights by borrowing against it, turning it into cash, and
financing its military. Additionally, the world leaders pledged
at least $100 billion of additional lending by multilateral
development banks, including a commitment to the World Bank
which would triple its lending to $35 billion.
No effort was made, that I am aware of, to say that before
we make additional commitments to the World Bank, we get that
organization to cease and desist its disbursements on loans
previously approved to the Government of Iran. It also seems
that as the President was making these commitments, he did not
adequately explain to foreign leaders that in our country and
with our Constitution, the President speaks for the executive
branch, and that where legislation or appropriations are
necessary, there is a co-equal branch of government, it is
right there in Article I of the Constitution, and foreign
leaders are often misled into believing that a President speaks
for all branches of the Federal Government.
In fact, they need to be warned that a commitment of the
executive branch is a commitment to use the executive branch's
power and a commitment to come to Congress and to try to
persuade us to move in the same direction. My concern is that
the policies reached at the G-20 meeting, while aimed at
solving the world's economic problems or at least ameliorating
them, seem to have been utterly blind to our anti-genocide,
antiproliferation and antiterrorism policies.
That may be the decision of the executive branch. It does
not have to be the decision of the legislative branch. It
appears that a number of our friends in Europe simply don't
agree with us on anti-genocide, antiproliferation or
antiterrorism. That doesn't mean they are pro-terrorist or pro-
genocide, it just means they think that we should conduct
business as usual while turning a blind eye to those concerns,
and it is clear that those who wish to be applauded by European
leaders best ignore those considerations.
The question is whether ignoring those considerations is
also a way to be applauded by Congress and the American people.
Last week, and I am glad he got here in time for this favorable
mention, I and Ranking Member Royce organized and signed a
letter to House appropriators urging the inclusion of important
safeguards in any congressional authorization of U.S.
Government funds to multilateral institutions. Specifically, we
want to prevent countries that are identified as supporting
terrorism or involved in nuclear proliferation, most notably
Iran, from benefitting from policies of the IMF and the World
Bank at the same time that the U.S. Government is transferring
billions of dollars to those institutions.
I should point out that the Senate war appropriations bill
includes a $109 billion transfer or commitment of funds, if you
will, to the IMF, and also over $3 billion is authorized for
the World Bank. Nothing in that bill asks those institutions,
in return for our largesse, to alter their policy: Business as
usual, toward Iran, Sudan and other terrorist regimes. Now,
these concerns are not new, as I have pointed out before. From
2000 to 2005, the World Bank approved $1.4 billion in loans to
Iran, some $0.5 billion is yet to be disbursed, and I believe
the United States should not provide additional funds to the
World Bank until those disbursements are stopped.
Similarly, according to a May 26 report in the Financial
Times, Hezbollah, in anticipation of potential success at the
Lebanese election, began meeting with IMF officials.
Fortunately, the Lebanese people were unwilling to embrace
Hezbollah. Unfortunately, what these discussions show is that
the IMF administrators were willing to embrace Hezbollah,
should it have been successful in those elections. The
international community should not expect Americans to
contribute or put at risk more than $100 billion without
focusing on the demands of the American people that these
international organizations do not benefit terrorism,
proliferation or genocide.
As noted in a CRS report, the most effective way that
Congress can influence U.S. policies toward multilateral
institutions is by attaching enforceable conditions to new
funding arrangements. Now, our discussion at these hearings
goes beyond the multilateral institutions. Our domestic, or at
least called domestic, stimulus efforts and bailouts through
TARP, TALF and the stimulus bill, play a major role in the
world economy, and one focus of this is the AIG bailout.
Foreign-owned institutions have benefitted from the bailout
of what are called U.S. companies. Most notable was our nearly
$200 billion committed to AIG. Let me focus a little bit on the
AIG bailout. The word is clear to investors worldwide. If you
loan money to an American auto company, like Chrysler, you may
get only 20 cents on the dollar, but if you take your money
and, quote, deg.``invest it at the AIG casino,'' not
putting it into anything productive, not actually building
anything, you just play the casino, the American taxpayer will
be squeezed into making sure you get every penny, and so while
the Chrysler bond holders are getting about 20 cents on the
dollar, the AIG counter-parties haven't lost a penny, and I
realize I have gone a little bit long but I know that Mr. Royce
would want to hear at least a full contingent of this opening
statement, so in deference to him, I will continue.
Now, when you focus on the AIG, we notice that Societe
Generale was paid $4.1 billion, U.S. Government money, on their
credit default swap. They didn't have to give up a penny, and
it is alarming and unacceptable that we sent this money to an
institution that has continuously operated a bank in Iran since
1974. On the same note, UBS, the biggest Swiss-owned bank, is
known as a haven for tax evaders.
It received $800 million of U.S. taxpayer money in the AIG
bailout. While the Swiss authorities have provided the United
States with details on 300 Americans suspected of tax fraud,
UBS and the Swiss Government officials have failed to identify
more than 50,000 U.S. account holders. Claiming that further
cooperation would violate the law, they are unwilling to
change, so U.S. tax money goes to support a bank that makes it
much, much more difficult to collect U.S. tax money from those
who owe it, placing the burden of that United States tax
collection on working families who do not have Swiss bank
accounts.
Now, there are American values and there are what I would
call the accepted values of Wall Street and the world economic
elite. Sometimes these values coincide, and were reflected at
the G-20 conference, which was dedicated to alleviating global
poverty and stimulating the world economy. But, there are three
T's where Wall Street values and world economic elite values
clash with American values. I call them the three T's: Tax
evasion, terrorism and total protection of the biggest
financial institutions, whether U.S. or foreign, at the expense
of the U.S. taxpayer.
I would hope that American foreign and economic policy will
reflect American values, and I hope that at least this branch
of government keeps that in mind and asserts its authority,
rather than serving as a rubber stamp for the administration.
With that, I yield to our ranking member, Mr. Royce.
Mr. Royce. Thank you very much, Mr. Chairman, and I thank
you not only for calling this hearing but, as you know, the
international financial crisis has impacted the full range of
our foreign policy and national security interests, and that is
part of the objective here, is to hear from our witnesses on
that. Let me begin by saying I share the chairman's concern
about IMF aiding Iran, and I very much appreciate the letter,
Mr. Chairman, that you led, and which I signed, calling for
this funding to be pulled out of the pending supplemental, and
I think it is very, very important that at a time when we
should be squeezing Iran because of its nuclear program, and
recognizing that the Iranian economy, frankly, is hurting, that
this policy of allowing Iran to receive new IMF money, and some
suggest, Mr. Chairman, that this could go as high as $1.7
billion--$1.7 billion, a lot of this at United States taxpayer
expense. This is clearly nonsense, and that is just one
concern.
We also have Sudan. We also have Syria. We have the other
beneficiaries, frankly, that we need to be worried about as
well. Now, admittedly, I am not big on IMF spending to begin
with, and I don't see ramping up its lending as central to the
global economic recovery. I certainly don't trust it to play a
critical regulatory role, as some advocate, and I suspect that
with its levels of lending plummeting over the last 5 years,
the IMF is probably desperate for a new mission, and I think
that this is part of that push, but I think this opaque
institution certainly hasn't made the case for a claim on U.S.
resources, and I think it is especially important that we
consider the fact that these are resources that we are going to
have to go out and borrow.
It is not as though we have reserves ready to fund this.
This will be done through borrowing, and I think the popular
media enjoys labeling the financial crisis, by the way, as a
crisis of free markets. It rarely explains the harmful impact
of government actions such as policies and political pressure
to sacrifice lending standards, to resist meaningful reform. I
would recommend Tom Sowell's book for those interested, the
economist book, The Housing Boom and Bust, that gives you a
full range of government interventions made in the domestic
market here, where Congress was pushing in one way while the
regulators were saying, wait a minute, wait a minute, the GSEs
are overleveraged 100 to 1. You know, why aren't we allowed to
go in and de-leverage them? Why can't we put some limit on the
government-sponsored enterprises, Fannie and Freddie? Why
should we have these 3 percent loans or zero down payment
loans?
Well, it was political pressure that drove that, you know,
CRA driving subprime lending here. There are a lot of issues
that, in fact, emanate from government intervention in the
market, and Congress's crippling of the regulators to do their
job. I had legislation, for example, to have a regulator look
at insurance institutions, like AIG, and have access to all of
the information at the Federal level in order to be able to get
past this patchwork quilt of regulation, but how does the Fed's
bad decision to keep interest rates effectively negative for 4
years running, how does that have anything to do with free
markets?
How do the central banks in Europe, following the Fed's
lead and having interest rates negative in Europe for 4 years
running when adjusted for inflation and the resulting bubble
that that created in terms of housing, in terms of an economic
bubble, how does that have anything to do with the free market?
No, no. These are mistakes made at the governmental level, and
these are examples of interventions where we didn't get the
regulation right.
That is what this is about, and the fact is that free
markets have done more to eliminate poverty than all of the
government programs that free markets combined fund, because it
is ultimately the market, through taxation, that funds the
programs that we are passing out of here, such as the funding
that goes to the IMF. At least the G-20 has agreed, on a
hopeful note here, in my view, to reject protectionism, yet too
many countries are moving toward protectionism.
The Obama administration is willing to spend aid money for
trade. The G-20 agreed to spend $250 billion on trade aid, but
it is unwilling to get an actual trade deal done. It is tied in
knots over the Panama deal, a deal of very minor economic
consequences, but it sends enormous signals worldwide in terms
of liberalized trade, or resistance to it in terms of
protectionism. It is setting on a Korea deal. You know,
finishing the Doha trade round could boost the global economy
by at least $150 billion a year, yet there is no American
leadership on getting that done.
Nothing would more advance our interests abroad than an
economic recovery at home. It is hard to see how today's
massive deficit spending is going to help on that, as we look
at government's attempt to spend. This year alone we will have
somewhere--we won't hit a $2 trillion deficit, but by the end
of the year, we will come close. Does anyone really believe
this administration's claim that we will get deficits under
control? I don't see the political understanding nor discipline
to do that, and the Fed Chairman, again, raised a warning last
week.
Meanwhile, government bureaucrats and politicians are
assuming ever-greater economic power. Who knows the powers the
massively expansive Obama health proposal will transfer into
public hands? TARP has brought the American people Government
Motors, $50 billion of GM being Government Motors. The
political economy is only beginning. The Hill reports that one
prominent Member of Congress ``was able to get GM to undo a
planned parts distribution center closure in his district.'' So
political pull is beginning to replace market forces.
One witness suggests that next will come graft and
corruption. As Venezuela and others nationalize companies and
embrace statism, their economic demise is going to intensify.
Let us not join that club. Let us try to embrace markets. Let
us try to keep politics out of it, and let us try, when the
regulators want to take effective action against institutions,
whether it be government sponsored enterprises like Fannie or
Freddie, let us not have politicians stand in the way and
prevent that proper regulatory role from occurring.
Mr. Chairman, thank you again for this hearing.
Mr. Sherman. Thank you, Mr. Royce. I should point out that
as scheduling has worked out on the Hill, the Foreign Affairs
Authorization Bill is on the floor now. I am watching it here
on this screen, just for a second. I was paying full attention
to Mr. Royce--and that is why so few of our colleagues can be
here. Almost our entire committee is down on the floor. This
hearing was scheduled first, but the floor needs to go forward.
I am going to resist, and it is very difficult for me,
commenting on Mr. Royce's views on trade, and instead recognize
the vice chair of this committee, Mr. Scott.
Mr. Scott. I won't mind saving you from Mr. Royce. This is
a very timely hearing, and very much needed. I really can't
think of any more single threatening issue for the future
welfare of our country than our financial situation, not just
here at home, but abroad. I have just returned from Europe from
our NATO meetings, and needless to say, the financial crisis,
the world's financial crisis was center stage, but the greater
bout of attention was paid to what is going on in the United
States, and surprisingly, that which got more attention than
the domestic side was our debt, and the part of our debt that
got the greatest attention was the debt that is being held in
the hands of foreign countries.
Many of you may not know, but just in the last 9 years, our
country has borrowed more money from foreign governments than
in the entire preceding, what, 211 years. Just think about
that. That means, since the foundation of the United States of
America, all of the money that was borrowed up through from
1789 up through 2002 does not come up to the amount of money we
have borrowed from foreign countries in the last 9 years. That
is an extraordinarily threatening situation.
Now, yesterday, I was on the Voice of America television
program, and it aired exclusively into China. And you know the
question that the Chinese were asking me over and over and over
again was while North Korea, certainly in the news and they are
right next door, the Chinese were concerned about that, but
they were more concerned about whether or not they should
continue to buy our debt. That is an amazing situation. So, and
just today, Reuters has reported that Russia is beginning to
question their continuance at the level of purchasing our debt.
And so, I think with that backdrop, this hearing is
extraordinarily important, and so I want to thank you, Mr.
Chairman, for examining the foreign policy implications of the
United States' response to our current financial crisis. The
United States has been, and certainly still is, the financial
backstop of the world. Make no mistake about it. We are still
number one, hanging on by our fingernails, but we are still
number one.
We still provide the lion's share of funding for most
multinational, financial and developmental institutions. The
U.S. dollar has been the currency of choice for international
transactions and investments for decades. Investing in U.S.
treasuries has been the safest form of investment for even
longer, and moreover, the American consumer has been the driver
of economic engines, not just in this country but in numerous
developing countries, through our purchasing power.
This is what makes and will continue to make America the
greatest nation in the world. Some say it is our military
strength, and it is certainly there, but it is our financial
capacity, it is our economic capacity, that drives the world.
We have historically been able to wield our tremendous economic
power alongside our military might to undergird our diplomatic
efforts and achieve our foreign policy objectives, but it has
been not just military, it has been economic power.
However, it seems that in the wake of our ongoing financial
crisis, our economic power, or at least the perception of that
power, as I alluded to at the very beginning with my remarks on
China and Russia, is beginning to unravel, and so while much of
the discussion today will focus on multinational financial
institutions such as IMF and the World Bank, I think it is
worth examining the effect that a changed perception of U.S.
financial prowess will have on our efforts to influence events
around the world.
Everything is image. It is not what we think of ourselves.
It is what other people think about us. So much like the view
of our military strength has been lessened by the quagmires in
Iraq and Afghanistan, so too, it seems, the view of our
economic might has become more negative as we are bogged down
in this recession. We have already seen talk from OPEC about
shifting away from dollar-based pricing of oil. So our economic
leverage is beginning to wane somewhat. So as we move forward
with our domestic financial rescue plans and with finding
multinational institutions in an effort to spark global
recovery, I feel that we must keep in mind that our ability to
influence other nations lies largely in our economic right,
real and perceived.
Thank you, Mr. Chairman.
Mr. Sherman. I thank the vice chairman. Without objection,
the full statement of each witness will be entered into the
record. We will ask each witness to summarize that statement
orally in 5 minutes. Once we hear from the witnesses, we will
be asking questions and I will depart from the usual procedure
in that I will have our vice chair, then our ranking member,
ask questions before I do.
Mr. Connolly. Mr. Chairman, could I just ask, I have an
opening statement.
Mr. Sherman. Oh, yes, go right ahead. I didn't know you had
one, but I look forward to hearing it.
Mr. Connolly. Thank you. I am sorry I am late, but I was on
the floor with the State Department Authorization Bill.
Mr. Sherman. As I pointed out to our colleagues, that is
why so many people--they all want to be here. They are all on
the floor.
Mr. Connolly. They all want to be at this hearing but we
are fighting for the State Department on the floor of the
House.
Mr. Sherman. Yes.
Mr. Connolly. Thank you, Mr. Chairman. Thank you so much.
Mr. Chairman, if this crisis has taught us anything, it is that
our economies are linked. Vulnerability in one system can have
global effects. Last fall's collapse of Lehman Brothers, for
example, displayed the ripple effect one catastrophic event can
have on the global economic landscape. The ripple effect, of
course, is not confined to just the financial sector. We have
all seen the effects in our respective districts, here in
Congress.
Fairfax County, my home county, for example, is home to
more than 360 foreign-owned firms, representing nearly 40
countries. These international companies are dealing with
financial challenges on both fronts. The U.S. Federal Reserve
and the Bank of England have taken necessary steps to insulate
our economies from further damage by buying debt. The U.S. and
the U.K. are sharing much of the burden for insulating the rest
of the world from further damage, though this situation is far
from ideal.
In a report released this week, the IMF warned that
economic recovery in Europe, specifically the Euro zone, could
be stymied by banks burdened with bad assets. I fear that some
European nations are not doing their fair share with regard to
properly cushioning the international economy from further
damage. For example, last month, the IMF called for European
authorities to follow the United States in conducting stress
tests. The EU stress test, which will be national and not
European-wide, will not even take place until September.
European banks must be on the same page as the United
States when it comes to cleaning up this mess. According to an
IMF report published Monday, the lack of a coordinated and
aggressive cleanup plan for European banks could hamper
economic recovery in the 16 countries that share the Euro. The
same report discusses the need for more decisive and thorough
action on the part of European authorities.
Mr. Chairman, German Chancellor Merkel has expressed
skepticism about the effectiveness of major economic stimulus
packages. Earlier this week she stated that ``the independence
of the central bank must be preserved and the things that other
central banks are doing now must be reversed.'' Though their
more conservative approaches led to political gains, perhaps,
for her party, I fear the long-term consequences in terms of
economic recovery in the Western hemisphere. I look forward to
hearing from our witnesses today. Thank you, Mr. Chairman.
Mr. Sherman. Thank you. I am told the gentleman from
Arkansas does not have an opening statement, and so we will
hear from our witnesses, the first of which is Damon Silvers,
who serves as associate general counsel for the AFL-CIO. Mr.
Silvers is also deputy chairman of the three-member
Congressional Oversight Panel. There are many Congressional
Oversight Panels. This one is not made up of Members of
Congress, but is perhaps the most important of the oversight
panels since it oversees the TARP program. Mr. Silvers?
STATEMENT OF DAMON SILVERS, ESQ., ASSOCIATE GENERAL COUNSEL,
AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL
ORGANIZATIONS (DEPUTY CHAIR OF THE CONGRESSIONAL OVERSIGHT
PANEL)
Mr. Silvers. Thank you, Chairman Sherman, and good
afternoon to you and to Ranking Member Royce. Thank you for the
opportunity to testify today. As you noted, I am associate
general counsel of the AFL-CIO and deputy chair of the
Oversight Board for the TARP. I hope you won't mind if I
mention that we have five members and one of them is actually a
Member of Congress, Jeb Hensarling. I think I would be remiss
if I didn't correct the record on that. My----
Mr. Sherman. The--go on. Go on.
Mr. Silvers. My remarks today, though, are my own, and are
not necessarily the views of the Panel, its staff or its chair,
Professor Elizabeth Warren. I am going to try very briefly to
address two issues. One is the interaction of TARP with foreign
institutions, and the second is the G-20 from the perspective
of the global labor movement.
When Congress enacted the Emergency Economic Stabilization
Act of 2008, Congress provided that funds under that act could
only be expended to support U.S.-based financial institutions.
It is built into the definition of the term ``financial
institution.'' However, Congress did not bar foreign financial
institutions from indirectly benefitting from EESA
expenditures, and in particular, as you noted, Mr. Chairman, in
your opening statement, a large portion of the funds provided
to AIG, one of the primary beneficiaries of the EESA, have been
transferred directly to foreign bank counterparties to AIG
derivatives contracts, including, as you mentioned, Societe
Generale and UBS.
Now, I do not believe that at this time, either the
documents that the Oversight Panel has obtained or the publicly
available information in this area includes sufficient
information to clearly understand the basic question of how the
economic relationship between AIG and its derivative
counterparties evolved during the critical month of September
2008, which led to the bailout of AIG. As a result, it is
really impossible to responsibly express with any certainty an
opinion about these transactions or provide answers to
questions such as, were these transactions in the form
undertaken unavoidable, or, were they in the public interest?
I think we can say, however, that none of the institutions
on the AIG counterparty list, as disclosed earlier this year,
would appear to have been bankrupted had they not received that
money. Now, more broadly, the National Intelligence Director in
the Annual Threat Assessment presented to the Senate Select
Committee on Intelligence in February of this year identified
the economic and financial crisis as ``the primary near-term
security concern of the United States,'' and the activities of
the Treasury Department, the FDIC and the Federal Reserve,
which constitute collectively the financial bailout, a set of
activities larger than the activities under the EESA that our
Panel oversees, raise several questions in relation to the
global interests of the United States. First, the question,
what is the impact of the approach we are taking to refinancing
our banking system on the perception among foreign investors of
the strength of our currency, the state of the Federal
Reserve's balance sheet, and the extent to which we have or
have not actually dealt with the capital shortfalls in our
major banks?
Secondly, to the extent to which our approach to resolving
our banking crisis is succeeding through providing low-cost
liquidity and an implicit guarantee to our major banks with an
international presence, is this approach causing U.S. banks
operating overseas to be perceived as having an unfair
advantage over their domestic competitors, with obvious foreign
policy and potentially national security consequences?
Thirdly, are we seeking to perpetuate the basic
international financial arrangements that appear to have
contributed to the bubble and the subsequent crisis, namely,
high degrees of leverage funded by cheap debt, financed by
global trade and currency imbalances? And fourthly, is it true,
as some have asserted that we today have no means of resolving
an insolvent global financial institution?
Now, the global labor movement has urged the governments of
the G-20 countries to ``put employment and fairness'' at the
center of government's response to the crisis. In general, the
global labor movement has supported the direction taken by the
G-20, and in a number of cases, following the lead of the Obama
administration. However, we are concerned that, first, the
financial regulatory reform proposals in the G-20 London
communique at the international level may be too weak.
Secondly, that banks in key countries are being propped up
rather than restructured, risking a Japanese ``lost decade''
scenario globally. Thirdly, that the governance of
multinational bodies such as the Financial Stability Board and
the IMF, charged with addressing the crisis, is both opaque and
too narrow in terms of who is involved globally. And fourthly,
that despite the very positive statements coming out of the
London meeting, that the resources committed to fiscal
stimulus, particularly in the Euro zone, and job creation, are
not increasing, while the downward spiral globally is
increasing. I have attached to my testimony a detailed
commentary from the global labor movement on the G-20 meeting
in London.
Thank you, in conclusion, for the opportunity to appear
before you today. Obviously, these subjects are somewhat more
complex than the 5 minutes allow, and though I do not speak for
the Oversight Panel in any respect, I hope I could speak in the
respect of offering the Panel's assistance to the committee in
any way you would find useful. I can say with certainty that
the AFL-CIO and the global labor movement do so offer that
assistance. Thank you.
[The prepared statement of Mr. Silvers
follows:]Damon Silvers (plus addendum) deg.
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Mr. Sherman. Thank you. It makes you wonder whether some of
these institutions were too big to fail. It said they were too
interconnected to fail. Arguably, they are just too well-
connected to fail. With that, we welcome Kevin Kearns,
president of the United States Business and Industry Council,
which represents the interests of family-owned and closely held
U.S. manufacturing companies. Mr. Kearns?
STATEMENT OF MR. KEVIN L. KEARNS, PRESIDENT, UNITED STATES
BUSINESS AND INDUSTRY COUNCIL
Mr. Kearns. Thank you, Mr. Chairman, Mr. Ranking Member,
other members of the committee, and it is a very timely
hearing. Five minutes isn't much time. I am going to take a
500-foot overview of the crisis, and that is, there is
cascading failure going on in domestic manufacturing. We seem
to think, collective ``we,'' that it is trillions for banks,
financial institutions, insurance companies, but really not
much for manufacturing, and if we give General Motors and
Chrysler some money, who else is going to line up?
We Americans just seem to love to hate our manufacturers,
but I would ask the question, where is the wealth generation
coming from to pay off the debt we have already incurred that
Mr. Scott referred to and the massive debt we are incurring
now? Any basic economic textbook will tell you there are three
ways you create wealth. You create it by making it, mining it
or resource extraction, and growing it. Banks and financial
institutions properly understood, as opposed to creating
derivatives and complex instruments that no one can understand,
should make money on a spread, you know, they pay their
depositors such and such and they take in a little bit more
from customers they lend to.
Even if we were to wave a wand and straighten out the
financial institutions today, I can guarantee you that no
domestic manufacturer, given our trade policies, given the
unfair advantages, the currency treating, the VAT tax
inequity--150 of our trading partners have VAT taxes, we
don't--the IP theft, the subsidies, etc., etc., the list goes
on. It is like Whac-A-Mole at the beach, you know, each time
you hit the mole, another one pops up faster.
I mean, they can create ways to subsidize their companies
faster than we can address them in, you know, years and years
of negotiation. When I was in the Foreign Service in Japan, I
saw the SII, Strategic Impediments Initiative, talks that went
on forever, the Moss talks that went on forever. Jim Rill tried
to turn the Japanese Fair Trade Commission into an antitrust
division of the Justice Department, etc., etc. The time for
chitchat diplomacy is over.
Our situation right now reminds me of England in 1946. You
know, they thought they had all the experience, but they lost
all their money, they lost their industrial base during the
war. They thought they were going to run the world and the
Americans were going to pay for it. Well, guess what? That
didn't happen, and it is not going to happen to us. So, we need
to find ways to re-energize our industrial base. We need to do
so unilaterally if necessary, because sometimes power and
unilateralism are necessary to bring other nations to the
table.
The Obama administration, as far as we are concerned, is
trying to restore the status quo ante. Everyone up here yelped
at a $789 billion stimulus bill. I didn't hear any yelping, or
from certain quarters I did, but about $750 billion trade
deficits year after year after year. I mean, we have had almost
40 years of trade deficits. How many years do we have to keep
going down that path, whether it is Panama, Mr. Royce, and you
are right, it is small potatoes, but how long do we have to
follow a failed model before we stop and re-evaluate it, as
opposed to rushing ahead with more?
Manufacturing does 60 percent of the R&D in this country.
It provides the best-paying jobs. It is critical to our defense
and our technology base. It is what we need. So when Congress
has, for instance, the Big Three CEOs in here and rakes them
over the coals, and they want a plan in 60 days or 90 days or
whatever it was, you know, what is Congress's plan to address
currency manipulation?
The Secretary of State signed on to Bunning-Stabenow-Bayh.
The President signed on to that bill. There were 180 cosponsors
in the House. Why isn't that on the President's desk today?
What are we doing about other trade cheating, intellectual
property theft, subsidies? Every other nation in the world
seems to think it is important to have a car industry, a steel
industry, chemical industry, technology industries, other heavy
industries. We don't seem to care. We seem indifferent, but any
basic economics textbook will tell you that it is important who
owns the rents or the profits.
They make the decisions. They are the ones in control, and
we are not in control of our destiny anymore. We may think we
are, but I associate myself with Mr. Scott's remarks, except to
the extent that the economic power is not there. We are not
generating the wealth, and there is no plan that I can see,
either in the Congress or the administration, to get our
wealth-generating industries back on track, to spend the money
on them. None of the 1,900 businesses I represent, and I will
just say this in conclusion, no business owner is going to
expand his factory or build a new factory in the United States
until we change our trade policy, until we call our allies and
other trading partners on their trade cheating, you know, you
are flushing your money down the toilet.
So, from the point of view of manufacturers, nothing is
going right in Washington, and they are pulling their money out
of their businesses and they are preparing to fail.
[The prepared statement of Mr. Kearns
follows:]Kevin Kearns deg.
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Mr. Sherman. On that happy note, we now turn----[Laughter.]
I thank you, Mr. Kearns, for your comments and agree with
almost all of them.
We would now like to turn to Dr. Nancy Birdsall, founding
president of the Center for Global Development. The Center for
Global Development is an independent non-profit policy research
organization that is dedicated to reducing global poverty. Dr.
Birdsall?
STATEMENT OF NANCY BIRDSALL, PH.D., PRESIDENT, CENTER FOR
GLOBAL DEVELOPMENT
Ms. Birdsall. Thank you very much, Mr. Chairman and other
members of the committee. I am going to concentrate on the G-20
agenda, and in particular, its implications for U.S. support to
the IMF package, and essentially, my statement has to do with
saying that I support fully the idea that Congress would go
ahead and endorse that package in the upcoming supplemental
bill. Let me start by saying that, as some of you have already
indicated in your remarks, in this century we are seeing really
big shifts in the landscape.
We are seeing the rise of China and other powers in Asia in
particular, and we see more and more that we face transnational
threats. Today's global challenges do not respect borders. They
threaten security globally and they threaten our own security
here at home, and the fact is, as some of your remarks have
indicated, the U.S. cannot hide from these problems and we
cannot manage these challenges anymore by ourselves. That is
what the G-20 leaders, as a group, recognized at the London
summit.
Let me quote from something that former Under Secretary Tim
Adams said at a hearing of the House Financial Services
Subcommittee on International Monetary Policy and Trade, in
which I also participated:
``Failed states and extreme poverty breed unrest and
instability and create the types of conditions that
allow dictators, extremists and terrorists to thrive.
In short, it is in our national security interest to
ensure that financial and economic crises don't
destabilize fragile states.''
He pointed out that in the recent period, recipients of IMF
loans have included Mexico, Colombia, Poland, Ukraine,
Pakistan, all key allies and/or crucial players in the success
or failure of United States foreign policy and in addressing
our national security objectives. We have a global village that
we constructed. We live in the center of that village. We are
in the biggest house, but there are fires spreading, and the G-
20 leaders essentially said, we need the IMF as a fire brigade
to deal with these spreading fires, and I think the Obama
administration and the Congress need to, in a sense, make the
commitments that will help ensure that the fire doesn't come
back to haunt us here at home.
Let me make four points very quickly. First is that the
U.S. economic recovery and our national security do depend in
part on substantially increasing those resources at the IMF and
at the multilateral banks. In a sense, I have said that
already, but I just want to emphasize that stimulating the
global economy is absolutely vital for our own domestic
recovery. Emerging markets are important in terms of our
exports. In 2008, virtually all of our growth was export-driven
and one-third of those exports went to emerging markets and
developing countries.
There is also a security issue. Here I want to be positive
about it and say that this crisis risks undermining tremendous
progress supported in very important ways by the United States
in places like sub-Saharan Africa. We now have in Africa 20
democracies, compared to three in 1989, 6 percent rate of
economic growth over the last decade, very good macroeconomic
management in most countries. All of that is put at risk now by
this crisis, which is leading to the withdrawal of capital, the
reduction of foreign aid, tremendous fiscal shortfalls, $15
billion alone for Africa in lost trade taxes, which they will
have to make up to pay doctors, to pay health workers, to keep
their teachers in school and so on.
So, it is in our interest on the security side to lock in
those kinds of gains. What does the IMF have to do with this?
As I suggested, it is the fire brigade in our global village.
The G-20 basically endorsed the idea that there should be $1
trillion available for emerging markets and poor countries.
That includes and needs to include $100 billion from the U.S.
for the new arrangements to borrow. The idea, the CBO has
suggested that be scored at $5 billion. The $5 billion will
leverage $500 billion.
The cost to the U.S. taxpayer would be $5 billion, and
there would be no cost to the U.S. taxpayer through the
issuance of additional special drawing rights. I would be happy
to answer questions about that. Now, the second point I want to
make is the IMF today is not the IMF of old.
Mr. Sherman. Dr. Birdsall, it appears your time has
expired. That is why I was tapping.
Ms. Birdsall. Thank you very much.
Mr. Sherman. Yes.
Ms. Birdsall. May I just repeat my three other points, just
say what they are?
Mr. Sherman. You don't need to repeat. I was tapping to
indicate that you were already over time.
Ms. Birdsall. All right. Thank you.
Mr. Sherman. And that is what this tapping is. It is not a
nervous affectation.
Ms. Birdsall. I didn't hear it. That is all right. Thank
you very much, Mr. Chairman.
[The prepared statement of Ms. Birdsall
follows:]Nancy Birdsall deg.
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Mr. Sherman. We will get louder next time. We will move on
to Ambassador Miller, director of the Center for International
Trade and Economics at the Heritage Foundation. He has
previously served as Ambassador to the United Nations Economic
and Social Council. Ambassador Miller?
STATEMENT OF THE HONORABLE TERRY MILLER, DIRECTOR, CENTER FOR
INTERNATIONAL TRADE AND ECONOMICS, THE HERITAGE FOUNDATION
(FORMER AMBASSADOR TO THE UNITED NATIONS ECONOMIC AND SOCIAL
COUNCIL)
Ambassador Miller. Thank you very much, Mr. Chairman, for
the opportunity to testify here today. The views I express are
my own and do not represent an official position of the
Heritage Foundation. I think there are three issues here, Mr.
Chairman. The first is the nature of the globalized
international trade and financial system. I am going to talk a
little bit about that. The second are the institutions of that
system, the IMF, the World Bank, the World Trade Organization.
You yourself, Mr. Chairman, expressed some concerns about
those institutions and some of their concerns. I share those
flaws, particularly the possibility that financing might go
through those institutions to rogue states or others that
support terrorism, but the final issue is the impact of the
U.S. Government actions, our current actions and interventions
in economic activity, both in the U.S. and other countries, and
I do want to talk about that.
What we do to keep our economic house in order here is far
more important to our well-being than anything we do through
international organizations or through cooperation in groups
like the G-20. First about the overall system, Mr. Chairman,
though we are in a recession today, it is important to remember
that in recent decades, our world economic system has been
producing strong, broad-based growth that has increased
prosperity and reduced poverty around the world.
Over the last 10 years, average world incomes have
increased by over one-third. Some criticize the free market
system that has produced this growth as good for the rich but
not for the poor. The data show otherwise. Countries that moved
toward greater economic freedom in the last decade reduced
poverty significantly, while those that turned their backs on
freedom saw poverty levels increase. Economic freedom's
positive impact is also evident in areas like education,
health, maternal mortality, life expectancy, as well as in
protection of the environment, where countries that are more
economically free do a far better job than their less free
counterparts. The free market system works.
The record of government interference in economies is not
so pretty. The TARP program, initiated under the previous
administration, is a good example of the problems of government
interference in markets. The TARP in particular has created
confusion, interfered with the establishment of market clearing
prices for the assets in question, and there has been a lack of
transparency in the program. It has done little to get the
troubled assets off the books of financial institutions.
The Fiscal Stimulus Package, passed under the current
administration, is even worse. One estimate is that only about
$37 billion of that money has actually been spent. Most of it
is going to be spent far in the future at a time when
government stimulus will no longer be appropriate but will lead
only to inflation in the U.S. economy. The cost of these
programs is creating a huge debt for our children, and we are
going to have to finance it somehow.
If we continue them, we are going to see either inflation
or increased taxes, or both, as well as a fall in the value of
the dollar, decreased foreign investment in the United States,
lower productivity overall, and reduced economic growth. Some
have expressed the hope that international cooperation, such as
among the G-20, could speed recovery. This is unrealistic. The
most important macro-variables, the money supply and spending
levels, are going to remain under the control of individual
governments.
There was also a lot of talk about regulatory reform at the
recent G-20 summit. Our current regulations are overly complex
and subject to manipulation. We don't need more of them, but
reforms to improve transparency and clarity could do a lot to
improve competition and decrease risk. There are other imminent
risks to the U.S. and world economies. Policies that would
greatly and artificially increase the cost of energy will
decrease U.S. and world growth and lead to increased poverty.
Actions that would restrict trade flows would also have a
devastating impact. Trade restrictions go by the name of
protectionism, Mr. Chairman, but what they protect are the
unfair privileges of politically connected special interests.
Finally, as the size and reach of the Federal Government
increases in the U.S., there is the ever-present risk of
increased corruption, which thrives where government
regulations are complex and pervasive.
Mr. Chairman, a time of crisis may be a time to examine
what has been done and what might be done better, but it is
surely not the time to fundamentally undo the policies and
practices that have brought so much benefit to so many. Thank
you very much.
[The prepared statement of Ambassador Miller
follows:]Terry Miller deg.
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Mr. Sherman. Thank you. One scheduling note, you will be
happy to know that while we are up here we are missing the
opportunity to debate an additional 27 amendments that they are
debating on the floor to the Foreign Affairs Authorization
Bill, so the good news of that is we will not be interrupted by
votes on the floor, and the other news is that the other
colleagues on our subcommittee, you know, have a perfect excuse
for not being here.
Finally, I want to welcome Roger Robinson, Jr., president
and CEO of the Conflict Securities Advisory Group. He has over
25 years of experience in identifying and analyzing
international security risks. Mr. Robinson?
STATEMENT OF MR. ROGER ROBINSON, JR., PRESIDENT AND CHIEF
EXECUTIVE OFFICER, CONFLICT SECURITIES ADVISORY GROUP (FORMER
SENIOR DIRECTOR OF INTERNATIONAL ECONOMIC AFFAIRS AT THE
NATIONAL SECURITY COUNCIL)
Mr. Robinson. Thank you, Mr. Chairman and members of the
committee for the opportunity to appear before you today. As
you mentioned, I have been working on a nexus between
international security concerns and global finance for some 30
years now. The views that I am expressing today are my own and
don't necessarily reflect the views of my firm, Conflict
Securities Advisory Group, which is an independent, impartial
research provider specializing in global security risk.
Today, despite the valiant efforts of the Treasury
Department and others to curtail financial flows to global bad
actors, Iran, Sudan, Syria, North Korea and other regimes
continue to benefit from lawful inflows of hard currency and
external financing. In this connection, I have several
observations I would like to share with the committee. First,
concerning the role of publicly traded foreign companies, it is
important to understand that these public firms represent the
principal source of financial and economic support for Iran and
certain other countries of concern.
Most Americans hold at least some of these companies in
their retirement accounts and other investment portfolios. Mr.
Chairman, you have certainly been a leader in addressing this
particular concern. The second involves the international
financial institutions, notably, the IMF. In your opening
remarks, Mr. Chairman, you reviewed the troubling amounts of
taxpayer dollars committed to this enterprise, including the
likely $250 billion general allocation this summer, from which
Iran could reportedly see more than $1.7 billion. The direct
cash infusions potentially provided by the IMF and other IFIs
to these governments are legitimate national security issues,
particularly as these funds are relatively undisciplined and
easily divertable.
The third issue deals with Federal contractors. We have
calculated that among the top 100 recipients of Federal
contract awards for Fiscal Year 2009, roughly 20 percent have
engaged in some kind of business activity within the borders of
a state sponsor of terrorism during the past 3 years. The
Congress could play a catalytic role here that needs to
transcend traditional ``name and shame'' tactics and should be
aimed at the mitigation of legitimate business and financial
risks.
Should it be of interest, our firm, Conflict Securities,
has researched the number of publicly traded companies
worldwide with business interests in each of the terrorist-
sponsoring states, but in the shortness of time, and I am
racing the clock, I would like to move to what more can be
done. I have several recommendations in this connection. First,
strengthen corporate awareness of global security risk. It is
defined as the risk to share value and corporate reputation
stemming from business ties to U.S.-sanctioned countries,
including the terrorist states. The SEC has an Office of Global
Security Risk that could be leveraged in this connection and
could communicate with foreign firms.
Second, we could highlight Iran's use of foreign
correspondent banks that facilitate the money transfers,
foreign exchange transactions, letters of credit, interbank
deposits and related financial activities with most of their
major trading partners, and that is something that should be on
the agenda. Third, capitalize on existing private investment
initiatives in the markets by mandating investment options for
Federal employees that take into account these security
concerns.
And finally, pass legislation to sanction Iran's refined
petroleum industry and encourage the Obama administration to,
for the first time, enforce the Iran Sanctions Act.
In conclusion, without the support of their state sponsors,
terrorist groups are apt to shrivel like a virus without a
host. Accordingly, the time is past due to take a more serious
inventory of financial measures that could be brought to bear
to hobble these regimes and change their cost-benefit
calculations, much as happened with Libya.
Mr. Chairman, I am persuaded that the market-oriented
measures referenced above could serve as the most potent,
nonmilitary means available to the U.S. to curtail terrorist
sponsorship and WMD development and proliferation. In the best
of worlds, the U.S. would receive robust and cohesive
multilateral support for such initiatives, support which has
traditionally been in short supply. If this is not possible,
the U.S. would be well-advised to proceed unilaterally.
The American financial system remains, as was stated by Mr.
Scott, the dominant force on the global landscape that few
responsible foreign financial institutions and companies can
live without from a shareholder and reputational perspective.
Regrettably, requiring these hard choices on the part of
primarily foreign firms and banks is now a necessity.
Postponing this day of financial reckoning will make more
likely a nuclear Iran and more capable and dangerous United
States adversaries worldwide.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Robinson
follows:]Roger Robinson deg.
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Mr. Sherman. Thank you, Mr. Robinson. I will recognize our
vice chair for his questions, followed by our ranking member.
Mr. Scott?
Mr. Scott. Thank you very much. I guess I would like to
follow up on, to get your response to a couple of queries that
were put to me by the folks from China yesterday. One caller
was concerned about the safety and soundness of our United
States treasuries and he asked whether China should divest or
risk losing out on its return. Of course, I ensured the caller
that the Treasury is the most safe and sound investment one
could hold and that there is absolutely no risk that we might
not repay our debt, but I am worried that there will soon come
a day when that isn't the case, at least there are people who
are thinking that.
Then another caller from China asked whether United States
had essentially been bought off by China, i.e., if the United
States has become reluctant to focus on the considerable human
rights abuses in China out of fear that they may stop supplying
financing to us. That is the other wrinkle in this. This
particular question in particular highlights in my mind the
dangers of our economic situation we find ourselves in. Now, I
in no way believe the United States has been bought off, nor do
I feel that the caller was expressing a common perception
around the world, but the issue is, the U.S., as it is
perceived to become economically weak, to what degree will its
leverage in holding people to a higher moral standard?
So I would like to kind of get your response to that,
because I think that is really the fundamental question we have
got here is, what is the measure of this risk that our
financial situation in this country is holding to the world? I
mean, here we have got folks in China who think China is still
dealing with us because we will go light on their human rights
concerns, and others are--Mr. Robinson, I particularly would be
interested in your response on this.
Mr. Robinson. Well, Mr. Scott, my personal view is that we
are, obviously, entering a somewhat perilous period. It is
unprecedented in our history, and I think that, and I very much
hope, that the administration understands the urgency of
righting the ship. This is a very complex question, and I
confess that it would be difficult to go into all of the moving
parts, so to speak. I would say that for the foreseeable
future, it is certainly the case that we would be servicing our
debt without any kind of disruption. I think the remarks to
your Chinese callers were spot on, but at the same time, I
think all of us, behind closed doors, need to acknowledge that
we are in new territory here, and like Kevin Kearns and others
have mentioned today, there are a number of remedial steps that
need to be taken urgently if the ship is to be righted. I would
leave it with those more broad remarks, if I may.
Mr. Silvers. Mr. Scott?
Mr. Scott. Yes, Mr. Silvers, Mr. Kearns?
Mr. Silvers. There are, I think, at least two ways of
looking at your question. The first is central to understanding
both how we got here and how we have to get out of here, out of
the structural nature of the crisis we are going through. At
the heart of our economic crisis is a structural trade deficit,
which has led the Chinese, rationally, to accumulate dollars
and then lend those dollars back into global markets,
depressing the global cost of credit in ways that ultimately
didn't capture the risks involved in the provision of credit.
This is at the heart of the bubble and the collapse of that
bubble. Those imbalances, that structural trade deficit we run
with China, is not a sustainable phenomenon. As Paul Krugman
once said about it, something like that that at some point has
got to end, will end. It creates a situation where we and the
Chinese are sort of in a state of mutually assured destruction.
If they stop financing us, we stop buying from them. I think
everyone understands this, and yet everyone also understands
that it can't be sustained over time.
I believe that the focus of the Obama administration's
stimulus program and budget on not just spending money for its
own sake but to lay a foundation for a more productive economy,
and the Obama administration's commitment to addressing
manufacturing, the details of which have not been worked out,
are directionally correct in terms of dealing with that
problem. On the other hand, those impulses among many different
policymakers to essentially try to return to the economic
status quo of 2006 or 2007 risks a perpetuation of the dynamics
you are concerned about to the breaking point.
There is a second and more short-term related problem here.
There have been, as a result of the bubble, very substantial
real losses associated with our financial system. Those real
losses can be found in abandoned tract housing projects across
large parts of our country. Who funds those real losses, who
takes the hit, is deeply connected to the question of the
sustainability of our financial relationship with the rest of
the world. To the extent that we try, either explicitly or
implicitly, hidden or above board, try to have the U.S.
taxpayer absorb those losses in their entirety--there are
trillions of dollars of these losses--rather than looking to,
as much as we can, the people who took the risks, the investors
in these institutions, to absorb those losses, if we do that
and we at the same time borrow the money to do that, then we
again run the risk of dramatically increasing the unsustainable
dynamics you are concerned about, and this brings us back to,
just as the first point tied us to trade, this point brings us
back to fundamental choices about whether the public or the
investors in Wall Street, essentially, are the people who are
taking the hit for the mistakes that were made by financial
institutions during the boom.
Mr. Kearns. Just very briefly, may I, Mr. Chairman? Is that
a yes or a no?
Mr. Sherman. 30 seconds.
Mr. Kearns. Okay, 30 seconds. I can be more succinct than
Mr. Silvers. There is a Chinese proverb that you can use, Mr.
Scott. It is that trees don't grow to the sky. The export
driven model that the rest of the world follows, that the IMF,
the World Bank, all these international institutions have
shoved down their throat, has made America the first and last
market of resort. It is over, okay. We are broke. We can't
absorb their goods. So we need a new model, and the sooner that
the Congress and the administration work on inventing what that
model is and the people in the private sector, the better.
Mr. Sherman. Thank you. The time of the gentleman has
expired. We will go to Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman. I would like to ask Mr.
Robinson a couple of questions, and one would be, what
specifically can be done to tighten economic pressure right now
on North Korea?
Mr. Robinson. I think that a lot of folks in Washington are
casting about for that answer, Mr. Royce, and----
Mr. Royce. Well, we had the Banco Delta Asia approach in
2005. That----
Mr. Robinson. Which was shockingly effective. You know how
that originated and how surprised Treasury itself was in the
way that it electrocuted money transfers, letters of credit,
interbank deposits. Something similar to that could be done by
looking at the correspondent banking relations of all of the
major North Korean financial institutions, as well as the
banking relationships of their larger state-owned enterprises.
Now, if these networks of banks, some of which are well known,
were to likewise feel themselves put at risk in terms of
accessing the U.S. financial system, as Under Secretary Levey
has done vis-a-vis the Iranian banks in many cases, this would
have a very powerful effect.
It would be a Banco Delta Asia times three or four-fold
impact, I believe, and we should also be looking at interbank
deposits, because folks don't necessarily appreciate that when
banks deposit with one another, the money can be used or
misused as a kind of reserve checking account that are renewed
every 6 months and turned into a 5-year loan near the cost of
funds. So, there are a number of technical aspects to this
strategy that we could employ that would, in effect, scare off,
not just Asian, but European and other banks worldwide, and
other financial institutions, from doing this kind of life-
support business with North Korea.
Mr. Royce. I am thinking about some of the reports on the
U.N. Development Programme and how they helped fund North
Korea.
Mr. Robinson. Well, we certainly want to include,
obviously, the international financial institutions. We have
heard the kind of record that is been cited vis-a-vis Iran and
the World Bank.
Mr. Royce. Right.
Mr. Robinson. We can sure suspect that multilateral
institutions need to understand that the free lunch for
Pyongyang is over.
Mr. Royce. Is Chinese cooperation critical on this, or can
we get that cooperation, in your opinion?
Mr. Robinson. I think we can but it is not going to
necessarily come voluntarily. I think that we have to put those
Chinese financial institutions that are insisting on providing
life-support to the North Koreans on notice that it is going to
be that activity or enjoy normal, unfettered access to the
United States financial system, but it is not going to be both.
Mr. Royce. That may be an area that the chairman and I can
cooperate on as we move forward, but you mention in your
written testimony that there were 50 publicly traded companies
doing business in or with North Korea. Could you give us an
example of some of those companies? You don't have to do it now
if you don't have it at hand. We will get it later, but----
Mr. Robinson. Well, I certainly can, and just to put that
in perspective, there are 350 publicly traded firms doing
business in Iran, 200 in Sudan, 180 in Syria, for a total,
taken together with the North Korean example, over 500 public
firms with active non-humanitarian ties in the terrorist-
sponsoring states, and of course, I include North Korea among
them notwithstanding the fact that it was erroneously taken off
the list of terrorist sponsors.
Mr. Royce. One of the things that strikes me right now is
with the attention, the focus, that we have on North Korea, we
might be able to make an example of North Korea to the next
guy, you might say. There is the old adage about warning shots
in Russia and warning shots in the United States. A Russian
told me he liked them here. In Russia they had them too but it
was a warning to the next guy. The idea would be if we could
get that kind of cohesion and get that kind of policy
developed, we might be able to show what cooperation could do,
and in this particular case, we might have enough unified
support globally to--and Levey has shown, and he is still in
his post, he has shown what can be done on this front. It is
pretty impressive.
2.0.0.5, as you indicated, it was an amazing lesson, and
when you can't pay your generals and you can't continue to
manufacture your missiles, as one of the defectors who had
worked in one of the missile plants told me, you know, he said
we were trying to buy gyroscopes on the world market, and when
you have got no hard currency because everything's been shut
down, you can't do anything. The whole line went dead for
months. And so now might be a time to try to get the reforms
necessary in the regime by deploying that strategy.
Mr. Robinson. Well, we have done a pretty deep drill on
North Korea and I would be pleased to assist with the kind of
research that we have done in this connection. Just keep in
mind that when you are dealing with serious financial
sanctions, which we are now talking about,----
Mr. Royce. Right.
Mr. Robinson [continuing]. The chance for multilateral
support incorporating the Chinese and Russians, for example,
and the six parties that are playing in this game, is unlikely
at best. Now, but----
Mr. Royce. I understand that, but----
Mr. Robinson. But, unilaterally, as you know from the Banco
Delta Asia case, we are packing the gear unilaterally in this
particular field.
Mr. Royce. Right, right. Let me go to Nancy Birdsall, if I
have still got some time here. I wanted to ask Nancy about an
issue.
What does the G-20 commitment to governance reform, in
other words, allowing developing countries to have a greater
voice in the IMF and other international financial
institutions, actually mean, because it seems to me what it
means is that the U.S. clout would obviously be diminished, and
I guess my concern here, do we want to willingly diminish that
influence in this regard, because many of the countries that we
would be giving that power to aren't necessarily after the same
objectives that you are after, Doctor.
I am just thinking about rule of law issues, trying to get
independent courts set up in different countries. We have
leveraged a lot to try to bring the rule of law, and that is
resisted by a lot of governments of the developing world.
Certainly, intellectual property is another issue, doing
something about intellectual property rights. If you diminish
our ability to leverage on the IMF and you empower, basically,
those developing countries where you are trying to institute
reforms, presuming for a minute that the values that we are
trying to inculcate or develop are worthwhile, such as an
independent court system, give me your take on that, Doctor.
Ms. Birdsall. Yes, I think the issue is the following: We
need to bring countries like China into the club in a
meaningful way, and in particular, into the clubs represented
by the international financial institutions, the IMF and the
World Bank. Why? First of all, by bringing them into the club,
we are in a position to work with them and, in effect, push
along their inclination increasingly to play a role of global
stewardship along with us.
Mr. Royce. Doctor, I was involved in Africa as chairman of
the Africa Subcommittee for 8 years, and I have to tell you, as
we pushed and as Europe pushed engagement with Africa, the
African Growth and Opportunity Act, conditioned upon the
development of the rule of law, independent courts, the Chinese
Government were sending the opposite message. They were telling
African leaders, No, you don't want to go down that road. That
is not in your interest, it certainly isn't in China's
interest, where they were trying to sole-source--they weren't
trying to open up markets and they certainly weren't trying to
improve the betterment of sub-Saharan Africa, and I just have
to share with you, I think your premise about bringing them
into the club, they are in the WTO and they are trying to wreck
the WTO, you know?
I mean, if they behaved in a responsible way on some of
this, I think we could be sold, but I think their behavior
convinces me that we are on exactly the wrong track if we bring
them into the IMF and give them influence in the IMF when their
goal is not the betterment of the developing world. It is
taking resources from the developing world, subverting
democratic process there, and pushing the idea of dictatorship,
frankly, in African states. They have been very forceful about
that.
Ms. Birdsall. Well, the current proposal is to increase
their voting rights and their quota in the IMF from 3.5
percent, something like that, to 5 percent, so there is no way
that the----
Mr. Royce. But collectively----
Mr. Sherman. The time of the gentleman has long since
expired.
Mr. Royce. If you add all of this up, we lose influence
there in a pretty big way, once you add all of the state actors
up.
I am sorry, Chairman.
Mr. Sherman. A number of issues came up during the ranking
member's questioning. First, as to North Korea being removed
from the terrorist list, I introduced legislation immediately
after the Congress was notified of that intention, to prohibit
the administration from taking North Korea off the terrorist
list. For a variety of reasons, that did not get a vote on the
floor. Speaking of North Korea and the ranking member's
question of what leverage we have, and Mr. Robinson, thank you
for your excellent focus on their banking relationships, my
fear is that any one of a thousand banks could act as a
clearing agent for them, cash on the barrelhead, and that we
need to focus, in addition to the banks, on their real, sole
lifeline, irreplaceable lifeline, and that is China, and as
long as China, which subsidizes the regime in North Korea, it
will take all of your banking skill and then some to put any
real pressure on that regime, and as long as China believes it
can sell tennis shoes in the United States and subsidize the
North Korean nuclear program at the same time, they will keep
doing it.
One of the biggest fallacies is that because China holds
our debt, they have power over us, and Americans are told, it
is like your banker holding your mortgage. You better be nice
to him. Well, imagine a world in which banks are prohibited
permanently from foreclosing. Then the banker better be nice to
you, and the fact is that in the world, the true power is those
who control markets, and unfortunately, as a number of our
witnesses have pointed out, the whole world has grown addicted
to overselling into the U.S. market.
Now, Mr. Silvers, your Oversight Panel, I think, has
pointed out that we need more regulation. That is a no-brainer,
but the World Trade Organization Financial Services Agreement
obligates the United States and other countries to refrain from
placing limits on the size of financial institutions, to grant
market access to all new financial products, as if we don't
have enough derivatives out there, to not add new regulation in
new areas, and these obligations are enforced through the WTO
tribunals empowered to impose trade sanctions against
countries, as if our trade relationship and trade deficit
wasn't big enough.
Now, it is true that certain prudential measures are
excluded from these WTO sanctions, but anything we did to
protect consumers would not be, and the whole Doha Round is
focused on further financial service deregulation. What steps
should Congress take to make sure that our efforts at new
regulation are not defeated? There is no way you can sell to
Congress the idea that there shouldn't be regulation of Wall
Street, so the way for the world economic elites to achieve
their purpose is to disempower Congress, and one of the more
clever ways to do that is through the WTO, a non-elected body
that could impose trade sanctions against the United States if
we dared to not follow their lead.
So, what do we do to make sure that Congress's efforts to
get a handle on the need for new financial services regulation
are not defeated by the World Trade Organization?
Mr. Silvers. Mr. Chairman, a couple of thoughts about this.
Initially, I am not as convinced as some are that some of what
appear to be WTO limitations on Congress's power in this area
are actually all that toothy, and I think that Congress has
taken a number of steps since the enaction of various WTO non-
tariff barrier provisions to effectively regulate aspects of
our financial markets and corporate governance, and no one
seems to have raised the WTO objection.
The basic structure of the, and I am not an expert on the
WTO, but my understanding is that the basic structure of the
way in which it remains possible to regulate national financial
markets involves not just the language you cited, but also sort
of extenuating national security circumstances, that sort of
thing, in the WTO----
Mr. Sherman. Mr. Silvers, if I can interrupt, because I
want to illustrate that the WTO is a truly toothless boogeyman
used by--and this boogeyman is used to scare Congress.
Mr. Silvers. Right.
Mr. Sherman. And that is, we could simply adopt the policy
that if the WTO, if any country got trade sanctions against us,
we immediately had double trade sanction against them. Now, if
that double trade sanction was in violation of the WTO, they
could take us to the WTO and get a triple trade sanction on us,
so long as our statute said, that means we do a quadruple trade
sanction on them, so we would make it clear that any country
that disagreed with our financial regulation was free to end
all trade with the United States, but otherwise should keep its
mouth shut. That is how toothless the WTO is, except as a
boogeyman to scare Congress into doing whatever the world
economic elites want us to do.
Mr. Silvers. And Mr. Chairman, I think that is precisely
the point I was, perhaps in a more wordy way, trying to make,
which is that I think it is a boogeyman, and I think that over
time, both the Congress of the United States and legislative
bodies in other WTO member states around the world have
effectively both strengthened and weakened financial
regulation, while subject to the WTO. I would point out,
though, that clearly, my testimony states that it is the
opinion of the National Director of Intelligence that the
failures to effectively regulate our financial markets have
contributed to the primary threat to this country's national
security extant in the world today, in the opinion of the
National Director of Intelligence.
So, to the extent that Congress agrees with the
Congressional Oversight Panel that comprehensive re-regulation
of our financial markets is necessary, there is clearly a
national security purpose underlying it. Secondly, I would say
that this boogeyman, frankly, goes to the need, both
politically, but also substantively, to make sure that there is
coordinated re-regulation of the financial markets globally,
and this is why the global labor movement is so concerned that
the G-20 language, in particular in respect to re-regulating
shadow markets, which is where some of the most slippery actors
here are and some of the greatest leverage exists in the world
economy, that that language is not strong enough.
We need, and the Congress needs, to work very closely----
Mr. Sherman. Mr. Silvers, I am going to have to interrupt
you, but one thing comes--I believe that we could create a
report, I know Mr. Kearns would support this, that the
hollowing out of our manufacturing sector is a grave threat to
our national security, and I think that would have very strong
validity in dealing with any action necessary to restore our
national security, both in the financial and the manufacturing
sector.
Turning to Mr. Kearns, according to a number of economists,
including Simon Johnson, former Chief Economist of the IMF, the
money that we are being asked to provide to the IMF, $109
billion together with a lot more money from other countries, is
very likely to be used chiefly for bailing out European banks
who have lost money, some $1.5 trillion, in Eastern Europe. Do
you think that American taxpayers should provide the money, not
to deal with the world's poor, but to bail out those banks that
made $150 trillion in shaky loans to Eastern Europe?
Mr. Kearns. I do not, Mr. Chairman.
Mr. Sherman. That is the easiest question I have asked.
Mr. Kearns. The Europeans certainly, the European bankers
certainly knew what they were doing vis-a-vis Eastern Europe,
and you know, we have had a system for the, I mean, I entered
the Foreign Service in 1977. I traveled in 80 countries. I
looked at a lot of governmental systems, financial systems,
etc., and I became convinced that there were many, many free-
riding allies around the world who always depended upon the
United States to take the leadership to transfer the
technology, to license the co-production, to make the loans, to
supply money to the institutions, and the sad fact is, as Mr.
Scott pointed out, it took us until the first year of Ronald
Reagan's administration for the national debt to hit $1
trillion, you know, and now I don't know what it is, $12-, $13-
, $14 trillion.
We don't have the money anymore to do this. I don't think
it is our----
Mr. Sherman. Let me squeeze in one more question.
Mr. Kearns. Yes. I don't think it is our responsibility.
Mr. Sherman. And that is, I believe the IMF played a major
role with the financial crisis in Asia. Is it not true that one
of the effects of their intervention in the Asian financial
crisis was to force those countries to have undervalued
currencies, which they kept undervalued for many years? Haven't
undervalued Asian currencies hurt the United States by causing
a huge and persistent trade deficit with those Asian countries,
and contributed to the loss of 4 million manufacturing jobs
here in the United States?
Mr. Kearns. Another softball, a grapefruit over home plate,
Mr. Chairman. They have. China competitively devalued in 1993
and 1994. Those led to other devaluations in East Asia.
Certainly many of the countries that China scooped business
from with their devaluation were a lot more closely aligned
with the United States and more friendly to our foreign
policies and security policies, etc., so East Asian
mercantilism is a massive and major problem, and the world is
not going to get better, the financial crisis is not going to
heal, until we do something about it.
Mr. Sherman. And Mr. Silvers, do you have a brief comment
on that, or do you generally agree with Mr. Kearns?
Mr. Silvers. Oh, I agree. I think, Mr. Chairman, you stated
it accurately.
Mr. Sherman. With that, let me recognize the gentleman from
Arkansas, and during this period, I am going to ask the vice
chair to chair for the next 5 minutes.
Mr. Boozman. Thank you, Mr. Chairman. I would like to, and
we will start with Mr. Kearns, but I would really like to get
the panel's input. You mentioned about re-energizing
manufacturing and things, and I think we all agree with that.
The reality, though, is that we are in a 70 percent
consumption, you know, market right now. We are way top heavy
on financial services. We need to export a lot more goods and
services, and yet, with the global economy the way it is, that
is very difficult to do.
If I remember right, I read an article by Ms. Barshefsky,
the trade rep in the 90s, and she was talking about the fact
that 17 nations, including the United States, had already
started, you know, the ``Buy America,'' the equivalent of that
in their country, and that trade might be down as much as 10
percent. So, again, I would like to hear your all is kind of
take as to where we are going in the future and, you know, what
the deal is.
Mr. Kearns. Well, I think--may I go first?
Mr. Boozman. Yes.
Mr. Kearns. If you take a look at the import penetration
statistics of the U.S. market, they are really dramatic, and
they are worsening. That is, foreign countries and foreign
companies' share of major industries, major industrial
categories, sectors in the U.S. economy. So I think the first
thing that we have to do is not so much worry about exports,
but worry about retaking those percentages in our home market.
We have the world's vastest market. It is the market we know
the best. We don't have state-to-state regulations that confuse
us. So let us make sure that we are the ones making the
products here that Americans want and need----
Mr. Boozman. So would you exclude other products in an
effort to do that?
Mr. Kearns. Well, I would certainly, you know--there is the
myth of the level playing field, and I went to Frankfurt as a
commercial officer in 1977 in the Foreign Service, and so I
have been doing this 32 years and I haven't found a level
playing field yet, and it is impossible for U.S. companies to
compete against foreign VATs, foreign subsidies, foreign
dumping, IP theft, you know, and on and on and on, without
strong government actions. So, if it were up to me, I would use
Article XII of the GATT and I would declare a balance of
payments emergency, and I would put in tariffs, I would put in
a border-adjustable surcharge for currency manipulation.
I think the time for talking to these foreign nations and
trying to get them to agree over some series of years to do
what we want them to do is impossible. The previous
administration talked to the Chinese about increasing domestic
demand and following a different model, and they were stiffed
every time a Treasury secretary went to China, so let us
concentrate on our home market and take back a good percentage
of that.
Mr. Boozman. Ms. Birdsall?
Ms. Birdsall. Yeah, I would just like to disagree with the
thrust of what Mr. Kearns is saying. I think the issue is that
we need to have a mechanism to ensure enhanced demand abroad.
We have to have stimulus, not just in this country, but around
the world. The fact is that China has done a relatively large
stimulus package in order to increase domestic demand. The fact
is that China, it is increasingly subject to the worry about
the overall global imbalance. It is trying to find ways, given
its political constraints, which are problematic, admittedly,
to move away from an export-driven mercantilist approach.
It is also true that the IMF was unable to discipline China
on the foreign exchange side. It was equally unable to
discipline the United States on its fiscal side, so we have a
world in which it is absolutely critical that the U.S. retain
its leadership in pushing for collective action that deals
together with our allies and partners on these problems. If we
start threatening here and there, you know, we are going to do
this, we are going to get ourselves into a big problem.
We are the masters of the universe in terms of knowing how
to exploit an open, global, a liberal trading environment, and
one part of that package has to be provision of collective
insurance through institutions like the IMF and the World Bank
so that developing countries and the rising, emerging markets
don't go the mercantilist way, don't try to self-insure by
accumulating reserves and doing all the saving, so that we are
having to do all the buying and borrowing.
We absolutely have to retain the leadership we have had for
50 or 60 years in creating a system of collective insurance and
appropriate collective action, bring China into the global
community on these financial issues. Thank you.
Mr. Boozman. Mr. Miller?
Ambassador Miller. Thank you very much. I also want to
disagree strongly with Mr. Kearns. I think the kind of
restrictive and protectionist measures that he is proposing
would set back growth and productivity in the United States and
around the world tremendously. He is talking about re-creating
a trading and commercial and production system that we might
have had in the past, but the jobs that we need here in the
United States are the jobs of the future, the jobs in new
sectors, the newly created jobs that will happen in an open
environment.
So, I think it would just be very tragic indeed to start to
build walls around the U.S. economy and say, you other
countries stay out, because that is going, in the first
instance, to hurt American consumers tremendously who are
benefitting, the average family of four benefitting by about
$10,000 each year due to the open trading environment in which
we participate. So you are going to have that problem and then
you are also going to have the problem for U.S. manufacturers
who depend on the imports of intermediate goods in their own
manufacturing processes, and if we put tariffs on those goods
coming into the country, then our manufacturers aren't going to
be able to produce the finished products in a competitive way
and our productivity will go down, our wages will go down, it
is going to be bad for Americans in every aspect.
Mr. Sherman. The time of the gentleman has expired. I now
recognize the gentleman from Virginia.
Mr. Connolly. I thank the chair, and I would like to ask a
number of questions, if we could be concise in our answers to
the extent that is possible.
Let me start with you, Dr. Birdsall, and I so much
appreciated your citation of China, because actually, the
stimulus in China seems to be working. By the way, Ben
Bernanke, the Federal Reserve Bank chairman here in the United
States, announced to us last week at a luncheon that he
believes that the stimulus here is working, and he is not a
wild-eyed liberal, the last time I checked. Should we be
concerned at the cleavage between the United States and some of
its close allies, Germany and France to wit, on the issue of
economic stimulus at this time?
Ms. Birdsall. Yes, I think we should continue to press the
Europeans to increase their stimulus packages. We also have to
recognize, however, that they have more automatic stabilizers
built into their system because of their different and stronger
social safety net, and I believe in the next year, as
unemployment increases, for example, in Germany, and it will,
because it is been kind of, employment has been propped up up
until now, but as this thing unfolds and unemployment
increases, their effective stimulus spending will increase
automatically because of the safety net on unemployment.
So, you know, it is a back and forth. There are some
estimates that suggest that because of their automatic
stabilizers, their stimulus has been, in effect, 2 percent of
GDP already. I think it could be more, it should be more. I
think it is a problem, and my understanding is, my assessment
is that the Treasury and the administration have been pressing
hard on that and will continue to do so.
Mr. Connolly. Thank you. By the way, in that same
conversation, Chairman Bernanke was asked about inflation, the
stimulative bills and growing deficits, do they have an
inflationary impact down the road? What he said was that in
looking at projections over the next 10 years, the assumption
is 2 percent or below inflation for the next decade, that there
are no signs in the market right now of anyone being worried
about inflation. Would you all concur? Mr. Silvers?
I don't mean to suggest he said there is nothing to worry
about. He was looking at data that said, there are no
indications of the market suddenly in year 4 or 5 getting
panicky about inflation.
Mr. Silvers. Right. I mean, I would hate--I am not
qualified to second-guess the chairman of the Fed on this
question. The only thing I would be concerned about is that
long bond interest rates are rising, and perhaps Mr. Bernanke
knows things about that that I don't. I am perfectly willing to
submit that. I would just point out something in relation to
your last question, if you will indulge me.
Mr. Connolly. Of course.
Mr. Silvers. The labor movements in Europe, in the Euro
zone, I think share your view of the need for further stimulus
spending on the part of Euro zone governments. That is a key
element of my testimony today.
Mr. Connolly. Okay. If I may move to another subject, and
invite any of you to speak up, how important is the new
arrangements to borrow, and how important is it for the United
States to participate? Ambassador Miller, do you want to start?
Ambassador Miller. Oh, well, I probably don't have the same
view as Dr. Birdsall. I don't think it is very important at
all. I think it is important for the U.S. to participate as an
equal partner in these international institutions. They do
good, on average, but they are not essential to the workings of
the world economy, and the amounts of money that are given to
other countries, are provided, loaned, actually, to other
countries through these programs, are very small compared with
the amounts of capital that are moving through the private
sector through flows from trade, financing that through foreign
direct investment in the United States, through the purchase of
government securities of the United States by other countries,
so these are really very modest amounts of resources that are
being provided through these international organizations, so in
the global scheme of things, it is not that important.
On the other hand, it is important for the U.S. to be a
good international citizen, and that means that we do need to
participate on an equitable basis with other countries of the
world, and in the case of the IMF, which hasn't had an increase
in its resources in a very long time, it may be that some sort
of increase is in fact appropriate right now.
Mr. Connolly. Dr. Birdsall?
Ms. Birdsall. Yeah, I think it is useful to remind everyone
that the Europeans and the Japanese are also contributing $100
billion, that the Japanese contributed $100 billion earlier. It
is very important to participate, both as a good global citizen
and also because this is the moment when in many developing
countries and emerging markets, the private flows aren't
happening. There is capital withdrawals. There is, remittances
are declining, trade flows are declining, so the whole point is
for the international institutions to play a counter-cyclical
role and to be there when the private money is insufficient,
and to play the stimulus role that, within the domestic
economies, additional deficit spending plays. Very important
for our prosperity, our security, securing demand abroad, our
exports, all of the other things that some of the other
witnesses have applauded, in order to secure our place, our
continued leadership as a trading partner and as a global
citizen.
Mr. Connolly. My time has expired, Mr. Chairman.
Mr. Sherman. Thank you. I now recognize the gentleman from
Illinois, a strong advocate for U.S. manufacturing and small
business.
Mr. Manzullo. Thank you. I am late here because we were
attending a press conference because of what one of our state-
owned enterprises, General Motors, is doing to the dealers. I
have been going over some of the testimony, and I think there
are some structural issues with the IMF that need to be
addressed. Is anybody here familiar with the G-20, the Global
Plan for Recovery and Reform of 2 April of this year? I have
got a copy here and as I read this, I am absolutely shocked,
and I sit in shock and awe that money would go to an
organization that could state such things as, ``We start from
the belief that prosperity is indivisible.''
Well, forgive me for the United States wanting to be
profitable. Apparently, everything we have to do in this world
is to make sure that every Third World country, and every
country, has the same prosperity that we do. I am a citizen of
the United States and not of the world, and I think we have to
take that into consideration in dealing with international
bodies, that part of being an American is that we want to
prosper and we owe no apology for that.
But as you get into this agreement, especially paragraph
15, where it talks about taking the Financial Stability Forum,
giving that teeth, turning that into the Financial Stability
Board, to give it, among other powers, to endorse and implement
the FSF's tough new principles on pay and compensation and to
support sustainable compensation schemes and the corporate
social responsibility of all firms. Mr. Kearns?
Mr. Kearns. Yes, sir.
Mr. Manzullo. Does that shock you?
Mr. Kearns. Well, Mr. Manzullo, you and I have done
business on manufacturing for a number of years now, so----
Mr. Manzullo. Right. Nothing shocks you anymore.
Mr. Kearns. I have said before you came in several times--
--
Mr. Manzullo. And I have voted for every free trade
agreement, but we still agree on maintaining the manufacturing
base in this country.
Mr. Kearns. Yeah, well, I think we have come to an end, and
I think that there is no, you know, there is no easy solution.
Prosperity can't be shared. The notion that we can pass some
stimulus bills and talk our friends and allies and some non-
allies into stimulating their economies and everything is going
to come out fine, after we have been on this, you know,
consume, borrow, spend, binge for the last 10 years, is
irresponsible, and----
Mr. Manzullo. Does anybody else want to comment on that?
Ambassador Miller, then Dr. Birdsall?
Ambassador Miller. Thank you very much. I think the
important issue here is to remember that we don't operate in a
zero sum game in the international economy. Doing something
that is good for the United States doesn't mean automatically
that we are doing something bad for another country.
Mr. Manzullo. That is correct.
Ambassador Miller. Of course, in all circumstances, we need
to do what is absolutely best for the United States, but in
most cases, the vast majority of cases, that is going to mean
doing things that are also good for other countries, not in the
first instance, but as a result of doing things that are good
for ourselves, so this really is a case where we can have win-
win solutions for everyone in the world if----
Mr. Manzullo. But what about these words?
Ambassador Miller. Well, I think the words are problematic,
certainly the words corporate social responsibility and the
talk about compensation and corporate pay compensation. That is
very problematic, but that is also a rhetorical flourish, I
think, on the part of the leaders there. What we are talking
about is a consultative forum in this case, and if it started
indeed to go beyond words, I would be extraordinarily
concerned, but----
Mr. Manzullo. Yeah, but wars start with words. Policies
start with words.
Dr. Birdsall?
Ms. Birdsall. I just participate in the statements of
Ambassador Miller, on both counts. It is a consultative forum.
I think it was probably done to satisfy the Europeans in order
to have greater strength on some other----
Mr. Manzullo. But the European Central Bank has come out
against funding more money to the IMF.
Ms. Birdsall. The main thing that I would say is, on this
issue of prosperity is indivisible, that my sense is that the
idea is that that is a both, or more importantly, a statement
of fact, a positive as opposed to a normative statement, with
which I would agree, that we are better off here when others
are better off there.
Mr. Manzullo. But that is not what it says. I mean, what
Ambassador Miller just says, that when the United States
prospers, then the world prospers. Maybe not in the first
round, but somewhere down the line because of the creation of
wealth, of the utilization of foreign materials, the import of
foreign materials, for example, into manufactured products here
in the United States, but what bothers me is that we are
supposed to sit back, write all kinds of check to the IMF, and
when you see what the leaders of the Group of 20, and this was
signed by the Group of 20--Spain signed it individually. I
mean, they have been in their own world for years, but we can
deal with international bodies responsibly, but what I don't
like is when the socialists tweak the language, then they turn
to America for the check.
That bothers me more than anything, and also what bothers
me is the fact that in one of the statements, I think that you
made, Dr. Birdsall, is the fact that, on page 9, ``Monitor but
don't micromanage further IMF reforms. Further and deeper
governance reforms are needed at the IMF, but I worry that the
tendency for Congress to dictate what the IMF can and cannot do
undermines the U.S. role in global institutional decision-
making and ultimately weakens the effectiveness of the IMF.''
The one who writes the check, and we write most of it, I
believe, should have the opportunity to dictate the rules under
which that check is spent.
Ms. Birdsall. May I respond briefly?
Mr. Manzullo. Of course, absolutely.
Mr. Sherman. Let Dr. Birdsall respond and then the time of
the gentleman has expired. Go ahead, briefly.
Ms. Birdsall. I think we are talking about a package, to be
concrete, which will cost the American taxpayer, at the most,
$5 billion, which will trigger--our contribution will leverage
$500 billion to ensure that there is prosperity, to increase
the likelihood that there will not be catastrophic economic
losses elsewhere which would bounce back like a fire to hurt
us. So, that is the way I think of it. It is $5 billion. Let me
point out that in the context, for example, of the IMF and the
World Bank, U.S. contributions, except for these special things
that the IMF are virtually, they are not there, except for this
sort of special package, the NAB, and at the World Bank we are
no longer the largest single contributor to the soft money
window.
So, we are losing our leadership. We are losing our
leverage. We are losing our influence. We are losing our
ability to take the normative positions that I think all of you
support, because we are not making the financial contributions
that we should.
Mr. Manzullo. Thank you.
Mr. Sherman. Thank you. I just want to correct the record
factually. The most we could lose to the IMF is $109 billion.
There is a small risk that we will lose something, and the CBO
has in effect said there is like a 5 percent risk of us losing
the whole $109 billion, not a risk to only $5 billion. I would
also point out that the leverage depends upon whether other
countries do what their leaders said they would do, which may
or may not occur in light of the action that Mr. Manzullo
points out was taken by the European bank.
With that I yield to the woman from California.
Ms. Watson. Thank you so much, Mr. Chairman. I will just
throw this out, maybe one of you would like to respond. Please
do so. Both the World Trade Organization and the World Bank
have been monitoring trade restrictions proposed and adopted
since the beginning of the financial crisis. However, they have
come to different conclusions concerning the number of anti-
dumping cases in 2008, with the World Trade Organization
finding that there has been no dramatic increase and the World
Bank finding that the number surged in 2008.
Has any effort been made to resolve the differences between
the two reports, and anyone who might have information, can you
respond, please? Okay, Dr. Birdsall?
Ms. Birdsall. I don't know the answer to your question
whether there has been any effort to reconcile the two, but I
think that it is probably important to recognize that it is
healthy to have this robustness and some redundancy in these
assessments by the international institutions in which the U.S.
is a member, and it is probably useful to assume that the
greater estimates that the World Bank has put out are an
important warning signal that we are on the brink, potentially,
of a trade war, and the U.S. needs to take leadership in
ensuring that that doesn't happen.
Ms. Watson. Let me address this one to Mr. Robinson. Do you
believe that these full payments to foreign banks such as
Societe Generale and the Deutsche Bank and Barclays were a
proper use of Federal funds AIG received, and do you believe
that not paying these counterparties at a rate of 100 percent
would have posed a systematic risk to the global economy, and
is there a more appropriate mechanism for providing needed
capital to foreign AIG counterparties?
Mr. Robinson. I would associate myself with the chairman's
remarks in that respect, in the sense that the irony of the AIG
banks being made whole 100 cents to the dollar is scandalous at
some level, that is for sure, and it seems to me that that was
not indicated or required. There is certainly, in the case of
Societe Generale and others, and we do have a list of those
banks that have been, obviously, recipients of U.S. Government
or taxpayer largesse, that as I may have mentioned in my
testimony, there is a dearth of due diligence on the security-
minded or security-related side of that equation as well.
Again, some of these banks have international activities,
including partnering with Tehran and a number of other
terrorist-sponsoring states, that almost certainly was never
looked at when the due diligence was performed as to these
recipients, and we have never really had a security-minded
conditionality in global finance for this country until over
the last couple of years, and this was surfaced by still just a
handful of folks in the United States, the chairman among them,
who are intent on trying to get a better handle, not only on
where our money is going and how it is being used, but some
sense of fair play, which this does not represent, given the
risk that these investors knowingly took in going into AIG.
It is, as I say, you know, in my humble opinion, scandalous
that they would be made whole in the way they have when you
compare it to those bondholders, for example, in Chrysler. I
think that was the illustration that the chairman used. So, I
have problems with this particular issue, and I also believe
that, I hope that we will more systematically, when we are
doing due diligence in the broadest sense of the term, we will
finally, at long last, include our national security as a plank
or standard operating procedure, if you will, for that kind of
due diligence.
Ms. Watson. Mr. Chairman, a colloquy with you, I have about
5 more seconds.
Mr. Sherman. Oh, absolutely.
Ms. Watson. Okay. Is it possible that we could hold a
hearing, then, to see where these dollars go and taking in the
security aspect? I think we need to pin that down. We don't
want to repay these banks and they are supporting the
proliferation of arms in Iran or wherever, and I think we need
to zero right in and see if we can start a trail and find out
just where. Can you respond, please?
Mr. Sherman. Well, I think we have, in this committee,
focused on what happens to United States money, both private
and public sector, and how that affects our efforts against
terrorism and nonproliferation, and in my opening statement I
focused on how we put money into AIG and they then immediately,
I mean, it was seconds, wired many billions of dollars to a
French bank that is actively engaged in banking with Iran.
Ms. Watson. If we could zero right in and just hold a
hearing to really trace and then see what we need to do in
order to secure these funds--one of the things I understand
that is being considered with North Korea is cutting off the
funding that would circumvent and, you know, go to North Korea,
that is feeding their nuclear proliferations. So, I think we
need to do a little more, and I was hoping that maybe we would
have a hearing to trail, trace.
Mr. Sherman. We have focused on that a bit in this hearing.
I look forward to covering it in other hearings, and I am
relying on the witnesses to let us know whether they have the
pithy information. It is not enough for us to have a hearing
because we have got very interesting questions. We have to have
some reason to think that you folks can come up with
interesting answers. So, I see Mr. Robinson nodding his head,
and we will certainly check to see whether we can put together
a panel that will focus exactly on----
Ms. Watson. I yield back.
Mr. Sherman. Yes. I am going to do a short second round
here, basically because Mr. Robinson hasn't gotten enough
questions, but before I do, I want to once again paraphrase the
Congressional Research Service when they stated, the most
effective way that Congress can influence U.S. policies toward
international financial institutions is by attaching
enforceable conditions to new funding agreements, and it
strikes me that if we pass a bill providing $109 billion to the
IMF with not a single enforceable condition, then we are not in
the business of influencing U.S. policy toward multinational
financial institutions, which begs the question, why do
taxpayers have to pay money to keep the lights on in this room?
I would think that if Congress doesn't want to be
influencing U.S. policy toward multinational financial
institutions, the whole idea of having this committee, this
subcommittee, etc., is called into question. Now, Mr. Robinson,
for 13 years, we have had on the books, well, it is been on the
books for longer, but for 13 years, no administration has
identified a single company that has invested over $20 million
in the Iran oil sector.
As you know, the Iran Sanctions Act requires that the
administration name and identify such companies, and then
either impose sanctions or waive those sanctions with an
explanation as to why they are being waived. The convenient
approach taken by the last two administrations, and this
administration may still be reviewing the policy, but it is at
least continued for the last 136 days or so, is to simply never
see such a triggering transaction.
Could you identify for us just a couple of the clearest
investments in the Iran oil sector of more than $20 million of
the type directly described by the Iran Sanctions Act? And I
realize I am hitting you with a specific here. My guess is that
you can answer now, if you can't, I will ask you to answer for
the record, but go on.
Mr. Robinson. I have some recollection of such companies.
If you go back in time to what was then the Iran-Libya
Sanctions Act, and the waiver program, which became a kind of
program, an automatic waiver, commenced, as you might recall,
with, I believe it was Total, the French oil giant, and Gazprom
of Russia. They have remained active in Iran and in some cases
other terrorist-sponsoring states. If you look at Sinopec,
which is traded on the New York Stock Exchange, as I recall,
they have about a $100 billion deal in Iran that certainly
qualifies for over the $20 million mark of the legislation.
If you look at Royal Dutch Shell and, I believe, BP--I am
starting to run out of off-the-cuff examples, but I would
underscore that there are a number of very prominent firms that
are technically in violation of the Iran Sanctions Act today,
and as that bill has been expanded somewhat to move beyond the
oil and gas sector to some of the downstream operations, this
number of companies will increase.
Mr. Sherman. I believe most of those are legislative
proposals that were opposed and blocked in the Senate by the
former administration. So let us not count our legislative
achievements before they are signed into law.
Mr. Robinson. Needless to say, I think it is moving in that
direction, and again, the signal that is being sent
internationally is clear, which is that you can invest in
Iran's strategic energy sector with impunity and there is not
an executive branch on either side of the aisle who has been
willing to step up to sanctions enforcement.
Mr. Sherman. Or to even--as you point out, there was--first
of all, it was once the Iran-Libya Sanctions Act, we enforced
it against Libya, we had some international support in similar
sanctions on Libya, and it worked so well, Libya gave up its
nuclear program, and we took them out of the act. So, the act
was remarkably successful when applied. It is now the Iran
Sanctions Act. You describe a period of time more than 13 years
ago when administrations would at least identify the company
making the investment, name and shame, and they would at least
follow the law, even though the law allows them to limit their
sanction to naming and shaming and to waive all other
sanctions, and what we have experienced for the last 13 years
is an executive branch that deliberately violates American law
for the purpose of protecting Iran's business partners, which
shows you that the values of the world economic elite sometimes
take precedence over not only American values, but even
American law.
I will ask you to furnish for the record, not the biggest
investments over the last 13 years, but those that are most
clearly provable, because sometimes there is an announced
investment in Iran that may or may not reach the point where it
constitutes an investment as defined by the law. So the issue
here is not what is the biggest, flashiest announcement, but
what is the most provable investment of over $20 million, and I
would ask you to furnish at least one example during the last
few years of the Clinton administration and at least two
examples during the Bush administration, and perhaps you can
furnish one or two examples of things that are continuing,
because something can be an investment during the Bush
administration but also be an investment during the Obama
administration as well, and when I refer to the Bush
administration, I mean the second Bush administration, not
going back to the 80s.
I have got so many questions here, but we have gone long. I
don't know whether my colleague from California has any
additional questions.
Ms. Watson. No. Thank you.
Mr. Sherman. I think we have, consistent with the
President's declaration that America does not torture, we
should let our witnesses go. Thank you very much.
[Whereupon, at 3:13 p.m., the subcommittee was adjourned.]
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