[Senate Hearing 111-325]
[From the U.S. Government Printing Office]
S. Hrg. 111-325
THE U.S. AND THE G-20: REMAKING THE INTERNATIONAL ECONOMIC ARCHITECTURE
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HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 17, 2009
__________
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COMMITTEE ON FOREIGN RELATIONS
JOHN F. KERRY, Massachusetts, Chairman
CHRISTOPHER J. DODD, Connecticut RICHARD G. LUGAR, Indiana
RUSSELL D. FEINGOLD, Wisconsin BOB CORKER, Tennessee
BARBARA BOXER, California JOHNNY ISAKSON, Georgia
ROBERT MENENDEZ, New Jersey JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland JIM DeMINT, South Carolina
ROBERT P. CASEY, Jr., Pennsylvania JOHN BARRASSO, Wyoming
JIM WEBB, Virginia ROGER F. WICKER, Mississippi
JEANNE SHAHEEN, New Hampshire JAMES M. INHOFE, Oklahoma
EDWARD E. KAUFMAN, Delaware
KIRSTEN E. GILLIBRAND, New York
David McKean, Staff Director
Kenneth A. Myers, Jr., Republican Staff Director
(ii)
C O N T E N T S
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Page
Geithner, Hon. Timothy, Secretary of the Treasury, Department of
Treasury, Washington, DC....................................... 5
Prepared statement........................................... 7
Kerry, Hon. John F., U.S. Senator from Massachusetts, opening
statement...................................................... 1
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
statement...................................................... 3
Additional Prepared Statement and Questions Submitted for the Record
Gillibrand, Hon. Kirsten, U.S. Senator from New York, prepared
statement...................................................... 33
Responses of Secretary Geithner to questions submitted for the
record by the following Senators:
John Kerry................................................... 33
John Kerry and Richard Lugar................................. 34
Richard Lugar................................................ 35
Kirsten Gillibrand........................................... 39
Robert Casey................................................. 41
Roger Wicker................................................. 42
(iii)
THE U.S. AND THE G-20: REMAKING THE INTERNATIONAL ECONOMIC ARCHITECTURE
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TUESDAY, NOVEMBER 17, 2009
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 3 p.m. in room
SD-419, Dirksen Senate Office Building, Hon. John F. Kerry
(chairman of the committee) presiding.
Present: Senators Kerry, Cardin, Shaheen, Kaufman, Lugar,
Corker, Isakson, and Wicker.
OPENING STATEMENT OF HON. JOHN F. KERRY,
U.S. SENATOR FROM MASSACHUSETTS
The Chairman. The hearing will come to order.
Mr. Secretary, thank you so much for taking time to be here
with us. I know this is a busy time, in every respect, but it's
a particularly good moment for us to be thinking about some of
the issues in front of this committee that you also deal with.
So today, we're pleased to address the future of the G-20, the
IMF, the World Bank, and America's role in remaking our global
financial architecture.
It's been almost a decade since a Treasury Secretary last
addressed this committee. And back then, it was to discuss the
IMF and the Asian financial crisis. While those events unfolded
far from our shores, in many ways America has been ground zero
for a financial crisis today that nearly resulted in global
economic collapse. We're not out of the woods yet, but it's not
too soon to start rebuilding and rethinking our international
financial institutions.
The global economy has changed dramatically, quickly, and
profoundly. Twenty years ago, worldwide capital flows were less
than 20 percent of what they are today. Ten years ago, much of
Asia was in economic disarray. Today, the old order has been
shaken up by new realities, emerging powers, and entirely new
financial entities. Increasingly, the economic policies of any
single nation, no matter how powerful, are inadequate to meet
the demands of a world where both risk and capital move
globally.
Alongside our financial challenge, we're pursuing new
development priorities, such as mitigation and adaptation to
climate change, protecting food supplies, empowering women, all
of which we increasingly view as fundamental to future security
and stability. We need institutions that are designed and
equipped to thrive in this changed environment; organizations
with stronger multilateral levers, empowered to monitor and
protect the global monetary system; and development banks,
actively engaged with a new set of priorities consistent with
the continuing goal of ending poverty.
When President Obama announced from Pittsburgh that the
G-20 would replace the G-8, Singaporean Prime Minister Lee Kuan
Yew called it an implicit acknowledgment that the post-World
War II order had come to an end. And, indeed, I think that this
transformation from G-7/G-8, and then G-8 with various pluses,
ultimately to, now, the G-20, is a stark acknowledgment of a
fundamental transformation that has taken place in the use of
power and in the global decisionmaking process. It's certainly
true that the rise of the so-called ``BRIC countries''--Brazil,
Russia, India, and China--represents a fundamental global
economic shift.
Twenty years ago, the President's most important global
financial trip would have been to Europe. Today, it is Beijing.
Clearly, the developing world needs a legitimate seat at the
table so that all of us can better address shared challenges.
We've already begun this process through recognizing the G-
20 as the premier economic coordinating forum, and it has made
encouraging progress since. A year ago, at the height of the
crisis, it convened, for the first time, at the leaders level,
and it launched the largest and most coordinated fiscal and
monetary stimulus ever undertaken.
My Senate colleagues and I worked to make good on our G-20
commitment last spring to dramatically increase the IMF's
lending capacity to contain the crisis. Without legislative
action, in keeping with your request, Mr. Secretary, and the
President's, the world economy would still be in a much more
precarious place.
The International Monetary Fund and its sister
organization, the World Bank, must also evolve to reflect this
changed world. After World War II, a handful of developed
countries understood that an international framework was
necessary to avoid repeating the chaos of the 1930s. And so,
they put one in place. In 2009, the IMF's and World Bank's
continued legitimacy and effectiveness depend on transcending
their origins to offer underrepresented countries an increased
voice. We need to explore how these changes will affect
American interests and how we can lead within these new
frameworks.
To be sure, the IMF and World Bank have evolved, responding
to the end of the gold standard, incorporating decolonized
countries around the world, and eventually taking on board the
countries of Eastern Europe. However, as the rate of global
economic change accelerates, we need to ensure that our global
economic architecture can keep up.
Today, the World Bank and other multilateral development
banks are seeking more capital contributions from Member States
in order to address the current crisis. These institutions have
been vital in protecting vulnerable people in countries and
supporting development. This committee has a long history of
working with them, and we should be sensitive to their
requests. But, we should also be prudent in our response.
Capital is flowing back into many emerging markets, and the
budgets of many donor nations around the world are strained. We
need to ask ourselves, Do these institutions truly need
additional funds now? If so, how much is appropriate? And
finally, should new funding be provided temporarily or
permanently?
Any increase in funding must be coupled with a reevaluation
to ensure that these institutions are actually fulfilling their
mandate to focus on the world's poor. Our own funds and
development spending are limited, and our focus should not be
on the needs of middle-income countries.
The G-20 has singled out climate change and food security
as challenges demanding greater attention. And I agree. Banks
deciding whether to fund major energy projects in developing
countries, particularly middle-income countries, should take
care not to lock them in to a high-carbon future that will be
costly for all of us and especially devastating for the world's
poorest nations.
Instead, we must help countries to craft well-balanced
energy strategies. Our efforts to address energy poverty and
climate change must not work at cross purposes. That means we
must persuade our institutions to focus their investments on
building energy efficiency and renewable energy capacity in the
short run and carbon capture and sequestration and other
advanced technologies as they, too, become available.
Secretary Geithner, we know full well the enormous
responsibilities that you've taken on at a moment of
unprecedented strain and transition. And we very much
appreciate the job you're doing and appreciate your taking time
to be with us today to answer questions and share with the
committee your thoughts about this new architecture and the new
rules of the road. We look forward to hearing your thoughts
about the G-20 and those other issues shortly.
Senator Lugar.
OPENING STATEMENT OF HON. RICHARD G. LUGAR,
U.S. SENATOR FROM INDIANA
Senator Lugar. Well, thank you very much, Mr. Chairman.
I join you in welcoming Secretary Geithner and thank him
for appearing before the Foreign Relations Committee.
As we seek to emerge from the worst economic crash since
the Great Depression, we need to consider how the United States
maintains its influence, addresses national security
deficiencies and provides global leadership in an era when the
American economy may not be the overwhelming source of power it
once was.
Increasingly, national influence will be determined by
whether countries can contribute to solving global problems, or
at least, whether they are making themselves indispensible to
other nations.
China and other developing economies are demanding a
greater say in the management of the world economy through the
G-20 and other mechanisms. China's global leverage has
increased as it has deliberately positioned itself as a
creditor nation with more than 20 percent of the world's
current account balance surplus. We cannot depend indefinitely
on China investing heavily in United State Government debt.
Some thought must be given to how we work with China and other
nations to establish a more sensible global balance that
depends less on demand by American consumers.
The United States and the G-20 also must rethink the role
of the international financial institutions that provide crisis
support and assistance to developing countries and emerging
markets. As one of the largest shareholders in these
institutions, the United States enjoys an opportunity to
influence their policies and programs and to ensure that
hundreds of billions of dollars are managed effectively and
transparently. Are the IMF, the World Bank, the African
Development Bank, the Asian Development Bank, the European Bank
for Reconstruction and Development, and the Inter-American
Development Bank achieving their missions of fighting poverty,
encouraging growth, and promoting democracy? What could the
international financial institutions have done differently to
help mitigate the current global financial crisis?
Six years ago, I began an examination of the multilateral
development banks, focused on ensuring that their financing
reached the intended people and projects. I chaired six
hearings on the topic that included examinations of individual
projects and policies of the respective banks.
In the months to come, the administration is likely to seek
substantial capital increases for the banks the chairman has
just mentioned. It is important for the success of any such
request that the administration fully engage Congress. The
administration's $100 billion loan request for the IMF last
September came very late in the process of the Supplemental
Appropriation Act of 2009. There was no opportunity in the
House or the Senate for hearings or authorizing legislation
addressing whether the money should have been conditioned on
reforms. After the supplemental passed, the President signed
the bill with a statement asserting the administration's
discretion to disregard the few provisions added by Congress
that promoted reform at the IMF.
The United States has strong national security and
humanitarian interests in alleviating poverty and promoting
progress around the world. That is why the Congress regularly
supports appropriations for subsidized loan and grant programs
through the multilateral development banks.
But the American people must have confidence that our funds
will be managed effectively, efficiently, and transparently.
Given our domestic budget and employment situation, it's all
the more critical that we ensure that our contributions promote
United States interests.
It also is imperative that our government examine capital
increases for each bank as a unique request. Each financial
institution has its own distinct management challenges. For
example, capital increases for the European Bank for
Reconstruction and Development must be accompanied by much more
information concerning whether wealthy Russian business
interests are benefiting from the 41 percent of bank funds that
flow to that country. Similarly, capital increases for the
Inter-American Development Bank must address how that bank is
reforming its practices after its unrealized loss of $1.9
billion in 2008 from its liquid portfolio of cash management
instruments.
The World Bank, for its part, has been a leader in
addressing concerns about corruption and governance. Among
other steps, it regularly publishes the names of contracting
companies that have violated World Bank policies.
Given the linkages between our financial sector and that of
other countries, we cannot achieve economic recovery in
isolation from the rest of the world. In the face of job
losses, wealth evaporation, homelessness, hunger and other
outcomes, the fabric of many nations will be tested. We have to
expect additional political, economic, or even national
security shocks. The global crisis is likely to reduce
enthusiasm within the United States and beyond for liberalized
trade measures that would greatly benefit our country. The
United States must continue to offer a clear leadership that
ensures the major economies will cooperate on financial
restructuring and resist protectionism.
I thank the chairman again for calling this important
hearing and look forward to Secretary Geithner's testimony.
The Chairman. Thank you very much, Senator Lugar. I
appreciate your comments, as always.
Secretary Geithner, if you would summarize, and we'll put
any full text in the record that you have. And we look forward
to your comments and then a good dialogue.
STATEMENT OF HON. TIMOTHY GEITHNER, SECRETARY OF TREASURY,
DEPARTMENT OF TREASURY, WASHINGTON, DC
Secretary Geithner. Thank you, Mr. Chairman and Ranking
Member Lugar, members of the committee. It's a pleasure to be
before you today.
This committee has played an indispensable role at critical
moments to strengthen America's leadership in the international
financial system. This is one of those moments.
As you understand, and as you said in your statements,
economic policy is central to achieving our national security
and foreign policy objectives. Our capacity to advance and
protect our national security interests depends fundamentally
on our economic strength at home. But, our economic strength is
increasingly dependent on the strength, openness, and stability
of the global economy.
Six years ago, the United States played a central role in
the creation of the international financial institutions and
the multilateral trading system. Today, that system has to be
reformed to address the great challenges of our time. And we're
now engaged in a process of advancing a set of very
consequential reforms that will help modernize these vital
institutions and arrangements for international economic
cooperation.
As part of these changes, we're placing the G-20 at the
center of the cooperative effort. After decades in which
cooperation was focused on a small number of the major
industrial countries, we've made the G-20 the premier forum for
international economic cooperation.
We're working to strengthen the international financial
institutions, so they can play a more effective role in
promoting our interests in global growth and development. As
part of this, we are examining a set of reforms to improve
internal governance in the institutions, to provide more focus
on core priorities of development, and to strengthen the
financial structure of the banks.
We're supporting a set of reforms to the governance
structure of the institutions to increase the rights and
responsibilities of our major trading partners and the most
populous, rapidly growing economies in the world.
We're working to create more effective means of cooperation
on financial reforms to help prevent future financial crises.
This is why we created the Financial Stability Board as a
complement to the existing Bretton Woods Institutions and why
we expanded
this forum for cooperation on financial standards to include
all the G-20 countries.
Now, these reforms to the architecture are critical to
advancing U.S. interests. And as you see at the G-20, they have
very broad support internationally.
I just want to highlight very quickly, Mr. Chairman, some
of the major substantive priorities on the international
economic agenda that we face today, although both of you
highlighted all of these.
First, is to build a more stable foundation for global
economic growth. As the United States saves more as a country,
future growth will depend more on domestic demand outside of
the United States. During his discussions this week in
Singapore and China, President Obama emphasized that the United
States and China must be at the center of efforts to put the
global economy on a more sustainable and balanced growth path.
China has to move to take steps to move away from excessive
reliance on exports to domestic consumption-led growth. And, as
you saw in the G-20 and in APEC, there is very broad support
around the world for this view.
Second, we have to work to enact stronger global financial
standards to create a more stable financial system. This is
about capital requirements. It's about oversight of critical
markets like derivatives. It's about reforms to help manage the
failure of financial institutions that operate globally. For
all reforms in the United States to be effective, they must be
accompanied by stronger standards globally. Otherwise, risk
will just move to countries with softer, weaker regulation.
Third, we're committed to playing a leadership role
addressing global development challenges. President Obama has
proposed support for a major new international initiative to
strengthen food security, and, as part of this, we're
establishing a multilateral food security trust fund at the
World Bank to increase and improve agricultural assistance to
low-income countries. Central to this will be advancing new
strategies for increasing productivity in agriculture through
research and development, through policy reforms, and through
investment.
We have to work to address climate change. And we're
working in the G-20 to do so in a way that will best promote
reforms, not just in the major economies, but in the major
emerging market economies. In this context, I particularly
appreciate the support of this committee for the World Bank's
climate investment funds along with the global environmental
facility. We hope these funds can be building blocks for
leveraging future U.S. climate investments.
Now, these are just some of the priorities. We're working
very hard to try to help rebuild a international consensus
around the world and in the United States in support of reforms
to open markets for U.S. exports to strengthen the
international trading system.
All these challenges require the United States to play a
leading role, but we can't solve them alone. We've witnessed,
in this crisis, the world come together to enact a very
powerful, very effective, coordinated response to avert the
worst financial crisis since the Great Depression. And I
believe this extraordinary cooperation makes it more likely
we're going to be able to advance these longer term reforms.
We're actively engaged now in building a 21st century
architecture that will better serve future generations. We do
this not just out of idealism, but because of the pragmatic and
realistic calculation that our economic and national security
interests are often best served through multilateral
cooperation.
We look forward to working very closely with this committee
on these challenges. And I look forward to answering your
questions.
[The prepared statement of Secretary Geithner follows:]
Prepared Statement of Hon. Timothy Geithner, Secretary of the Treasury,
Department of Treasury, Washington, DC
Chairman Kerry, Ranking Member Lugar, members of the Senate Foreign
Relations Committee, thank you for the opportunity to testify today on
the role of the Group of 20 (G-20) in the global economy.
This committee has long played a central role in strengthening
America's leadership in the international financial system. This role
is more important than ever at this moment when global cooperation is
critical for promoting America's well-being and our national interests.
In the wake of the most severe global recession in decades, strong
American growth will require stronger growth in our trading partners.
Moving from a global economy based on U.S. demand to one based on
global demand is critical to our domestic efforts to reduce
unemployment and increase the wages of middle-class Americans.
At the start of this year, the world confronted the very real risk
of a great depression, global deflation, and financial collapse. Over
the past year, President Obama has worked closely with G-20 partners to
adopt a forceful response to the global financial crisis. U.S.
leadership and action, coupled with historic G-20 cooperation and
response, has put out the financial fire and restarted growth in
private activity. We are now moving from a period of rescue and repair
to one of recovery. As growth strengthens and financial headwinds
diminish, we will begin the essential process of restoring balance to
public finances and fully removing the broad backstop still in place
for credit markets.
Cooperation through the G-20 will remain essential as we start to
unwind extraordinary measures and put in place the broad framework to
achieve a strong, sustainable, and balanced recovery, and implement
profound financial reforms at home and abroad.
After the experiences of the Great Depression and World War II, the
United States led in the creation of the international financial system
that anchored prosperity and stability for more than 60 years. Today,
that system must be reformed to address 21st century challenges. The
United States again faces an opportunity to help shape a system that
ensures better economic potential for future generations in America and
around the world. As this committee recognized by organizing today's
hearing, the United States will be more effective in achieving our
economic goals and our strategic priorities and interests when we work
in partnership.
Let me briefly describe how we are working with the G-20 to advance
our central objectives: rebalancing the global economy to achieve
stronger and more sustainable U.S. growth goals; promoting global
financial stability; and forging multilateral solutions to threats such
as food insecurity, fragile states, and climate change. To achieve all
of these goals, we will need to reform the global financial
architecture.
rebalancing the global economy to achieve strong and sustainable growth
As stabilization and recovery take hold, our policy challenge will
shift to catalyzing private demand and business investment. This will
require continued policy support. We cannot make the mistake of putting
on the brakes too early or withdrawing support prematurely. This is why
our recovery programs were designed to provide support for growth over
a 2-year period, and that is why other governments around the world are
committed to continue the recovery now underway, before the G-20 shifts
to restraint. At the recent G-20 ministerial meeting in St. Andrews,
Scotland, Finance Ministers and Central Bank Governors were united on
the central point that growth remains the dominant policy imperative
across our countries.
But the financial crisis also showed clearly that previous global
economic patterns were unsustainable. To establish a more global
foundation for growth and avert future crises of this nature, we must
rebalance global demand.
As U.S. consumers save more and spend less in the years ahead, and
as our government embarks on a path of fiscal responsibility, emerging
markets and economies with large and sustained surpluses will need to
shift their growth toward domestic demand and reduce their reliance on
exports. Governments around the world will need to accept this basic
reality or we will all face slower growth.
Indeed, countries are already redirecting policies along these
lines. In the United States, private saving has risen and the U.S.
current account deficit has fallen from over 6\1/2\ percent of GDP in
late 2005 to about 3 percent of GDP at this time. We are seeing
domestic demand play a stronger role in recoveries abroad and
corresponding reductions in global imbalances elsewhere.
At the Pittsburgh summit, President Obama secured a commitment by
G-20 leaders to adopt a Framework for Strong, Sustainable, and Balanced
Growth. In St. Andrews, G-20 Finance Ministers and Central Bank
Governors set out a detailed process and timeframe for achieving this
goal. We asked the International Monetary Fund (IMF) to assist us in a
mutual assessment process by evaluating whether policies pursued by
individual G-20 countries are consistent with a more sustainable and
balanced trajectory for the global economy and, if needed, recommending
how policies could be adjusted to improve the global outlook.
Why is this important? In the final analysis, it is up to each of
our countries to deliver the policies needed to achieve strong,
sustainable, and balanced growth throughout the world. The
administration will do its part and looks forward to working with
Congress to put our fiscal policy on a sustainable footing when
recovery is in place. But the fact that all of the G-20 countries
signed up to this detailed process, recognizing that policy formulation
in their countries will need to take broader global interests into
account to avoid the booms and busts of the past, demonstrates the
strong collective resolve to tackle global challenges with the same
force that we brought to overcoming the crisis.
Let me assure you, however, that we are not laying the foundation
for global rebalancing only in the context of the G-20. Even before the
Pittsburgh summit, we were working hard to achieve this goal through
the Strategic and Economic Dialogue (S&ED) with China and in our
ongoing bilateral discussions. I have had lengthy conversations with my
European colleagues about this subject, and I was just in Tokyo for
bilateral discussions with the new government ahead of attending the
Asia Pacific Economic Cooperation (APEC) Ministerial in Singapore,
where there was broad agreement on the need to balance growth.
Open trade and investment policies will be equally important to
ensuring future U.S. economic growth, prosperity, and sustainability.
Trade will be critical to creating U.S. jobs and ensuring economic
dynamism and vibrancy. Importantly, G-20 countries have played an
active role by pledging to keep markets open, not to erect
protectionist barriers, and not to retreat into financial
protectionism.
Together, Congress and the administration have a critical role to
play in showing the world that we are serious about critical financial
reforms, strong trade and investment, and fiscal consolidation. These
policy steps are essential to continuing the strong U.S. role in the
global economic system, ensuring strong international confidence in
U.S. economic fundamentals, and promoting our Nation's interests. By
taking action at home, we must communicate our resolve to ensure that
the U.S. economy remains the strongest and most innovative in the
world.
Together with the other measures we are taking, these steps will
help foster a sustainable global growth path and a strong U.S. economy.
promoting global financial stability
Next, alongside the growth agenda, we must build a stronger global
financial system to prevent and mitigate financial instability wherever
it emanates in the international system.
In the wake of the crisis, policymakers and regulators from the
United States and across the globe have mounted strenuous efforts to
repair financial systems. A strong and welcome consensus exists among
G-20 countries on a framework and objectives for building a more stable
global financial system. We have agreed on a strategy to put in place
stronger constraints on risk-taking across the financial system, to
bring appropriate oversight to key institutions, products and markets,
such as the over-the-counter derivative markets, to reform the
securities markets, and to provide the tools necessary to wind down
firms that fail. All of this will make the financial system stronger
and better able to withstand future pressures.
But as we saw during the financial crisis, in a world of global
capital markets, even the strongest regulatory standards can be
circumvented by lax oversight in other financial centers, triggering
regulatory arbitrage and a race to the bottom in which everyone loses.
Thus, the Obama administration believes it is in the United States
interest to work with our G-20 partners and other countries to seek the
adoption of high standards by all major economies.
That is why we expanded the Financial Stability Board (FSB) to
include all of the G-20 countries.
That is why we are pursuing a vigorous agenda of regulatory reform
internationally in parallel with our agenda at home. We are working
with the G-20 to subject nonbank financial institutions, credit rating
agencies, and hedge funds to greater scrutiny and advancing adherence
to international standards across a number of other areas. We agreed at
the Pittsburgh summit along with the G-20 countries to build high-
quality capital, mitigate procyclicality in financial regulations,
strengthen adherence to sound compensation practices in order to foster
greater financial stability, improve the functioning of over-the-
counter derivatives markets, and address cross-border resolutions and
systemically important financial institutions.
The challenge each G-20 nation faces is now to implement this
agenda. Here at home, we are working to enact sweeping reforms designed
to protect consumers and investors and create a more stable, more
resilient financial system. Working with Congress to pass legislation
on comprehensive reform of our Nation's financial system is one of my
highest priorities.
forging multilateral solutions to global threats
Let me now shift to the third priority: working with the G-20 to
forge multilateral solutions to today's global threats. From
Afghanistan and Pakistan to food security and climate change, the Obama
administration is committed to revitalizing the multilateral financial
institutions to help tackle our toughest global challenges.
The G-20 has strongly supported the central role of the
multilateral development banks (MDBs) in the fight against global
poverty and as essential partners during this time of financial stress.
They serve as the first responders for the global poor and provide a
high return on U.S. development dollars. We estimate that for every
dollar that the United States invests in the World Bank as paid in
capital, $26 of aid are delivered.
As evidenced in Afghanistan, Pakistan, and Iraq--environments that
are as critical as they are challenging--the multilateral development
institutions play critical roles in addressing some of our most
pressing problems, often working side by side with our bilateral
efforts, including Treasury's Office of Technical Assistance.
Recognizing that bilateral and multilateral aid work best when they
work together, it is critical to focus more attention and resources in
order to achieve greater results in the following areas:
Advancing Energy and Climate Security
The President has outlined comprehensive changes in how we use
energy, focusing on policies to advance energy and climate security
while promoting economic recovery efforts job creation, and driving
clean energy manufacturing.
U.S. domestic action, however, can only be part of the solution to
our energy security and climate change challenges. We must seek a
global agreement with significant action by all major economies. As
part of that agreement, developing countries will need financial
support to reduce their emissions and create new markets for clean
energy technologies, as well as to adapt to the unavoidable effects of
climate change.
Climate finance therefore will need to be scaled up significantly
but we must do so in a way that is efficient and leverages U.S.
investments in the arena of climate.
Because of their central role in financing and assisting countries,
we have argued within the G-20 that the MDBs are uniquely positioned to
play an important role in helping to transition to a green global
economy.
The World Bank will specifically have a central role in
contributing to financing the transition to a green economy by
assisting countries in integrating climate change concerns into their
core strategies. In the context of a new climate agreement, we have
argued that a new climate fund should be established at an existing
international financial institution to deploy financial resources
effectively. We expect such a fund to build on the experience of the
Climate Investment Funds (CIF) at the World Bank, which this
administration has strongly supported.
While the G-20's work on climate is in its early phases, this fund
can provide additional momentum to the U.N. negotiations in Copenhagen
in December, as well as ensure that any agreement is implemented
effectively.
At Pittsburgh, the G-20 leaders committed to phase out inefficient
fossil fuel subsidies over the medium term. This groundbreaking effort
will encourage the conservation of energy, improve our energy security,
and provide a downpayment on our commitment to reduce greenhouse gas
emissions. We believe this step will encourage investment in clean
energy sources, promote green growth, and free up resources to use for
pressing social needs such as health, food security, and environmental
protection. We will follow through on the commitment while also
preventing an adverse effect on the poorest by providing them with
targeted cash transfers and other appropriate forms of support.
Enhancing Food Security
Over the past year, the global financial crisis put millions more
people at risk of chronic hunger and poverty. At the G-20 summit in
London, President Obama called for a new approach to food security that
includes strategic coordination of assistance, investment in country-
owned plans, a comprehensive approach to enhancing agricultural
development, and the effective use of bilateral and multilateral
institutions and facilities. In Pittsburgh, the President furthered
this effort by securing agreement among G-20 leaders to establish a
multilateral food security trust fund at the World Bank to scale up
agricultural assistance to low-income countries. To advance these
efforts, I have been working with Secretary Clinton, Secretary Vilsack,
my colleagues in the G-20, the World Bank, and others to advance new
strategies for agricultural investments that leverage the resources and
expertise of the multilateral organizations, and support accountable,
country-led strategies.
Generating Growth in the Most Challenging Environments
As the United States works to stabilize the economies of vital
countries, such as Iraq, Pakistan, and Afghanistan, the MDBs have a
critical role to play in offering support. From assessing needs to
mobilizing donor resources and providing substantial technical and
financial support, the MDBs are important partners in places of
strategic interest to the United States.
For example, Pakistan--one of the largest borrowers from the Asian
Development Bank--will receive nearly $1.6 billion this year and
another $1.4 billion next year to finance projects in the energy,
transportation, and agricultural sectors. Afghanistan, the largest
recipient of grants from the Asian Development Bank, will receive half
a billion dollars over 2009 and 2010. In Iraq, the World Bank is
implementing programs worth $1 billion in education, roads,
electricity, and water. These types of investments help governments
meet fundamental human needs which, in turn, give citizens a stake in
maintaining a stable political and economic environment.
Supporting Private Sector-Led Growth, Infrastructure, and Financial
Access
Additional means of strengthening the potential of the global
economy include supporting private sector-led growth strategies and
improving access to financial services for the poor. Through the G-20,
we are seeking a renewed focus from the MDBs on promoting the business
and market environments, including appropriate legal reforms needed for
private enterprises of all sizes to thrive. These efforts will in turn
strengthen the ability of the private sector in developing countries to
foster opportunities for growth.
Improving access to financial services for the poor is also a
critical component of this effort. Together with our G-20 partners, the
United States has agreed to support the safe and sound spread of new
modes for the delivery of financial services to the poor. Also,
building on the example of microfinance, the United States and its G-20
partners have asked the MDBs to scale up the successful models of
small- and medium-size enterprise financing.
Furthering the Reform Agenda
We are committed to working across the Obama administration and
particularly with the State Department and USAID to ensure coherence of
this critical development agenda.
Achieving these objectives will require reform from the MDBs. To
ensure the effectiveness of U.S. investments in development, we
continue to press for institution-wide reforms. Our desired reform
agenda includes greater progress on combating corruption; strengthening
financial management; improving transparency, accountability, and
governance; increasing the capacity to innovate and demonstrate
results; dedicating a greater share of resources to the poorest; and
seeking better coordination and division of labor among institutions.
Achieving these objectives may also require new resources. As this
committee is aware, all of the MDBs are undergoing, or have just
concluded, capital reviews as part of a broader strategic
repositioning. At a time when resources are at a premium here at home,
the United States is carefully reviewing all options. Additionally, to
underscore our commitment to poverty reduction, the United States will
want to show leadership in MDB discussions on concessional financing
for the poorest. We are conducting a thorough review of how best to
equip these institutions for today's and tomorrow's challenges, and
look forward to working with this committee, as well as with our
partners in the G-20, to reach agreement on a set of core priorities,
reforms, and resources.
However, to be credible in these negotiations, we must fully honor
our previous commitments, which currently surpass $1 billion. I hope
this committee will support our requests to pay down our arrears.
reforming the international financial architecture
Reforming the international financial architecture will be critical
for advancing these priorities and the cause of multilateralism. An
essential element will be to strengthen international institutions and
enhance cooperation, while continuing to preserve the strong leadership
role of the United States in international forums.
As we continue to shape the G-20 to serve as the premier forum for
global economic cooperation, we will also deepen and not diminish
engagement though bilateral means such as the S&ED and through regional
groupings such as APEC and the Summit of the Americas process.
As this committee knows, the financial crisis clearly demonstrated
the central role that the IMF plays in the global system as a crisis
responder. Over the past year, the IMF has taken critical steps to
strengthen its crisis response by improving the ways it provides needed
resources to members--both emerging market and low-income countries--by
streamlining conditionality in programs to focus on the most critical
actions a country needs to take, and by increasing its capacity to
provide precautionary support to help forestall crises, importantly
through a new Flexible Credit Line.
I want to thank the chairman, ranking member, and members of this
committee for your critical support for the U.S. $100 billion
investment in the IMF's NAB. Rapid congressional passage of this
legislation at a critical moment in the crisis enabled the United
States to play a leadership role in expanding the IMF's supplemental
resources through the NAB by $500 billion and restoring financial
market confidence at a dark time. The commitment of G-20 members to
contribute to the NAB has resulted in contributions from leading
emerging economies for the first time.
Looking ahead, the IMF will have a critical role in supporting
balanced growth and financial stability. I have already touched on the
important assistance the IMF can provide in helping the G-20 countries
with the mutual assessment of their economic policies. What we ask of
the IMF, and frankly what is needed, is candid, transparent, and
independent surveillance to support this process.
In order for the IMF to effectively carry out its post-crisis
mandate and to continue to fulfill its role as a crisis responder, the
IMF's governance structure needs to evolve to reflect the relative
weights and changing dynamics of the world economy. This means giving
greater representation to dynamic emerging market and developing
countries that are now playing a greater role in the global economy and
it also means preserving our strong leadership role in the Fund.
Progress was made on this front earlier this decade and, earlier this
year, Congress passed legislation to implement those necessary reforms.
The G-20 took a critical step in Pittsburgh, committing to a shift in
quota share of at least 5 percent to dynamic emerging market and
developing countries. G-20 leaders also reaffirmed their commitment to
complete the process of reviewing quotas by January 2011.
Similarly, we secured agreement among the G-20 to support a shift
of at least 3 percent of the World Bank's voting power to developing
and transitioning countries. We expect an international agreement to be
reached on this issue in the spring of 2010 at the annual meetings of
the World Bank and the IMF. We look forward to working with this
committee as those reforms proceed.
conclusion
Ten years ago, the Treasury Department took the lead in creating
the G-20 Finance Ministers' and Central Bank Governors' process. We did
so in recognition of the changing face of the global economic and
financial system and the need to give dynamic emerging market economies
a greater role in the system, especially in the wake of the Asia
crisis. The G-20 finance process continued, on the whole successfully,
during this period. It showed that our countries, despite representing
a wide range of cultures, history, and developmental levels, could work
together and had common interests in promoting the improved
functionality of our economies. A decade later, based on this shared
experience, the G-20 countries were well positioned to tackle the
challenges of the crisis.
From rebalancing the global economy to preventing financial
instability and addressing global threats, we must seek the engagement
of partners to achieve our economic goals and objectives and serve our
Nation's interests. First and foremost, we are responsible for our own
destiny and our job begins at home. But in today's interdependent
world, no country is isolated from global events.
The turmoil of the past 2 years has been the worst the global
economy has witnessed since the 1930s, and has put the international
economic system to the most severe test it has faced since then. By
shifting the forum in which we addressed the crisis from a small circle
of advanced nations to a broader and more representative table of the
world's major economies, we strengthened the foundation for success in
taking cooperative action to pull the global financial sector back from
the brink.
But the job of building an effective international economic system
for the 21st century is far from finished. If the United States is to
succeed in building a strong economy for future generations at home and
abroad, we must continue to seek the support of our global partners in
the G-20 and other forums. Just as the United States led in developing
the institutions of today, so must we lead in developing the future
foundation for a strong, resilient, and innovative global economy.
Thank you and I look forward to your questions.
The Chairman. Well, thank you very much, Mr. Secretary, for
a quick and comprehensive summary.
One of the things that struck me, as I read the leader's
statement, coming out of the G-20 meeting in Pittsburgh and
also looking at some of the meetings that have taken place in
between, that the response to the crisis, in terms of the
stimulus and the global consensus, ``We've got to put the
stimulus out. We've got to do this investing,'' was unique and
powerful. And it had its impact. But, is it unfair for me to
say that the talk of reform and restructuring still remains
prospective, in a sense? What I keep seeing in these meetings
is, ``We must reform this. We've got to strengthen that. We've
got to redo this.'' But, I don't really see that that has yet
taken hold. And if so, what are we looking at?
Secretary Geithner. I don't think that's quite fair. I
think that you can look at three areas to judge whether this
consensus on reform is going to have any traction over time.
You can look at what's happening on the international financial
reform debate. You can see it in the governance structure of
the institutions; reforms to the international financial
institutions. And you can look at it in this broader framework
we call ``Framework on Growth.''
And if you look at--in financial reforms, for example,
there is very detailed negotiations going on right now, in
parallel with the work of the Senate and the House, on
financial reform here, on a new global accord on capital
standards, on how to bring, as I said, more comprehensive
oversight to derivatives markets, to the kind of markets that
are critical to the way systems work today, and to try to build
a framework for helping to manage future financial failures
more effectively.
On the international financial institutions, we made a lot
of progress on the early architecture of reforms to the
governance structure to give more, as I said, voice and
responsibility to the major economies.
On the Framework for Growth, you're seeing--even as the
recovery takes hold, you're seeing countries put in place
reforms that are going to make it more likely this recovery is
more sustainable over time, is more balanced. So, just as an
example, you see domestic demand in China, in Japan, many of
the major emerging markets, advancing more rapidly now. You see
the early shape of the recovery reflect this basic pragmatic
recognition that, again, as we save more in the United States,
demand is going to have to come from domestic sources
elsewhere.
So, I think that what you see in the reform agenda is
promising. Of course, the test is going to be on what countries
actually do over time. But, I think it's very promising, and I
think it reflects the basic strategic judgment, which I hope
you share, which is that you need to move on the reform agenda
while the memory of the crisis is still acute. If you wait too
long, you won't have much support. Support will fade.
The Chairman. I agree completely with that. I'm delighted
to hear that those negotiations are making progress. When would
you anticipate that they would come to fruition and the
structure would be laid out?
Secretary Geithner. On all these fronts?
The Chairman. Yes.
Secretary Geithner. Oh, I think it depends a little bit--
I'll give you an example. On a new accord on capital
requirements for financial institutions--``capital,'' broadly
defined--more conservative liquidity management, constraints on
leverage, et cetera, those things which are critical to
financial reforms--we set a deadline for agreement,
internationally, by the end of next year. And there's very
active, detailed negotiations going on right now on the
detailed elements of that framework. And our hope is that we--
and we all committed to at least a notional deadline of putting
in place 2 years after the initial agreement.
The Chairman. Does what we do on financial regulatory
reform at the beginning of next year have an impact on that?
Secretary Geithner. Oh, absolutely. I think that we have to
be able to set the international agenda on reforms, because we
can't have a system without a level playing field, and if all
we do is raise standards here, and the rest of the world
operates at this standards, it will be bad of U.S.
institutions, bad for stability.
For us to set that agenda, to get the world to come with us
to higher standards, we have to be--show we can deliver it in
the United States. We'll have no credibility if we can't
deliver it in the United States. And if we--if the process
moves too slowly here, we'll lose momentum internationally, and
that'll be bad for our interests.
The Chairman. I've heard that the reforms with respect to
pay are particularly thorny, complicated, whatever. Can you
share with us some insight on that?
Secretary Geithner. This is a terribly important and
terribly difficult issue. There's a basic consensus that we all
share, which is that incentives in the financial system created
by the--set by the compensation practices, made the institution
more risky, help magnify the kind of vulnerabilities that led
to this crisis. And to change that, we're trying to do two
things. One is to promote legislation that will force companies
to submit to their shareholders for a vote how they pay their
senior executives. Simple principle. We think it will be very
effective. But, we don't think that's enough.
We're also proposing--and you've seen the Fed propose the
initial outlines of standards to this--that our supervisors set
out broad standards for a compensation structure, and enforce
those standards. We think these are a necessary complement of
reform. They're not enough on their own, but they'll help make
sure that what we do on capital and leverage--will not be
undermined by future compensation practices.
We're doing all of that across the system. And, of course,
as you've read, we've been very--we've been--we've worked very
hard to make sure, for those institutions that took
extraordinary assistance from the government--Ken Feinberg is
putting in place very, very tough constraints on compensation,
just to make sure that taxpayers' money is going to fix those
institutions, not to reward, through excessive pay packages, a
set of senior executives.
Now, on that basic framework, there is very broad support
across the major financial institutions--the major financial
systems in Europe, in the U.K. And that's important, because,
again, without a level playing field, then these reforms will
be ineffective.
The Chairman. You were just in China. The President is
spending his last night there now. They've concluded the talks.
How would you characterize the economic outcome with respect to
our goals versus accomplishment in Beijing?
Secretary Geithner. I think the President made a lot of
progress. I think the best test of that is going be--is just to
look at what you're seeing, in terms of what China is actually
doing, in terms of policies, to shift sources of future growth
away from exports, the kind of heavy intensive--heavy industry,
intensive--very carbon-intensive growth strategy of the past to
a growth strategy that relies more on domestic consumption and
investment. And, that's going to take a lot of time. It's going
to take a long period of time. It's going to take a lot of
reforms. But, the broad strategy of their reform agenda is very
supportive of that change. And if you--again, if you look at
the shape of the recovery there, you're seeing very promising
early signs of shift to that.
Now, China's very important to the United States
economically. We want to see more open markets in China, a more
level playing field for United States companies that compete in
China and compete with China around the world. And it's very
important we see financial reforms, broader reforms to their
exchange rate system over time that will help reinforce this
process toward a more balanced global recovery. This is not
just an issue between China and the United States. Important
for both of us, but it's pretty important to the global
economy.
And on those issues, on climate change, which you read
about, on our broad national security priorities, in terms of
North Korea and other areas of the world, I think we have a
very strong foundation for cooperation. We're not going to
agree on everything. Our interests are necessarily going to
conflict in the future. But, our basic--the President's basic
judgment is, we're going to be more effective at working
through those problems if we invest early in a strategic
relationship where there's a better mutual understanding of our
basic interests and we can work more effectively to advance the
things we both care so much about.
The Chairman. One final question, if my colleague would
permit.
The World Bank and development banks have been strongly
focused on energy poverty, and ensuring access to electricity
for the world's poor. But, that has very, very often--almost
always--come at the expense of very high carbon emissions. How
would you recommend that the banks reconcile the need to help
the world's poorest today with the threat of climate change
that's obviously going to disproportionately affect the world's
poor?
Secretary Geithner. Well, as you've seen the President lay
out in the United States--and I know you were playing a
leadership role in this--we're going to need to see very
comprehensive changes in how countries use energy around the
world. Not just here, of course. And we're behind the rest of
the world--much of the rest of the world in this. But in the
most populous, most rapidly growing economies in the world.
As you said, the institutions, like the World Bank, need to
be working in support of those reforms to make sure that growth
in those countries is more energy efficient, less energy
intensive, less carbon intensive. That means that they need to
be supporting reforms that encourage that shift and transition,
and need to make sure that the resources they're putting at
work in those countries in support of development are not
working against these broader objectives to support the global
consensus on addressing climate change.
But, I think you're right to emphasize it. Our judgment is
there are three critical priorities that have to shape the
institutions--what the institutions do. And we need much more
focus on these priorities. They are climate change, the broad,
green imperatives; they are food security, agricultural
development, a classic, traditional emphasis development, where
we lost focus as a world, and we're trying to redress that
balance; and on supporting the basic institutions that are
critical to private markets, private-led development strategies
in these countries. Those three core programmatic priorities
need to be at the center of what these institutions are doing.
And we need to make sure they're doing those--not just that
they're focusing on those, but they're doing those more
effectively with the types of governance changes that both of
you referred to.
The Chairman. Well, thank you very much, Mr. Secretary. I
appreciate the succinct, direct answer.
Senator Lugar.
Senator Lugar. Thank you, Mr. Chairman.
Secretary Geithner, let me double back to a comment I made
in my opening statement in which I said I'm hopeful that, in
months to come, the administration will fully engage the
Congress--if it seeks substantial increases for these six banks
that we have discussed. Now, without quibbling over recent
history, the problem that I perceive is, the administration
asked for $100 billion for the IMF last September, for good
reasons, which you could further elucidate. However, it came
very late in the process of the Supplemental Appropriation Act.
Now, adding insult to injury, after the supplemental
passed, someone gave the President a statement to sign with the
bill that asserted the administration's discretion to disregard
the few provisions added by Congress that promoted reform of
the IMF. This in effect gave the administration sort of a blank
slate, and while removing Congress from the equation.
This is why your appearance today is very timely. This
problem occurred only 5 months ago. But, as we've been
discussing today, the United States may or may not seek further
increases for the banks. However, given the portfolio of six
different situations, even if we decided not to seek increases
for some, with others we may feel, in terms of the world
financial crisis or recovery, that such increases are
necessary.
Finally my hope is that with regard to the timing of the
requests, even if there is a short timeframe, you and others
who are responsible would approach the chairman and indicate
that we don't have much time, saying that ``You folks have got
to have your hearings, your deliberations, make your
suggestions.'' I think that would be a healthier process, in
terms of the intergovernmental relations concerning this issue,
knowing, as you know, that we are deeply interested in these
banks, as you are. We bear responsibility for appropriating the
money and thus really need this level of outreach. Fortunately,
life goes on even after one appropriation bill by the
administration won't be back again for 3 more years or so. But,
even with that being said, do you have any thoughtful comment
about this process and, even more importantly, about the
future?
Secretary Geithner. Senator, let me just say clearly, I
absolutely will commit, personally, to consult with the
chairman and with you and with the committee before we get to
the point where we are going to formally recommend to the
Congress a set of broad reforms and any potential increase in
resources of these institutions. And you were very gracious in
the way you said what you just said. I recognize that the
process, earlier this year in the IMF, was not ideal. And we
had to do--move very, very quickly in the face of a, as you
acknowledged, enormous delicate global financial situation. And
I know it was not ideal, would not want to put you through that
again. But, I just want to underscore that the actions you made
possible were decisive in helping turn confidence.
If you look back and look at when confidence and global
economic activity, financial markets, trade stopped falling off
the cliff and started to turn, it was around when the world saw
the United States acting forcefully, not just to fix our
recession, our financial crisis, but to put substantial
financial force behind these institutions so that they could do
what they needed to do to address the crisis facing the rest of
the world. It was decisive. But, I agree with you, it wasn't
the ideal way to do things. And I personally commit that we
will consult very closely with you before we get to the point
where we want to consider any material changes in their basic
financial structure.
And I completely agree with you that--and I will not
support--I would not support a change in the capital base of
these institutions without a fundamental reassessment of their
role and without a set of reforms that give us confidence in
asking you to use the taxpayers' money to support these
institutions.
And I agree with you, too, that we need to look at these
institutions individually. They've got different challenges on
the management side. They've got different records of using our
resources well. They've got different challenges and--but, it's
also important to recognize that we have to look at them
together. We can't come to you and say, ``We'd like you to
support this one this year,'' without, I think, having some
sense of what a full package will look like. And that's what
we're trying to take a careful look at now.
Senator Lugar. Well, I appreciate that pledge very much.
And, likewise, to the extent that you can furnish to us
information, even prior to requests, so that we are all up to
date on your appraisal of the six and their situations. I
recall visiting with the leadership of the Inter-American
Development Bank in support of efforts that my staff and I have
made to oversee of use of funds appropriated by Congress to the
bank. Now, they had the problems that I've discussed. And they
came to us privately and made a pretty good statement, and then
followed through. And so, I hesitate even to offer an argument
of criticism today, although it was very clearly a rather large
loss in their portfolio. Now, all of this occurred outside the
dialogue we might have had with the administration, including
anybody in the Treasury. Granted, much of it occurred in the
last administration, quite apart from your watch. But, I just
am grateful for this opportunity and am looking forward to
seeing the relationship between you and the committee function
much more transparently and efficiently so that we all have the
best, most up to date information. I want to see a situation
where we're not interviewing the bank presidents while Treasury
is off somewhere else, and we're----
Secretary Geithner. I would appreciate that.
Senator Lugar [continuing]. Simply working on the same
page.
Now, let me just ask this. Given what we have just
indicated, some Americans would ask, ``Do we really need these
international development banks anymore?'' There are many
important, crucial relationships being created in the G-20
among Member States who may otherwise not have chosen to work
with one another so closely, granted they may be fairly fragile
or new or however one wants to characterize them. The
increasing importance of the G-20 leads one to question--from
the U.S.'s perspective--as to if we are entering into a new
era, in terms of international finance, in which these banks
that comprise membership and conduct operations based largely
on geographical situations make less sense? And, if so, do
other nations see it that same way? Or, as you attend these
conferences, do most still espouse the same status quo with
regard to the banks, however well they've been run, one way or
another? I ask this because a lot of our hearings that I cited
were with regard to dams that never got built, roads that never
happened, money that disappeared. It gave, for the first time,
the free press of some emerging nations an opportunity to
question their leadership as to, ``Where's the money?'' But, it
also raised questions as to the efficacy of our surveillance of
this, our oversight. So, I wonder, in the remaining minute that
we have here, what is your prognosis as to the future of the
maintenance of all of these institutions?
Secretary Geithner. Well, let me just begin by making the
basic statement that even if one believes, as I do, that these
institutions are critical to our interests as a country, and
even if one is daunted by the enormous challenges you see
around the world, in terms of poverty, development, et cetera,
it's not possible, I think, for us to come to you and ask you
to support resources for these institutions without being able
to make a very compelling case that those resources will be
used effectively and wisely, more effectively than they've been
used in the past.
So, I deeply understand they're committed to--it's not
enough to assert that the world faces enormous challenges. And
it's not enough to assert that these institutions play a
central role. We need to be able to demonstrate that there are
a set of reforms in place--not just on the horizon, but in
place--that give us more confidence these resources will be
used effectively.
It was conventional wisdom, I think--and this has been true
over time--if you look back 15 years ago, 10 years ago, I would
say there was a strong view, held in many circles, that the
advent of global finance and the extraordinary growth in
private capital flows rendered these institutions irrelevant.
And I think one of the tragic things about this crisis, a
crisis that, in many ways, as the chairman said, started here.
It wasn't solely our responsibility, but we bear some
responsibility for this crisis. This crisis caused enormous
damage, and it would have caused much more damage if you didn't
have a set of institutions like this in place that could
respond very quickly to cushion the blow.
And I think if you look at, again, what's happening with
food security, what needs to happen on climate change, if you
look at what it takes to put in place the basic institutions
around property rights and contracts, around financial systems
that are necessary for private-led, market-led development
strategies, I think you see a very important role for these
institutions, going forward.
But, the critical test, of course, is, Can we demonstrate
that these resources are going to be used carefully and
effectively? I think they offer the highest return than we've
seen on almost any development program of the United States
over the last 65 years or so. So, I think there's a good case
for that, continuing it. But, we have to meet a high bar, a
high and skeptical bar, appropriately skeptical bar, if we come
to you again to ask you to increase resources for these
institutions.
Senator Lugar. Well, I thank you for that answer. And as
you can tell from our hearing, we're interested in following
with you the nitty-gritty of what is occurring in each of the
six--without a prejudgment that they should not exist, but we
certainly are looking forward to better performance.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Lugar.
Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman.
Mr. Secretary, thank you for being here this afternoon.
Before I get to my question, relative to the topic of this
hearing, you'll forgive me, since I don't get to see you on a
regular basis, that I will raise another issue with you. And I
know, as you've pointed out, that we have seen some stability
return to our financial markets, that we're beginning to see
some signs that the U.S. economy is growing. But, as you know,
jobs and employment continue to be a huge issue. And one of the
challenges that I'm still hearing from businesses in New
Hampshire, particularly small businesses, is that they are
still having a very difficult time getting access to credit.
So, I hear some reports that the administration is working
on looking for other ways to help small business with credit,
and I would just encourage you to continue that effort, because
it continues to be a very big issue for small business. So----
Secretary Geithner. I agree with you. You're right. And we
are--the President proposed, 3 weeks ago--we're convening a
whole range of people from the broader financial community, the
small business community, at the Treasury tomorrow--Karen Mills
and I are doing that--to examine a range of additional ideas.
Senator Shaheen. Great.
Secretary Geithner. And you're exactly right, that even
with the broad improvement in access to credit, price of
credit, you've seen across the financial system, small
businesses still face very tight credit terms. And there is a
very strong economic case for trying to make sure that we are
trying to help mitigate those financial headwinds, that kind of
classic credit crunch. The recovery will be weaker if we are
not successful in trying to mitigate those things. And we're
working on it.
Senator Shaheen. Thank you. As you pointed out, if we're
going to rebalance the world economy, that means we're going to
have to save more and that consumption demand is going to come
from other developing countries and developing parts of the
world. But, I love the Ex-Im Bank's comment about this, that
over 90 percent of markets are outside of the United States,
and yet only 1 percent of businesses do business outside of the
United States. And, clearly, we've got to change that equation.
So, as you are talking to our G-20 partners, what kinds of
initiatives and efforts are you urging so that we can continue
to open those other markets to American business?
Secretary Geithner. Well, I would focus on just two broad
sets of changes. And it's a--you know, it's a very complicated
set of reforms you need. One is to make sure that you're
seeing, again, growth come from domestic consumption, less from
exports, in the future. And that requires, again, a very
substantial shift in the broad orientation of almost any
economic policy in these countries. And, as you said, you know,
we want to see the markets more open, too. This is a--that's a
more simple, less complicated set of challenges, but it's a
very important part of it.
And, I think, as you referenced--you mentioned, referencing
Ex-Im. There are things we can do, too, to try to make sure
that American companies have access to finance to compete in
those markets, as well. And so, I think that, you know, we need
to make sure that we're building support here in the United
States for more open trade and so we can be credible in
advancing a ambitious agenda for more open markets outside of
the United States. And that's an important part of this broader
effort to try to shift the source of future growth toward
domestic consumption outside of the United States.
Senator Shaheen. You talked about financial regulatory
reform as being critical, and mentioned executive compensation.
What other elements would you like to see when it comes to that
reform?
Secretary Geithner. I think the most important things are
about the basic standards that determine how risky major
institutions are. And that's centrally about how much capital--
how much reserves, financial reserves you force them to hold
against future risk. It's about forcing them to fund themselves
more conservatively so they're less vulnerable to runs. It's
about trying to make sure that they are less leveraged in the
future. And that's something that we have to do in the United
States. We have to make those standards more conservative. They
need to be higher than they were. And they need to be applied
across institutions that serve the basic function of banks.
They may not look like banks, but if they're banks, in that
basic sense, they need to be subject to those requirements.
But, again, for that to work, we need to have a level playing
field on capital around the world.
We actually were more conservative than most major
economies, in terms of the capital requirements our banks were
forced to live with. But, we did not apply those requirements
to a bunch of institutions that operated, effectively, like
banks--AIG, the major investment banks, whole range of other
institutions. And that was a very tragic failure in regulation.
But, outside the United States, the constraints applied on
banks were actually less conservative than the United States.
I'll just give you an example. Our entire banking system today,
including the investment banks, if you count them as banks, is
about the same size as GDP--as the overall income the United
States produces every year. That number is about five times GDP
in the United Kingdom, about eight times GDP in Switzerland,
about two to three times GDP in much of continental Europe. And
that just illustrates the importance of trying to make sure you
do this on a level playing field, because the system won't be
stable and it won't be fair if we push requirements up higher
in the United States, but don't see standards raised around the
world.
Now, there are many other things that are important to do.
So, all the stuff we're trying to do on derivatives, on crisis
management, to be able to manage failure of these large
institutions more effectively in the future, protect the
taxpayers, make sure taxpayers aren't at risk in the future,
those are things that require complementary reforms outside the
United States, as well. So, you need to do these things in
parallel.
If we do them here first and then try to get the world to
come with us over time, then we're going to be less effective.
So, we're trying to do it in parallel.
Senator Shaheen. Thank you. And, my final question, you--I
think the administration has been successful in going after
some of the tax havens that are in existence. And I think that
has been very encouraging; the agreement with UBS and some of--
the dual track that the administration is on. Can you talk
about what your priorities are, going forward, for the next
efforts that you see underway?
Secretary Geithner. Thank you very much for highlighting
this. Very impressive set of changes in just a short period of
time. There's been more agreements signed to deal with these
problems in the last 10 months than I think were signed in the
last 10 years globally. Sweeping changes. With Switzerland and
the major havens coming--major--excuse me--offshore financial
centers coming in from the cold, makes it much harder for those
who want to remain outside. And we want to just build on this
momentum. And it's very promising and very important.
Senator Shaheen. So, no specifics that you want to point
out?
Secretary Geithner. Oh, I--you know, just--you'll see more
of the same. We want to see more agreements on information
exchange with the remaining countries that are still not moving
quickly enough. And we would like them to move more quickly.
And, again, we've got--I think we've got the momentum with us
now. And it's been a sea change, basic regime change, globally,
on this. And I think we'll make a lot more progress.
Senator Shaheen. So, if Senator Kaufman were here, I'm sure
he would want to know if it would be helpful for us to pass the
Malta treaty.
Secretary Geithner. I'm sure that would be helpful, and I'm
sure there are many other things you can do to help reinforce
the incentives countries have to try to move with us on this.
Senator Shaheen. Thank you.
The Chairman. Thank you, Senator.
Senator Isakson.
Senator Isakson. Thank you, Mr. Chairman.
Thank you for your service, Mr. Secretary. I really
appreciate your comments referring to banks--individuals that
looked like banks but weren't banks, and the disparity between
the oversight and accountability in investment banking versus
traditional banking.
In fact, I want to associate myself with Senator Shaheen's
comments about credit, in terms of small business, in terms of
American business. And I do think, because our traditional
banking system is as regulated as it is, it is now constricted
in the amount of credit it can extend, because of the capital
requirements, loan loss reserves, et cetera. So, hopefully, as
we bridge ourselves from what you referred to, which I think
you're right, from a period of stability to a period of growth
again, and that growth is only going to come if that
traditional banking system can meet the Main Street small
business requirements in the economies. That's kind of a
statement, not a question, but I associate myself with what
Senator Shaheen said. And I agree totally with what you said.
In fact, I think if the investment banking community had been
subjected to an annual audit like FDIC does, and the
accountability and transparency and tier-one capital
requirements at banks, that we might not have had the problem
that we had. I don't know if you have a comment on that, but--
--
Secretary Geithner. I agree with you, and you said it well.
But, I would note that banks weren't perfect.
Senator Isakson. No. No, no. I'm----
Secretary Geithner. Lots of banks got----
Senator Isakson. It was a relative statement. It was a
relative statement.
Secretary Geithner. And there were weaknesses in
supervision of banks, as well outside banks.
Senator Isakson. Two quick questions or observations. One
is, tell me what you see this oversight of derivatives to look
like.
Secretary Geithner. We are trying to do the following key
things:
The first is to bring the standardized part of the
derivatives market onto central clearinghouses. That is very
important. Right now, if you're in this business, you're going
to have hundreds, if not thousands, of counterparties, tens of
thousands of positions. That risk is all managed bilaterally
through that complicated, spaghetti-like structure of risk.
It's very, very hard for you to know, in real time, what your
exposure to loss would be if a major counterpart, a major firm
defaults. If you move the standardized part onto
clearinghouses, you reduce that very, very complicated picture
to really one number. Much easier for you to assess what your
exposure is, your loss is. And that, if done well--if you
design the financial protections of the clearinghouse
carefully, that will make the system more stable, less likely
to see the kind of panic-type dynamics of contagion you saw in
this crisis.
Many other things are important, too. I'd say the other
most important thing is to try to make sure that the regulatory
authorities responsible for market integrity, for preventing
manipulation, for protecting investors--they need to make sure
that they can go after practices in the derivatives market. So,
they need the information and the authority and the tools to
police those markets.
Those are the two--that's the simplest way to say the two
important things of this. Many other things that are important,
too. I think, in some ways, the most damaging failure of
regulation that related to derivatives was we let a number of
institutions, like the mainline insurance companies like AIG,
write huge amounts of protection--insurance contracts--against
a fall--the risk of a fall in house prices, for example,
without adequate capital to support those. And we need to make
sure they hold capital against those commitments. If we do that
well, it will make the system more stable in the future.
Senator Isakson. Well, that was the basic genesis of the
$85 billion call in September on AIG, if I'm not mistaken.
Secretary Geithner. AIG being one example. One of the worst
examples, but not the only example----
Senator Isakson. Right.
Secretary Geithner [continuing]. Again, of firms that wrote
a huge amount of commitments without capital to back them. Many
of those in credit derivatives linked to the real estate
market.
Senator Isakson. One other question. When you refer to
restrictions on compensation, as I understand it, a lot of that
has been not so much in the amount, but in the change for
maturity over time, versus incentives for 1-year pops to get a
big bonus and then you're out of there. Is that right?
Secretary Geithner. You got it exactly right. We don't--we
do not believe, although a lot of people seem to think this
would be just and fair--we do not believe it's appropriate for
the government to set limits on amounts of compensation or to
get involved in the detailed design of those basic questions.
We think that if you--well, you understand that risk.
Senator Isakson. Except for longevity.
Secretary Geithner. But, we do think--we do think, on the
structure of compensation----
Senator Isakson. Right.
Secretary Geithner [continuing]. The incentives it creates
is a very appropriate role for regulation supervision, and we
support that clearly. So, as you said, you want to make sure
that compensation for senior executives is predominantly paid
out in stock, that it vests over time, it's at risk over time,
you don't have guaranteed multiyear bonuses, where you get paid
independent of the performance of your firm.
Senator Isakson. Right.
Secretary Geithner. Those are very important changes, and
they will align the incentives of managers and executives more
with shareholders and with the system as a whole. And that is a
necessary, appropriate object of government policy.
Senator Isakson. Do you see the threshold on that to be a
TARP recipient, or do you think that should apply whether they
receive TARP money or not?
Secretary Geithner. Those broad reforms, we think, are
important across the financial system as a whole. Remember,
these are institutions that operate--they play a very critical
role in the economy as a whole. They inherently have a lot of
risk, and the government has to have in place a set of
constraints on excessive risk-taking. And if you let--if you
ignore compensation, it will undermine the constraints that a
capital requirement is designed to impose.
Senator Isakson. On that subject, and I'll conclude, you
know, there are corporations that have done their best to make
good efforts to be accountable on their compensation. I would
encourage you to look at something that happened a few years
ago at American Family Life Insurance, in Columbus, GA. Their
CEO went to stockholder advice, which, at the time, he caught a
great deal of flack----
Secretary Geithner. Right.
Senator Isakson [continuing]. From competitors for doing
so, but, over time, if more of that had taken place, where they
were engaged, the accountability basis probably would have
worked out a lot better.
Secretary Geithner. I completely agree. And we've proposed
legislation--the House has passed it--to require say on pay;
require companies to submit to their shareholders for a vote--
--
Senator Isakson. It's another form of transparency that
works.
Secretary Geithner. That is a form of--I think that can
help a lot.
Senator Isakson. Thank you, Mr. Chairman.
Senator Cardin. Secretary Geithner, let me follow up on the
transparency issue. And let me thank you for your service and
note the importance, now, of the G-20. The G-20 certainly
provides additional opportunities for us, considering the
expanding realities of the world economy, to deal with the
management of the world economy. But, we're now dealing with
countries where transparency is a lot different than it is in
the United States.
Senator Lugar and I have been working to increase America's
participation in the Extractive Industries Transparency
Initiative to try to have the United States show leadership in
this very important area where we think openness and
transparency needs to be dramatically improved to help,
basically, countries with minimal wealth.
I guess my question to you is, as you see the G-20 playing
a more critical role, how do we deal with the transparency
issues of governments that don't have a great track record in
this regard?
Secretary Geithner. I agree with you; I agree with your
emphasis on it. I think that initiative is a very valuable
initiative, and I would--we would be happy to spend some time
with you, thinking how we can work to make it more effective.
It's very important that, alongside that, you see
institutions, like the World Bank, following the leadership of
the World Bank in promoting reforms in these countries that can
reduce opportunities for corruption. And that has been a--
frankly, a late focus of those institutions. But, the bank is
doing some very important things in those regards. We can build
on that--support that. I couldn't agree more with you about the
basic emphasis on it. I'd be happy to work with you on how best
we can advance that.
Senator Cardin. Well, thank you. We'll take you up on your
offer on the EITI and ways that we could be helpful in dealing
with international institutions to leverage their importance to
transparency in the participating countries.
I'm curious as to your assessment of whether the G-20
itself would be expanded. We have complaints from emerging and
developing countries as to whether there's appropriate
attention in the international institutions to their needs. One
of the advantages of moving to a G-20 is that it certainly
reflects a much broader interest, but there will be concerns as
to how rigid the G-20 will be in the future.
Secretary Geithner. Right. Well, you've described the basic
tension exactly right, which is that, you know, if you make it
universal, you won't be able to do anything. But, we've made it
a valuable enough forum that people want to come, which is a
good test of whether the thing is doing something
consequential. We think we've got a basic, stable arrangement
now which is pretty representative of the major economies
around the world. And, I think we want to have some stability
around that arrangement now. If we keep changing the seats at
the table--expanding, changing--then, you know, you won't have
the kind of continuity of engagement. It will be harder to get
these things done.
So, I think that we've got something that broadly works
now. It's not perfect. You know, it's got a lot of Europeans at
the table, which is slightly anomalous. It's got regions that
are somewhat underrepresented, in their views. So, we may find
a way to change it. But, I think we need to have a period of
stability now.
Senator Cardin. Let me change the subject, if I might, and
talk about a subject that we haven't had much debate on in
Congress during these economic times, and that is our national
savings rates. We're all interested in trying to create jobs
and stimulating our economy. At the same time, we've created a
log of debt and a lot of borrowing. We need to get back to
policies that encourage domestic economic savings. And part of
that is to get our budget into balance. I understand that. But,
it also requires policies to encourage Americans to save,
policies ranging from very simple things such as financial
literacy to some of the recommendations that President Obama
has suggested on encouraging additional savings.
I just want to get your view as to where this is on your
priority order as we strengthen our economy--getting back to
increasing America's savings rates.
Secretary Geithner. Again, you said it well, and it is the
basic imperative facing our country, among many. It is
encouraging to point out that you've seen private savings move
from negative to somewhat modestly positive. That's very
healthy. That's a necessary, healthy transition for us. At the
same time, you've seen the amount we're borrowing from the rest
of the world as a share of our economy fall very sharply. Our
current account deficit, what measures how much we're borrowing
from the rest of the world as a share of our economy, was about
7 percent of GDP at its peak; it's now under 3. That's
encouraging, too. It means we're borrowing less from the rest
of the world, even though we're facing these enormously high
deficits. But, we're going to need to see very, very
substantial changes over time in our fiscal position to make
sure we go back to living within our means, that people
understand that. And, as part of that, trying to find ways to
encourage Americans to save more will be important.
Now, I think you're right that you can--education helps,
and there are things you can do to the design of the tax
incentives we create for savings that might do a better job of
encouraging those savings at the margin. I think the most
powerful thing that's going to affect behavior on savings in
the near term is going to be just the cost of the crisis, the
damage caused by a set of judgments made by many Americans that
left them with, really, just too much debt. And it's going to
take some time for them to reduce the amount of debt that they
owe and to get their basic household budget balance sheet into
a more stable foundation. That's a necessary change for us to
go through. But, it does mean that we're likely to grow at a
more moderate rate than we have, coming out of past recoveries.
And that's one reason why this is going to feel harder for the
average American, for a longer period of time.
But, I think you're also right to emphasize that part of
this is going to be what the government does--what the Congress
does, what the President does--in terms of moving our fiscal
position back to a sustainable balance over time.
Senator Cardin. I would just point out that when America's
economy was growing at a pretty fast rate, just a few years
ago, when our national savings rates were, in some quarters,
negative during this big boom, Americans said, ``Well, we're
increasing our savings because of the equity in our homes and
the value of increased retirement savings through appreciated
values.'' Well, that's not there any longer. So, I really do
think we've had, for a long period of time, a serious problem
of Americans saving. The rates have been historically too low
for a great economy. And I think when we get our economy back
on track, we need to look for structural changes that reward
savings. And we'll look forward to working with you as we try
to figure out those types of fiscal policies that provide for,
I think, a more balanced approach toward national savings.
Secretary Geithner. I completely agree with you and like
the way you said it. The financial reforms that we're engaged
in, working with the Congress on now, will help in that regard,
because I think that they will make it less likely that
Americans borrow responsibly and aren't left with debts they
can't afford, obligations they don't understand. They will help
reinforce this broad process of increased savings, as well.
But, you're right to emphasize it.
Senator Cardin. Thank you.
Thank you, Mr. Chairman.
The Chairman. My pleasure. Sorry I wasn't here to recognize
you, but now I'm here to formally unrecognize you. [Laughter.]
Senator Corker.
Senator Corker. Mr. Chairman, thank you for having this
hearing. And, Mr. Secretary, as always, good to see you, sir.
Secretary Geithner. As always----
Senator Corker. Yes, sir.
Secretary Geithner [continuing]. Nice to see you.
Senator Corker. As you can imagine, we're in some pretty
intense meetings right now as we're getting ready to work a
markup in our own financial regulation, and obviously--and I
know there's a lot of harmonization that's been talked about,
between what we do and what happens with other major economies.
I know you've been working on that, and I know, obviously,
we're playing the lead role. And the European Union, I guess, a
lead role also. I know a number of other countries aren't
playing quite as active a role. But, it seems to be sort of
between the two entities there that this is happening. And I
know--and this is not a dig--but, you know, we've sort of--you
all's proposal has sort of put forth a semi-codification of
TARP, where, in essence, there's an ability to use taxpayer
moneys. And I don't want to debate that, necessarily. I know
we've done it, both publicly and privately.
What are other countries doing in this regard, when it
comes to resolution, or at least the UE. What are--EU--what are
they thinking in this regard?
Secretary Geithner. Let me reassure you, as I've done in
the past, that we are not proposing, and I would not support,
putting in place the kind of permanent authority like what you
made possible in the TARP. Would not be good for the country to
do; I wouldn't support it.
The things that are very important for us to have, which we
do not now have, are the authority to make sure we can----
Senator Corker. No, no, I don't want to talk about what
we're doing. I'm pretty familiar with all three proposals. What
is it that Europe is doing----
Secretary Geithner. Yes.
Senator Corker [continuing]. In that regard?
Secretary Geithner. But, I think it's relevant to this,
because I think it's important for this foundation of what we
want to get them to do with us.
Simple stated, we want to make sure we have the capacity to
manage the failure--not preserve--manage the failure of large
institutions with less cost than it takes the taxpayer, less
damage to the economy. And we need to have some emergency
authority to contain the risk of financial panics. Limited
authority, carefully circumscribed, to make sure we can draw a
circle around the fire and prevent spreading to healthy
institutions. Those are the two things we did not have, coming
into this crisis. It was a tragic, costly failure, as you
understand well. We can't have any--no reform process will be
adequate unless it gives us a carefully designed balance of
authorities like that. Otherwise, the taxpayer is going to be
more exposed in the future and there's going to be more risk of
moral hazard. Because, in the end, if you don't have those in
place, government is going to have to do what we did last fall,
which caused more moral hazard, more cost to the taxpayer to
put out the crisis.
Now, many other countries already have those policies in
place. Very few are adequate, the way they're designed. Some
are better than what we had, but not good enough. And so, we're
working to make sure there are complementary changes that
provide a better balance between, again, taxpayer protection,
moral hazard, stability, crisis tools. And there's no system
I've seen, outside of the United States, that I think is fully
adequate to the challenges that we're----
Senator Corker. So, it's not yet adequately addressed, is
what----
Secretary Geithner. Yes. I don't think it's adequately
addressed, no.
Senator Corker. And let me say, you guys--Treasury has made
improvements in what they proposed. I still think there's a
pretty gaping loophole that creates a moral hazard. And I think
that--and as I've said it to your Assistant Secretary, I think
that's where the heavy lifting is, in figuring out how we have
some degree of flexibility and not create that moral hazard.
Secretary Geithner. I agree with you, the way you put it. I
agree with you.
Senator Corker. But--and I know you all are still coming
our way, and there's a lot more to come. And I appreciate that.
Secretary Geithner. You coming our way, too, a little bit?
It would make it more helpful.
Senator Corker. I'm--we're working toward that.
Resolution. The resolution piece is obviously--I think we
did nothing else here. Nothing else. The most important piece
we need to work on. And what are they doing in that regard? I
mean, are they relying on bankruptcy courts? Are they creating
a mechanism like FDICIA? Have they thought that through yet?
Secretary Geithner. Again, I think, my--basically they're
behind even where we are today on this. In--most countries have
a different regime for banks than they have for companies,
because banks are different. They recognize, like we did, that
it requires a different set of mechanisms. Bankruptcy, itself,
for a financial system, doesn't work, because the run can
happen so quickly, you don't have the time to go through that
process, and there'll be no willing DIP financer to a financial
institution that is mid-run. So, most of the countries
recognize that basic distinction and have some basic
architecture for resolution of bank-type entities. And most of
those countries, like you know, operate as universal banks. So,
they don't quite have the same disparity we have between
institutions that are narrow banks and big holding companies
built around them, or investment banks, or other large, complex
institutions that are like the major globally active banks in
function, but, in legal structure, are somewhat different. So,
they have basic bank-like resolution architecture, in its
rudimentary form. It's easier for them, in part, because they
have universal banks. But, I don't think any of them really
have an adequate structure.
Senator Corker. Well, again, we're ahead there, as far as--
--
Secretary Geithner. Oh, we're not ahead yet, but I hope
we'll be ahead.
Senator Corker. As far as our thinking goes----
Secretary Geithner. Yes.
Senator Corker. Right. The consumer protection piece. Has
the European Union and many of the entities there actually set
up a separate entity like is being proposed by the
administration? I guess the--all the major bills now have that
component, separate from prudential regulations.
Secretary Geithner. Good question. And I think it varies
across all those economies. And I don't--I can't tell you
exactly what looks like the best model out there. But, again,
we have a challenge they don't have. Because with the Federal
structure of banking in the United States, and with the great
diversity of institutions that we allow, provide the consumer
credit and mortgages, they have a simpler problem to solve than
we do. As you know, in our country, we left that responsibility
spread around at least six or seven institutions at the Federal
level and 50 or more at the State level. And our judgment is
that that system failed miserably, and that we're not going to
have an adequate set of protections in place unless we
concentrate that accountability and authority in one place,
with a better set of standards. But, you know, we want to do
that in a way that doesn't constrain innovation, limit choice,
allows for competition. That's the hard thing to do.
Senator Corker. Yes.
Secretary Geithner. Hard to get that balance right.
Senator Corker. And I think--in a separate entity that has
rulemaking and supervision and all those things, I think that's
an oxymoron. I think you do--you can do that. And that's one
area, I hope, that we will work hard to narrow our very, very
major differences. I think that----
Secretary Geithner. We thought we could run them
separately. Well, that didn't turn out so well for the country.
And I think that if you separate rulewriting from enforcement,
I think the rules are likely to be not that good, because
people don't have responsibility for enforcing them. They'll be
less well designed. They'll be further away from the market.
And I think the basic risk is, the rules will be less
effective.
Senator Corker. And I was actually talking more about
reinforcing their role in the prudential--at least in the
regulated areas, in the prudential regulators that exist. I
don't think we've ever had, you know, somebody that's been
approved by the Senate in those positions. I think there are
ways that we can get at this without weakening the safety and
soundness provisions, and I hope we'll get there.
Let me ask you--let me--it sounds like there's not a lot
happening, in the other countries, in the three most important
areas. Let me just ask you this. Is--other than the European
union, is there--are--in Latin America and other places--is
there much thought being given by policymakers there to overall
financial reg reform and trying to, quote, ``harmonize,'' with
some of the things we're doing here?
Secretary Geithner. Let--I think there is a lot of thought,
and a lot of support on--particularly on the design of the
capital accord, as well. But, an irony in this crisis is,
because so many emerging markets had such a traumatic,
wrenching financial crisis in the 1990s, they actually put in
place a lot of pretty sensible reforms that made their systems
much more resilient in the face of this global recession. Now,
I'm not saying they are ahead of the United States, but because
they had deep crises early, they made--that produced the
impetus for a lot of fundamental reforms. And their systems
were remarkably resilient and stable, despite the pressures of
this recession.
This is really a challenge now. And the sort of frontier of
thinking and reform is going to still be in the major financial
centers of the world, principally the United States, Europe,
and Japan.
Senator Corker. Secretary, thank you. I tried to stick to
the subject matter at hand. There's a lot I know we need to
talk about, and I appreciate your testimony today.
Secretary Geithner. Thank you very much.
Senator Corker. Thank you.
The Chairman. Thank you, Senator Corker.
Mr. Secretary, we'll wrap up here fairly promptly, unless
colleagues have a lot more questions.
But, let me try to, if I can, just pin down a few things
with respect to the new G-20 structure. I understand that the
division of labor is ostensibly that the G-8 will be
responsible for foreign policy and the G-20 is going to do the
economic policy. But, obviously, in practice, sometimes that
line is fuzzy; complicated to draw. So, who is going to decide,
in practice, what issue is going to go to
G-8 and what is going to go to G-20?
Secretary Geithner. Well, could I slightly amend what you
said? On the financial area, central banks and Finance
Ministries, we're still going to get together as the G-7
occasionally, and as the
G-8. And you would expect us to. Because there are important
things that, really, we have to keep doing together. And I
think there's no reason why that would undermine the broader
role we're trying to give to G-20.
The Chairman. So, the G-7 group of Finance Ministers will
continue to----
Secretary Geithner. Yes. Now, again, we want to make sure
that what we do informally in that group is contributing to and
not undermining this broad shift to the G-20 as the center of
gravity. But, I think there'll be an important role to be
played still, on occasion, by that group of the major
economies. As--you know, as you would expect they're--roughly
60 percent of global GDP, a much larger share of global
financial activity--they are the major flexible exchange rates
in the international financial system. The world looks to those
major economies to provide a source of broad stability to the
financial system. And there will be an important role that will
be played in those--in that forum.
The Chairman. Are you convinced that the right parties are
at the table----
Secretary Geithner. In the G-20?
The Chairman [continuing]. For the G-20?
Secretary Geithner. Well, I--again, I guess it--it's the
best of the alternatives available today. It's not perfect. And
again, if you looked at it today, there are things that seem
somewhat anomalous. But, we can't keep reinventing it and
changing it. And I think it's--again, it meets that basic
pragmatic test; it's better than the alternatives.
The Chairman. So, can new countries join the G-20?
Secretary Geithner. You know, again, our view is that--
can't make it bigger without undermining its effectiveness. And
we have experimented with various ways to have observers, other
people at the table, represent regional for a--that have worked
relatively well. So, we'll be pragmatic in that case. But, we
want to keep the core membership stable.
The Chairman. And how do you bring in to the deliberative
process the big-decision concerns of folks who are outside of
it who play a significant role? Take, for instance, Singapore.
Secretary Geithner. Right. Well, Singapore is a good
example. Singapore has been at the table in these meetings, at
least over the last--the ones I've been part of--representing,
in effect, APEC. We've also had a representative of the African
Union sitting at the table. We've been very careful to try to
make sure we look for practical ways to give----
The Chairman. Sitting at the table as ``plus members,'' or
as----
Secretary Geithner. We don't use the word ``plus,'' but
they're sitting at the table, have an opportunity to
contribute. And, let me just point out, their contributions are
very valuable.
The Chairman. They're not there in the way that people
complained with the G-8, for the coffee break, so to speak.
Secretary Geithner. No, it's a--no, it's--there from the
beginning. They sit there around the table from the beginning
to the end of the conversation.
The Chairman. What future economic issues would you proffer
might well be taken up by the G-20 now?
Secretary Geithner. They're the ones you've covered. They
are about the basic--how we grow as a global economy. They're
about the broad trade agenda, climate change, development,
financial reforms, basic architecture.
Now, that's not completely comprehensive. There are things
we do occasionally, in terms of an issue you care a lot about,
in terms of the financial complement to our efforts to counter
nonproliferation and terrorist financing. There are lots of
other issues that we can do effectively with countries that sit
around that table. And we take a pragmatic test in these
things, where we've got an important interest that we have to--
can only advance with cooperation, we look for the fora that do
the best job at building consensus.
The Chairman. Is the hosting going to rotate, just
automatically, through all 20?
Secretary Geithner. I've forgotten what the actual rule of
rotation is, but we've agreed on the next 2 years, I believe,
which is enough for now.
The Chairman. Now, is there any firewall against the
possibility that the entity might evolve into not just an
economic entity, but into a political entity?
Secretary Geithner. Well, you know, these are now meetings
of leaders, not just of Finance Ministers and central bank
governors. So, the heads of state of these countries will
decide how they want to use their time together most
productively. And that balance has changed over time; I'm sure
it will change in the future. But, again, if you make it too
broad, there's a risk that you diffuse the basic impact of the
group.
The Chairman. That's right.
Secretary Geithner. And, I think, for the moment, the
consensus is to try to focus on the vague existential economic
questions we face.
The Chairman. Yes. Now, the G-8 was made up of capitalist
countries, and the G-20 has mixed economies at the table;
you've got state-led capitalists and--I'm not sure you'd call
them ``pure,'' but--capitalist countries. How, in your
judgment, will this forum impact the way that capitalism and
globalization evolves as we go forward here in the century?
Secretary Geithner. Well, I think it depends,
fundamentally, on how effective we are in bringing to the table
not just policies that demonstrate that we are capable of
running our country well, addressing the economic challenges we
face--our credibility everywhere depends fundamentally on
that--but also whether we can bring ideas to the table that
will command broad support. We have no capacity--or very
limited capacity--to compel consensus on these kind of things.
Our effectiveness depends on whether we are bringing broad
ideas for addressing these common challenges that other
countries see in their interest to support. And on the basic
shape of market-oriented economies, we are seeing very, very
broad support for the kind of core economic strategies that
this President has laid out for our country and globally. And I
think what's really remarkable is--again, if you listen to what
countries like China, like India, like Brazil are saying about
their basic reform agenda--how close it is, in, sort of, basic
values and judgment, to many of the things we're trying to do
in the United States. Even though our situations are very
different, political systems are very different.
The Chairman. And with participating members representing
some of the biggest oil-producer countries, but also have some
of the biggest consumers at the table----
Secretary Geithner. Right.
The Chairman [continuing]. Maybe that's beneficial. Maybe
it isn't. I'm just trying to get a sense of, How do you
anticipate successes in energy security with that mix?
Secretary Geithner. Well, you know, you saw the President,
in Pittsburgh, get that group of countries, including Saudi
Arabia, including countries that subsidize the use of energy--
the cost of energy--very, very aggressively and expensively,
commit to a broad commitment to phase out, over time, those
types of subsidies. So, it is possible, when you get countries
like that together, that you can agree to things that are--they
can see to be in their collective interest, even if your
starting points are very different. That's one example.
And, you know, our interests are going to diverge. It's
just that we're a better chance of trying to find areas where
we can work together if you sit across the table from each
other and try to work through it.
The Chairman. Does the G-20 need an enforcement mechanism?
Is there any discussion of that?
Secretary Geithner. I don't think that that's the right way
to think about the G-20. You know, as we design a broad
political agreement on climate change, as we design these
reforms on the financial system, like on capital, there will be
things we will do, in terms of commitment, monitoring,
incentives for compliance enforcement, that will be appropriate
to those individual policy issues. But, I don't think the G-20
should play a role, as an institution, independent of that,
with legal enforcement authority.
The Chairman. Well, Mr. Secretary, I've just been informed
we're going to have a vote shortly here. And so, I'm not going
to prolong the proceedings. Senator Shaheen, I don't know if
you had any additional questions--no additional questions.
Let me just ask, Mr. Secretary, do you have all your people
in place yet?
Secretary Geithner. I want to thank you for moving so
quickly to move out of committee a set of very important senior
officials of the Treasury. And thank you for asking. There will
be--you'll have the opportunity, as a Senator, to consider the
President's nominations of, I think, four or five remaining
senior people, and we're hopeful that that will happen----
The Chairman. Well, it's only November 2009.
Secretary Geithner. It's only November, and we do have a
lot of time ahead of us still. But, it would be good if they
were in place.
The Chairman. It's just stunning to me that it has taken so
long. And I'm sure it's stunning to you, coming out of the
private sector. It just--it boggles my mind.
Secretary Geithner. Let me tell you, they're great people,
though. And I'm very lucky that we have people of this
experience and talent willing to come work for the----
The Chairman. Well, I know you have very talented people
coming in, and we look forward to approving them.
But, I do want to say that I think you've done an
extraordinary job of responding to some of the largest economic
challenges the Nation has faced in a long time, with very few
appointees coming in, and that's a credit, frankly, to the
professional staff and people who are there anyway. And I think
you would agree with me, you've been well served in that
regard.
But, I want to thank you also for your answers to questions
today. I think you've been concise and precise, and I really
appreciate the directness of your answers. I think it's been a
very good exchange. We're very appreciative to you.
Secretary Geithner. Thank you very--and we look forward to
continuing it.
The Chairman. Look forward to working with you.
Thank you.
And we stand adjourned.
[Whereupon, at 4:25 p.m., the hearing was adjourned.]
----------
Additional Material Submitted for the Record
Prepared Statement of Hon. Kirsten E. Gillibrand,
U.S. Senator From New York
Secretary Geithner, thank you for coming to testify before us
today. The work you are doing with the G-20 is critical for the global
economy, and ultimately impacts the jobs and welfare of all of our
constituents and the people of other countries.
I look forward to hearing your testimony on a number of issues
involved in the work of the G-20--from provisions affecting the capital
reserves of financial institutions to potential restrictions on
executive bonuses. I am chiefly concerned with three topics.
First, I want to focus on the impact that the new international
architecture will have on the U.S. economy. The United States, with New
York as its center, is and must remain the global leader in financial
services. As we work to reform financial regulatory oversight in the
United States, it is essential that this effort be coordinated with
international reforms.
The current system represents regulations and associated regulatory
bodies created over many decades that failed to reflect the emerging
products, pools of capital and institutional forms. In many ways, this
lack of a cohesive framework encouraged dangerous investments that
ignored risk and exploited regulatory loopholes or international
inconsistencies. As we institute reform, it must reflect the global
nature of finance.
We must reorder and redesign our oversight bodies and laws to
properly reflect a 21st century financial system. Clearly, regulatory
reform must reflect a financial system that is no longer rooted in the
traditional bank but is global in scale and interconnected in ways that
our current regulatory framework never envisioned. It is imperative
that greater regulatory oversight in the United States does not create
an exodus of domestic industry to points of lower standards
internationally or provide other nations with the opportunity to
implement protectionist measures.
Second, I hope to hear about Iran. Though not the heart of this
hearing, the
G-20 has played an important role in President Obama's work on Iran--
creating a united front with our allies. Moreover, the Treasury
Department deserves a great deal of praise for its own targeted
financial sanctions against Iranian institutions and for leading the
international community to take similar steps. I support your work and
look forward to working with you on these important issues.
Finally, this hearing happens to fall during President Obama's
visit to China. Our relationship with China is complex. China is the
largest holder of our sovereign debt. Our two countries have an
enormous and growing economic relationship. The United States and China
are working on a number of global issues from climate change to Iran's
and North Korea's nuclear military programs.
I appreciate that in such a multifaceted relationship, it is
difficult to isolate any one issue. However, it is imperative to New
York and the rest of the country's manufacturers that we address the
issue of China's undervalued currency. While China has made efforts to
increase the flexibility of its currency and reduce its relative
undervaluation against the U.S. dollar, I believe that it should take
further steps to ensure the Reminbi reflects a fair and accurate
valuation.
______
Responses of Secretary Timothy Geithner to Questions Submitted by
Senator John F. Kerry
Question. What is the impact on the United States of changing the
process for selecting heads and senior leadership of all international
financial institutions, as referred to in the Pittsburgh G-20
Communique?
Answer. We are committed to ensuring that all the international
financial institutions (IFIs) are fully responsive to U.S. interests.
For many years there has been a convention that the IMF would be headed
by a European, a U.S. citizen would head the World Bank, and a
representative from the applicable region would head the various
multilateral development banks (MDBs). Many are advocating for a merit-
based selection process regardless of nationality. Leadership in these
institutions will be a subject of intense discussion in the period
ahead and will inevitably be bound up together with broader discussions
of reform. We will be sure to consult with Congress on this important
issue.
Question. In considering an ``open, transparent and merit-based
process'' for leadership selection in the international financial
institutions, how is ``merit-based'' defined?
Answer. The IMF's Executive Board adopted a candidate profile to
guide the 2007 selection of the Managing Director. This profile called
for ``a distinguished record in economic policymaking at senior
levels,'' as well as other strong managerial and communication skills,
ability to build consensus, and a proven understanding of the Fund.
The World Bank's Executive Directors prepared a profile in 2007
outlining the qualities a nominee for President of the World Bank
should have that includes: a proven track record of leadership;
experience managing large, international organizations; a familiarity
with the public sector and a willingness to tackle governance reform; a
firm commitment to development; a commitment to and appreciation for
multilateral cooperation; and political objectivity and independence.
Question. As the United States currently has a 16.7-percent vote in
the IMF, it can block approval of all measures requiring an 85-percent
supermajority. How does the administration view proposals from some G-
20 members for the United States to give up this effective veto at the
IMF, by reducing the supermajority threshold to below 85 percent?
Answer. Changing voting majorities for key IMF decisions is not
under serious consideration in the G-20. The administration is not
contemplating losing the U.S. veto over certain IMF decisions.
Question. Over what specific areas does the United States have an
effective veto at the IMF? In particular, how would the loss of the
U.S. veto impact decisions by the IMF to sell its gold reserves or
change the principles for determining distribution, valuation, method
of valuation and composition of the SDR? Could this proposed change in
supermajority voting percentage affect which non-Member States or
nonofficial organizations can hold SDRs and under which terms and
conditions?
Answer. The United States has veto power over certain decisions
with a required majority of 85 percent of total voting power. These
include adjustment of quota shares, gold sales, changes in fundamental
principles of SDR valuation, allocation of SDRs, prescription of
official holders of SDRs, and amendments to the IMF's Articles of
Agreement. We are not contemplating a loss in U.S. voting power.
Changes in the required majorities for the decisions described are not
presently under consideration in the IMF.
The prescription of official holders of SDRs requires 85 percent of
total voting power. Private sector holding of SDRs is not allowed.
Changing the required majority for the prescription on official holders
of SDRs is not presently under consideration in the IMF.
Question. In the Pittsburgh G-20 Communique, Finance Ministers were
called upon to ``consider how mechanisms such as temporary callable and
contingent capital could be used in the future to increase MDB lending
at times of crisis.'' Are there temporary capital measures that may be
more appropriate to support the MDBs in times of financial crisis than
a General Capital Increase and to what degree are these being
considered by the administration?
Answer. As part of our overall review of the capital increase
requests of the MDBs, Treasury is closely examining alternatives to
permanent capital increases to the MDBs. These options are similar to
forms of capital seen in the private sector, including preferred
capital shares or subordinated debt. As with our general review of the
requests, no decision has been made with regard to what may be the
appropriate form of capital.
______
Response of Secretary Timothy Geithner to Question Submitted by
Senators John F. Kerry and Richard G. Lugar
Question. In many instances, legislation requires that the Treasury
consult with Congress before proceeding with a vote or approval of a
policy at the international financial institutions. Could you please
outline what consultation entails? What steps will Treasury take to
ensure adequate consultation is performed?
Answer. I am committed to making sure that Treasury works closely
with Members of Congress and their staff to ensure that there is
regular consultation in a manner that keeps Congress fully informed of
Treasury activities. In the instance of legislative requirements that
Treasury consult with Congress preceding a vote or approval of policy
at international financial institutions, it is our practice to formally
initiate this consultation process with the relevant committees.
______
Responses of Secretary Timothy Geithner to Questions Submitted by
Senator Richard G. Lugar
Question. Thank you for your thoughtful response to my question
about the process followed for the IMF legislation which provided
authorization for reforms and appropriations for a $100 billion loan.
To confirm, will the administration commit to follow a regular
legislative procedure for the authorization and appropriation of future
funds for the international financial institutions?
Answer. I commit to consult with the committee before we get to the
point where we are going to formally recommend to Congress a set of
broad reforms and any potential increase in resources of these
institutions. I recognize that the process earlier this year in the IMF
was not ideal. We had to move very, very quickly in the face of an
enormously delicate global financial situation. I want to underscore
that the actions you made possible were decisive in helping turn
confidence.
If you look back at when confidence and global economic activity,
financial markets and trade stopped falling off the cliff and started
to turn, it was around when the world saw the United States acting
forcefully, not just to fix our financial crisis, but to put
substantial financial force behind these IFIs so that they could do
what they needed to do to address the crisis facing the global economy.
Although emergency supplemental appropriations legislation is
necessary occasionally, the administration is committed to requesting
anticipated program funding, such as funds for the IFIs, in the regular
budget. Furthermore, I am committed to making sure that Treasury works
very closely with the committee and others in Congress, when we
consider future funds for the IFIs.
Question. Will the administration be requesting funds for a quota
increase at the IMF as Managing Director Strauss-Kahn has indirectly
requested?
Answer. In Pittsburgh, G-20 Leaders committed to a shift in IMF
quota share to dynamic emerging market and developing countries of at
least 5 percent from overrepresented to underrepresented countries as
part of the IMF's next quota review scheduled to conclude by January
2011. We did not make any commitments regarding the size of IMF quota.
At this point, Managing Director Strauss-Kahn has not formally
requested a quota increase. We will keep the committee informed as the
quota reform discussion moves forward and as we develop our position.
Question. U.S. influence at the international financial
institutions is important to our foreign policy. Is the administration
contemplating losing the veto on certain policies at the IMF and some
of the multilateral development banks?
Answer. No. We are not contemplating losing the U.S. veto over
certain IFI policy decisions, which is closely tied to our financial
investment in these institutions.
Question. If the United States were to lose influence, what sort of
policy responses would the administration consider implementing?
Answer. U.S. influence in the IFIs depends on more than voting
power. The United States maintains significant influence in the IFIs as
the world's leading economy. The United States also leads by generating
sound policy ideas in the IFIs and will continue to do so.
Question. The international financial institutions spend little
(less than an estimated 3 percent) on monitoring, evaluation and
program/project oversight capacity-building in the recipient country.
In comparison, the Millennium Challenge Corporation spends 15 percent
on monitoring and evaluation alone. Has the administration used
leverage to call for increased oversight within the international
financial institutions? What more can the international financial
institutions do to ensure that projects have strong monitoring,
evaluation, and oversight?
Answer. I agree that the IFIs should be doing more to effectively
monitor, evaluate, and provide oversight over their projects and
programs. We have been encouraging the MDBs to undertake more impact
evaluations, to better measure and attribute the effects of their
operations and to assess what works and what does not. In addition, we
encourage the independent evaluation units to work with borrowing
member countries to help build local monitoring and evaluation
capacity. All the MDBs are moving in this direction.
While more needs to be done in this area, it is important to note
that the MDBs actually spend more on monitoring and evaluation
activities than the statistics demonstrate. MDBs fund these programs
through their annual budgets, and the MDB projects themselves also
allocate resources to these activities. As such, it is difficult to
identify a comprehensive figure that includes all of these expenses.
Question. In the wake of the recession, the United States must be
particularly judicious about spending. How would you prioritize future
capital increases for the international financial institutions? Which
are the best uses of U.S. taxpayer funds?
Answer. We are currently reviewing requests for capital increases
at a number of the MDBs and will move forward only on commitments where
we are confident that they represent the best use of U.S. taxpayer
funds within the context of our overall global development goals. For
example, we need to be satisfied that each MDB is fully employing its
available resources efficiently and effectively and that each is
committed to implementing needed reforms that will focus their missions
and improve their effectiveness in accordance with the core principles
I laid out at the IDB annual meetings last March. These included an
increased commitment to transparency, accountability, and good
corporate governance; an increased capacity to innovate and achieve
demonstrable results; and greater attention to the needs of the poorest
populations.
We are very mindful of the total budgetary impact of potential
commitments and will be particularly sensitive to the impact of any
capital commitments on our ability to ensure adequate resources for the
MDBs' concessional windows. We place a high priority on these
concessional windows, which support the poorest countries. I expect to
finalize our decisions on capital commitments by the Bank/Fund Annual
Meetings next spring.
Question. Please outline the level of U.S. arrears to the
multilateral development banks. Why is it important to clear the
arrears? How do the arrears affect the ability of the United States to
promote change at the multilateral development banks? What is the
administration's plan for clearing these arrears?
Answer. The United States has over $1 billion in unmet commitments
to the MDBs, including the Global Environment Facility (GEF) and the
International Fund for Agricultural Development (IFAD). The bulk of our
unmet commitments are to the concessional windows, which provide grants
and concessional loans to the poorest countries. Our large arrears
undermine U.S. leadership at these institutions, due to significant
skepticism of the willingness of the United States to deliver on any
initiatives that require significant funding.
Additionally, without funding for IDA15 arrears, the United States
will not be able to earn sufficient credits to meet current
international debt relief commitments under the Multilateral Debt
Relief Initiative (MDRI). Without full funding for arrears to the
Inter-American Investment Corporation (IIC) as scheduled, the United
States will fail to clear longstanding arrears and will permanently
lose capital shares in the institution.
We need the support of Congress for the administration's requests
to pay down existing arrears. In addition to raising awareness of the
damaging effects of arrears on U.S. leadership in multilateral
institutions, it is also important not to accumulate new arrears.
Question. What international financial institution legislative
mandates are useful, constructive and promote the interests of the
United States? Which are outdated and counterproductive?
Answer. Treasury takes very seriously its responsibility to carry
out the legislative mandates that apply to U.S. participation in the
six IFIs. At the same time, there are an overwhelming number of
mandates--some of which are over 50 years old--that have not been
reviewed by Congress for many years.
Treasury appreciates Congress' inquiry in this area and would be
happy to present a catalog of these mandates and work with you toward
eliminating mandates that are no longer relevant, and streamlining
others to better reflect current congressional intent.
Question. Will you commit to reviewing the forthcoming Senate
Foreign Relations Committee minority staff report on reform of the
international financial institutions and consider integrating the key
recommendations?
Answer. Yes; Treasury will review the report and consider the
recommendations.
Question. The G-20 has called for a more open, transparent, and
merit-based
selection process for the leadership of the IMF and the World Bank.
Most in Congress would like to retain U.S. leadership at the World
Bank. What is the administration's position on how the merit-based
selection process should be implemented? Will Americans be considered
for the top leadership position in the regional development banks?
Answer. We are committed to ensuring that all the IFIs are fully
responsive to U.S. interests. For many years there has been a
convention that the IMF would be headed by a European, a U.S. citizen
would head the World Bank, and a representative from the applicable
region would head the various MDBs. Many are advocating for a merit-
based selection process regardless of nationality. Leadership in these
institutions will be a subject of intense discussion in the period
ahead and will inevitably be bound up together with broader discussions
of reform. We will be sure to consult with Congress on this important
issue.
Question. The G-20 only includes one African nation: South Africa.
What steps is the United States going to take to ensure that G-20
deliberations take into account the views, needs, and interests of
small developing countries, particularly in sub-Saharan Africa?
Answer. As host of the G-20 summit in Pittsburgh last September,
the United States invited African Union Commission Chair Jean Ping and
the New Partnership for African Development Chair, Meles Zenawi (also
Prime Minister of Ethiopia), to attend as observers. African
Development Bank President Donald Kaberuka was also present as a member
of the delegation. The Treasury Department also reached out extensively
to African governments and institutions such as the African Union and
the African Development Bank to get their views and recommendations as
we prepared for the Pittsburgh summit.
In that spirit, Treasury officials met with the African Union
Economic Commissioner in August to discuss the African Union's
perspective on the financial crisis impact on Africa, and how the G-
20's work might affect Africa. Treasury officials took advantage of the
AGOA summit in Nairobi last August to reach out to a number of African
ministers regarding G-20 plans. Two Treasury representatives
participated as observers to the African Committee of Ten Finance
Ministers and Central Bank Governors' July meeting in Abuja, where the
agenda included developing recommendations for the Pittsburgh summit.
Our outreach to Africa continues as we further develop work coming
out of the Pittsburgh summit. For example, the G-20 Financial Inclusion
Experts Group is inviting non-G-20 countries to contribute to its work.
Among the eight countries that will be invited are three sub-Saharan
African countries that have had success in promoting financial access--
for both the poor and for small- to medium-sized enterprises--and the
African Development Bank will also participate in the group's inaugural
meeting.
Question. Some argue that recovery from the global economic crisis
must include specific measures to help poor countries, including
improved market access for their products. Would you agree? They assert
that the administration should consider a proposal to offer 100 percent
duty-free, quota-free market access to the least-developed countries.
What is your view of this proposal?
Answer. Trade can be a powerful development tool. The United States
provides duty-free access to least-developed countries for 83 percent
of our tariff lines under our Generalized System of Preferences (GSP)
program for developing and least-developed countries, and 91 percent of
our tariff lines for least-developed countries covered by African
Growth and Opportunity Act and the Caribbean Basin Initiative (CBI). We
are particularly open to sub-Sahara African countries--in 2007, over 98
percent of U.S. imports from AGOA-eligible countries entered the United
States duty free; much of the remainder can be attributed to the fact
that the preference was not claimed on otherwise eligible products.
In the Doha Round negotiations, the United States committed to
providing duty-free/quota-free access for 97 percent of our tariff
lines during the Hong Kong Ministerial in 2005.
Question. The G-20's London Communique asserts a desire to make the
global economy ``green, sustainable, and inclusive.'' What does this
assertion mean in practice? How does the administration plan to further
this objective, and to foster an international consensus on the
functions and institutional architecture needed to implement and
enforce any climate change agreements?
Answer. The Department of the Treasury believes that the United
States should help lead international efforts to facilitate a
transition to greener and more sustainable global economy. Given rapid
economic growth in many developing countries and the resulting
acceleration in their greenhouse gas emissions, it is critical that
this transition include all countries, not only the most developed.
This transition will require the establishment of a practical and
effective international financial framework that can effectively and
efficiently scale up and deliver public and private resources to help
move developing countries onto more sustainable, lower emission
development paths, and increase the deployment of clean energy
technologies around the world. We believe that the MDBs and the GEF
will have an important role to play in this framework and that some new
financial arrangements may be necessary, such as the Copenhagen Green
Climate Fund noted in the recently negotiated Copenhagen Accord, as
well as increased attention to climate change mitigation and adaptation
in core lending activities. The United States is also committed to
participating in a strong fifth replenishment of the GEF, which
operates the financial mechanism of the United Nations Framework
Convention on Climate Change (UNFCCC).
We are working to facilitate this transition through a range of
important international venues, notably by participating in climate
talks hosted by the United Nations Framework Convention on Climate
Change (UNFCCC), as well as at the Major Economies Forum (MEF), along
with Treasury's own efforts in the G-20. Since the G-20 brings together
Finance Ministers from the world's largest economies, we believe that
it has an important role to play in supporting the Copenhagen Accord
and other economic and finance related agreements. For example, Finance
Ministers are following through on the recent commitment in Pittsburgh
to phase out fossil fuel subsidies, reducing global greenhouse gas
emissions by up to 12 percent by 2050. We believe that working in
multiple venues and drawing on the expertise of Finance Ministries will
help build consensus around the necessary economic policies and
financial arrangements to address climate change, as well as the
broader elements of any agreement. We will also continue to consult
closely with Congress to ensure that any arrangements we develop
internationally are acceptable here at home.
Question. The Secretary of the Interior has expressed support for
the disclosure by the United States Government of payments received
from extraction from Federal lands. Would you support the United States
committing to becoming an implementing country of the Extractive
Industry Transparency Initiative as delineated in S. 1700, the Energy
Security through Transparency Act?
Answer. Treasury has been a strong advocate of the Extractive
Industry Transparency Initiative (EITI), which seeks to bring greater
transparency to oil, gas, and mining revenues in resource rich
countries. The United States has been a supporting country since the
initiative was launched, assisting in the efforts of implementing
countries through bilateral programs and, recently, our contribution to
the EITI trust fund.
Question. During committee staff oversight trips to developing
countries, a number of foreign government officials have lauded the
efforts of Treasury's Office of Technical Assistance. They asserted
that Treasury advisors provided excellent, relevant, and timely advice
on issues including budget, tax, and transparency. What more could
Treasury's Office of Technical Assistance do to help promote
transparency and accountability in resource rich countries so that the
billions earned by those countries are effectively utilized for the
benefit of their citizens rather than lost to corruption and
incompetence?
Answer. Thank you for passing on these appreciations of the
effectiveness of Treasury Technical Assistance. Our advisors do their
best to help developing and transition countries build capacity to
manage public finances well. In order for Treasury Technical Assistance
to do more to promote transparency and accountability in resource rich
countries, these countries need to demonstrate increased commitment to
reform.
Commitment to reform is the essential starting point.
Unfortunately, the presence of significant natural resource revenues
can undermine commitment to reform. Prospects for success are sometimes
better in countries that are still in the process of developing their
resource extraction industries. Ghana and Mozambique are examples of
countries on the cusp of revenue windfalls where Treasury Technical
Assistance has found traction with counterparts. Real commitment to
reform is difficult to discern, and one looks to various signaling
devices as evidence of commitment. One example is when a government
embarks with conviction upon a program of institutional change such as
the Extractive Industry Transparency Initiative (EITI), and makes
progress in that program. As noted above, Treasury is a strong
supporter of EITI.
Assuming commitment to reform, the biggest constraint to increased
collaboration between Treasury Technical Assistance and resource rich
countries is funding. Requests for Treasury Technical Assistance far
outstrip available funds. Increased demands associated with the global
financial crisis, together with reports of our effectiveness, have
combined to double requests for Treasury Technical Assistance over the
last year alone. We will continue to fund high-priority technical
assistance activities using our available resources.
______
Responses of Secretary Timothy Geithner to Questions Submitted by
Senator Kirsten E. Gillibrand
international architecture questions
Question. I have heard specific concerns about position limits for
commodity futures in the United States would drive business overseas
and create a boon for foreign markets. Is that your view? How do we
avert this important portion of the financial markets from moving
overseas while trying to improve market regulation domestically?
Answer. We share the CFTC's interest in ensuring the fair, open,
and efficient functioning of futures markets, and we welcome the CFTC's
public dialogue on, and careful review of, the best way to oversee the
derivatives markets. We continue to engage with our counterparts both
bilaterally and in the G-20 to raise international standards in order
to avoid regulatory arbitrage. U.S. regulators are also actively
engaging with their counterparts in international standard setting
bodies to raise international standards.
Question. The European Union has proposed legislation that would
force U.S. alternative asset managers to domicile or open offices in
Europe in order to market their funds in Europe. Given the enormous
size of the U.S. alternative management industry relative to the EU,
this appears to be an effort for the EU to grab market share or
advantage EU-based firms. Despite requests from elected representatives
and affected firms, we have seen no concrete or public actions from
Treasury. Please comment as to how Treasury plans to address this
protectionist action from the EU.
Answer. The hedge fund proposal is currently only in a draft form
and discussions remain ongoing within the EU. As a result, there are
opportunities for the United States and European Union to work together
to ensure that we develop consistent standards, and we continue to
actively engage with the EU on this issue. Over the past 7 years,
Treasury has worked with the European Commission (EC) to bring together
key regulators from both sides of the Atlantic to discuss financial
market regulatory concerns at the United States-European Union
Financial Markets Regulatory Dialogue (FMRD). In the most recent
dialogue in October, Treasury raised its concerns with the EU's hedge
funds proposal. We plan to follow up on this issue at the next FMRD in
early 2010. Treasury officials have also publicly raised our concerns
with this proposal in recent speeches.
Question. As we proceed in drafting legislation for financial
regulatory reform, it is imperative that we look at coordinating the
new regulations--eliminating loopholes, providing for global oversight
and creating a level playing field. I would like to know how Treasury
will work with foreign governments to achieve this end goal, especially
as it pertains to assessing systemic risk, adequate capital reserves,
and issues of transparency.
Answer. Maintaining a level playing field while, at the same time,
closing loopholes is very important for us, as well as for all of our
G-20 counterparts. The Treasury Department has worked actively with
foreign counterparts since the onset of the global crisis to strengthen
transparency, as well as prudential oversight, risk management, market
integrity, and international cooperation.
Treasury is an active member of the Financial Stability Board
(FSB), which has been coordinating the international response to the
financial crisis. The FSB is well suited for this work because its
membership includes finance ministries, central banks, and regulatory
authorities from the G-20 countries, as well as the international
standard setting bodies and IFIs. The FSB has been monitoring global
implementation of the G-20 Leaders commitments, and provides an ideal
venue for discussing the issues you identified.
For systemic risk, the IMF, Bank for International Settlements, and
the FSB are working cooperatively to develop guidance for the
assessment of systemically important institutions, markets, and
instruments. The Basel Committee on Banking Supervision (BCBS) is
developing tools to improve supervision in this area, and the IMF and
FSB have collaborated to identify gaps in information and recommend
actions to address them.
On the subject of capital, the BCBS is very aggressively moving
forward with proposals to strengthen capital standards for banks,
including standards for trading operations, securitization, and
leverage. U.S. banking regulators are very active members of the BCBS
and will continue to be deeply involved in this work.
The FSB is evaluating work by G-20 Member States, supervisors, and
regulators to improve over-the-counter derivative market transparency.
The FSB is also developing methods to improve global adherence to
international standards and codes, which can help to level the playing
field while raising the standards to which we are all subject.
iran questions
Question. The Treasury Department deserves a great deal of praise
for its own targeted financial sanctions against Iranian institutions
and for leading the international community to take similar steps.
Could you please outline the concrete steps that other nations have
taken to isolate Iran's financial system?
Answer. All U.N. Member States are obligated to implement financial
measures as identified by the Security Council in a series of
resolutions (1737, 1747, and 1803). U.N. Member States are also
required to freeze the assets of entities and individuals that have
been designated under these resolutions for their involvement in Iran's
nuclear and missile programs. Both the European Union and Australia
have gone beyond the Security Council resolutions by imposing
additional measures targeting Iranian proliferation, to include the
designation of Iran's Bank Melli.
In response to the Financial Action Task Force's (FATF) warnings
about the risks Iran poses to the international financial system and
the FATF's calls for countries to implement effective countermeasures
to protect against these risks, a number of jurisdictions have issued
advisories to their financial institutions and implemented regulatory
measures to ensure enhanced scrutiny of transactions with Iran. In
addition to these formal government measures, we have seen many in the
private sector, particularly in the international banking community,
respond to the risks posed by Iran by cutting off or significantly
reducing their business ties to Iran.
This combination of formal government action and voluntary
decisions by the private sector to curtail Iranian business has
increasingly isolated Iran from the international financial system.
Question. What additional steps are we asking our G-20 partners to
take and what is the likelihood that this will occur?
Answer. Financial measures are most effective when imposed as part
of a broad-based effort with the support of the largest possible
international coalition; as such, we are actively engaging our G-20
partners on the importance of protecting the international financial
sector from Iranian illicit conduct by minimizing ties to Iran and
applying enhanced scrutiny over Iran-related transactions. Iran's
financial footprint in many of these countries has shrunk in recent
years, due to formal and informal actions taken by G-20 Member
countries.
Treasury will continue to work closely with our partners in the G-
20 to maintain awareness of the threat posed by illicit finance
emanating from Iran as we work together to respond to the international
financial crisis. We will continue working closely with our G-20
partners to implement targeted financial measures specified by the U.N.
Security Council, and to apply countermeasures as called for by the
FATF in order to safeguard the global financial system.
Question. While I am a strong believer in our dual track strategy,
and the fact that this type of pressure is critical to getting Iran to
negotiate on its nuclear military program, does the fact that our
sanctions regime is tougher than that of other countries put U.S.
financial institutions at a disadvantage?
Answer. Iran's use of its banks and the international financial
system to support proliferation and terrorism poses a clear threat to
the integrity of the financial system. The FATF has confirmed the risks
that Iran poses to the international financial system because of its
lack of an adequate antimoney laundering and counterterrorist financing
regime, and has called on all jurisdictions to implement
countermeasures to protect against those risks. The U.N. Security
Council has sanctioned one of Iran's state-owned banks, Bank Sepah, and
called upon all Member States to exercise vigilance when dealing with
any of Iran's banks, particularly Banks Melli and Saderat. The broad
recognition of the illicit finance risks posed by Iran has also led
major banks around the world to cut off or significantly reduce their
Iran-related business. This curtailing of business with Iran has helped
to strengthen countries' financial systems and to ensure that they are
not tainted by illicit conduct. Preserving the integrity of the
financial system is to the long-run benefit of our financial
institutions.
______
Responses of Secretary Timothy Geithner to Questions Submitted by
Senator Robert P. Casey, Jr.
food security
Question. The U.N. recently announced that 1 billion people, one-
sixth of the world's population, go hungry. This is an unacceptable
number which we, in the developed world, have the power to reduce. G-20
Leaders have reaffirmed their commitment to meeting Millennium
Development Goals during the recent summits and have agreed to
establish a food security trust fund at the World Bank. What is the
status of the implementation of food security programs by the
multilateral development banks?
Answer. The MDBs, particularly the World Bank, responded rapidly to
the rise in food prices in 2008 and are increasing their levels of
assistance for food security in line with the donor community as a
whole. We strongly believe that multilateral institutions have a key
role to play in addressing the issue of food security given their
expertise, strong relationships with recipient governments, and
significant financing capabilities.
The World Bank's Global Food Crisis Response Program (GFRP) is a
good example of the MDBs' focus on the food security crisis. This
program, established in May 2008, will provide up to $2 billion in
short-term assistance to reduce the threat that high food prices and
rising agricultural production and marketing costs pose to the
livelihoods of the world's poor. The money is used to feed poor
children and other vulnerable groups, provide for nutritional
supplements to pregnant women, lactating mothers, infants and small
children, meet additional expenses of food imports, or buy seeds for
the new season. GFRP has approved $1,164 million for 35 countries as of
October 2009, of which $799.8 million has been disbursed.
The MDBs are also strengthening their support for the investments
needed to address food security in the medium and long term. The World
Bank recently unveiled a new Agriculture Action Plan and announced its
plans to increase its support for the agricultural sector from $4.1
billion annually in FY 2006-08 to between $6.2 and $8.3 billion
annually over the FY 2010-12 period--between 13 and 17 percent of total
projected World Bank commitments. The African Development Bank is
developing an Agriculture strategy, slated for Board deliberation in
early 2010. The emphasis will be on agricultural infrastructure and on
renewable resources management (including forestry) and climate change
mitigation and adaptation. The AfDB's assistance will be aligned with
the Comprehensive Africa Agriculture Development Program (CAADP).
During the 2010-12 period, the Bank expects lending for agriculture to
comprise about 11 percent of its total lending (about $2.8 billion),
mostly to support agricultural infrastructure in AfDF countries. On the
strength of its Eighth Replenishment, the International Fund for
Agricultural Development (IFAD) plans to implement a $3.0 billion
program of work over 2010-12, focusing on rural poverty and smallholder
agriculture.
Question. In your opinion, is the United States meeting its
commitments to the multilateral banks in terms of food security
programs?
Answer. The U.S. Global Hunger and Food Security Initiative
(GHFSI), which has been developed through a collaborative interagency
process, clearly identifies the need to work with and through bilateral
channels and multilateral institutions to address the food security
crisis.
The United States is working closely with like-minded donors
including Spain and Canada, the World Bank and other development
institutions such as the International Fund for Agricultural
Development (IFAD), the World Food Programme and the African
Development Bank to establish the trust fund called for by G-20 Leaders
at their summit in Pittsburgh. As part of President Obama's pledge to
seek at least $3.5 billion in agricultural development assistance for
food security over 3 years, the United States intends to make a
significant contribution to the trust fund. Continued U.S. leadership
on the fund is critical for its success.
The trust fund, which will be administered by the World Bank and
implemented by a number of development institutions including IFAD and
the MDBs, will help to finance medium- and long-term food security
investments and complement our bilateral food security spending. The
fund will be able to invest in a variety of areas to promote food
security throughout the supply chain, including rural infrastructure,
input markets, social safety nets, nutrition and others. It will
support country-led agricultural development plans and work in close
coordination with other development partners.
recapitalization of mdbs and debt sustainability
Question. We now know that the impact of the financial crisis,
which started in the industrialized world, has also had a severe and
alarming impact on low-income countries. According to the World Bank,
an extra 55 million people will be forced into poverty this year as a
result of the financial crisis. This is on top of the 130-155 million
people that fell into poverty in 2008 because of rising food and fuel
prices. New assistance to mitigate the effects of the financial crisis
in low-income countries has largely been in the form of new loans
through the World Bank or other multilateral development banks. What
steps are being taken by the United States and other G-20 countries to
assure that new loans to low-income countries from the IMF, World Bank,
or other MDBs are not going to increase the likelihood of an
unsustainable debt burden?
Answer. A vigorous crisis response on the part of the IFIs is
appropriate to help mitigate the serious impacts of the crisis on the
most vulnerable. However, we are also aware that risks to debt
sustainability in low-income countries are increasing, as declines in
GDP, exports, and government revenues have led to a deterioration of
debt sustainability indicators across low-income countries. Lending by
the IFIs to low-income countries is guided by the Debt Sustainability
Framework (DSF). This joint World Bank-IMF framework aims to support
low-income countries' efforts to achieve their development goals
without creating future debt problems.
At the major MDBs, the decision on the composition of financing
(the mix of grants and loans) is based on the country's risk of debt
distress assessed under the DSF, with countries rated at higher risk of
debt distress receiving a greater proportion of their financing as
nondebt creating grants. Increased resources from the MDBs in response
to crisis needs have been on the terms required by the DSF, e.g.,
grants-only countries have received more grants.
For low-income countries seeking IMF assistance, the IMF takes into
account the risk of debt distress assessed under the DSF when
determining access to IMF financing. In response to crisis, the IMF has
temporarily forgiven all interest payments coming due on its
concessional credit to low-income countries and committed to
permanently increasing the level of concessionality of its credit to
low-income countries thereafter. However, credit from the IFIs is often
only a small fraction of total borrowing by low-income countries. The
United States has been very active in our support for the goal of long-
term debt sustainability and the importance of responsible lending for
non-IFI creditors as well. We will continue working diligently on these
issues through the IFIs, the Paris Club, the OECD, the G-8/G-20, and
other fora.
Question. Given the limited amount of U.S. resources available for
recapitalization of MDBs, grants, direct foreign assistance and debt
relief obligations, what are the tradeoffs between providing nondebt
creating assistance versus supporting the MDBs to provide new loans?
Answer. As your question indicates, there are several forms of
nondebt creating assistance to developing countries, including grants
and direct debt relief. A key tradeoff between those types of
assistance and MDB capitalization is leverage. The MDBs have made
substantial progress in differentiating between countries that are
capable of repaying market-rate MDB lending and those that are not.
While nondebt creating assistance may be more appropriate in some
cases, for example, in low-income countries facing elevated risks of
debt distress, when countries are capable of repaying market-rate
loans, the leverage of U.S. contributions is substantially increased.
For example, while each dollar the U.S. contributes to the World Bank's
IDA yields 11 dollars of grants or low-interest loans to developing
countries, each U.S. dollar contributed to the IBRD yields over 26
dollars of lending to developing countries.
______
Response of Secretary Timothy F. Geithner to Question Submitted by
Senator Roger F. Wicker
Question. Mr. Secretary, thousands of investors in the United
States, and hundreds from my State, lost billions of dollars invested
in fraudulent certificates of deposit sold by Stanford International
Bank. The Antigua and Barbuda government knowingly allowed Stanford
Financial to operate a fraudulent scheme there. Do you believe that the
U.S. representatives to the IMF and World Bank should use its voice and
vote to stop any loan for Antigua until that government cooperates in
the ongoing investigation? Since you have influence over the U.S.
representatives to the IMF and World Bank, will you take immediate
action to communicate that the United States will do all it possibly
can to stop any loan that benefits Antigua and encourage the Antigua
government to cooperate in this investigation?
Answer. While Treasury is aware that Antigua and Barbuda is in
preliminary talks with the IMF on a Stand-by Arrangement, no such
arrangement has been agreed to and Treasury does not expect any vote to
be scheduled this year. Treasury analyzes every request for an IMF
program on its economic and financial merits. Treasury's assessment
would take into account its evaluation of the authorities' commitment
to reform and ability to implement an IMF-supported macroeconomic
stabilization program successfully. We would also urge the IMF to
target improvements in Antigua and Barbuda's financial regulatory
capacity as part of any program design.
Treasury is not aware of ongoing talks for immediate financial
assistance between Antigua and Barbuda and the World Bank.
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