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Committee on Financial Services

United States House of Representatives

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CURRENCY

The Committee on Banking and Financial Services
U.S House of Representatives, 105th Congress
James A. Leach, Chairman

Phone: (202) 226-0471 Fax: (202) 226-6052 Internet: http://www.house.gov/banking

For Immediate Release                                              
Friday, January 30, 1998   Andrew Biggs 226-0471

Opening Statement of
Representative James A. Leach
Chairman, Committee on Banking and Financial Services
At Committee Hearing on East Asian Economic Crisis

On behalf of the Committee, I would like to welcome our extraordinarily distinguished first panel of witnesses to discuss the economic crisis in East Asia. I particularly want to acknowledge the presence of Secretary Cohen, who I believe is making the first appearance of any Secretary of Defense before this Committee in recent memory. We are also pleased to see again Secretary Rubin, Chairman Greenspan, and Deputy Secretary Summers. Later on this afternoon we will hear testimony from an exceptional panel of private witnesses.

On a procedural note, a number of members expressed concern about the length of time consumed by opening statements at some Committee hearings. These concerns have become even more magnified by the sheer size of our Committee which now stands at 60 members. In this regard, all Members received a memorandum from me dated January 15 indicating my intent to limit opening statements to no more than 20 minutes divided as follows: three minutes to the Chair and Ranking Member of the full committee; three minutes each to the Chair and Ranking Member of the Subcommittee of principal jurisdiction; with any additional statements equally divided between the two sides. Of course, all Members may submit opening statements for inclusion in the hearing record and if the Minority side prefers, I would have no objection if it wishes to divide its share of the time in another manner.

The is the second hearing on the East Asian economic crisis that the Committee has held in recent months, with a third scheduled for Tuesday, February 3rd. At the risk of presumption, I would like to make a series of observations about the current economic crisis in Asia from the perspective of one who has recently returned from a Committee delegation trip to the region. Neither I nor my colleagues who accompanied me -– Mr. Vento, Mr. Hinchey, Mr. Bentsen, and Mr. Jackson -- speak from identical perspectives. But we concur on the seriousness of the situation and the appropriateness of a U.S. government response.

In any regard, first let me comment on the American economic situation. The good news of the day is that for the last 12 months the budget in Washington has not only been balanced but has evidenced a fractional surplus. The bad news is that as strong as the American economy currently is, the United States is vulnerable to a downturn in growth because of the economic turmoil in Asia. Weakened growth will have negative ramifications for the budget and disinflationary, perhaps deflationary ramifications for the economy.

The Asian financial contagion is simply not the kind of event in which an economy as large as ours is immune. Economists now suggest that between one-half and one and a half percent of U.S. GDP growth will be erased this year because of events in Asia. In dollar terms, that is a reduction in growth of between $40-$120 billion. Indeed, according to a recent Salomon, Smith Barney analysis net U.S. exports may be expected to plunge by $70-$80 billion this year, equal to 1% of GDP. Exports are expected to suffer from a strong dollar and growth slowdowns in Asia and Latin America, while the strong dollar will make Asian products more competitive thus boosting imports into the United States. These figures could worsen if Asian economies and currencies are not stabilized.

The Asian crisis is likely to hurt the Pacific coastal states disproportionately, as over 40% of the nation’s $177 billion in exports to Asia originated in the West coast in 1996 and from a midwestern perspective, Asian markets are particularly important to American agriculture. Overall, U.S. agricultural exports to Asia account for 40% of our agricultural exports worldwide, totaling $23 billion. From 1991-1997, Asian countries accounted for nearly 45% of our export growth.

In this regard, Agriculture Secretary Glickman is to be commended for responding quickly to an emerging credit crunch in the region by making available $2 billion in export credit guarantees -- $1 billion to South Korea and $1 billion to other Asian countries – under the GSM export credit guarantee program. To date, I understand $162 million in sales have already been registered under GSM to South Korea alone, mostly for meat, cotton, corn, and soybean meal.

It is key to note that without the IMF stabilization program and concomitant trade and investment reforms which are helping to stabilize the uncertain financial environment, these sales might well not have occurred. Not only IMF liquidity but its seal of approval for macroeconomic and structural reforms has made it possible for banks to guarantee letters of credit and utilize GSM. Without operative letters of credit, American farm exports, which reached $4.5 billion to Korea in fiscal year 1997, would effectively shut down.

When Congress considers issues like the IMF human rights concerns naturally come to the fore. Here I would like to stress that all sides share a common premise -- it is important to advance internationally-sanctioned human rights concerns. But, based on this premise differing judgments emanate. Critics of the IMF hold that no aid should be advanced to countries with imperfect human rights practices. On the other hand, proponents, like myself, would point out that if the economies of countries such as Indonesia collapse we are likely to have a human rights inferno, with ethnic Chinese persecuted and large segments of the population receiving inadequate nutrition. The IMF, as the legislation before this Committee stipulates, should give enhanced attention to human rights and labor concerns, but there should be no misunderstanding: a cold-shouldered refusal to support the IMF could precipitate a caldron of human rights abuses.

Here the importance of commerce in agricultural products should not be underestimated. Starvation exists in North Korea without the intervention of UN-led World Food Program relief. Likewise, Indonesia is grain short and it is key that the country’s banking and credit arrangements be stabilized so that food products can be imported. Trade, after all, is a function of capacity to pay, as well as need.

As many have observed, for the near future, geo-economic concerns are likely to dominate geo-political ones in this region where America has fought three wars in the last two generations. But there are at least two political issues which carry severe economic, as well as military, ramifications that could spiral out of control at almost anytime.

The first is the unresolved division between North and South on the Korean peninsula. In this divided land, the United States, on a bipartisan basis, can be expected to continue to maintain a commitment to the democratic forces in the south. Despite economic turmoil, South Korea has produced an impressive election in which an out-of-power party and an once-exiled leader have prevailed. Opposition party victories are the norm in democratic societies, but the degree to which formerly antagonistic political camps are currently cooperating in Korea may be unprecedented in any democratic country in this century. Similarly the speed in which Korea is moving to change its economic structure may be unprecedented. Kim dae Jung who former governments attempted on no less than three occasions to assassinate now leads a united country committed to democratic and market reforms.

The sense in Seoul is that economic and security issues are interlinked and that the new government must unflaggingly address the first so it will be in a stronger position to give attention to the second. Meanwhile, America can be expected to stand by its allies from a friendship as well as security perspective.

Here let me note a symbolic act from my Congressional district. Last year the president of the University of Iowa, Mary Sue Coleman, visited South Korea to raise endowment funds from graduates of the university. Earlier this month she returned to Seoul on a different mission. She declared that Korean students at the University of Iowa would be given, where needed, financial assistance to that none would have to give up their education because of the new constraints on the Korean economy.

The other potential trip-wire in Asia is Taiwan where sovereignty issues remain explosive. Taiwan may be the only political entity in the world where a distinction needs to be made between the precepts of self-determination and independence. The Taiwanese can maintain de facto self-determination as long as independence is not declared. Expressed another way, if independence is decreed, self-determination will be jeopardized.

In this regard, I was impressed with how concerned the Chinese government appears to be that Taiwan might be attempting to strengthen political claims by offering economic assistance to those countries in the region weakened by the recent economic crisis. Chinese leaders described this alleged strategy of taking advantage of the economic circumstances as breaching traditional Chinese morality and cited a prominent American economist, G. Fred Bergsten, who two months ago suggested before this Committee that Taiwan devalued its currency out of a desire to put pressure on the Hong Kong dollar. Mr. Bergsten will have an opportunity to defend that assertion when he appears again before this Committee later today. Most experts in the U.S. and Hong Kong doubt this contention and believe the Taiwanese decision principally related to Taiwanese concerns that the competitive position of other Asian countries, particularly Korea and Japan, had improved given the currency devaluations in the region. Whatever the Taiwanese motivation, it would appear that the island's 10 percent devaluation was a dubious strategy given Taiwan's extraordinary reserve position and trade surplus. It is key to the current situation in Asia that a further devaluation does not take place.

As for China, it is positive that the renminbi has not been devalued and critical that the Hong Kong peg be maintained. If Hong Kong can ride out this crisis, and absent further economic cratering in the region, there is no reason to believe it shouldn't, it is not unreasonable to speculate that the next challenge to the peg could be a few years hence when the pressure may be to appreciate, rather than depreciate the Hong Kong dollar.

In the current context it is impressive that both Hong Kong and Beijing are committed to currency stability. Perhaps in a future setting when confidence in the underlying economic situation is strong, China will give consideration to adopting a band or, less likely, more flexible floating exchange rate approach, but for the immediate future both the renminbi and the peg would appear to be secure. Speculators play currency games at their peril.

In the 1930s, the global economy contracted as countries competitively devalued their currencies and raised tariff and non-tariff barriers to trade. The trade lesson of the century is that the best way to stem trade problems is for nation-states in times of turmoil to take the opposite tact. Countries should refuse to adopt beggar-thy-neighbor currency policies and open, rather than close, their markets to outside trade and investment. Open markets are particularly important in finance where foreign banks and financial firms can assist countries in capital formulation. In the United States, for instance, 25 percent of bank assets and over 35 percent of commercial loans are held by foreign banks. In Hong Kong, foreign owned banks hold 70 percent of bank assets. Little appears more counter-productive for countries than protectionism in financial services. And of all countries in the world, the one that would likely benefit the most from opening up comprehensively to foreign banking, securities and insurance firms is China. And of all countries the one that has the least excuse and most counter-productive rationale for maintained closed market practices is Japan.

Two recent experiences in the Americas would appear relevant to the Asian dilemma today. The first relates to Mexico. In what might be described as the first crisis of the new economic order a multi-billion dollar economic package was put together which exceeded the need.

By making it clear that the international commitment potentially exceeded $50 billion, of which less than one half was ever drawn upon, any incentive for those who might negatively speculate on Mexico was eliminated. The effect of delivering an economic package larger than the contingency required is similar to the military strategy of overwhelming force -- the doctrine that the greater the power committed, the less the likelihood of significant casualties or policy failures.

Interestingly, at this junction in our history, Congress has a tendency to transfer to the Executive branch discretion on controversial foreign policy issues when Congress does not want to leave voter-liability fingerprints. Clearly, it would have been preferable for Congress to act to underscore bipartisan and more importantly, bi-institutional support of lack therefor for a significant policy initiative. But, in the end, the Executive Branch acted without Congressional concurrence on the Mexican program, with viable but minimal legal authority, utilizing its authority to tap Treasury's Exchange Stabilization Fund.

In the wake of what proved to be a successful intervention in Mexico, it had been my hope that in a time frame in which no crisis was at hand the international community would have moved in the direction of developing new multilateral approaches to international financial crisis prevention and management. A strengthening of the International Monetary Fund (IMF) to ensure that it has adequate liquidity and consideration of international bankruptcy laws for nation-states would appear to be in order if we are to prevent public treasuries from being placed disproportionately in financial jeopardy.

The second relevant American experience relates to the internal savings and loan debacle of the 1980s. In terms of contrast with Japan's real estate problems, the U.S. savings and loan problem was sparked initially by an interest rate mismatch. Institutions that borrowed short and lent long were caught in an incurable dilemma when interest rates skyrocketed in the late 1970s. Japan's problems are different and more severe. In Japan, the problem is one of asset values, not interest rate differentials. Indeed, the Japanese interest rate setting could not be better for real estate lending today.

Yet the effect is the same of interest rate mismatches and overstated asset values. Real estate mistakes weakened the quality of bank loan portfolios and jeopardized the stability of individual financial institutions. The lesson of America is that the more rapidly one deals with problems the better it is for the economy. In the 1930s, the U.S. government through the Reconstruction Finance Corporation pumped money directly into banks. In the 1980s through the Resolution Trust Corporation it transferred assets to more viable institutions. Both models work. While the Resolution Trust Corporation model led to imperfect judgments on the timing and valuation of certain asset sales, it had the advantage of putting assets in strong hands. The taxpayer was pinched but the economy was stabilized. It is simply a fact of commerce that when financial intermediaries are troubled, credit allocation is restricted or distorted. Likewise, strong financial intermediaries are a prerequisite to sustainable growth.

The American people are naturally concerned today about aspects of IMF lending. They see a circumstance where Asian economies are likely in the next two years to increase their current account trade surpluses with the United States. While it can be pointed out that the trade deficit would certainly be worse for America if greater currency stability is not achieved in Asia, political attention to trade deficit issues will almost certainly escalate in the near future in America. Asian countries would thus be advised to give the benefit of the doubt to U.S. imports in the near future. For the sake of the Japanese standard of living, as well as economic growth in the Pacific Rim, it is critical that Japan promote a demand-growth economic agenda. While the rest of Asia may have to tighten its belt, Japan should unloosen. Economic stagnation is neither good for Japan nor its trading partners.

Last year's 41 percent increase in Japan's trade surplus with the U.S. is potentially grist for problems for Japan in the Diet, as well as Congress. Protectionism may increase trade surpluses but it reduces GDP growth, and growth, not surpluses in trade, are what Japan needs to reinvigorate. The issue isn't simply economics. There has been a remarkable loss of confidence in governments which failed to produce economic growth and it is interesting that a hitherto perceived dissident, Kim Dae Jung, now enjoys 90 percent approval ratings and that a heretofore technocrat is now the most respected modern-day leader of Thailand.

There are isolationist and protectionist tendencies in all countries. In America today, isolationism may be stronger than protectionism, but both instincts have common roots. As much, however, as Americans have a hesitancy to look outward, the history of the century makes clear that when challenged, Americans are willing to take on global obligations. Deep down every American knows we can't live as the world's largest island. There is no Maginot Line or Great Wall in modern commerce. The global hiring hall is here whether we like it or not.

Politically Americans are less secure without allies and economically less prosperous without trading partners. Neither economic autarky, nor political isolationism is viable for the world's lone remaining superpower. Yet the American ambivalence is that what we know deep down is not always what we would prefer. Despite, for example, having the world's largest economy with the most far-reaching global interests, our Congress has found it politically difficult to authorize payment of our annual dues to the United Nations, to grant effective negotiating authority to our own trade negotiators (what is dubbed "fast track" discretion) and to provide critical resources to international financial institutions. Each of these issues will be seriously reviewed early in this Congressional session and I am cautiously optimistic about a constructive outcome.

However, whatever Congress's judgment about the above issues, American will stay involved in Asia. More crucial than replenishment of the IMF will be the actions of U.S. companies. The investment decisions of Citicorp, Merrill Lynch and AIG, for instance, will be more important for Asia than assistance decisions of the United States Government. And the question of whether America will maintain an oopen market is more important than any IMF program.

Nevertheless, it should be clear that the United States has responded forthcomingly to the Asian crisis through the IMF, as well as with separate decisions involving the Exchange Stabilization Fund. In this regard, the current program has been put in place with the support of the U.S., which is the only country with veto power in the IMF. What, in essence, Congress will be addressing in the weeks ahead is not the current program for Asia, but whether further resources will be transferred to the IMF to deal with the next crisis wherever in the world it may occur.

Virtually all critiques I have read about a policy reliant on institutions like the IMF have a degree of credibility. The problem is that alternatives may be worse. The challenge is to establish a policy that neither ignores the problem, nor Americanizes responsibility for the solution.

Ignoring the problem will produce an economic cratering of Asia which could be devastating to our export sector and place U.S. manufacturers at a profound currency-related disadvantage. The other alternative – exclusive reliance on the U.S. in a region of strategic significance in which we have fought three wars in the last 60 years – would be much more costly to the American taxpayer. The two greatest advantages of the IMF are that it involves burden-sharing, with the U.S. share being 18 percent, and that it has the authority of the international community to insist on modern fiscal, monetary, and banking reforms, as well as other structural practices. In this context, the IMF serves as a multilateral insurance policy against the prospect of a global financial meltdown (analogous the Federal Reserve’s role in providing conditional emergency liquidity in the event of a domestic financial crisis).

The irony of current IMF bashing deserves review. In Latin America the IMF -- which was a decade ago pilloried by the left and right for advancing anti-inflation policies -- appears to be increasingly vindicated. Fiscal and monetary policies that have radically reduced inflation have lifted all boats. As for Asia, it is possible that IMF conditionally ought to include greater concerns for human rights, environmental and labor concerns, but there are few economists who don't support the IMF's efforts to advance greater market competition with less corruption feeding governmental intervention in various societies. If the IMF didn't exist, analogous institutional efforts would be re-created for each crisis. Whatever mistakes in judgment are ascribed to it, the IMF stands as a coherent alternative to chaos. And in times of disorder, institutions which help re-establish order take on enhanced significance, psychologically and substantively.

Given that this type of crisis may be more a result of structural weaknesses than currency problems -- where imprudent banking practices appear to have been disproportionately responsible for a sudden loss of confidence in several economies -- care must be taken to ensure that the IMF's role is not expanded from being a last resort stabilizer of currencies and economies to a last resort lender to banking systems. The IMF can responsibly undergird economies to protect the public, but it is not the IMF's role to bail out banks. Capitalists should not be shielded from mistakes of capital allocation.

Hence representatives of the public have a responsibility to emphasize that banks must take hits on their banking misjudgments. Neither Congress, nor any international institution should replace private liabilities with public ones. Indeed, there are long-standing international banking covenants that the countries in which banks are chartered and operate are responsible for regulation of individual financial institutions and for dealing with problems as they occur. Not only do moral hazard problems come into play with regard to any IMF policy which might be designed to bail out banks, but it would be the wrong publics asked to take responsibility.

Many commentators have used the term "bail-out" in discussing IMF-led stabilization programs. Bail-out indicates that someone is getting something for nothing. This is wrong on two fronts. First the IMF is a lending institution, not an aid granting one, and over years has made a profit. Funds transferred by nation-state treasuries to it are the equivalent of bank account movements of resources, not the giving up of assets. Second, no one government or international institution has the capacity to resolve the crisis in Asia. Grand sweeping solutions don’t exist. It will take cooperation of governments, banks, commercial businesses and most of all ordinary citizens to solve the problem.

A review of regional economies indicates that those countries with prudential and transparent regulation have done well and those without have found public treasuries jeopardized. In addition, the chaebols of Korea, the keiretsus of Japan and cartels of Indonesia have lessons for the United States. Those who today actively advocate financial modernization legislation in Congress which mixes commerce and banking might want to take a hard look at the kinds of conflicts of interest endemic to systems that have allowed such mixing.

With regard to the question of corruption, the lessons are writ large: the best antidote to cultural corruption is a legal system where small conflicts are treated philosophically as seriously as large ones and where economic enterprise is decentralized and subject to as little control by government as possible. The general level of corruption goes down as the degree of market competition increases. Free market systems are not only more efficient than statist models, but more honest.

Here the comments of Kim Dae Jung made to us during our recent visit to Seoul are instructive. The President-elect suggested there was little economic freedom in Korea when business had to rely on government allocations of credit and resources and where such allocations were dependent on contributions to politicians and political parties. There could be no freedom, he exclaimed, if the government had the power to break any business that didn't cooperate with its agenda. Political systems which employ government-decreed, rather than market-driven, lending must be changed if democracy is to be achieved in the economy.

What some countries in Asia need is a good dose of Teddy Roosevelt trust-busting, the privatization of state enterprises in China and the elimination of nepo-capitalism that hallmarks countries like Indonesia.

Analogously, what American politicians need is a deeper understanding that trade, as long as it is fair and reciprocal, is good and that we cannot isolate ourselves from global problems. Just as this crisis has produced a leadership test for governments in the region, with the question of whether they have the will to address controversial problems in their societies, it has provided a leadership test for the United States, with the question of whether we can remain a global leader.

Finally, let me conclude with an observation from Gordon Wu, a Hong Kong engineer/philanthropist. Wu speaks to Americans with as much moral authority as anyone in Asia because he donated $100 million to his U.S. alma mater in appreciation for the education he received. He told our group last week in Hong Kong that America's choice is simple. If it puts out a helping hand today, people in Asia will remember tomorrow. If it doesn't, that will be remembered as well. Good neighborliness, as well as the American national interest, requires that we lead.

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