Thank you Mr. Chairman. It is my pleasure to be here today to discuss the desirability of increasing the size of the International Monetary Fund at this time, as well as potential actions to improve international economic policy. At the outset, I should indicate that these views are my own and do not necessarily represent the views of the American Enterprise Institute. I believe that there are three salient points that have not been adequately addressed to date by the Administration in its request to the Congress for funds to support an IMF expansion.

      First, I believe that the prospective cost to the American taxpayer of our IMF contribution is greater than the Administration has suggested to date. It has been described as an essentially riskless investment, like putting money into a credit union. This is not the case.

      Second, an expansion of the IMF has been described by the Administration as essential for our macroeconomic stability. It has been suggested that millions of American jobs are at risk if this increased IMF funding is not approved. Again, I do not believe that this is the case.

      Third, and I believe most important, an enlarged IMF is simply not the best way to advance a sound international economic policy for the 21st century. The IMF is a relic of the Cold War and, while potentially advantageous to the global situation in the second half of the 20th century, is not central to a sound global economic strategy for the next century. Congress should seize this opportunity to carefully consider how we would like to shape the United States' global economic policy for the decades ahead.

      Let me begin with the nature of the U.S. contribution to the IMF. In recent Congressional testimony, a senior Administration official likened American contributions to the IMF to deposits in a credit union. Consequently, he argued, the money involved was not really an expenditure. He added that the credit union was safe because a substantial portion of its assets were in gold, and that no one had ever lost any money in the IMF. While this analogy demonstrates some superficial validity, I think that it is an unfortunate comparison, and I hope and trust that the Administration itself is not confused by its own analogy.

      Let me put on my hat as a former regulator to examine this comparison. While the IMF is like a credit union in that it only lends to its members, the requirements for an IMF loan would not qualify it as a credit union under existing American practice. An American credit union does not loan to its members based on how much they contributed, but based on the assets or collateral they are going to purchase with the money. Most significant, credit union loans are backed by an automobile or a home. Unsecured signature loans carry a very high interest rate and are ultimately backed by the bankruptcy statutes of the borrower's state of residence.

      By contrast, the IMF does not lend on collateral, but effectively makes only "signature" loans to member states. There is no bankruptcy statute or right to attach assets in the event of a default. Furthermore, there is no real assessment of credit worthiness. Quite the contrary, an apparent requirement to get an IMF loan is that the borrower is not creditworthy, in that the borrower could not obtain private sector financing.

      As far as the gold backing is concerned, I would find it somewhat troubling as a bank regulator if one of the banks I was supervising had an asset that was as volatile as gold backing up a substantial portion of its balance sheet. I would note that gold has lost roughly 20 percent of its value in recent months. This is certainly not reassuring.

      While I have not performed the analysis myself, I do know that at least one private sector analysis of the IMF balance sheet found that if it were a bank, serious questions could be raised about the IMF's capital adequacy. Usually this would mean shrinking the size of the institution rather than enlarging it. I would stress that the IMF is not a bank and should not be treated as such. But, nor is it a credit union. The U.S. contribution should be viewed from a pragmatic point of view not as a deposit, but as an expenditure.

      It is also true that no one has, to this point, lost money in the IMF. Of course, if it were such a great investment, the IMF would be going directly to Wall Street and not to the U.S. Congress to fund its needs. I think the better comparison is that the IMF is like the FDIC in the late 1970s or early 1980s. At that time, the taxpayers had not lost any money in the FDIC. It was there to assist troubled members if they had a crisis. What we learned over time, however, was that a sufficiently large crisis would come along which would swamp the capacity of the fund to cover the losses of the large number of banks which were involved.

      I really think that is the rationale behind the IMF request for a quota increase and the observation of Chairman Saxton that a further quota increase is likely in the foreseeable future. Due to a variety of reasons, not the least of which involves the concept of moral hazard, the IMF considers an ever larger quota necessary to cover the risks involved in ever larger international lending positions. The question the Chairman asked therefore is a good one. If this really is the equivalent of 1980 and we are dealing with the equivalent of the FDIC, we desperately need to reflect on whether we want to make the institution ever larger, or whether we want to contemplate new arrangements to cover the missions of the institution.

      The second fundamental question I would like to address has to do with the supposed necessity of contributing to the IMF for reasons of economic security. We are told that the economic consequences of not approving the $18 billion request are potentially dire. There are two separate arguments which support this claim: one has to do with trade, the other with the banking system. I would like to examine each closely.

      But before looking at the details of these arguments, let us consider the big picture for the moment. The same people who are warning of dire consequences if the IMF funding is not approved tell us in other venues that the U.S. economy is in the best shape ever. It would be a truly unusual circumstance in economic history that a record breaking economy would be so fundamentally fragile that it relied on an appropriation equal to one quarter of one percent of GDP for its continued success.

      There is one possible link between record setting expansion and economic fragility that needs to be considered. Is the United States economy really just resting on an economic bubble of excess credit expansion? Although I think the answer to this question is on balance, no, I would feel more comfortable with the intellectual consistency of the advocates of this funding if they were to resolve the apparent paradox in their arguments.

      But, if this link between expansion and fragility were in fact the result of a financial bubble, an $18 billion appropriation for the IMF is at best irrelevant. There are other actions we should be taking and other questions we should be asking. Why are we effectively easing bank supervisory standards in the midst of a financial bubble by telling lenders to roll over loans which are officially in default? Why are we not gradually trying to deflate the bubble through a slightly more restrictive monetary policy? Why is the Administration advocating $40 billion in new spending programs rather than pursuing a more contractionary budget policy? Shouldn't public officials be trying to "talk down" the stock market and warning investors of the risks ahead?

      Again, my own judgment is that the U.S. economy is not so fragile at this point in time that failure to approve this money would lead to an economic recession. However, I do believe that we may be at risk of encouraging a future financial bubble to develop through the actions now being proposed. Increasing the capacity of the IMF is not helpful in this regard as it sends a signal to borrowers and lenders alike that a U.S. taxpayer funded safety net is being expanded to rescue them, should they engage in imprudent lending. I also worry somewhat about the regulatory treatment of the bad debts associated with Asian lending. This is not 1991. The banking system is not fragile. Regulatory forbearance at a time of record setting bank capital and profits and a robust economy is simply not appropriate.

      Now let us consider the two detailed mechanisms which supposedly link our economic security to the need for an IMF funding package. The first I would call the "trade" argument. The Administration is pursuing a lobbying campaign claiming that jobs would be lost in various members' districts if the IMF package is not approved. I can well understand the need for this from a political point of view. But a careful examination of the claim suggests it is not well constructed.

      My personal favorite "trade" story comes from recent IMF hearings before a committee of the other house of Congress. There, one Senator from Nevada noted that the entertainment facilities in his state had been emptied since the Asian crisis began. State revenues were particularly threatened. While the Senator was not explicit, the supposed logic followed that we needed to replenish the IMF, so that it could bailout Asia, so that Asian high rollers could return to Las Vegas and lose the money back to us.

      While one might chuckle at the details, I am sorry to say that the fundamental logic of this argument is exactly the same no matter what industry and no matter what state is involved. The notion that you can indirectly channel money to someone to repay a bad debt and then expect him to buy (on net) more goods from you than your initial gift is plainly fanciful. I do not believe that the act of creating jobs in one's district should be the sine qua non of a Congressman's decision making. But the Administration, by making this argument, is advancing a logic which is false: The IMF quota increase is not a net job creator in the United States economy. Congressmen who base their vote on the argument that it is are doing their constituents a disservice.

      The other detailed link between the IMF package and the health of the American economy has substantially more merit. It involves the well-being of the banking system. Chairman Greenspan has testified that the risks from the current crisis pose a "small but not negligible probability" of placing the global banking system in jeopardy. I concur with Chairman's Greenspan's evaluation. The question is what the best ways are to deal with this risk.

      As Chairman Saxton pointed out in his opening remarks, the money for the IMF now under consideration is not related to the current commitments the IMF has made to Asia. Frankly, if approved, this additional funding would be used if events in Asia produce a much bigger debt problem than the IMF now expects or if those problems were to spill over to other regions: Eastern Europe, the nations of the former Soviet Union, or Latin America. In practice, the small but not insignificant risk to our banking system that Chairman Greenspan alluded to would involve one of these eventualities. I do not believe that either the Fed or the IMF believes that the Asian crisis, if contained at current levels, poses the kind of risk we are talking about.

      I believe that if the Asian crisis were to worsen, or if financial problems were to spread to other regions, the IMF would be of only limited usefulness in stemming it. Of much more importance would be actions already taken over the past decade in the United States to improve the quality of our financial system . As a result of these actions, our financial system is far better able to weather the current difficulties than it was 10 years ago and is far better positioned than any of our competitors.

      This involved a lot of hard work by our Nation's regulators and its banks. And we paid a price. The economic headwinds which afflicted the United States economy in the early years of this decade were, in large part, a result of the actions taken to strengthen the banking system so that it can be healthy today. Let me stress two particular changes. First, our banks built substantial capital and loan loss positions. This was the result of legislative and regulatory requirements to make sure that any bank losses would be carried by the stockholders of the institution and not by the taxpayers. This capital building process was a major cause of the economic slowdown in the early 1990s, but it laid the groundwork for the current economic expansion.

      Second, the Federal Reserve, under the leadership of Governor Susan Phillips, worked closely with the major global U.S. banks to develop highly sophisticated computer models of banks' balance sheets. They carefully modeled the complex interrelationships between various components of bank portfolios. This all sounds very technical, but it has had a big practical payoff. Bank managements and the Fed have a much better understanding of the actual risks in the lending portfolios of the banking system than exist in other countries. This has really paid off. Our banks are far less exposed to the Asian crisis than those of Europe or Japan, who did not do the same hard work.

      Third, our monetary authority has spent the last 17 years building credibility. This credibility, and the Fed's ability and willingness to use it in a crisis, is the real defense America has to prevent systemic problems in Asia from spreading to our banking system and our economy. Again, this has not been a costless process. The process of building credibility was a major factor in the recessions of 1982 and 1990. It is important to recall that back in the Carter Administration, the monetary and financial credibility of the United States was so low that we were actually forced to issue bonds denominated in foreign currency. Today, the dollar is the undisputed king of the world financial community. As a result, it would take an unlikely series of catastrophic policy errors to produce the kind of crisis in American banks that we fear today.

      There are essentially three lines of defense that any economy possesses with respect to trouble in its banking system. The first, and most important, is prudence on the part of bankers. That is why the efforts of the Fed during the 1990s to properly model the exposure of American banks was so crucial. In the U.S., at least bank management has the tools and information at its disposal to prevent excessive risk positions from emerging. The second line of defense is bank capital. Again, U.S. banks are in an unusually strong position in this regard. The third line of defense is the central bank. In my view, the Federal Reserve stands ready, willing, and able to provide sufficient liquidity and, if ultimately needed, regulatory forbearance, to protect the U.S. economy from adverse shocks.

      The role of the IMF in protecting our economy from a breakdown of our banking system is negligible. One might even question whether the net effect of the IMF is positive or negative. As I have already mentioned, the primary line of defense for our economy is bank prudence. And there is ample evidence that a further expansion of the IMF would not be helpful in enhancing prudent behavior in the long run. If there were any evidence that the IMF has or could enhance the risk assessment process, I would consider this a favorable contribution. But, the position of the IMF in not releasing its country reports for fear of "destabilizing" markets and the poor advance warning the IMF has given in the current crisis do not give one comfort in this regard. I therefore do not share any part of the Administration's conviction that an expansion of the IMF would provide any net increase in the macroeconomic security of the United States.

      Finally, let me turn to the future. It can't possibly be in the interest of the American people to maintain the existing international economic order. We cannot continue to have a situation in which every time a bank in one country tries to foreclose on a loan in another country, an international incident is provoked which threatens a collapse of the world banking system. America has the most to gain from a global economic order in which capital investment – including equity investments – can be made anywhere on the planet. It also has the most to gain from a world in which contract disputes, including bankruptcies and insolvencies, can be resolved before a fair and impartial arbiter.

      With regard to direct investment, our long term objective should be that a company headquartered anywhere on the planet should be able to invest in a factory anywhere else on the planet and receive the same legal protections as any other company located there. I find it amazing that America has tolerated a situation in which any Korean firm can make any investment it wishes in the United States, but no American firm was allowed to own a majority stake in a Korean enterprise. We should aggressively use our leverage in the current dispute to end such inequities.

      With regard to lending, our long term objective should be to ensure that bankruptcy mechanisms are in place which allow lenders to repossess the collateral which underpins their loans. We need an international bankruptcy "best practices" standard, and we are now in a sufficiently strong negotiating position to bring one about if we act immediately and use the advantages the current crisis affords us. At the same time, it should also be made clear that those who make investments or loans which are not profitable must bear the consequences of their decision. As long as it is perceived that international institutions and the United States taxpayer will bail out imprudent lenders, crises of the kind we are now experiencing are sure to recur.

      We have also made a serious mistake in effectively converting loans from various international banks to various Asian companies into loans from American and other taxpayers to the Korean and other governments. A lender should be able to foreclose on a borrower without it becoming an international issue. By effectively nationalizing these economic arrangements, we expend the moral authority and security commitment of the United States in the interests of private parties which may not even be American.

      Much has been made of the supposed foreign policy interest of the United States in these matters. While I do not pretend to be a defense expert, I believe that most of this foreign policy concern has to do with the perceived reputation of the United States in the countries involved. Our present policies I believe represent the worst of all worlds. The United States is identified as the effective "puppet master" which dictates IMF policy. America, therefore, gets the blame for the harsh macroeconomic conditions which the IMF demands as conditions for its loans. At the same time, as we all know well, the IMF does not represent American interests, but the interests of its many member states. So, the United States bears a disproportionate share of the foreign policy costs without achieving its share of the foreign policy benefits.

      From a foreign policy perspective, a world in which an international bank, even an American owned one, can foreclose on a Korean company in default, must be infinitely preferable to one in which the American government, with or without the IMF, imposes macroeconomic policies borne by the entire Korean nation. By converting the problems of those failing companies into national problems, and by converting the cause of the banks into an American cause, we are actively weakening our world standing.

      We are at a critical juncture where the global economic and security policy interests of the United States happen to coincide with the interests of the great majority of the population of the planet. A free international economic order, in which one doesn't need connections with the government to be able to run a business, is as much in the interests of individual citizens of Asian countries as it is in the interest of American citizens and firms. The sooner we make clear that we are not interested in bailing out crony capitalists and the banks which lend to them, the less likely it is that we will ever face an economic crisis like the present one again.

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