Thank you Mr. Chairman. It is my pleasure to be here today to answer any questions you might have regarding the appropriate role of the International Monetary Fund in today's global economy. 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 am particularly honored to be here on a panel with two former associates, Paul Volcker and Bill Niskanen, whose views I enormously respect. I believe that my views are likely to fall somewhere in between the views of these two distinguished individuals, perhaps reflecting the influence of both men on my thinking.

      As a matter of fundamental principle, I believe that the elected representatives of the American people are the ones who should control the terms of assistance to foreign governments and institutions funded by the American taxpayer. Any exceptions to that basic principle must be subjected to a fairly rigorous standard.

      Unlike many critics of the International Monetary Fund, I do believe that the IMF can play an important role in the international financial community. And I do believe that a limited quantity of U.S. taxpayer funds can be committed to that purpose. But let us be clear about why the Congress might want to delegate responsibility for the disbursement of funds to an international body like the IMF. I believe that there are two reasons which need to be considered.

      First, in today's international market, events often move swiftly. Specifically, events might require a decision on the allocation of funds in a time frame too short for the standard legislative process. In such circumstances, an institution like the IMF might well play a role as a speedy provider of liquidity in a crisis. I should note that Congress has certainly created precedents for such a time sensitive delegation of decision making. In international security arrangements, the President is empowered to direct military forces to undertake warlike actions without a formal declaration of war. In financial matters, the Congress has granted the Treasury significant authority to intervene in foreign exchange markets with the exchange stabilization fund without ever consulting the Congress. In domestic banking circumstances, the Federal Reserve might similarly take significant steps which would, at least potentially, commit taxpayer funds without seeking congressional assent.

      Second, it may be that international circumstances are such that a sum so vast is needed that the United States cannot prudently be expected to act on its own, or may find it advantageous to act with others. An international body might be more efficient, or might have expertise which we do not. Again, in the international security area we have long delegated decision making to international groups such as NATO, and recently we have established precedents of letting the United Nations act without congressional assent because we have judged it in the U.S. national interest to work through international bodies. In the area of foreign financial assistance, the U.S. Congress sometimes chooses to use international agencies such as the United Nations as well.

      Thus, it is important that the Congress establish that these funds are going to either be used in so speedy a fashion that the normal legislative process would not work, or that the mission we are undertaking is of such a magnitude that we should subsume American interests in a larger international cause. I do not believe that either of these conditions has been demonstrated sufficiently.

      Let us consider the "timeliness" argument. Although the Indonesian banking crisis happened more than 7 months ago, the IMF and the government of Indonesia are still negotiating the terms for an IMF disbursement of funds. While one must admit that our Founding Fathers designed the legislative process to be slow and deliberative, even the most extreme critic of the legislative process would have to concede that Congress could beat the IMF in the decision making process in Indonesia hands down.

      Frankly, with regard to this issue of timeliness, the Congress has at its disposal much more effective means of allowing both speedy action and a more direct expression of the U.S. national interest. The Federal Reserve could be authorized to intervene in international currency markets and be granted an appropriation by Congress to do so. Unlike the IMF, Federal Reserve officials are regularly questioned by members of this Congress, including this committee. They are directly accountable, subject to audit and dismissal from their posts if Congress finds that they expended money in a manner which was not consistent with congressional intent. In my view, the Exchange Stabilization fund could be used in this manner, but actions by this Administration, in both the current crisis and the Mexican crisis, indicate that those funds were used to circumvent the congressional process, rather than to carry out congressional intent. So, I am sorry to say that the Administration's case for ever more money for the IMF cannot be justified under this time limitation argument. IMF behavior indicates that timeliness is not an issue, but even if it were, a much better alternative already exists from the point of view of congressional supervision.

      What about the argument that multilateral action is needed? Certainly the size of the funds being expended seems so large that prudent management would suggest that having a partner would be a good idea. But, is this expenditure of funds advancing a cause so noble that U.S. national interests should be subordinated to those of an international body?

      Again, I think the reality is that this is not the case. I have just recently returned from two weeks in Asia and can tell you first hand that the IMF bailout has not had an effect which one could consider desirable. Let me focus particularly on the case of Korea. There, the giant Hanbo Steel has been effectively absolved for a year from paying any interest on the enormous amount of corporate debt which it has built up over many years. This gives the company an enormous competitive advantage over all other steel producers, American, Japanese, German, whatever. As the saying goes, when you don't have to pay your bills, your gross is your net.

      The fact is, the great majority of the money the IMF disbursed in Korea and throughout Asia did not go to some noble cause such as feeding the hungry or housing the homeless. It went to helping specific companies which compete in the global marketplace get a reprieve on their debt service. This not only is not in the American national interest, it is not in the interest of the global economy either. Hanbo Steel is not outproducing its competitors because of some inherent cost advantage gained by greater efficiency. It is outproducing its competitors because it is being subsidized by the taxpayers of the United States and the other major countries of the world. The IMF action is making the global economy less efficient, not more efficient. Again, the Administration argument that we must subordinate U.S. national interest for a higher global interest carried out by the IMF does not wash in this circumstance.

      There is certainly a foreign policy problem for the United States in the crisis now unfolding in East Asia. But, I cannot help but wonder how much more effective a direct appropriation of $18 billion to the foreign policy operations of the United States would be in advancing the U.S. national interest than a similar appropriation to the IMF. Again, Congress could maximize its control over any such direct appropriation, targeting its use to those endeavors which do the most to enhance the economic and security interests of the United States. Indeed, I believe that an appropriation of smaller magnitude could actually have a far greater effect in advancing U.S. interests than the $18 billion now under consideration. I might add that in considering such an increase in foreign aid, Congress might also want to address the international monetary issues I discussed above by granting increased authority to the Federal Reserve, along with the necessary funding to carry out the stated objectives of Congress in the international monetary stabilization arena.

      It is therefore clear to me that the IMF has not demonstrated that it has either a time advantage or a size advantage which would justify subordinating U.S. interests and control to that of a multilateral institution. But what of the argument that it has a qualitative advantage and is more efficient than an American governmental agency might be in carrying out its mission. There is no question in my mind that the staff of the International Monetary Fund includes some of the most competent and intelligent professionals available in the world. I also believe that they are well meaning. Certainly Stan Fischer, chief economist of the IMF, is one of the world's leading economists and a man for whom I have enormous respect.

      Unfortunately, the competence of individuals can at times be overwhelmed by the bureaucratic demands of an institution. I believe that is the case today at the IMF. Otherwise competent individuals are caught up in a bureaucratic mission which is not making maximum use of their talents.

      First, I do not believe that the IMF is hastening an economic recovery in Asia. It is simply not the case, as some claim, that creditors and debtors are incapable of resolving their own problems without the IMF. I would note that the stated reluctance of the congressional leadership to approving more funds for the IMF has actually helped force the banks and the debtor nations to sit down and negotiate. Had there been no IMF, this would have happened much sooner. Sadly, the efforts of the IMF and the Administration to create an early role for the IMF in this crisis had the effect of delaying negotiations between the parties directly involved.

      This is a matter of straightforward self-interest. Both parties involved in the dispute -- the banks and the borrowers -- stood to lose money. Both are also aware that a protracted dispute simply increases the economic damage and increases the total losses which must be covered. But, both also saw the injection of IMF funds as a way of minimizing this loss. Thus, as long as it seemed as though the IMF was going to keep injecting funds, neither party had any incentive to resolve the dispute. It was only late in December, when it became clear that the IMF was running out of money and would not be replenished in a timely manner, that an effective rollover of Korean debt occurred.

      Thus, confronting the problem now before the Congress, I believe that an increase in the IMF quota would not be helpful to meeting the objective of a speedy recovery of Asian economies. Approval of the IMF quota increase would simply signal to those parties most directly involved that the world's taxpayers will cover a substantial portion of the losses brought about by their imprudent behavior. On the other hand, an actual rejection of a quota increase might destabilize Asian markets at a very delicate moment. Thus, the best course for the Congress is to defer consideration of the issue while studying the issue carefully and monitoring how events in Asia unfold.

      Second, the expansion of the IMF into the role of lender of first resort has, in my view, detracted from its ability to carry out the functions for which it is well suited. The primary mission I have in mind is as an objective international provider of economic information and analysis. The predictive performance of the IMF in the current Asian crisis was dismal, to say the least.

      In October, 1997, the IMF predicted that Indonesia would enjoy 6.2 percent growth in 1998. Its April forecast is for a decline of 5 percent. In Korea, a similar forecast last October of 6 percent growth has been marked down to a decline of 0.8 percent. In Thailand, growth of 3.5 percent has been revised to a contraction of 3.1 percent. Most alarmingly, expected growth of 2.1 percent in Japan has been adjusted down to a zero growth scenario.

      Yes, events change, and yes, private economists make errors too. But there are some differences. First, private economists with these error margins usually lose their jobs, as opposed to enjoying a massive increase in their operating budgets. Second, the problem with the IMF making these errors is that they largely result from biases created by the bureaucratic mission of the IMF, and thus undermine that institution's effectiveness. Third, these IMF induced errors create externalities with respect to the conduct of global economic policy, both in the affected nations, and among other nations and organizations of the world. To be specific, the IMF's self-described mission of being an aggressive lender causes it to fail in the mission for which it is most suited: providing objective economic advice.

      In part, this results from the ownership of the IMF. It is owned by its voting members, the governments of the world who are its members. They provide its budget. They are also its customers. The IMF bureaucracy must therefore remain on very good terms with these governments. That is why errors such as the Japanese economic forecast are made. Last May, the IMF forecast 3 percent growth for Japan in 1998, and even in October was forecasting 2.1 percent growth. The only other agency I know which advanced such optimistic numbers was the Japanese Cabinet. These numbers exceeded any private forecast of which I am aware, and especially in October, exceeded the best guesses of most government economists in Japan as well. The Japanese government is of course, the second biggest contributor to the IMF and has the second largest block of votes.

      In the case of lending to nations in trouble, the need to close the deal causes the IMF to be unduly rosy about the effect of its prescriptions on the country receiving IMF assistance. Consider for example some calculations by David Malpass of Bear Stearns on the effect of the IMF on the dollar GDP of Asian nations. In Thailand, dollar GDP is expected to fall from $184 billion in 1996 to $156 billion in 1997 and $121 billion in 1998. In Korea, the decline is likely to be from $485 billion in 1996 to $437 billion in 1997 and just $300 billion in 1998. In Indonesia, the decline is likely to be from $226 billion in 1996 to $201 billion in 1997 and just $100 billion in 1998. As a caveat, I should note that a major portion of these declines is the result of IMF prescribed devaluation, and it is certainly true that living standards will not fall by equal percentages.

      What is key is that the IMF will not provide detailed estimates of the effect of its policies on the dollar GDP of recipient nations. If it did, it would surely not be able to close the deals with the participating governments as they would be shocked by the resulting effects. The IMF is also unlikely to want to provide such details to its major global constituency – global banking institutions – for they would quickly curtail their lending if they were aware of the magnitude of these effects.

      I have no doubt that a limited sum of money, contributed by a variety of nations, could, if expended in emergencies, provide a much needed function in the modern global economy. The IMF should stick to this mission. It is one that the IMF can carry out with the ample financial resources and vast array of human talent and experience it has at its disposal. Its ability to function would be enhanced if it chose to cooperate with the world's central banks in carrying out its mission and if those central banks were empowered to cooperate. But this is not the case today.

      Finally, let me turn to an issue which I believe to be of particular concern in the present environment. The pretense, advanced by the Administration in recent congressional testimony, that this money is merely a "deposit" and the IMF is something like a "credit union" is plainly faulty. Further, the Administration argued, the U.S. contribution to the Fund was not really an expenditure and was costless to the American taxpayer. They 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 were 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 nearly 20 percent of its value in the last year or so. 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.

      In sum Mr. Chairman, I think that there are two ways in which the Congress can effectively influence the IMF. The first is to just say "no". A decision not to increase the American quota at the IMF would send a loud and highly effective signal regarding the operations of that body. It would indicate that the Congress would like to limit the growth of the IMF and, by so doing, try and limit its operations to those functions for which it is most suited: providing liquidity in times of global economic emergencies.

      The second mechanism at the Congress' disposal is to require the IMF to take specific actions before any additional funds are provided. This is, in effect, what the IMF does to the countries which request its money. So-called "conditionality" requires that the country involved meets certain IMF conditions before any money is disbursed. I do not think that the hortatory language in the bill referred by the full committee accomplishes that end.

      Some might suggest that the congressional deliberation process has had an effect on the IMF, regardless of what further actions are taken. I think that this argument holds some merit. In particular, I noted during December and January that the IMF would tend to strengthen its demands for market opening and greater transparency as objections emerged in the Congress and among opinion leaders to the increased funding of the IMF. But, I would argue that this is largely an argument which has its roots in the "just say 'no'" case I outlined above.

      We should be clear that, by and large, the demands the IMF makes on recipient states are both reasonable and not contrary to U.S. national interests. Some would say that is sufficient. I disagree. Where U.S. taxpayer money is at stake, the Congress has the responsibility to choose that mechanism which maximizes its control over the funds disbursed and the conditions attached to any disbursement. The present Administration proposal does not rise to that standard.

      As a practical matter, we should recognize that the IMF, like any bureaucracy, tends to operate in its own self interest. There is no doubt that the U.S. executive director and indirectly, the U.S. Treasury Department has a substantial influence in that body. While one may be content to simply let this influence take its course, I do not believe that Congress should be satisfied with letting its constitutional powers to control the purse strings be so easily circumscribed.

      Thank you Mr. Chairman, and I would be pleased to answer any questions which you might have.

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