Representative Saxton. . . .The point that I — let me just back up to that last question.
      With regard to the answer, are securities or promissory notes comprising of, reflecting usable quotas valued at face value on the asset side of the balance sheet. With regard to your [IMF] financial statements, we have a statement that says "each member has the option to substitute nonnegotiable or noninterest bearing securities for the amount of currency held by the fund in the general resources account that is in excess of one-quarter of one percent of the member's quota."
      What does that mean?
      You just answered that there are no securities or --
      Ms. Lissakers. Some countries do provide securities, but I understand that is a fairly small number, and I can follow up. . .
      Representative Saxton. Are those also listed on the asset side?
      Ms. Lissakers. All quotas are liabilities of the institution.
      Representative Saxton. On this general department balance sheets I have here, under assets, general resources account, currencies and securities listed.
      Ms. Lissakers. Under assets?
      Representative Saxton. Yes ma'am.
      Ms. Lissakers. Those would be — well —

      Representative Saxton. . . . Is this accounting system a transparent system, do you believe?
      Ms. Lissakers. I confess it is not fully transparent to me as a layman in this area. . .

Karin Lissakers is the U.S. Executive Director to the IMF.

      "Budget estimates should be classified and presented in a way that facilitates policy analysis and promotes accountability." IMF Code

      Representative Saxton. . . . Is there any reason why the IMF financial statements should not be available in an understandable fashion to a typical economist or banker? Is there a useful purpose served by the opaque and confusing IMF accounting system that is currently used? . . .
      Mr. Geithner. You know, I have been at the Treasury 10 years, and I am not an economist or an accountant, and I have found this stuff hard to figure out and understand.

Timothy Geithner is Assistant Secretary, International Affairs, Department of the Treasury.

      Dr. Calomiris. . . . It has been bothering me since I discovered that Secretary Rubin has been spreading it around. It bothered me in Mr. Bergsten's written testimony, the statement that the American taxpayer doesn't pay a penny.
      Well, I worked at the IMF for a summer. I made a salary. Someone paid it. I don't think it was the tooth fairy; I think it was the taxpayers of the member states of the IMF who paid the salary. So there must be a gross cost involved in running the IMF. Borrowers don't pay it. In fact they receive interest rate subsidies.
      Another thing that is wrong with what I believe Mr. Bergsten said is, he said if it is just a credit cooperative, in some sense we all have this option to borrow, so we are all gaining; so even if there are interest rate subsidies, we all get subsidized, so in net there is no subsidy. That is not right because the probability of using it is not equivalent across the countries. . . .

      . . .So irrespective of whether you think that the benefits justify the costs, let's be honest; let's stop saying things like this doesn't cost us a penny, because if anyone believes that a loan subsidy doesn't cost him a penny, I would like to borrow some money from him at zero interest. . . .

Dr. Charles W. Calomiris, Paul M. Montrone Professor of Finance and Economics, Colombia Business School, and Director, American Enterprise Institute Project on Financial Deregulation.

      Dr. Lindsey. . . . I think the prospective cost to the American taxpayer 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. . . .

      . . . Of course, if it were really such a great investment, the IMF would go directly to Wall Street to raise the money and not to the U.S. Congress to get the funds it needs. . . .

Dr. Lawrence B. Lindsey, former Governor, Federal Reserve Board, and Resident Scholar, The American Enterprise Institute for Public Policy Research.

      Dr. Lindsey. . . . Is this really a cost to the taxpayer? If it worked, then I would recommend not $18 billion, but $100 billion or a trillion or $2 trillion. I mean, $18 billion is not going to solve the problem. . . .
      . . .The reason that it is not costless to the taxpayer, I think is threefold. First, there is an opportunity cost involved to the U.S. economy. The money is being borrowed at the risk-free rate available to the U.S. Government. We are borrowing more than we would otherwise borrow. That money is therefore not available to other public sector uses. It goes from the U.S. Government, at the same rate to the IMF, at the same rate to the foreign borrower.
      We agree the foreign borrower is paying too little, which means we are introducing a distortion into the system, so it is simply not costless because of the opportunity cost involved. A better test of whether this is costless or not would be the dissolution test.
      If we were to announce that we were withdrawing from the IMF, would we actually get our money back? I don't believe so, but I think that would be the real test as to whether the loans to date have been costless.
      Thirdly, prospectively, I again think the right comparison is with the FDIC or with FSLIC prior to the banking meltdown in the late 1980s. I think you can find statements by Treasury officials that the FDIC was a costless institution, that it never–that we never incurred a loss in all the bank resolutions we ever had. . . .

      Representative Saxton. . . . First of all, let me ask you about my request for three of the IMF reviews of the bailouts of Thailand, Indonesia, and Korea. Under the law, Congress must take the performance results and take the results of agency policies into account, in consideration of funding issues. We do that consistently. Yet the Treasury and the IMF refuse to release the IMF studies of the effects of its own policies for the use of public policy debate, even as it asks Congress for an $18 billion IMF appropriation. . . .

      Representative Saxton. . . . Is there any doubt the IMF studies would be of great interest to Members of Congress in reaching informed decisions about the merits of IMF appropriations? Why should these documents not be publicly released after deletions of any classified or proprietary material?
      Mr. Geithner. . . . We make those documents available to the Congress upon request. You each have full access to that information and to those documents, but we do not have the capacity to release that information to the public; we don't have procedures in place that would allow us to release systematically redacted or modified versions of those documents to reduce classified information. . . .

      Representative Saxton. . . .Sabastian Edwards, a former chief economist of the World Bank, has said the pervasive secrecy of the IMF makes evaluating its performance extremely difficult, if not impossible. . . .

      Dr. Calomiris. . . .IMF secrecy is contrary to its proper role as the source of independent, objective and informed opinion about the economic performance and financial risks of member countries. In pursuit of its appropriate mission, any policies or conditions for assistance advocated by the IMF should be revealed publicly. That will encourage a lively debate about their merits and permit critical evaluation about their effectiveness. . . .

      Dr. Bergsten. . . . You are absolutely right. The IMF should be more transparent. . .

      What I think is most needed is for the IMF not only to make available the country data, as it is now doing, and try to expand that, but to make available its own appraisals . . .The second part is judgmental, in which the IMF staff renders judgments as to whether the country is getting into trouble. That, I think, should be made public. If it were, it would alert the markets and there would be fewer of the crazy loans that everybody on the panel agrees have been made. . . .

      Representative Thornberry. . . . Do you agree that other investment decisions will be made, in part based upon how the IMF treats this situation today in Asia?
      Mr. Geithner. They will. I think it is an important risk, the moral hazard risk you are referring to. It is something we worry quite a bit about. We design the programs to try to minimize it, but you can't eliminate it. . . .

      Dr. Calomiris . . . When the crisis has passed, the big winners are the wealthy, politically influential risk takers, and the biggest losers are taxpayers in countries like Mexico, Indonesia, or Korea. . . .If risk taking bankers know future gains from taking on risks will be private but losses will be borne by taxpayers again, that amounts to a government subsidy for risk which thereby encourages excessive risk taking, the so-called "moral hazard problem". . .

      . . .What can explain this epidemic? Not shocks of unprecedented magnitude like oil price hikes, wars or global downturns in demand, since such influences have been absent. The explanation is the roller coaster of risk produced by the choices of banks in developing economies, choices that are the by-product of government subsidies for risk taking. . . .

      . . .The main influences of IMF and the U.S. Treasury in the 1990s have been to aggravate the problem in two ways, first, by lending legitimacy to domestic bailouts by calling for domestic taxation to repay loans from the IMF and the U.S. Treasury, thus making the wealth transfer within the developing countries much easier; and second, by insulating foreign creditors from losses during the crisis. . . .

      . . .What will foreign lenders learn from the Mexican crisis or the recent Asian crisis? I fear they are learning that they can lend without risk of default because of implicit protection of the IMF and the U.S. Treasury, and it does not help matters that the IMF and the Treasury are signaling their intent to provide ever-expanded bailouts by calling for ever- increasing amounts of IMF capital and new IMF lending facilities. . . .

      . . . Let me close with some specific recommendations. . . First, stop the bailouts. The more the developing countries are forced to handle their own financial insolvencies and the more foreign investors are forced to bear the cost of their investment decisions, the more developing countries will be attracted by the benefits of true liberalization.

      Dr. Meltzer. . . . The banks' behavior is evidence of the pervasive problem of moral hazard. The banks expected to be bailed out again, so they acted imprudently, without regard to elementary banking principles. . . .

      . . . It helps the Asian banks to avoid default, but the money goes to the foreign bankers.
      Instead of taking losses like the holders of currency, stocks and bonds, the banks collect with relatively small losses. And in exchange for extending repayment, the banks collect fees for renegotiating the loans. They demand government guarantees of the loans they made to the banks, financial institutions and private corporations. . . .

      . . .The IMF's programs help governments to drive a large wedge between the social risk–the risk borne by the troubled country–and the private risk borne by bankers. This is one source of moral hazard, and one reason we have a crisis-generating system. A common argument in its defense is that Mexico repaid its loans to the U.S. Government and the IMF. That argument misses the point. If banks and financial institutions had taken losses in Mexico, they would have exercised elementary judgment about risks in Asia. . . .

      . . . The IMF and Treasury lending to Asian countries continues this dangerous system. The risk of a bigger, future crisis increases. Too much of the world has become "too big and too indebted to fail." Neither the IMF nor development banks, nor the U.S. and the Japanese governments can pay for all the errors, mistakes and imprudent actions they help to create.
      Secretary Rubin was right when he said in September, "What we don't want to have is a situation where people can do unwise things and not pay a price," but that is the system Secretary Rubin and the IMF have created and sustained. . . .

Allan H. Meltzer, The Allan H. Meltzer Professor of Political Economy, Carnegie Mellon University and Visiting Scholar, American Enterprise Institute.

      Dr. Calomiris. . . . There is an enormous amount of evidence, both case study analysis and also statistical evidence that clearly links this pattern of collapse since 1982 to the moral hazard problem. . . .
      It is absolutely understood and accepted in Japan that "moral hazard" has played an enormous role in the financial collapse. No, it is probably not IMF-sponsored moral hazard in the Japanese case, but as I pointed out in my report, while the IMF has made matters worse, it didn't invent moral hazard. The domestic governments invented these policies, and it is often part of the way liberalization has taken place in many economies–freedom without responsibility. The IMF simply makes it worse. . . .

      Dr. Lindsey. . . .However, I do believe we may be at risk of encouraging a future financial bubble to develop through 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. . . .

      Dr. Meltzer. . . . Now Bagehot said, correctly, lend at the penalty rate; that will tell you the market isn't functioning, and that way there will be no risk to the organization, and there will be no excessive borrowing. That is a principle which has been established, and once it was established, it worked perfectly for the British banking system. There were no serious problems for the next hundred years. That is the principle we ought to install at the IMF.
      And all of this talk about what is the cost of funds to the IMF is really irrelevant to the problem of what rate they should be charging. They should be charging a rate which discourages people from getting subsidized loans relative to the rate at which they, the borrower, could borrow elsewhere.

      Dr. Meltzer. . . . Food prices are going to go up three to four times. Every company that has debt in Indonesia is about to fail, because the debt now becomes extraordinarily burdensome when they have to pay four times or more the price at which they contracted the debt, just to keep the thing afloat. There is a real crisis. The IMF program failed in Indonesia. . . .

      Dr. Meltzer. . . . The results have been disastrous for the Mexican economy and its people. Despite enormous growth in the world economy for the past 20 years, Mexican real income in dollars was the same in 1996 as in 1974. . . .
      . . .The Mexican people have been on a bumpy road but they have gone nowhere. In the same period, Mexican debt in constant dollars increased from $40 to $160 billion. That is shown in chart 2, following chart 1. Much of this is the price that Mexico paid for U.S. and IMF assistance. Without the IMF and the U.S. Treasury, Mexico would learn to run better policies, would have less debt and, I believe, would have made more progress. . . .

      Dr. Calomiris. . . . The responses by the IMF and the U.S. Treasury to the Mexican crisis and the recent Asian crises have been shortsighted and counterproductive. The suggestion that the IMF's capital and facilities should be expanded to permit it to engage in more such activity in the future is troubling. . . .
      . . . The IMF and U.S. Government are undermining the natural process of reform in many emerging economies. If foreign investors are protected by the IMF, they will be less discriminating about where they place their funds and thus provide less of an incentive for reform in developing economies. . . .
      . . .IMF intervention may reduce the likelihood of future bailouts. But the 1994-95 intervention in Mexico and, already, the recent Asian interventions are providing contrary evidence. . . .
      . . .So far, nothing substantive has been done to introduce market discipline into the Mexican banking system since its crisis, and there is no reason to believe anything will be done to limit the current system of subsidizing the risks of the industrial conglomerates and the banks they effectively own in Mexico. I expect similar results from the current conditions being attached to IMF assistance in Asia. . . .
      . . . Instead, they tax quickly and deeply, pay back their loans to the IMF and the treasury, replenish the wealth of risk-loving conglomerates and their banks and return to business as usual. . . .

      Representative Saxton. Does IMF review of the Korean bailout examine the failure of the first Korean bailout to restore confidence?
      Mr. Geithner. Absolutely.

      Dr. Calomiris. My experience in Latin America and the experience we are seeing illustrated here show that IMF reforms of banking systems can't work. . . . It is not very good at making sure the reforms in the financial system take place. By the time those reforms would occur, over any reasonable period it would take to implement those reforms, the IMF is already out. . . . The IMF simply doesn't make a difference and in fact makes matters worse I believe.

      Representative Ganske. So your point is that, regardless of what –and this ties in with what your statement was before on the plywood, which was recently reported in an issue of the Wall Street Journal, a lot of these countries will make an agreement with the IMF to do certain things to open up their markets, et cetera, but the leverage is only there as long as the IMF is giving the money and, many times, temporarily; and once that is over, then it is your opinion that there is a reversion back to practice as usual.
      Dr. Calomiris. I think that is right . . . The reason the IMF is starting to get interested in banking reform is that their assistance has become microeconomic bailouts of banks. The problem is that IMF conditions for banking reform aren't going to work because you can't turn a banking system around on a dime the way you can change a fiscal policy around. It is that simple.

      Representative Saxton. Dr. Lindsey, if you would respond, I have what I believe to be an accurate record of the interest rates that are generally charged by the IMF on a monthly basis, from October to February, and those interest rates seem to indicate that it's about 4.5 to 4.7 percent. That seems to me to be significantly below market rate. Is that correct?
      Dr. Lindsey. I think that is a fair conclusion.
      Representative Saxton. But what market rate?
      Dr. Lindsey. . . . So what is happening is the IMF is taking an essentially risk-free rate, tacking on a little administrative cost, and calling that a market rate. It really is not a market rate. . . . So what the IMF is doing–I think the better phrase, rather than market rate, they are charging these countries a risk-free rate. To the extent there is risk in the system, it is not being reflected in what the countries are being asked to pay. . . .

      Representative Saxton. . . .In any event, it is below the true market rate.

      Dr. Calomiris. . . .Second, there is no reason to expand the IMF's capital or develop the new proposed lending facility to provide fast-track bailouts to financial systems in distress. Indeed, an expansion of IMF capital or facilities would do real harm by signaling an intention to strengthen and expand the IMF's commitment to provide bailouts in the future. The U.S. Government should do all within its power to encourage the IMF to revert to pre-1994 goals of advising countries on their macroeconomic policy and serving as an international delegated monitor charged with tracking those policies.
      Third, denying the IMF its desire to increase its capital and facilities and working to restrict its purview are not enough to stop the trend toward unwise expansion of global bailouts. Congress should abolish the exchange stabilization fund, a legacy of the Great Depression which has no legitimate role in U.S. monetary policy today. The World Bank should also be prevented from serving as a substitute vehicle for bailouts. . . .

      Dr. Meltzer. . . .The next step is to strengthen the global system. IMF bailouts and government-enforced restrictions on competition impede the solution. Financial crises in Latin America in the 1980s, Mexico in 1994 and 1995, and now in Asia, should alert governments to the need for fundamental reform. More money for the IMF delays reform of the international system, encourages moral hazard, and subsidizes risk. Fundamental reform begins with global banking and a true lender of last resort.

      Dr. Lindsey.. . .The notion that you can indirectly channel money to repay a bad debt and then expect the other guy 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 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 fundamentally false. The IMF quota increase will not be a net job creator in the United States economy, and Congressmen who base their vote on this argument alone are at best doing their constituents a disservice. . . .

      Dr. Lindsey. . . .Now, it would be a truly unusual circumstance in economic history that a record-breaking economic recovery would be so fundamentally fragile that it relied on an appropriation equal to one-quarter of a percent of GDP for its continued success. . .
      . . .Again, my own judgment is, the United States economy is not so fragile at this point in time that failure to approve this money would lead to an economic recession. . .
      . . .And, finally, our monetary policy for the last 17 years has been used to build credibility. When we went to the IMF in 1978, we were in desperate shape; now we are not. I think it is our monetary policy in the end which will protect us from any problems.
      In sum, Mr. Chairman, and I note the red light has come on, I do not think that we need to appropriate this money to save our economy, I think we have other protections in place, and I would also point out that I think the Administration is underestimating the cost to the U.S. taxpayer of the proposed bailout.