Since 2000, the PRC’s exchange rate policy and the shadow policies of other Asian governments slowed the depreciation of the U.S. dollar and lowered interest rates, particularly at the long end of the yield curve. By distorting market price signals, these policies have exacerbated a number of economic problems not only in the United States but also around the world:

• These policies have contributed to the growth of unsustainable imbalances in the international accounts of both the PRC and the United States.

• The PRC’s massive accumulation of foreign exchange reserves is stoking rapidly rising inflation in China.

• Low long-term interest rates contributed to the housing price bubble during the first half of this decade. As
the bubble approached its peak, reckless lending became rampant.

• The bursting of this bubble revealed significant overinvestment and malinvestment in housing in the United States as well as significant speculative excesses in credit markets around the world.

• The inevitable unwinding of these imbalances, the liquidation of overinvestment and malinvestment in
housing, and the restoration of confidence in credit markets may slow real GDP growth in the United States
for several years.

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Since 2000, sovereign wealth funds (SWFs) in emerging countries have become major investors in the United States and other developed countries that are members of the Organization for Economic Cooperation and Development (OECD).  Since September 2007, SWFs invested at least $62 billion in OECD-country banks and other financial firms, whose capital had been diminished by losses related to the subprime mortgage loan crisis.

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Low gas prices have not vanished completely.  On the international market, oil and gasoline prices have been surging.  The well-worn explanation is that increasing oil consumption pushes against a strained supply chain, causing the price to rise.  But there are domestic markets where oil consumption has accelerated and petroleum prices have not risen or not risen significantly; indeed the prices are reminiscent of those in the U.S. 35 years ago

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In 1978, the People’s Republic of China (PRC) embarked upon incremental reforms that transformed its command economy into a mixed economy. Essentially, Chinese leaders sought the benefits of capitalism without relinquishing control of the “commanding heights” of the economy.

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This paper reviews key issues relating to IMF financing in the context of the recent Asian bailouts. Several major problems exist with current IMF lending practices. In particular, IMF lending promotes moral hazard, is overly dependent on taxpayer support, involves subsidized interest rates, and is often associated with conditions that are open to question. Furthermore, IMF operations are overly secretive or non-transparent in nature. Accordingly, continued unqualified support from the U.S. Congress is problematic. Whether or not financing is extended, ironclad guarantees are needed to ensure that IMF lending meet certain conditions mitigating the above-cited problems.

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Recent headlines reporting that the U.S. dollar fell to an all-time low against the euro prompted fears about the economic consequences of the declining value of the U.S. dollar in terms of foreign currencies. A review of the facts shows that fluctuations in the value of the U.S. dollar are not unusual and its current value is well within historical norms.

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Argentina's depression of 1998 to 2002, whose effects linger today, was not a failure of free markets, as some observers have claimed. Rather, it resulted from blunders in economic policy that impeded economic growth, explains a new Joint Economic Committee study titled Argentina's Crisis: Causes and Cures.

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With the outlook for expanded donor funding dim and its own debt restructuring plan essentially dead, the International Monetary Fund (IMF) could play a constructive role by promoting collective action clauses in bonds offered by sovereign borrowers, Vice Chairman Jim Saxton said today. Saxton made his remarks in connection with the release of a study from the Gailliot Center for Public Policy of Carnegie Mellon University, A Simple Means to Defuse Sovereign Default, by Adam Lerrick.

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There is body of research and analysis, which began in the 17th and 18th centuries and continues to today, that has examined the benefits of international trade and investment. At the government level, faith in these benefits has encouraged many countries to adopt international economic policies that promote greater trade and investment. This paper examines these benefits. A key feature of government policies that promote greater international trade and investment is a commitment to reducing global barriers to trade and investment. This paper will also examine the benefits from reducing these barriers.

The organization of the paper is as follows. Section I outlines the scope of the paper. Section II provides a brief history of international trade relations in the last century. The section introduces some key terms used later and records the motives of U.S. officials instrumental in furthering international trade and investment after World War II. Section III reviews economic research that has established various correlations between international trade and investment and increases in economic growth and income. Section IV considers four ways international trade and investment can increase economic growth and income. These four consist of the following:   

• Growth of international trade and investment from trade liberalization.
• Gains in economic welfare from lower trade barriers.
• Changes in the pattern of international trade and investment from comparative advantage.
• Gains in total factor productivity and technology diffusion from greater international trade and investment.

Section V concludes the paper with some observations on international economic policy.

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A new role for the International Monetary Fund (IMF) in supervising sovereign bankruptcies was rejected today by Joint Economic Committee (JEC) Chairman Jim Saxton. Saxton made his comments in releasing a new report, Sovereign Default: The Private Sector Can Resolve Bankruptcy without a Formal Court. The study, authored by Adam Lerrick and Allan Meltzer, explains how available measures could address this issue without a new centralized mission for the IMF.

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An independent review of World Bank performance is urgently needed, according to a new analysis released today by Chairman Jim Saxton of the Joint Economic Committee (JEC). According to the new report, the World Bank's own evaluation of its improving performance lacks credibility, noting "when the auditors are captive, when the timing of judgment is premature, when the criteria are faulty and when the numbers are selectively chosen - then the conclusions are worthless." In recent years questions about the effectiveness of the World Bank have generated much controversy, including within the World Bank itself.

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The discredited and wasteful approach used by the World Bank in its attempts to promote economic development would be eclipsed by President Bush's Millennium Challenge Account proposal, Congressman Jim Saxton said today. Saxton's comments accompanied the release of a new analysis, Real Relief for the World's Poor: The Millennium Challenge Corporation, by Adam Lerrick of The Gailliot Center for Public Policy at Carnegie Mellon University.

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The World Bank should move toward providing international development aid in the form of performance-based grants instead of loans, according to a new analysis released today by Joint Economic Committee (JEC) Chairman Jim Saxton. The analysis, Grants: A Better Way To Deliver Aid, demonstrates that performance-based grants, "would cost the same as traditional loans, but would deliver more benefits to the global poor."

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In the Trade Act of 1974, Congress sought to create a mechanism that would allow the President to negotiate meaningful reductions in non-tariff barriers while preserving the pre-eminent role of Congress in domestic legislation. This mechanism is called Trade Promotion Authority (TPA). TPA was used to negotiate the Free Trade Agreement with Canada, the North American Free Trade Agreement (NAFTA), and the Uruguay Round Agreements (URA). However, TPA lapsed in 1994 and has not subsequently been renewed.

Since TPA is an authorization to negotiate trade agreements rather than a trade agreement, the economic benefits of TPA are dependent upon what agreements the President may use TPA to negotiate. To overcome this problem, economists must look forward and project possible outcomes of future trade negotiations.

Using a variety of statistical models and data sets, economists have consistently found large GDP gains from international trade liberalization. A survey of relevant empirical studies of possible outcomes suggests that a conservative estimate for the maximum potential benefits from full international trade liberalization under TPA would be a $750 billion increase in global GDP. Of course, the actual benefits from TPA will depend upon the precise terms of any international trade liberalization agreements negotiated under TPA.

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Major currency crises have been frequent in the last ten years. This report describes what currency crises are, why they are important, what features recent major currency crises have shared, and what the implications are for U.S. participation in international monetary affairs.

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In October 1998 the Federal Reserve Bank of Chicago and the International Monetary Fund (IMF) co-sponsored a conference entitled "Asia: An Analysis of Financial Crisis." Karin Lissakers, one of 24 directors representing 182 IMF member countries, proffered "A View from the Executive Board." Noting that, while the IMF's annual surveillance reviews-or Article IV consultations-are "supposed to provide an early warning of trouble ahead", the board concluded that the pre-crisis "macroeconomic fundamentals in Asia by conventional definition looked strong." Moreover, Ms. Lissakers acknowledges that (Lissakers, 1999, p. 4):

As we discussed the Asian performance, some on the board questioned the sustainability of twenty-five to thirty percent or more rates of private credit expansion year after year and wondered about the soundness of the underlying investments....the weight of opinion was that this had worked well so far, and....seemed to be the norm for Asia, the standard for the 'Asian model'.

While stipulating that "There were, nevertheless, warning signs in Thailand....", Ms. Lissakers suggests that the IMF "did not pay sufficient attention to other indicators...most notably the rapid build-up of foreign short-term obligations by banks and the nonbank private sector, especially in Korea and Thailand." And, finally, Ms. Lissakers acknowledges that (Lissakers, 1999, pp. 4-5):

• The IMF "did not worry enough about the incentives pegged or managed exchange rates give to both borrowers and creditors to accumulate unsustainable cross-border, cross-currency exposures";
• The IMF "was unaware of the extraordinary leverage of Korean companies...[and] did not focus on the weak accounting and disclosure practices of banks and nonbanks; or the loose loan loss provisioning and generous rollovers of banks to their key clients";
• The IMF "underestimated the impact of the Japanese government's contractionary fiscal stance," and
• The IMF "also underestimated the effect of political factors. 'Political risk is unfashionable in the sophisticated financial world of the 1990s. Private sector financial analysts, too, largely discounted the fragility of the political underpinnings of the Asian economies and did not fully comprehend the extent to which rampant corruption was discrediting regimes...as well as weakening economies directly...

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A new policy framework for the International Monetary Fund (IMF) to provide assistance in financial crises without bailing out private sector investors will be released May 10 by Majority Leader Dick Armey and Chairman Jim Saxton of the Joint Economic Committee (JEC). The proposal was designed by Adam Lerrick and Allan H. Meltzer, both of whom were previously associated with the Meltzer Commission.

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Evidence of widespread corruption in several countries receiving IMF assistance raises questions about the relationship between such assistance and corruption. While some degree of corruption is present in all countries and is often "home-grown," there are a number of reasons to believe that under certain conditions, government-to-government assistance can actually promote corruption.

Research suggests that the more pervasive is the public sector's role in the economy, the more likely is corruption to flourish. Foreign assistance, however well-intentioned, can promote the very conditions fostering corruption. Such aid can strengthen existing public sector bureaucracy, result in larger government spending and a larger public sector (relative to the private sector), entrench a corrupt status quo elite, and foster delay in reforming existing corruption.

All of this is directly relevant to current IMF operations. IMF funds currently can be distributed to corrupt public bureaucracies and elites and are often (unwittingly) used to promote those conditions fostering additional corruption. Despite widespread evidence of corruption, IMF lending generally has not been associated with adequate safeguards, controls, or pre-conditions to prevent corrupt misuse of borrowed funds. This lapse suggests IMF lending may work to foster corruption. Reducing or reforming IMF lending, imposing strict conditionalities, and/or establishing reliable monitoring methods appear to be alternative remedies available at this time.

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The finances of the IMF are relevant to U.S. taxpayers because of the prominent role of the U.S. in funding the IMF and guiding its decisions. Consequently, under U.S. law IMF quota increases, as well as significant IMF gold sales, are subject to Congressional approval. However, informed policy decisions by Congress require adequate IMF transparency to ensure the availability of necessary information. Only with adequate transparency can Congress, in consultation with academic and other experts, develop a thorough understanding of the IMF's financial structure and the costs of U.S. participation in the IMF.

Over the last two years, the Joint Economic Committee (JEC) has promoted essential transparency through hearings, research papers and press statements. This paper reviews some of the key conclusions of JEC research concerning IMF financial structure and costs of U.S. IMF participation.

The lack of IMF transparency makes many dimensions of the costs of U.S. participation in the IMF unclear to policymakers and the taxpaying public. These costs include a disproportionate U.S. burden in financing the IMF, subsidized interest rates, absorption of risk, and cost-shifting and other aspects of non-restituted IMF gold sales. Conservative estimates of the costs of U.S. participation in the IMF indicate that these costs are substantial. The evidence shows that the U.S. is shouldering a significantly greater proportion of the IMF's financial burden than the oft-cited 17.7 percent quota share suggests. Instead, the U.S. contributes about 26 percent of usable IMF resources.

In addition to these costs, it is important to highlight the changing nature of the IMF financial structure. The IMF's portfolio has become riskier in a number of ways over the last two decades. Further, the IMF has evolved into an organization that relies on a narrow base of donors to provide the funds borrowed by a separate group of borrowers. More specifically, financial support is increasingly supplied by a small number of industrialized countries while borrowers are for the most part developing countries facing long-term structural problems. Furthermore, IMF lending is highly concentrated. The five largest borrowers from the IMF account for 70 percent of outstanding loans.

This information, while essential for informed Congressional decisionmaking, has not been readily available to Congressional policymakers or the taxpaying public. Much of the reason policymakers and the public are not fully informed on these matters is a documented lack of transparency on the part of the IMF.

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There have been a number of recent calls for the International Monetary Fund (IMF) to sell part of its 103 million ounce gold holdings as part of a plan for debt relief for the heavily indebted poor countries (HIPC). One such proposal has been advanced by the Administration, and officials of several other nations as well as the IMF have voiced support for similar plans. The proposed gold sales would require Congressional approval, and debate on this change in policy is already underway.

• Although the exact form of the proposal is not yet clear, there are several reasons for Congress to critically examine this proposal and review the potential for negative consequences:
• The proposal is not transparent in that its content and full ramifications are unclear, and it may ultimately facilitate financing for certain IMF operations without conventional authorization and oversight.
• The proposed gold sales would tap a hidden IMF gold reserve that can be viewed as belonging to member countries. The cost of the proposal to the U.S. would amount to half a billion dollars, relative to restitution to member countries.
• Continued gold sales may weaken the IMF's balance sheet. With one-third of its outstanding credits from its main account owed by Russia and Indonesia, it is reasonable to question whether potential weakening of the IMF's financial position is desirable at this time. The money contributed by the taxpayers of the U.S. and other nations is exposed in IMF lending, and IMF gold sales would increase this exposure further by reducing the capital cushion of the IMF.
• Gold sales may deepen already serious moral hazard problems by leading to expectations by other distressed borrowers of further gold sales for debt relief. The volume of proposed gold sales already has expanded significantly in recent months.
• The proposal could help perpetuate and reinforce the IMF's drift toward becoming another development bank similar in many respects to the World Bank.
• The proposal may encourage the IMF to continue its policy of deeply subsidized interest rates, including the IMF's reluctance to fully comply with the Congressional reforms mandated in 1998. The proposal has put downward pressure on gold prices and harmed poor nations that are also gold producers.

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Recent discussions relating to reform of the "international financial architecture" have drawn attention to the function of an international lender of last resort (LOLR). There are, however, few, if any, clear delineations of this important function, partly because of differing premises, definitions, and understandings of an international LOLR role. After summarizing well-established domestic LOLR functions, this paper describes the international LOLR role. The question as to whether existing institutions such as the IMF or the Federal Reserve can provide such international LOLR services is then addressed.

Under existing institutional arrangements, the IMF cannot serve as a genuine LOLR. Specifically, the IMF cannot create reserves, cannot make essential decisions quickly, and does not act in a transparent manner in order to qualify as an authentic international LOLR. The Federal Reserve, on the other hand, does meet essential requirements of an international LOLR. It can quickly create international reserves and money, although it has not openly embraced international LOLR responsibilities. The Federal Reserve can easily implement this function by employing several readily available market price indicators and global prices measure without jeopardizing longer-term price stability objectives.

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This paper considers current problems in what is often termed the "global financial architecture" and proposes a set of solutions to those problems. The solutions take the form of redesigning (in combination) rules governing domestic bank safety net policies, lending by the International Monetary Fund (IMF), international competition in banking, global capital flows, and government debt management policies.

Section II outlines the problems the proposal is meant to address. Section III describes the principles that should guide reform. Section IV discusses details of how to implement those principles, including specific rules governing domestic bank safety nets, IMF membership and IMF lending policy. These would replace not only the current IMF, but other lending programs including the Exchange Stabilization Fund (ESF) and ad hoc emergency lending by the World Bank the InterAmerican Development Bank. Section V discusses the political economy of the new set of rules and whether enforcement would be credible. Section VI concludes.

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Perverse economic incentives are key, important forces contributing to the increasing number and severity of financial crises in today's emerging market economies. A pernicious combination of factors works to create these incentives. Specifically, these factors include overly generous public safety nets (e.g., implicit or explicit public, uncircumscribed deposit insurance), risk-enhancing structural change in the financial system, and inadequate levels of owner-contributed equity capital. This combination contributed to produce the severe financial crisis in the U.S. thrift and banking industries in the 1980s.

This same combination is present in even more virulent form in many of today's emerging market economies. Recent IMF lending and prospects for additional IMF lending not only reinforce these risk-promoting incentives in emerging economies, but also foster additional risky lending by international financial institutions.

Recognizing these circumstances underscores a number of important policy implications and suggestions for policy action to minimize these adverse incentives.

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This paper reviews key issues relating to IMF financing in the context of the recent Asian bailouts. Several major problems exist with current IMF lending practices. In particular, IMF lending promotes moral hazard, is overly dependent on taxpayer support, involves subsidized interest rates, and is often associated with conditions that are open to question. Furthermore, IMF operations are overly secretive or non-transparent in nature. Accordingly, continued unqualified support from the U.S. Congress is problematic. Whether or not financing is extended, ironclad guarantees are needed to ensure that IMF lending meet certain conditions mitigating the above-cited problems.

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