[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                            THE STATE OF THE


                     INTERNATIONAL FINANCIAL SYSTEM

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 19, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-18






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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          HAROLD E. FORD, Jr., Tennessee
    Carolina                         RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
VITO FOSSELLA, New York              STEVE ISRAEL, New York
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio              JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
TOM FEENEY, Florida                  STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   AL GREEN, Texas
KATHERINE HARRIS, Florida            EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas               
TOM PRICE, Georgia                   BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina

                 Robert U. Foster, III, Staff Director



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 19, 2005...............................................     1
Appendix:
    April 19, 2005...............................................    39

                                WITNESS
                        Tuesday, April 19, 2005

Snow, Hon. John W., Secretary, United States Department of the 
  Treasury.......................................................     7

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    40
    Pryce, Hon. Deborah..........................................    42
    Waters, Hon. Maxine..........................................    44
    Snow, Hon. John W............................................    46

              Additional Material Submitted for the Record

Waters, Hon. Maxine:
    Written questions to Hon. John W. Snow.......................    56
Snow, Hon. John W.:
    Written response to questions from Hon. Michael G. Oxley.....    60
    Written response to questions from Hon. Brad Sherman.........    59
    Written response to questions from Hon. Maxine Waters........    58


                            THE STATE OF THE



                     INTERNATIONAL FINANCIAL SYSTEM

                              ----------                              


                        Tuesday, April 19, 2005

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 3:02 p.m., in Room 
2128, Rayburn House Office Building, Hon. Michael G. Oxley 
[chairman of the Committee] Presiding.
    Present: Representatives Oxley, Pryce of Ohio, Royce, Paul, 
Manzullo, Biggert, Hensarling, Pearce, Davis of Kentucky, 
McHenry, Frank, Waters, Sanders, Maloney, Watt, Baca, Scott, 
Davis of Alabama, Green, Cleaver, and Moore of Wisconsin.
    The Chairman. The Committee will come to order.
    Mr. Secretary, it is good to have you back again this 
afternoon and welcome back to the Committee.
    We are glad to have you here for the Financial Services 
Committee for another annual testimony on the state of the 
international financial system. We meet as the group of seven 
countries strive to make structural changes identified in the 
Agenda for Growth. Global imbalances are global challenges that 
all parties need to meet in order to safeguard continued 
economic growth around the world. At the same time, G-7 leaders 
are considering how best to fund development and manage the 
IMF's assets.
    U.S. leadership in the G-7 has generated innovative 
approaches for addressing the challenges and opportunities 
presented by China's growth. I hope that real progress on these 
issues can be made in time for the G-7 summit later this 
summer.
    I note that this is the Secretary's first testimony since 
Congress passed and the President signed the Intelligence 
Reform and Terrorism Prevention Act. That Act included a 
requirement authored by my colleague, Mrs. Biggert, that this 
annual testimony include an assessment of international 
cooperation and coordination from the IMF, World Bank and other 
multilateral policymaking bodies in the fight against terrorist 
finance. I look forward to your testimony on this topic.
    Economic resilience and continued growth are critical 
components to providing peace, stability and freedom around the 
world. As President Bush has noted, economic and political 
freedom gives hope to millions who are weary of poverty and 
oppression.
    As your testimony rightly points out, a 5 percent expansion 
in sub-Saharan economies over the next 2 years would lift 
nearly 30 million people out of poverty. One important method 
for promoting economic development is to foster conditions for 
more balanced growth worldwide. Stronger economies create more 
demand, promote economic opportunity and ownership and provide 
a foundation for political stability. I look forward to hearing 
your ideas for how we could support European efforts to make 
the necessary labor and other structural reforms that are so 
needed.
    I continue to support the President's efforts to express 
America's compassion for the world's most vulnerable people 
through a wide range of development initiatives. I also support 
the increase by $100 million for multilateral development 
assistance for the International Development Association and 
the African Development Fund and the increased proportion of 
grants.
    The UK's presidency of the G-7 is wisely spent focusing on 
development issues. I commend our cousins across the Atlantic 
for their vision, even as I question whether all the proposals 
make sense. I will be interested to hear your views on the 
proposed International Financing Facility. I expect we will 
evaluate the IDA and ADF replenishment requests in light of 
progress made to implement performance-based assessments as 
well as efforts to increase transparency anti-corruption 
programs and accountability.
    We need to make sure that development dollars are allocated 
efficiently and are going to the people who need it most. I 
hope the new president of the World Bank will adopt as a high 
personal priority continuation and expansion of the bank's 
anti-corruption efforts.
    This could help counterbalance potential bureaucratic 
backsliding and competitive pressures among other regional MDBs 
to lower standards. Regarding proposals to mobilize some of the 
IMF's gold reserves to fund debt relief, I note that U.S. 
negotiation to sell IMF gold cannot be conducted without 
Congressional authorization starting with this Committee. We 
have not received such a request, and I understand there is no 
consensus, at least at this time, in favor of gold sales within 
the G-7. Therefore, I assume that no such negotiations are 
underway.
    In the area of trade liberalization, at all levels can be 
more effective than development assistance in fostering 
economic growth. Trade is not a zero sum game, and all 
participants benefit from liberalization. I look with cautious 
optimism at the broader Doha round of negotiation in the WTO, 
as well as efforts within the group of 20 to support progress 
on the global trade agenda.
    I would urge you, Mr. Secretary, to be actively and 
personally engaged to move along the financial services 
negotiations.
    Last, but certainly not least, I focus on Europe and the 
Financial Markets Dialogue. We meet as the U.S. and the EU for 
forging a reinvigorated relationship following the President's 
successful visit to Europe last month. The Treasury Department 
has done an excellent job of leading this informal forum in 
which regulators from the U.S. and Europe can discuss 
regulatory differences.
    Finally, concern exists that the Treasury Department may 
not be appropriately staffed internationally. Consequently, I, 
together with Chairwoman Pryce and Ranking Members Frank and 
Maloney, commissioned a GAO study yesterday to assess 
Treasury's international staffing structure and whether changes 
can facilitate the Department's conduct of international 
economic policy.
    We at the Committee share with you an interest in insuring 
that the Treasury Department has adequate staff and a good 
structure to meet the strategic economic policy challenges of 
the 21st Century.
    I now yield to the gentleman from Massachusetts,
    Mr. Frank.
    Mr. Frank. Thank you, Mr. Chairman.
    Mr. Secretary, welcome again, and I will, in the question 
period, get into the debt relief question, because I think this 
is an important opportunity for us. But I want to talk about 
here is the issue you that affects both the international 
economy and our own, and it is obviously the number one issue 
for us, and that is our own economic picture.
    I am troubled. We have had, in the past couple of years, a 
good degree of economic growth. What is troubling to me is that 
this economic growth has been accompanied by less job creation 
than historical standards would have predicted. The best job 
creation that the Administration has predicted and even with 
the job creation, a stickiness in wages, stickiness being a 
nice word for they ain't going up. What we have seen 
consequently is an erosion of the position of a large number of 
average Americans.
    I have problems with that from the standpoint of equity. I 
think it is troubling when the country grows but inequality 
also grows. I welcome for the fact that, for instance, Chairman 
Greenspan of the Federal Reserve agrees that that is a problem.
    But growth can be an economic and political problem. It can 
be a economic problem if we begin to see kind of a slowdown in 
consumer spending, which could be the result of this lack of 
income in those categories. It is clearly already a political 
problem. You have now an increasing degree of resistance on the 
part of a lot of Americans to the kinds of things you advocate 
in the international field, because they see themselves as the 
victims of globalization rather than participants in the 
benefits.
    We are reaching an unhealthy state in the country, not just 
internationally but domestically, where there are more and more 
people who feel that they read good news but they are not 
getting much of the action.
    Now, let me document what I am talking about. I want to 
talk about some statistics on job growth the ups and downs of 
job growth.
    In June of 2003, the Council of Economic Advisors in this 
administration said that we would get job growth of 305,000 per 
month--305,000 jobs. They do pay a little bit more than the 
dollar. 305,000 jobs per month. That was the prediction in June 
of 2003.
    Then in October of 2003, Mr. Secretary, you were the more 
realistic than the Council of Economic Advisors. You said 
everything you knew about economics said we would get 200,000 
per month.
    Then the CEA decided you were a piker, and they raised you 
and themselves in the 2004 economic report to 325,000 a month. 
This year's economic report, suddenly, you are the optimist 
again, 175,000 a month.
    So, on the projections from the Council of Economic 
Advisors, it is very troubling, and there is no explanation of 
this. I read the Council of Economic Advisors report, and maybe 
you have to wait for the DVD to come out, but we have gone from 
a projection from the Council of Economic Advisors to 325,000 
jobs created a month to 175,000 jobs created a month a year 
later. We lost 150,000 jobs a month just looking at the CEA 
report.
    Now the problem is that with all of those, and you were the 
low man in the prediction until the CEA came out again at 175, 
you were 200. But, in fact, for the five quarters since we 
started this recovery, and since you made your prediction in 
October of 2003, the actual total has been 165,000 a month. 
There have been a couple of good months, but there have been a 
couple of really lousy months.
    You said, Mr. Secretary, that everything you knew about the 
economy said, we would get 200,000 jobs a month. Well, we have 
had 165,000 a month since then. That is troubling. I don't 
think it is you learned the wrong things, I think it is that we 
have new things in the economy. I think what we are doing is we 
are seeing a situation in which what is good news can become 
bad news, the bad news is that productivity is going up and 
that we are able to make more things. We are able to provide 
more services. We are able to create more wealth with fewer 
people.
    But because of our social arrangements, we are turning that 
good news into bad news for some people so that we appear to be 
getting fewer jobs per unit of increased wealth than we used 
to. Again, your number was 200,000. We had 165. The Council of 
Economic Advisers--this has not been very well noticed, but the 
Council of Economic Advisors--I would have thought this would 
have required a little bit of explanation when you go from 
projecting 325,000 jobs per month in 2004 and a year later you 
project 175,000 jobs per month.
    Now, I think that is an implicit recognition that things 
have changed in the economy. There are limits to what 
government can do. I will close this briefly. There are limits 
to what government can do to undo that trend.
    But here is the problem. We are in a situation where it 
does appear, contrary to all the predictions that have been 
made, that things have come about in the economy, where wealth 
is less evenly shared than it used to be. What it would seem to 
me appropriate would be for the public sector in that situation 
to try to mitigate the consequences of this increased 
inequality. Instead, and this is where I fault our public 
policy, we have exacerbated it.
    So we have a national--we have economic trends, national 
economic trends, globalization, productivity, information 
technology which tend to exacerbate inequality, which tend to 
allow us to create more wealth with fewer jobs. Public policy 
has unfortunately been reinforcing that tendency rather than 
trying to slow it down. The consequence is a country which is 
becoming increasingly hostile to many of the measures you want 
to think--I will be supporting debt relief for the highly 
impoverished highly-indebted poor countries.
    I am very glad we don't have a national referendum on this 
subject, because while I think it is a very important thing for 
us to do, I don't think we could carry a referendum nationally 
on that because of the kind of resentment that is building up 
because of these kinds of figures, so I hope you will help us 
figure out what we do if not to stop this trend, to at least 
mitigate its effects.
    The Chairman. The gentleman's time has expired. The 
gentlelady from Ohio, the chairwoman of the subCommittee.
    Ms. Pryce of Ohio. Thank you, Chairman Oxley, and welcome, 
Secretary Snow. Thank you very much for taking the time to 
discuss with us the state of the international financial 
system. We all know that the health of the U.S. and the EU 
economies are inextricably bound together in trade and cross 
border investment flowing and linking our capital markets.
    The recent historic enlargement of the EU, through the 
accession of 10 new Member States, only magnifies that region's 
importance. The increasing closeness of the U.S.-EU 
relationship has underscored a growing trade in financial 
ideas, talent, technology and capital across the Atlantic.
    I commend you, Mr. Secretary and your staff, for opening a 
dialogue with the EU dedicated specifically to financial 
services issue. I hope to hear more during this hearing on how 
the Treasury is working to improve trade in financial services 
between the U.S. and the EU.
    Mr. Secretary, as you know, U.S. and international 
financial regulators have been negotiating the capital 
requirements for banks in the Basel Committee over the past 
several years. Many of us are concerned about the seeming lack 
of transparency in this process as well as cooperation among 
our own regulators.
    I know other members on this Committee share my concern and 
would appreciate your thoughts on the Basel II process, 
specifically first noting how the U.S. regulators are working 
together, and, second, the competitive impact Basel might have 
on banks that do not opt in.
    Additionally, the G-7 recently made a political commitment 
to provide ``as much as 100 percent debt relief'' to relieve 
the debt burdens of the poorest countries in the world, but 
they failed to provide a view on how this could be funded. In 
light of the G-7's agenda on development and debt relief for 
this year, I am hoping you will touch on recent discussions to 
have the IMF sell some of its gold stock and use the 
anticipated profits to relieve the highly indebted poor 
countries debt.
    As you recall, the last time this idea was raised in 1999, 
the initial creation of the HIPC program brought it about, gold 
prices plummeted to a 20-year low. News of the G-7's proposal 
to sell gold from the IMF stockpile to pay debt relief sent 
gold prices down again last October, not only affecting the 
gold-rich United States, but also the developing countries that 
depend on their own gold for export revenues, the very 
countries that we are trying to assist.
    Finally, as the Chairman noted, and I am sure you are 
aware, U.S. law prohibits the Treasury from engaging in 
negotiations on this matter without consultation and approval 
from the Congress. So we will be waiting to hear from you or 
not to hear from you either way on that.
    I do thank the Secretary for his appearance today. I look 
forward to your testimony.
    With that, Mr. Chairman, I am happy to yield back any 
balance of my time.
    The Chairman. The gentlelady's time has expired.
    The gentlelady from New York.
    Mrs. Maloney. Thank you, Mr. Chairman and welcome, 
Secretary Snow, and thank you for being here. Given the time 
constraints, I want to highlight three areas of great concern 
to me. The deficit, a debt relief and international cooperation 
in the war on terror. Mr. Secretary, as you are well aware, 
this Administration holds the absolute record for debts and 
deficits. Over the last 4 years of the Clinton administration, 
President Clinton reduced the national debt by a total of $453 
billion, and he turned over to President Bush a $236 billion 
surplus and a national debt of $3.3 trillion.
    Yet the budget that the President has sent Congress for the 
coming year projects a deficit of over 390 billion, a record 
high, and a debt of 5.1 trillion, another record high, and this 
Administration has voted three times to raise the debt ceiling 
to over $7 trillion.
    This budget does not include the future costs of Iraq or 
Afghanistan missions, nor does it include the CBO estimated 1.9 
trillion cost of making the President's tax cuts permanent, and 
it does not include the projected 2 trillion more dollars that 
the Republicans want to borrow from foreign countries for the 
private accounts that will change and undermine Social Security 
as we know it.
    Just this month, we learned we had another record, another 
unfortunate record, and this was with the trade deficit and 
goods and services of well over 61 billion in February, again, 
a record high for a single month. The goods and services 
deficit was a record of 617 billion for all of 2004, again 
another unfortunate record for deficits that this 
Administration has given to us.
    The broader current account deficit, which is the best 
measure of how much we have to borrow from the rest of the 
world, was a record 655.9 billion in 2004 and it hit yet 
another record 6.3 percent of the GDP in the fourth quarter of 
2004.
    I am concerned that should foreign investors lose 
confidence in our economy and reduce their investments, our 
constituents could face serious consequences, including a 
dangerously weak dollar and increased credit card, home 
mortgage rates and a sluggish economy, to say the least.
    While the Administration claims its new budget will address 
the situation, the Bush record is consistently rosy predictions 
followed by a consistently ballooning deficit and debt. The 
budget put forth by the Administration for fiscal year 2004 
which allows similar proposed caps to nondefense discretionary 
programs would seem to be more of the same.
    I am also interested, as are my colleagues on both sides of 
the aisle, and your comments on the Administration's support 
for the heavily indebted poor countries. I strongly support the 
HIPC program. I personally authored a debt relief bill for Iraq 
with Chairman Leach just last Friday.
    I joined with other members of the Committee, too, Mr. 
Secretary, in urging you negotiate over the past weekend 
multilateral debt cancellations to poor countries.
    I am also very, very concerned and look forward to the 
update from you on the cooperation the Department is receiving 
on the international effort to track and cut off terror 
financing. I am concerned by the news in many of the financial 
papers today of the third day slide in the stock market, the 
continuing slide in the dollar, and what does that mean for our 
country.
    I, likewise, join this Committee in its joint effort on the 
Basel decision to make sure that our financial institutions are 
not disadvantaged in capital requirements in the world global 
market in the competition that we face in the global economy. 
So we have many challenges ahead of us. I am deeply, deeply 
concerned over a never-ending debt deficit, trade deficit, all 
record highs.
    One of my constituents has given the country what he calls 
a debt clock, and is placed on 42nd Street and 7th Avenue. 
Every day it puts up the debt which every man, woman and child 
in this country owes to the Federal budget, the debt that each 
of us carry. It is well over $26,000 per individual. This is 
extremely troubling to me, and very strong indicators of 
trouble ahead in the economy.
    So I hope--I look forward to your testimony today, and your 
comments. Thank you.
    The Chairman. The gentlelady's time has expired. We now 
turn to our distinguished witness, Treasury Secretary Snow, and 
I know that technically you are not here voluntarily, because 
you are required under the law to testify before this august 
Committee once a year. Actually, in the first quarter, 
according to statute.
    So that time is running out on that first quarter, and we 
appreciate your appearance here today, Mr. Secretary, and look 
forward to your testimony.
    Mr. Frank. Time has run out on the first quarter.
    The Chairman. Yes, I guess we have--by the way, the energy 
bill keeps an extension of daylight time by 1 month on one end 
and 1 month on the other. So I guess if we can do that, we can 
effectuate your testimony in the second quarter.

   STATEMENT OF HON. JOHN W. SNOW, SECRETARY, UNITED STATES 
                   DEPARTMENT OF THE TREASURY

    Secretary Snow. Thank you very much, Mr. Chairman, Ranking 
Member Frank, Ms. Pryce, Mrs. Maloney--Congresswoman Pryce, 
Congresswoman Maloney. It is always a great delight to be up 
here before this Committee, and whether I was required to or 
not, Mr. Chairman, I would welcome the opportunity to share 
thoughts with you on the important subject of the international 
economy and where things stand, where we see it going and 
trying to take it, what some of the pressure points are and 
what we are trying to do with them.
    We just concluded the spring meetings of the IMF and World 
Bank, where finance ministers, development ministers, Central 
Bank, governors convene; we also held a meeting of the G-7. And 
I think it would be a fair assessment of the conclusion of 
these meetings that the world economy seems to be in good 
order, in sort of a sweet spot. We have seen high world growth 
rates, the highest growth rates according to the IMF and World 
Bank in 30 years.
    The United States is leading the way with the highest 
growth rates among the industrialized world. There are no 
recessions in any major economies anywhere. There are no 
financial crises in any major economies anywhere on the globe. 
A marked contrast to circumstances we have seen in the past.
    We think good policies promoted by the United States 
government are helping to contribute to higher growth, greater 
prosperity and more stability in the world economy. There are 
three principal goals of the Bush administration when it comes 
to our international economic agenda, and it won't surprise 
you, increasing economic growth is a critical part of it, 
raising standards of living and reducing poverty across the 
globe.
    Secondly, stability, increasing economic stability, 
allowing for steady growth in the economy and reducing the 
hardships and sufferings that result from financial crises.
    As I say, I think the world is in a much better order today 
than has been the case in the past. Thirdly, we want to use our 
international economic policy to advance our foreign policy 
objectives, combating terrorism, promoting the reconstruction 
in Iraq and in Afghanistan, spreading economic freedom 
throughout the Middle East, through the broader Middle East, 
North Africa initiative, things like that.
    I think we are making pretty good progress on a lot of 
these fronts. As I say in the developed economies, the United 
States is leading the way. We grew at 4.4 percent over the past 
12 months, creating 2.4 million jobs over that 12-month period, 
coming in at about 200,000 jobs a month, as Mr. Frank 
indicated.
    It is the result, I think, of the inherent strength of this 
economy. It is resilient, it is responsive, it is adaptive. But 
it is also the result of well-timed monetary and fiscal policy.
    I give high marks to Chairman Greenspan and the Federal 
Reserve. I think they pursued a set of policies that were 
appropriate, accommodating higher growth levels that were 
needed in job creation. I give credit to the Bush 
administration and the Congress for acting on the fiscal policy 
front, reducing tax rates that clearly, in our view, helped 
stimulate the economy and move it forward.
    We can't rest; we can't be complacent. As Mr. Frank 
indicated, there are problems. We need to deal with them. We 
need to keep pressing forward to improve the performance of the 
economy. To do that, I would agree with you. We are reducing 
the deficit which, Congresswoman Maloney, has to be a priority. 
We are focusing on that and want to talk to you about that. 
There are other things that are important, dealing with these 
large unfunded obligations for the future, represented by 
things like Social Security, while preserving and protecting 
the promises of the system are important.
    You know, the President has called for broad-based tax 
reform, appointed a panel, a panel that appoints reports to the 
Treasury Department here in a few months, the end of July. I 
would see us engaging with you in broad-based tax reform later 
this year. Regulatory reform is very much on the agenda, as is 
energy legislation.
    As I look at our trading partners in the G-7, I am struck 
by the fact that we in the industrialized world are suffering 
from what can only be styled a growth deficit. That has serious 
implications for the developing world, as well as for the 
United States and the trade deficit itself, which is directly 
related to lower growth rates in the rest of the world.
    Japan, the second largest economy in the world, is showing 
improvement but it is still growing at a rate that is well 
below its potential. The same is true of Germany. The Euro zone 
as a whole is lagging, growth rates less than half the United 
States. That means they are creating less disposable income 
there, compared to the disposable income we are creating, which 
directly relates to this question of the current account 
deficit.
    At the G-7, we have established something, and this is 
joined in by all the members of the G-7, something that we 
initiated, called the Agenda for Growth, where recognizing the 
need for more growth in the global economy, each of us is 
committed to take on in our own countries and through our own 
political, administrative and regulatory processes, the things 
that most stand in the way, the things that most impede growth 
in our economy.
    There is a real commitment to do that. Progress is slower 
than we would like to see, but progress is real. There is a 
commitment. It is not a commitment just of word, it is a 
commitment of actions. We put a clock on ourselves and we audit 
our open results, and that audit process will be the subject of 
the October meeting of the G-7.
    In the emerging market countries, I think the most notable 
things there that I would remark on is the fact that economic 
growth is very, very strong. Latin America came in last year at 
about 6 percent. The emerging Asia countries came in at over 7 
percent. The emerging European--the so-called succession 
countries--the emerging European countries came in at well over 
6, 6.5, all in the absence of financial crises and all with 
spreads on paper that are moderate and all with inflation down.
    This is a truly stark contrast to the 1990s,
    Mr. Chairman. Why has this happened? I think it is because 
better policies are being put in place by these countries, 
through the leadership, the political leadership and economic 
leadership, better economic policies make a difference. We are 
seeing better economic policies applied, better fiscal policy, 
better monetary policy and there is no better example of this 
in my view than what President Lula and Finance Minister 
Palocci are doing in Brazil, which has turned the corner and is 
producing really strong and very good results.
    Let me comment briefly on China. I know that is on the 
minds of everybody. Our policy, with respect to China, clearly 
calls for them to move to a flexible exchange policy. We have 
urged them to take the steps to get their economy ready for a 
flexibility exchange rate. They have taken a lot of steps, we 
can discuss them later.
    They are now, in our view, ready to move to greater 
flexibility on their exchange rates. My colleagues and I at the 
G-7 have called on China to move to greater flexibility. We did 
so in the communique that was issued just over the weekend.
    On the developing countries, in the poor developing 
countries, we also see significant progress in lifting people 
out of poverty. Clearly the prime cases here are China and 
India, which are moving at a rapid pace with very substantial 
growth rates, 7, 8, 9 percent. Millions, actually tens of 
millions of poor people have been lifted out of poverty because 
of the progress in those countries.
    In sub-Saharan Africa, which is still a troubled part of 
the world, with population rising and concerns about growth 
rates rising fast enough to sustain higher standards of living, 
I am pleased to say that growth is now estimated to have been 
about 4.5 percent over 2004. It can be better, it will be 
better, if we follow the right policy. We want to support those 
policies. 4.5 percent is a nice pickup from where they have 
been.
    That is a result of their policies and the stronger, the 
stronger world economy. One of the Committee Members asked me 
to comment on the reforms of the international financial 
institutions. We are pressing them hard for reform agenda. We 
have called for a strategic review. We have asked for them, 
working with the G-7 and the other board members to think 
through their mission.
    The fundamental conditions have changed dramatically from 
the time they were put in place. The World Bank was put in 
place initially to deal with the post-conflict situation in 
Europe, reconstruction of Europe after the Second World War and 
quickly moved off into other arenas.
    The IMF was put in place to deal with a balance of payments 
adjustments in the context of a fixed exchange rate. Now, of 
course, large parts of the world have flexible or floating, 
freely floating exchange rates.
    So we are working to make sure the missions of these 
agencies are appropriate to the current conditions of the world 
economy.
    We are pressing those multilateral development banks, I 
think you would agree we should, to produce measurable results 
to put greater focus on grants rather than loans, to end this 
cycle of give, forgive, give, forgive. The paradigm of it 
creates the unsustainable debt levels.
    We are also encouraging on the subject of using private 
sector-led growth of nurturing the private sector as the best 
engine of long-term growth and of creating an environment of 
respect for law and property, anti-corruption regimes, that 
will encourage foreign capital coming in, and, of course, 
importantly, encouraging transparency, encouraging real 
accountability.
    One area where the United States is taking the lead, an 
area I know is very important, Mr. Chairman, to you and to the 
Committee, is on the effort to reduce the debt burdens on poor 
countries.
    We have a proposal to reduce the debt, cancel the debt up 
to 100 percent for the HIPC countries. I think we made some 
progress over the weekend in building support for our 100 
percent debt cancellation proposal with our colleagues in the 
G-7, a subject we will return to at the G-7 meetings in June.
    The subject of trade has come up in your comments, 
critically important that we continue to push for open markets, 
trade liberalization, for financial services. This is a 
priority for us in the Doha Round trade talks and in our 
bilateral FTAs. It is important that we make progress here for 
ourselves, for the rest of the world and for the global 
financal system.
    Finally, I think we are making, real progress on the 
subject of antiterrorist financing. We will come back to that, 
I am sure, as we go forward. The World Bank, the IMF, the 
multilateral development banks now have active participants in 
this effort to set standards, to audit, to be vigilant, to 
shape the global effort to deal with antiterrorist financial 
activities.
    At every meeting of the G-7, we have a session on that at 
every meeting of the APEC, at every meeting of the G-20. This 
is very much a matter of intense focus on part of the finance 
ministers and central bank governors of the world. I was 
pleased by the legislation last year to strengthen Treasury's 
hand, as you mentioned, and we have now appointed an under 
secretary, Stewart Levy, who is playing a critical role in 
overseeing the terrorism and intelligence functions of the 
Department.
    In that sense, the Department is really on the front ranks 
of dealing with anti-terrorism and national security.
    With that, Mr. Chairman, I am delighted to try to respond 
to your questions.
    [The prepared statement of Hon. John W. Snow can be found 
on page 46 in the appendix.]
    The Chairman. Thank you, Mr. Secretary, for your testimony, 
and particularly at the end when you talked about the anti-
terrorism activities on the part of the Treasury. And really, 
in many cases to the point of the spear as it relates to 
terrorist financing and the IFI issues. We met with Mr. Levy 
last week, and certainly he is energetic and focused on the 
task at hand.
    Let me ask you about the G-7, since it is a recent meeting 
that took place. I think our country has shown great leadership 
in including first Russia and China in some of the G-7 events, 
and I think that perception clearly is also the reality that 
bringing in those two large countries, at least in part, has 
proven to be very effective, as has our work in the Middle 
Eastern countries as well. Other models with Brazil and Mexico, 
and the G-20 record for sustained growth, I think have all 
shown, as your testimony indicated, some real progress there.
    On the other hand, there are those out there who have 
expressed concern that the G-7 is ineffective and is badly in 
need of reform.
    Do you agree with this in a general sense?
    Secretary Snow. Mr. Chairman, I think the G-7 continues to 
be a very important component of stability and progress in the 
global economy and in the global financial order. We recognize 
that other countries are growing more rapidly, China, India, 
Brazil, and there needs to be outreach to them. But the G-7 
remains the largest component of GDP in the world, and it is 
playing, I think, a true leadership role.
    As you mentioned, we have tried to embrace other countries 
to broaden the dialogue. We have done that through having China 
come, Russia comes, other countries have come. We have tried to 
keep the agenda relevant, focused on the things that really 
count, global growth, risk to the global economy, stresses in 
the global economy, things, financial, the war on terror.
    So I think it is a very important but can't be the only 
fora for bringing thoughtful consideration of these large 
issues that face the global economy.
    The Chairman. I was, this morning, in New York at a 
conference sponsored by the EU dealing with the Euro and with 
the new regulatory structure in the EU. Will the EU enlargement 
going from 15 to 25 affect the EU members participation in G-7 
meetings in any way?
    Secretary Snow. I don't think so, Mr. Chairman. It might 
affect some of the policies that are reflected in their 
comments. I am very positive about the accession. I think is 
going to add an element and dynamism and energy to the G-7. I 
think the Euro people, the Euro side of the G-7 feel that as 
well. But I don't think it would lead to a change in the 
composition of the G-7 itself.
    The Chairman. Let me ask you about diversified capitalize 
flows, Mr. Secretary. Mexico and Canada last year purchased 
55.4 billion in U.S. Treasuries, agency securities, corporate 
bonds and equities. China purchased only 47.3 billion and Euro 
zone purchased 45 billion.
    These numbers would seem to indicate that we have a fairly 
diversified pool of capital coming into the U.S. market. Would 
you agree with that assessment?
    Secretary Snow. Yes. Yes, I would.
    The Chairman. Do these statistics indicate that gradual 
diversification by Asian central banks of their U.S. dollar 
asset holdings might not be as significant as headlines might 
suggest?
    Secretary Snow. Oh, I think there have been a lot of 
misplaced headlines.
    The Chairman. Well, that is a new one.
    Secretary Snow. Those headlines should have been in other 
parts of the paper or not occurred at all, given the factual 
content of the stories that followed.
    The Chairman. Yes. I couldn't agree more. The statistics, 
then, do you feel fairly comfortable with them given the 
diversity out there? The diversification?
    Secretary Snow. Absolutely, Mr. Chairman. I am confident 
that the U.S., we know it is, and I am confident that it will 
remain an attractive place to invest. We have the deepest, the 
richest, the broadest, the most efficient capital markets in 
the world, and the best risk-adjusted returns. Our job is to 
keep them that way so we can continue to attract capital.
    The Chairman. Finally, let me ask you, your testimony 
includes an impressive statistic, I thought, that I wanted to 
focus in on. That is: 5 percent expansion in sub-Saharan 
economies over the next 2 years would lift nearly 30 million 
people out of poverty. That is quite extraordinary, and I think 
we all share that commitment to what we are trying to do. Can 
these kinds of growth rates be achieved through development 
assistance and debt relief alone, or do we need to continue to 
push for trade liberalization?
    Secretary Snow. Oh, I think, Mr. Chairman, trade 
liberalization is really critical here. I had a meeting over 
the weekend with 6 or 7 of the finance ministers from the 
region, and was encouraged by their commitment to these good 
policies, by their commitment to routing out corruption. It 
happened just within a week or 2 that the President of Nigeria 
had, in effect, removed two or three members of his parliament 
and criminal sanctions were brought against them and against 
the Speaker of the House. Here is a country with a population 
that represents 20 to 25 percent of all of Africa adopting 
really good policies, committed to the right things. Minister 
Megosi is on the front of doing--of driving results, and there 
are other ministers and presidents in the region. It is 
something we just have to continue to reinforce.
    Debt forgiveness will help. The financial support from the 
world community will help. But it will only happen, in my view, 
if good policy and trade opportunities continue to be the order 
of the day. We knew trade liberalization is awfully important 
for continued growth and prosperity in that region.
    The Chairman. The gentleman's time has expired.
    The gentleman from Massachusetts.
    Mr. Frank. Mr. Secretary, I agree with you on the 
importance of stressing anti corruption. I am not sure you 
picked the example most likely to appeal here when you cited a 
President moving criminal prosecution against the Speaker of 
the House and indicting members of the parliament. Maybe there 
are some other examples you might want to put forward in 
another context.
    The debt relief question is important, obviously going 
forward with any corruption. Two words, I kind of perked up 
when you said we are for debt relief up to 100 percent. I want 
to help you get up to it.
    There are a couple of issues here. One of the problems, I 
understand, is that some of the debt is IMF debt. I understand 
it is a smaller percentage overall. But I also understand that 
if you look at when it comes due, debt payments, debt service 
payments, IMF debt is a much greater percentage than 10 percent 
in the near term. It is also the case, while it is 10 percent 
across the board, that doesn't necessarily mean it is 10 
percent for any one country.
    What is the problem with also doing IMF debt? Now, I 
believe that we ought to go ahead with gold sales. I think we 
can do that. I think the gold sales we did previously were 
useful moneys, I will put in the record, Mr. Chairman, 
unanimous consent, a description of some of the benefits that 
came around from the last round of HIPC debt relief. We did 
this in a bipartisan way, was supportive and it had a good 
impact. Why not include the IMF debt?
    Secretary Snow. Well, Congressman Frank, the reason we are 
focusing on IDA and the African Development Fund is that is the 
great proportion of the debt.
    Mr. Frank. Why not do both?
    Secretary Snow. Well, I think we are building towards a 
consensus on the HIPC for IDA and the African Development Fund. 
I don't see a consensus at the other side of the IMF yet. We 
have had discussions on it. We will continue to have 
discussions. But we are right on the verge, right on the cusp, 
I think, an historic coming together, a meeting of the minds on 
the need for----
    Mr. Frank. I hear that, but I don't think there is a 
contradiction to working on that. To the extent there is 
arbitrary reluctance to do gold sales again, I think that is a 
great mistake, particularly if I am wrong, you can correct me, 
but according to the people with the data, who have generally 
been accurate, always accurate to me is, in terms of the debt 
service payments, about 50 percent right now is going to IMF 
debt, so even though the overall debt is less, given the timing 
of the debt, so that you really are only putting out a 
significant chunk by guarding that weight.
    Secretary Snow. As I say, Congressman Frank, whatever the 
merits of moving on the IMF side of the debt, we don't have 
anything close to the consensus, and we are focusing our 
efforts now----
    Mr. Frank. Well, you ought to tell----
    Secretary Snow.--on getting this done.
    Mr. Frank. You ought to negotiate with them. I think you 
ought to tell those people, whoever we weren't able to get a 
consensus, I hope you will be able to convey there will be 
considerable unhappiness if people think that is where we stop.
    Simply with regard to IDA, and I appreciated Under 
Secretary Taylor, who has done a very good job with this, was 
very useful, and I agree that in addition to forgiving the 
debt, we should go to grants instead of loans. I disagree with 
people who for some reason don't agree with that.
    But I then do--there is a fair question. What do we do 
about the future? Yes, you can deal with this in terms of the 
period of debt. You can do it by testing the debt relief. But 
what do we do to make sure that IDA is in a continued position 
to make those grants?
    I agree with you that grants are better than loans, but to 
the extent that the loan flows were some of the source of 
revenue, are we committed to replacing that or are we making 
sure through our appropriations process that there will be 
funds going through for IDA?
    Secretary Snow. Yes, we indicated there would be no--under 
our policy, Congressman, there would be no reduction in net 
resource----
    Mr. Frank. Even if that would require appropriation going 
forward?
    Secretary Snow. Yes. We have said that we want to make sure 
that there is no reduction in the net, net flows.
    Mr. Frank. All right. I appreciate that, because I think, 
with that, then there shouldn't be a problem. Let me go back 
now to the job creation issue, because you said that--you had 
used the figure 200,000 again, but the problem has been 
beginning in the third quarter of 2003 when things start to get 
better, unfortunately the average is only 165,000 a month.
    Now, you would have said 200,000 a month. But 35,000 jobs a 
month, as you know is quite significant. It makes a difference 
between getting to whittle down the unemployment rate and not, 
you are in that range. I know you are not responsible for the 
Council of Economic Advisors report, but aren't we entitled to 
some explanation of nearly a 50 percent drop in their 
projection about jobs.
    In 2004, the Council of Economic Advisors said, it almost 
looks like there is randomness here. June of 2003, job 
projection by the Council of Economic Advisors, 305,000 per 
month. October of 2003, you say 200,000 a month. January of 
2004, they are back up to 325. Now they are down to 175, and, 
of course, the reality has been below everything.
    I mean, are people supposed to have confidence in this kind 
of bouncing around. At the very least, is there some reason why 
you are aware of that we have dropped in their projection from 
325,000 jobs a month to 175,000 jobs a month in just under a 
year?
    Secretary Snow. Congressman, no, I am not an authority on 
how those estimates get made. As I recall, going back to my 
conversations with Dr. Mankiw, when he was chairman of the 
council--he has now returned to academic life.
    Mr. Frank. He took 150,000 jobs a month with him. Can we 
get them back?
    Secretary Snow. As I recall this, the job number that comes 
out of the----
    Mr. Frank. Black box.
    Secretary Snow. Well, out of this process, they call it the 
Troika process, is a residual. It is sort of what comes after 
you figure growth rates and inflation rates and interest rates 
and all sorts of other things in the macro economic model, and 
this is a residual of that. So it is not so much an active 
forecast as the result of other things in the model.
    Mr. Frank. Let me give you, Mr. Secretary, and I will 
finish, as someone who studied economics, I think about when 
you did, I share what I intuit is your nostalgia for the days 
when there were less formulae and more thinking and more words 
and fewer numbers when we did this economics stuff.
    But I don't think it is truly--therefore, it does seem to 
me, looking at what you said, we do have to confront the 
prospect that we may be getting fewer jobs per unit of 
increased wealth than we were getting. We have to address that.
    I mean, the fact is that during the period in which the 
economy has been growing and growth has been good, over five 
quarters, job growth has averaged 165,000. It has bounced up 
and around. But I think 5 quarters, 165,000, it is been 
bouncing around, there has been no trend one way or another. 
That is a pretty solid set of numbers. I think it leaves us 
with fewer jobs than you reasonably expected.
    I think when you said that in October of 2003, you were 
reflecting historical experience. A year and a half later, it 
looks as if you were too optimistic, not because you were wrong 
then, but because of changes in the economy. I think we have 
got to begin to think about ways to address that. Thank you, 
Mr. Chairman.
    The Chairman. The gentleman's time has expired. The 
gentlelady from Ohio.
    Ms. Pryce of Ohio. I thank you, Mr. Chairman.
    Mr. Secretary. Chairman Oxley and I wrote to you on March 
17th regarding our concerns that there is a looming crisis in 
the WTO services negotiations. Strong services provision in the 
Doha round are critical in our estimation. We were very happy 
that the services sector was finally given equal billing with 
agriculture and goods, thanks to a strong push by the U.S. and 
the EU back in July.
    But what can we do to convince developing countries of the 
benefits of services liberalization and how can we get them to 
do the internal political machinations to develop offers? Free 
trade and financial services is as important as free trade in 
goods or agriculture, as anything else. I just would appreciate 
your perspective.
    Secretary Snow. Congresswoman, of course, I agree with you, 
it is absolutely critical. We were disappointed that more 
offers didn't come in earlier in the year, and Dr. Taylor and I 
and Mr. Quarles all reached out to our counterparts to suggest 
that, you know, you should accelerate your efforts here. I 
think that produced some results, some additional offers came 
in.
    We are intent on making broad-based liberalization of 
financial trading, a key feature of the Doha round. I have 
talked with Mr. Mandelson, Peter Mandelson, who referenced Mr. 
Levine. I look forward to talking to Congressman Portman, as he 
takes on that new role.
    We think it is absolutely essential and going beyond WTO, 
it is absolutely essential that the developing countries begin 
to do it with themselves and trade with themselves. Because 
when you look at the picture, an awful lot of restrictions are 
within the developing countries on trade with themselves.
    But I want to assure you that this is absolutely a priority 
with us. I am going to be meeting tomorrow with EC Commissioner 
Troy on the subject of the dialogue and we will get into the 
subject of the services and opening up the transatlantic 
market. Mr. McGreevy and I will be talking about opening up the 
transatlantic dialogue on services. It is a priority for us.
    Ms. Pryce of Ohio. Well there is a growing impression, I 
think, in some circles, that this is a hostage to agriculture 
issues, and do you share that opinion?
    Secretary Snow. Well, agriculture is really certainly the 
main act here. That financial services, we are going to make 
sure financial services doesn't get forgotten.
    Ms. Pryce of Ohio. Thank you, let me shift gears. 
Ironically, the sale of IMF gold would impose a hardship on the 
very nations that the G-8 wishes to help, going back to that 
issue. Of the 38 HIPC nations, more than 30 are gold producers 
or potential producers. The falling gold prices in 1998 and 
1999 resulted in the loss of 150 million in annual exports 
earnings to these nations, and it turned into job losses, wage 
decreases and tax disruptions, all kinds of things. So given 
that, why are the IMF gold sales considered by anyone to be a 
credible alternative for debt relief?
    Secretary Snow. You know, there is no consensus on this 
among the G-7 or the board of the IMF. I think that if you did 
a vote now, I haven't ever taken a vote count, you would have 
as many or more against than in favor of the gold sales. There 
simply isn't a consensus to move forward. The U.S. position is 
clear on that. It is inadvisable and not a course of action we 
could support, and we have made that clear. Why others continue 
to push for it, I don't know, but I don't see how they will 
ever be successful.
    Ms. Pryce of Ohio. Well, I don't either, but each time it 
comes up, it shakes the market and I just wonder what is behind 
it.
    But thank you very much, Mr. Secretary, for your appearance 
here today and your candid answers, I yield back.
    The Chairman. The gentleman from Vermont, Mr. Sanders.
    Mr. Sanders. Thank you, Mr. Chairman.
    Mr. Snow, good to see you again. Mr. Secretary, I find it 
hard to understand that, given the fact that last year we had a 
$617 billion trade deficit, that we had $162 billion with 
China, that any sensible person could continue saying that our 
trade policy is working when in fact the last number of years 
we have lost millions of decent-paying jobs because of PNTR 
with China and the NAFTA agreement.
    Coincidentally, Mr. Secretary, this morning I was at an 
event in Winooski, Vermont, where many people have lost their 
jobs. I want to ask you a very, very simple question. Up here, 
we make very good salaries. You make a good salary. You are a 
former CEO. If you were a worker in Winooski, Vermont, and you 
made $10, $12 an hour--and, yes, there are people in America by 
the millions who make $10 or $12 an hour--and if the Secretary 
of the Treasury of the United States of America said, in 
essence, that it is appropriate, it is okay, it is right for 
American workers to compete against desperate people in China 
who make 30 cents an hour and who go to jail if they try to 
form a union or stand up for their political rights, do you 
think that that is right? Should American workers have to 
compete against folks that make 30 cents an hour and go to jail 
when they stand up for their rights? Yes? No?
    Secretary Snow. Well, the reality is, of course, as you 
know, the United States lives in a big global economy; and 
probably the worst thing we could do for living standards of 
the American people is to seek to pursue isolationist policies.
    Mr. Sanders. Nobody is talking about isolationist policies. 
Do you think I should be telling those workers that the 
Secretary of Treasury says that it is right and moral for them 
to have to compete against desperate people who make 30 cents 
an hour?
    I am hearing you say that that is globalization. 
Globalization didn't just happen. It happened because corporate 
America spent millions of dollars trying to get this Congress 
successfully to pass permanent trade relations with China and 
NAFTA, which is a disaster. It doesn't just happen. It happens 
because of policy.
    I want to ask you another question. We hear a lot of talk 
about patriotism and love of country. When the CEO of General 
Electric, a fellow named Jeff Immelt said, I quote, when I am 
talking to GE managers, I talk China, China, China, China. You 
need to be there. I am a nut on China. Outsourcing from China 
is going to grow to $5 billion, end of quote. What do you say 
to Mr. Immelt? Do you say, that is good? That is what we want 
American CEOs to do? We want you to move to China? Or do you 
say show some respect for American workers and the people who 
have made you a great corporation?
    What do you say to people like Mr. Immelt--and it is not 
just him--for all of corporate America that is selling out the 
American people that have made their corporations great and 
given them huge salaries? What do you say to those guys?
    Secretary Snow. I haven't had a conversation with Mr. 
Immelt on that subject, but it is clear that we need to keep 
this economy of ours flexible, adaptive, open, so we can create 
all the jobs possible so that everybody who is looking for work 
can find a job, so that Americans continue to prosper in this 
new economy.
    Mr. Sanders. You know as well as I do that large 
corporations like GE are employing fewer and fewer Americans.
    My next question would be, given the fact that corporations 
like GE, IBM, Boeing, you name it, are throwing American 
workers on the street and heading to China, do you think they 
should be coming in to the Congress and asking for billions and 
billions of dollars in taxpayer subsidies and tax breaks or 
would you agree with me that if corporations are throwing 
American workers on the street they shouldn't get welfare from 
the American taxpayer?
    Secretary Snow. Often, I guess, we are dealing here with 
the eye of the beholder, but as a general proposition I am not 
in favor of corporate welfare.
    Mr. Sanders. And you would share my concern, therefore, 
that in programs like the Export-Import Bank, we have given 
billions of dollars to large corporations who have thrown 
American workers out on the street and moved abroad?
    Secretary Snow. I don't know the specifics of that, but I 
am not a fan of corporate welfare. Now I qualify that by saying 
corporate welfare is often in the eye of the beholder. But as a 
general proposition, no, I am not a fan of corporate welfare. I 
think it results in a misallocation of resources and burdens 
that aren't justified by the benefits.
    Mr. Sanders. I look forward to working with you on some 
legislation.
    The Chairman. The gentleman's time has expired.
    The gentleman from California.
    Mr. Royce. Thank you, Mr. Chairman.
    Mr. Secretary, nice to have you back. We are here today to 
discuss the international financial system, and GSE debt has 
become a major source of investment in the global marketplace. 
In fact, Japan and China together own close to $200 billion in 
GSE debt. So, clearly, risk management practices of the GSEs do 
have global implications in terms of the effect on the markets.
    I wanted to get some of your opinions on the current 
legislation facing our Committee. In my mind, there is a 
significant difference between a regulator task to oversee 
safety and soundness and one focused on systemic risk in the 
entire global financial system. I know you and Chairman 
Greenspan are concerned about the potential systemic risk of 
the GSEs. What does the Administration think about the language 
authorizing the regulator to limit portfolio growth in the 
current Baker-Oxley bill in H.R. 1461?
    Secretary Snow. I would like to look at the specific 
language. I support the intent to limit portfolio growth beyond 
what is required and necessary to sustain the primary mission 
of the GSEs, which is to make the secondary market.
    Mr. Royce. Let me ask you this, Mr. Secretary. What kind of 
specific guidance is necessary for the regulator in this 
regard?
    Secretary Snow. Well, what I would propose is that the 
regulator operate in a statutory framework where there is 
recognition that systemic risk needs to be managed and dealt 
with; that systemic risk grows out of the ability of the GSEs 
today to grow their loan portfolios, which they have done in 
very significant--taken on substantial debt over the course of 
the last 15 years or so and invested in--in effect, arbitraged 
their low borrowing rate with MBSs and mortgage-backed 
securities and mortgage paper. And therein lies the potential 
systemic risk. The regulator needs to be alert to that.
    I would hope the statutory framework, the legislative 
language, the report language would frame the issue that way 
and then direct the regulator to limit the holdings of the GSEs 
in their investment portfolios to the amount of MBS and 
equities and other mortgage assets, hold them to a level not 
greater, maybe with a cushion--obviously, with some cushion--a 
greater level that is necessary to enable the entities to carry 
on their specific statutory mission in their charters to create 
liquidity for the secondary market.
    They would be allowed to hold all the cash they wanted, 
would be allowed to hold all the near cash and the treasuries, 
but I think they need to be limited in their ability to invest 
in interest-priced paper beyond treasuries.
    Mr. Royce. Thank you, Mr. Secretary.
    Another question I wanted to ask you about, I chair the 
International Terrorism and Nonproliferation SubCommittee over 
in International Relations; and there was a report released 
last Thursday on the IMF on its technical assistance program to 
assess country implementation of the Financial Action Task 
Force standards. What this report says is that the IMF has been 
hampered because expected donor funding largely did not 
materialize. This is a pretty important area.
    So I was going to ask you, why did the IMF expect 
additional funding for these reviews? Was the United States 
Executive Director to the IMF aware of these problems? And what 
can the United States do to ensure that implementation of these 
standards for the Financial Action Task Force is supported 
worldwide in the event that the IMF cannot serve as a partner 
in this effort due to their argument about resource 
constraints?
    Secretary Snow. This is a subject that is regularly under 
review with us and the IMF and the G7 and the other finance 
minister meetings. I have not reviewed that report yet, but I 
do know that there is enormous effort going into this standard-
setting engagement and to building broad-based support, not 
just for signing up but for actually doing the implementation 
through the banking system and financial institutions and the 
bank regulators that is essential to make it work out. I will 
send you some comments on their report, but I have not seen 
their report.
    The Chairman. The gentleman's time has expired.
    Gentlelady from New York.
    Mrs. Maloney. Thank you, Mr. Chairman.
    Mr. Secretary, a strong economy at home is going to help 
the world economy; and, as a New Yorker, I am deeply concerned 
about the need to act promptly to extend the Terrorism Risk 
Insurance Act. After the attack on 9/11, the one program that 
helped New York move forward more than any grant, more than 
anything, was the joint effort by the Chairman and Ranking 
Member with the leadership and support of the President and the 
Administration that created the Terrorism Risk Insurance Act. 
It expires at the end of the year.
    I know you will be coming out with a report in June, and 
that will add greatly to the debate. But, right now, the 
financial service industry, the real estate industry and the 
business community at large are very, very concerned. They are 
knocking on the doors of Congress, wondering if we are going to 
move this program forward and reauthorize it.
    And my question to you, what is your view on the need to 
extend TRIA? Will you be providing leadership? This is 
essential to the economy of New York City and I would say every 
major urban--Washington, D.C., and every area that is mentioned 
as a terrorist target.
    Secretary Snow. Yes, Congresswoman. We are moving along 
well with the study that you have asked us to do. I think the 
deadline for the study is the 8th of June. We plan to have the 
study up certainly by that date, hopefully even sooner.
    I know it is an issue of enormous importance. We have had 
tremendous volume of input from both sides of the market, the 
insurers and the people who buy the policies. We are going to 
give it the best analytical effort we can. The support from the 
industry and the users of insurance policies has been terrific. 
But I better wait until we finish our report because I am not 
sure quite yet.
    Mrs. Maloney. Thank you, and keep a deep concern and focus 
on it. It is important.
    If your explanation of the trade deficit is correct, that 
it is an imbalance of payment between exports and imports, why 
hasn't the weakening of the dollar caused the trade deficit to 
improve? It has gotten worse. With the weakened dollar, by that 
definition, would it not improve the trade deficit?
    Secretary Snow. There are a lot of things that affect that 
current account balance: differential monetary policies, 
differential savings rates, differential growth rates, 
differential rates of creating disposable income and differing 
expectations for currency values in the future and so on. It is 
maybe the single most complex set of economic relationships and 
impossible to model or really predict with any accuracy.
    What we have tried to do is lay out the things we think are 
most important in that adjustment process. One is growth rates 
that I have talked about.
    Second, higher growth rates in our trading partners so they 
will generate more disposable income and buy more from us. 
Second part of it, though, is the U.S. savings rates. We are 
saving too little. We know that and acknowledge it. The deficit 
is too high, as you suggested earlier, and I agree with you, 
and we have to bring the deficit down both short term and long 
term. We are trying to encourage higher household savings 
rates. They are nearly zero. We just don't save very much in 
the United States. So higher savings rates would help us.
    Thirdly, we are intently focused on currencies that aren't 
flexible; and that is the Asian zone, primarily China. We have 
indicated that it is time for China, in our view--China has 
taken the steps to fix their financial infrastructure and time 
for them to move to a flexible currency.
    The combination of those things is what it takes to address 
this global imbalance. People talk about the U.S. current 
account deficit. It is a shared deficit. And the other side of 
the Capitol dubs it that the current account deficit is the 
large capital account surplus. We have to view this as a shared 
responsibility.
    Mrs. Maloney. To finance our trade deficit last year, we 
had to borrow over $650 billion from the rest of the world. 
What would be the consequences for the U.S. economy and the 
world financial markets if foreigners suddenly decided to dump 
our dollars? Is it good for the U.S. economy to be borrowing so 
much from abroad? You testified earlier, it is shared with 
various countries, China, Japan and Mexico and Canada. But 
won't the repayment of that debt and the associated interest 
costs be a drag on our future and our future standard of 
living? And isn't it troublesome? This is the first time that 
we have borrowed so much from the rest of the world. And your 
comments.
    Secretary Snow. My comments are, I wish we had higher 
savings rates in the United States, wish our deficit would come 
down. I am confident our deficit will come down. We have 
proposals pending before the Congress to help savings rates go 
up. Sure, I wish we had higher savings rates. I also wish the 
rest of the world was growing a little faster so they would 
create more opportunities to use their higher savings for 
investments in their countries. And I wish China would move to 
a flexible exchange rate soon so that the adjustment that that 
would introduce to the global economy would be allowed to play 
out and it would have a beneficial effect, I am sure.
    The Chairman. The gentleman's time has expired.
    The gentleman from Texas, Mr. Paul.
    Mr. Paul. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. I want to make one real quick 
comment about something you had in your written report that I 
found fascinating. Seemed like you were praising the Japanese 
for moving to privatization of their post office, and I was 
wondering if that was a subtle suggestion to us that maybe we 
ought to consider the same thing.
    But I am interested in your comments dealing with the need 
for international financial stability as well as economic 
stability; and, obviously, I think we all are. In answer to one 
of the questions, you talked about why the lower dollar so far 
hasn't sorted out our current account deficit. But the one 
issue that wasn't mentioned, that I think is important, that 
someday we have to think about, and that is the special status 
that the dollar has.
    As a remnant of the gold exchange standard which ended in 
1971, we still have a currency that is recognized as a reserve 
currency. So, therefore, it gets a bonus and people are more 
willing to hold dollars than any other currency. So we don't 
save. We supplement our savings with the creating of credit out 
of thin air, and then we spend it. In some ways, the 
instability or the lack of the arrangement we want with the 
Yaun is actually a tremendous benefit for us because we print 
money and then we spend it over there and we get cheap goods.
    When the day comes when finally there is a flexible 
exchange rate between the Yaun and the dollar, some people are 
going to be unhappy because interest rates may go up and it may 
have a cascading effect and others may want to raise their 
currency in relationship to the dollar.
    So I think we are far from stable. When you gave your 
optimistic report at the beginning, I hope it is all true, but 
I was tempted to knock on some wood in hopes that it truly is 
that positive. But I just think that the nature of the 
currencies, when every country is putting money at a different 
rate, there is no anchor to it. It is naturally unstable, and 
we have a lot more to deal with than any of us realize.
    In talking about debt relief, I am interested in this 
subject as well because we talk about selling gold and getting 
the currency to help debt relief, and we talk about 
appropriations. But I would like you to comment on this when 
you get a second. Why is it we need to appropriate money? Why 
don't they just default? This whole idea that you have to first 
loan them the money, then they don't pay it back and we have to 
appropriate money so they can pay their debts off. It seems 
like they ought to default and there should not be any need to 
sell gold and should not be any need to appropriate more money 
from the American people.
    I assume from your comments that there is not going to be a 
request from the Congress to agree to sell the gold. Is that 
more or less what I should expect?
    Secretary Snow. Yes.
    Mr. Paul. No request. But gold essentially by the financial 
community and our governments and international monetary fund, 
everybody has agreed that gold no longer is money. Either the 
money was stolen from the American people and was taken from 
them at $20 an ounce--we defaulted on the bonds. We defaulted 
with the foreigners at $35 an ounce in 1971. That is stolen 
money. Why isn't it just returned to our government? And why 
doesn't our government that no longer wants to use gold as 
money, why don't we sell this gold? Why is this clinging on to 
gold when it is no longer money? How do you look at this gold 
issue?
    Secretary Snow. The gold is part of the financial reserve 
of the IMF. It is, in effect, a balance sheet item at the IMF. 
They have very substantial gold reserves which they carry on 
their books, and it represents a substantial part of the basic 
assets of the Fund. So it affects their financial condition.
    Mr. Paul. Why do we have to appropriate money to pay off 
debt? Why can't they just default on the debt they owe? Why 
would we have to sell the gold?
    Secretary Snow. It is because of the way we budget debt. 
When we take on these obligations, it becomes a budget item in 
the U.S. accounts.
    Mr. Paul. We just can't write it off?
    Secretary Snow. Well, we need, basically, Congressional 
approval.
    Mr. Paul. Is the debt owed to the government or to banks, 
private banks?
    Secretary Snow. The debt we are talking about here is owed 
to the multilateral development banks, to basically IDA, which 
is a part of the World Bank, and to the African Development 
Fund. Those two entities hold most of the debt we are talking 
about.
    The Chairman. Gentleman's time has expired.
    The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you very much, Mr. Chairman.
    Welcome again, Mr. Secretary. Always a pleasure. Going to 
ask a series of questions, if I may, so work with me in my 5 
minutes.
    First, it is true that the G7 is going to be meeting in 
Scotland in July and on that table will be the issue of a plan 
to ease the debt particularly to the impoverished nations. 
Given the concern that terrorists are one of our biggest 
concerns in the fight against terrorism, these impoverished 
countries are basically incubators because of that poverty. 
With that understanding and background, knowing we have an 
extraordinary obligation to deal with this, where is the 
problem between Great Britain and the United States that is 
preventing at this point an agreement on how we are going to 
come up with a plan to deal with world debt as it affects these 
impoverished countries and what do you expect to happen coming 
out in July?
    Secretary Snow. Congressman Scott, I can give you an 
optimistic answer there. I think the U.S. and the U.K. are 
narrowing their differences as we develop a better 
understanding of each other's approach. I am talking about IDA 
and the African Development Fund. We are really getting close.
    I had a good chance to talk with Chancellor Brown over the 
weekend, and Dr. Taylor talked with people in the British 
delegation. We are in continuing discussions with them.
    I think we can narrow the differences to the point that we 
are almost in agreement. I think we now agree on 100 percent 
forgiveness. I am not sure they are fully to where we are in 
going forward saying it is all grants and not loans. In other 
words, for a long period, you don't make any more loans, you 
just give grants. But I think there is a movement there.
    I think we have narrowed our thoughts--they keep talking 
about additionality, more money going in. We keep saying, let 
us make sure there is no net reduction in resources going into 
the HIPCs over this time. We are understanding them better, and 
they are understanding us better. I think really good progress 
is being made. I look forward to meeting with the Chancellor 
and our British counterparts in June when we are in London this 
time in anticipation of the heads of state meeting. I am 
encouraged, and so are our British counterparts.
    Mr. Scott. Is the point of contention in the fact that we 
all agree in alleviating the debt but that the United States is 
balking at wanting to give more aid?
    Secretary Snow. That issue is part of the difference, but 
we have indicated that there may be a misunderstanding there. 
We are committed to making sure that the net transfers remain 
the same, that there is no reduction for the HIPCs and for the 
other non-HIPC poor countries in the resources available to 
them. I think there may have been confusion on that score. We 
don't think you have to put more money in. We are prepared to 
talk about that.
    But if you forgive all the debt, and that means the debt 
service goes as well and you don't take on additional debt for 
this extended period of time--I think it is 2010 we are talking 
about--I mean, 2015--and during that time grants occur, the 
balance sheets of those countries will improve dramatically and 
the reflows, that is the payments on the debt service, are not 
required, it is going to put the HIPC countries in a much 
better position.
    Mr. Scott. I have a little bit more time, and I have two 
more questions I wanted to get to. We have been receiving some 
complaints from foreign countries doing business in this 
country on being able to follow the rules with the Sarbanes-
Oxley law. We will be having hearings coming up on Sarbanes-
Oxley. Do you recommend--in relationship to responding to these 
complaints from foreign countries, do you recommend any changes 
be made in Sarbanes-Oxley?
    Secretary Snow. No, I wouldn't; and I think the SEC has 
shown--I don't think you need changes in the basic law. It is a 
matter of implementation. I think the SEC has shown some good 
flexibility here, some good accommodating behavior on the part 
of the regulator to deal with the problems of--that our 
European counterparts have had.
    I am sympathetic to some of their concerns. We have a 
notion of independence in a director that is somebody who has 
no major stake in the firm other than being a director. He is 
not a consultant and not being compensated by the firm, is 
disinterested. Some of the European countries have a different 
conception of a corporation, where suppliers of services to the 
company are like labor and expect to be on the board. We have 
to find a way to get convergence, and that is the very subject 
of the U.S.-E.U. dialogue that the Treasury is chairing.
    Mr. Scott. I want to get this last point in. We are 
involved right now in trying to provide leadership on 
simplification of the Tax Code and tax reform. You mentioned 
the commission the President has put forward, and later this 
summer we are coming up with recommendations on that. Wouldn't 
this be an excellent opportunity to address one of the issues 
that you pointed out we need to for the future of this country, 
for the economic health of this country, which is increasing 
our savings and our investment, if we could find a way as we 
are addressing reformation of the Tax Code that we put 
incentives into the Tax Code to encourage savings and 
investment?
    Secretary Snow. Absolutely. Absolutely. I think the 
Administration has come forward with some proposals along that 
way. There may be better ways to do it, but absolutely.
    Mr. Scott. We have legislation moving in that direction. 
Would you support us on that?
    Secretary Snow. I support the broad idea of encouraging 
savings, and one good way to do that is to allow investments to 
build up in accounts in a tax-free way or go into the account 
in a tax-free way so that the tax bite on savings is lower. 
Yes, that broad idea is something that I certainly support. The 
details we would have to look at, but the broad concept I 
support.
    The Chairman. The gentleman's time has expired.
    The gentleman from Georgia, Mr. Price.
    Mr. Price. Thank you, Mr. Chairman.
    I appreciate the opportunity to ask you a few questions. I 
welcome you back, Mr. Secretary; and I want to comment how 
judicious it was for you to respond to the inquiry about 
changes to Sarbanes-Oxley in the manner in which you did. I 
noted the smile on the face of the Chairman.
    Oftentimes, we hear comments from folks who you would think 
that they were Chicken Little and the sky was falling as it 
relates to our debt and our deficit. And although neither are 
exactly where we want them to be, I wouldn't mind if you would 
please share with the Committee your comments about our debt 
and deficit level vis-a-vis the world economy, the 
international economy, and how it is viewed in that light.
    Secretary Snow. Well, you are right. I mean, we are working 
hard to bring our deficit down and our debt to GDP levels down, 
because they are higher than we would like to see them. But we 
are in a pretty good spot relative to most of the rest of the 
world. Japan has debt levels that are over 100 percent of its 
GDP. We are in a much better position than most of the rest of 
the world. We can't be complacent about it. We have to continue 
to focus on it. But I am confident, as we do, we are going to 
find our deficit level come down to a level which will be low 
by historical standards, below 2 percent of GDP, and that is 
going to occur because we keep the economy strong and revenues 
come in and spending--tight spending controls as you are doing 
in the Congress. I feel very good about the path we are on for 
the fiscal deficit. The larger issue seems to me to be those 
outyears with the unfunded obligations.
    Mr. Price. What about in your conversations with financial 
leaders from around the world and the bigger picture of them 
looking at us? What kind of comments are they making to you 
regarding our debt and deficit?
    Secretary Snow. The G7 ministers and the IMF people, the 
central bank people I have talked to take us at our word that 
we are committed to bringing the deficit down and we will bring 
it down and they applaud us for that. And they recognize that 
the United States has gone through a tough time. We have had a 
recession. We have had the terrorist attacks. We have had 
corporate scandals that led to the Sarbanes-Oxley legislation. 
All of this had its effect on the revenue side of the 
government, reducing the revenue government revenue stream. We 
are now getting the revenue stream coming back up; and that 
combination of the economy strong and the revenue stream coming 
up and some decent controls on spending--I think we will 
clearly get us to where we need to be. The rest of the world 
wants us to get there.
    Mr. Price. Is it fair to say that the rest of the world 
hasn't lost confidence?
    Secretary Snow. It is fair to say that the rest of the 
world still has confidence in the United States and depends on 
the United States as the strongest engine of growth in the 
world economy. I think we have got their respect and confidence 
that we are committed to dealing with the deficit issue and 
putting it on a path which is the right path to be on.
    Mr. Price. I will yield back my time.
    On the issue that Mr. Scott raised and others have raised 
and you raised about our savings rate, which is woeful, I think 
we had Chairman Greenspan here awhile back, and he commented on 
the types of mechanisms to attempt to increase savings in our 
Nation. One of the manners in which that can be most successful 
would be to move toward a consumption tax, as opposed to our 
current structure. Would you have any comments about whether or 
not a consumption tax increases the rate of savings?
    Secretary Snow. By its very nature, that is what our 
consumption tax does.
    Mr. Price. A consumption tax by its very nature would 
assist in our debt and deficit, or as it is viewed in 
relationship to our global economy?
    Secretary Snow. The idea behind the consumption tax is that 
you don't tax savings and investment. You tax consumption. And 
the nature of such a tax system would be to tilt towards more 
savings and more investment.
    Mr. Price. Which is a good thing.
    Secretary Snow. I think we need more savings in this 
country. I don't want to comment on what is going to come out 
of this panel. I want to wait for the results of this panel. 
But, clearly, that is the argument for a consumption tax.
    Mr. Price. The gentleman yields back.
    The gentleman from California Mr. Sherman.
    Mr. Sherman. Thank you.
    I would like to identify myself with the comments of the 
gentlelady from New York on terrorism insurance and say that we 
also ought to look at disaster insurance being treated the same 
way. If this country suffers a 10 or $20 billion catastrophe, 
it doesn't matter to many whether it is a manmade or a natural 
catastrophe.
    We do, I think, have huge problems with Sarbanes-Oxley 
affecting smaller public corporations, but I know we are going 
to have hearings on those in this Committee. I won't take your 
time with those.
    My first two questions, I will ask you to respond for the 
record. The first is on the World Bank, which has provided over 
recent years $1 billion of concessionary loans to the Iranian 
government. We are subsidizing the very government that is 
building nuclear weapons, that will either use them or threaten 
to use them against the United States or its allies. I have 
offered legislation to give the Administration the power to 
take money appropriated from the World Bank and instead use it 
on AIDS worldwide. Secretary Powell praised the legislation, 
but, unfortunately, your Department has failed to embrace it. I 
would hope we would do more than just have tea and crumpets 
after voting no each time the World Bank votes to lend money to 
Iran.
    Second, when it comes to China, it flabbergasts me that we 
have, in effect, acquiesced to many years of wrongful currency 
manipulation as if China will eventually stop shafting us, that 
is okay. I hope you come to the San Fernando Valley and talk to 
people who have lost their jobs and families and became 
addicted to alcohol and lost their lives and explain to them 
that it is okay because China will stop doing to thousands of 
American families eventually when it finally is begged into 
ceasing its wrongful currency manipulation.
    But I do want to focus on the huge trade deficit. The world 
economy is built on a house of cards or a house of dollar-
denominated security certificates, built like a house of cards 
in the vault rooms in Europe and Asia. And these huge trade 
deficits result from three major causes: a failed trade policy 
in both the Clinton and Bush Administrations, our enormous 
Federal deficits in the last 4 years, and currency values which 
have adjusted a little bit. But it is your Department, Mr. 
Secretary, that puts forward the strong dollar policy. We have 
seen an end to the slide of the dollar. And while the slide of 
the dollar doesn't fill us with joy, it is the most benign 
possible outcome of this terrible circumstance where we have 
borrowed and borrowed abroad.
    I would urge you to change these three major policies, but 
I know you are not going to. Instead, what I would ask you is, 
are you willing to explore a plan to deal with a possible 
catastrophe, that is to say D day, the day the dollar drops--
and I don't mean by one quarter of 1 percent in a day; I mean 
like 10 percent in a day or 30 percent in a week--the day the 
house of cards collapses? Will we be in a position, perhaps 
working with others, to freeze currency markets that are in a 
free fall, to freeze stock markets that are in a free fall?
    I will point out that it is perhaps unlikely that things 
will unravel this particular way, but it is unlikely we would 
have a tsunami in the Indian Ocean, and we just did. Given the 
fact that this could be more destructive than that tsunami, are 
you working not to embrace the idea that the dollar would crash 
or to suggest that it was even a significant possibility but 
rather to know that we are prepared to deal with a tsunami if 
it hits us?
    Secretary Snow. Did you want me to offer verbal comments on 
Iran and China or just for the record?
    Mr. Sherman. I would for the record on Iran and China. 
Because, unless the Chairman yields more time, I would like you 
to focus on some sort of circuit breaker and emergency policy 
if the dollar declines suddenly, which is a possibility if not 
a probability.
    Secretary Snow. What we are trying to do is make sure that 
we have stability in the global economy and we don't confront 
disruptions.
    Mr. Sherman. Mr. Secretary, we can't continue forever to 
borrow half a trillion dollars and call it stability. That is 
the stability of building a house of cards. It looks stable 
until it caves in.
    Secretary Snow. What we are saying is we want to build the 
forces of adjustment in the global economy that will lead to, 
over time, the current account deficit getting into a better 
posture; and the things I talked about are the very things that 
need to be focused on.
    The Chairman. Congressman's time has expired.
    The gentlelady from Illinois, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman; and thank you for 
being here, Mr. Secretary.
    The OECD's Financial Action Task Force has announced 48 
recommendations for how countries should structure their 
efforts to combat money laundering and terrorist finance, and 
currently our pilot program is under way within the IMF and 
World Bank that assesses each country's financial sector 
standards and laws. The G7 recommended making permanent the 
pilot program, and this is your first testimony on these 
matters since last year's reform of the intelligence community. 
So I would like to know how important this World Bank IMF 
program in the fight against terrorist financing is and what 
role did the Treasury Department play in the formulation of the 
standards and their use within the IMF and World Bank?
    Secretary Snow. I am glad to have that question, because we 
have played a very active role through our representatives, 
Executive Directors and deputy Executive Director at both of 
those institutions, and this is something we very much support. 
We want to see a more robust role for both of those entities in 
the war against financial terrorism. We think the standards are 
an awfully important way to go and strengthens our hand in 
dealing with terrorist finance, and I think the United States 
yields to nobody in that whole effort. In fact, we yield to 
nobody on the whole effort on a global basis to build the world 
community support for these initiatives. The U.S. has task 
forces and technical teams all over the world helping build the 
competencies on terrorist finance that otherwise wouldn't 
exist.
    Mrs. Biggert. Well, some have suggested that the FATF may 
have reached its limits to prescribe standards for fighting the 
money laundering and terrorist financing and should focus on 
implementation in the near future. Do you agree with that?
    Secretary Snow. Well, I think both--I think we can still 
broaden and deepen the effort, but we are at the point where 
the standards are largely in place. Competency levels have been 
developed, and the focus has to be implementation. Absolutely. 
I agree with you.
    Mrs. Biggert. I understand that a number of regional-style 
FATF groups have been created and there has been a recent 
meeting that occurred in the Middle East, North Africa region 
and the agenda included how to address the link between the 
Muslim charities and possible terrorist funding as well as 
trade-based methods for funding the terrorist activities 
through falsified trade documents. Did the United States 
participate in these meetings directly or on an observer basis?
    Secretary Snow. I am not sure whether we did directly. Our 
presence was certainly felt, because we have engaged with all 
of the countries in the region on that subject. I have held two 
or three--Dr. Taylor and I have held three or four conferences 
with the ministers and central bank governors of the region in 
which the subject of anti-terrorist finance, dealing with 
charities, dealing with couriers, dealing with bank regulation 
to get at the problem has been the primary subject of our 
engagement. So, yes, whether we were there or not our presence 
was felt because of all these far-reaching engagements we have 
had on this subject.
    Mrs. Biggert. What do you think about the assessment the 
progress that is being made by this type of FATF body?
    Secretary Snow. I think there is good progress. There has 
clearly been a heightened understanding of the problem, a 
heightened commitment to it. Many more resources going into it, 
much higher competency level in going at the problem, but we 
are not satisfied. There is still a lot to be done, I would 
grant you that. But the difference between now and two years 
ago is really night and day in terms of the commitment to the 
issue.
    Mrs. Biggert. Do you think there are new tools that the 
international financial system may need to detect funds that 
finance terrorist activities?
    Secretary Snow. Yes. I think we have got to continuously 
adapt as they adapt. They are continuing to change. As we 
harden up and tighten up in one area, they find routes around 
it, and we are continuously learning and responding. This is a 
integrative process, and now E-commerce is becoming a vehicle 
for the movement of funds. We can never rest.
    The Chairman. Gentlelady's time has expired.
    Gentlelady from Wisconsin, Ms. Moore.
    Ms. Moore. Thank you, Mr. Chairman.
    I am always stunned that I have the opportunity to ask a 
question; and thank you, Secretary Snow. It has really been a 
great hearing, and I really have appreciated your animation and 
really engaging on these questions.
    My questions relate to your written testimony on the 
current trade imbalances, and I sort of want to pursue some of 
the line of questioning that Mrs. Maloney raised with you 
earlier. Your analysis in your written statements say that--
basically, you have said that the economic policies of 
countries, good and bad, really contribute to the global 
economy. And one of the things that you said in your testimony 
is that there is a gap, obviously, in the investment 
opportunities in the United States and the levels of savings in 
our economy. I am wondering if there is any connection or tie 
between the tax cuts that we provided and those beneficiaries 
not saving or investing in foreign instruments rather than in 
the United States instruments? Do you have any insight--that is 
my first question--into whether those tax cuts did or did not 
contribute to this gap?
    Secretary Snow. Ms. Moore, I don't think the tax cuts had 
much effect on--they certainly left people with more disposable 
income.
    Ms. Moore. What did they do with it or didn't do with it?
    Secretary Snow. Left the government with less money and 
left people with more money. The tax cuts, it seems to me 
pretty clearly, have helped get the American economy growing 
faster.
    Ms. Moore. Did they save it?
    Secretary Snow. They clearly didn't save a lot of it, as 
indicated in our savings rates, but we have much higher growth 
rates. Those growth rates have given people more disposable 
income; and some part of that disposable income, given our high 
propensity to spend, has been spent overseas to purchase 
imports. And certainly that has contributed to this imbalance. 
Our faster growth rate versus our trading partners has 
contributed to this imbalance.
    Ms. Moore. We give tax breaks and then they spent it 
overseas.
    Secretary Snow. Well, they spent it here and spent some 
part of it overseas.
    Ms. Moore. You also mentioned during the questions that 
many of our Members have given on both sides of the aisle that 
raised important issues--you said, in response to a question 
about what we could do in those poor countries, that if there 
were some private sector investment in those poor countries 
that would obviate this borrow-and-then-we-bail-them-out cycle 
and borrow-and-bailout cycle. Were you talking about private 
sector investment from inside those countries or from 
Americans?
    Secretary Snow. Well, successful economic development 
requires investments, and it is often led by foreign direct 
investment, where investors from outside the country bring 
capital to the country and expertise with it.
    Ms. Moore. Wouldn't it put these same countries in the same 
predicament? Right now, we are the strongest economy in the 
world; and perhaps that is the only thing that is keeping us 
afloat. But isn't our essential problem--I mean, to quote you, 
you say really, at the most fundamental level, the problem that 
we are facing is that we have a lot of investment opportunities 
and very low savings. Is this a formula for failure to say to 
very, very poor countries who are not developed, just open 
yourself up to all these foreign investors versus things like 
grants and loan forgiveness and other things, to have foreign 
investors basically come in and put them in a debt situation 
with their private investments?
    Secretary Snow. What I am talking about, that is where a 
foreign investor comes in and builds a plant and creates 
physical assets that invest in some cases in roads or in the 
textile manufacturing or in agriculture and that will 
strengthen the economy of that poor country. It will create new 
jobs, and it will raise their GDP.
    On the debts that I was talking about, those are primarily 
the debts that come from the lending of the World Bank and the 
other multilateral development banks that was intended to help 
the countries but has created nonsustainable debt levels. In 
our view, it is very simple and straightforward. These 
countries are getting buried in debt, and we want to help them. 
One way to help them is remove that debt.
    The Chairman. The gentlelady's time has expired.
    The gentleman from Illinois.
    Mr. Manzullo. Always good to see you and appreciate your 
patient attitude towards the Chinese with regard to floating 
the renminbi. We have talked about this in the past, and you 
have said it, and correctly so, that you can't move too quickly 
on it because the Chinese structure was simply not in place to 
handle a floating currency. In your written testimony on the 
bottom of page 5 you state: the Chinese are now ready to adopt 
a more flexible exchange rate. They have sufficiently prepared 
their financial system to live in a world of greater 
flexibility and need to take action now.
    Members of Congress are grumbling. They are grumbling 
because now there is another free trade agreement that is being 
set before us, CAFTA; and there is resistance coming among the 
free trade circles, which is where I am, that the 
Administration has to do two things: One, there has to be 
dramatic decisive action to force the Chinese to float their 
currency; and, second, that China must be treated as a market 
economy so that when they subsidize their companies we can get 
countervailing duties against them.
    What do you think about attaching legislation to CAFTA or 
as a prerequisite to satisfy Members of Congress and I guess to 
satisfy yourself, Mr. Secretary? Because you have done 
everything you can. You waited it out. And the Chinese are 
experts at delaying. They have 6,000 years of recorded history. 
We have about 225. What can be done to now force the Chinese, 
because they are ready to float, what can be done to force them 
to float their currency?
    Secretary Snow. Congressman Manzullo, the decision to float 
a currency is a sovereign decision. We have had long, intense 
discussions with the Chinese over a period of time. They have 
committed to do it. They have taken a lot of steps to put their 
financial system in place to enable the financial system to 
function well with the floating exchange rate, with a flexible 
exchange rate. And having taken all those steps, we are clear--
we are telling them directly, you know, you made enough 
progress here. We commend you on the progress. That progress 
now should lead to the next step, which is the flexibility.
    I don't support, as you know, the legislation that is being 
talked about that would impose a tariff on everything coming 
out of China by an amount that is estimated to be the 
difference between the current exchange rate and what the 
exchange rate would be if it floated.
    Secretary Snow. I mean, I know, I am sympathetic to the 
ideas----
    Mr. Manzullo. Even the author does not support that.
    Secretary Snow. But I am concerned it will not be 
effective. I want the result that I think you want, and that is 
flexibility in their currency. I just do not think that is the 
right way to get it.
    Mr. Manzullo. I agree that tariffs, tariffs will not work. 
But what are you going to do? I mean, it has got to be in this 
dynasty. Otherwise, it will just continue the way it is now. 
That seems to be what they are doing.
    I mean, we are at the point where the folks back home are 
saying, Congressman, how can you even consider another free 
trade agreement when we are locked into this horrible mess? I 
mean, what about a Section 301 or what about legislation that 
would allow the US to bring an action under 301 for the 
currency imbalance?
    What about those remedies?
    Secretary Snow. Well, we have looked, you know, in the 
past, at the 301 option and did not find it appropriate as a 
vehicle to deal with the currency, with the currency issue.
    Clearly, China is going to have to move here. The time has 
come, it is overdue.
    Mr. Manzullo. They are not. Their hands are going to be 
forced so we will have to find a way to do it. I do not expect 
to have an answer within the next 15 seconds, but I think that 
is what Congress is really asking for is some solid concrete 
solution to get it done, and they will appreciate your 
leadership on that.
    Secretary Snow. Well, thank you, we want to see it done. 
You know that.
    Mr. Manzullo. Thank you, I yield back.
    The Chairman. The gentleman yields back. The gentleman, the 
very patient gentleman from California, Mr. Baca.
    Mr. Baca. Thank you, Mr. Chairman.
    The Chairman. Please turn your mike on.
    Mr. Baca. Thank you very much, Mr. Chairman. Thank you, Mr. 
Secretary for appearing before us.
    As you know, Mr. Chairman, one of the most important things 
for insuring the health of international financial systems is 
preserving the soundness of the U.S. economy. Many foreign 
governments have invested in our bonds, and it is important 
they continue to be able to have faith in the integrity of our 
system.
    Based on that and based on the opening statements, you 
indicated that the world economy is in good condition, no 
recession, no crisis, but yet you continue to indicate that we 
are at a deficit that is too high, and there needs to be more 
control on spending, I do agree with you there.
    In light of that, it seems like this Administration--we are 
very much concerned with this Administration's budget. It 
continues to underestimate the cost of the war that continues 
to be high, somewhere around $400 some billion that we spent on 
the war. Now we are talking about Social Security and 
privatization.
    Before I get into that, you also indicated that we have 
created about 2.4 million jobs. Well, we do not know what kind 
of jobs were created and how many jobs were created two or 
three times, because we could have counted two or three times. 
We actually have lost about 2 million jobs.
    We have lost about 550,000 jobs in outsourcing, so we have 
lost alot of jobs. So it makes it very difficult as we look at 
another trade agreement, see if we can get another trade 
agreement because we are looking at the President's plan to 
look at Social Security, privatizing, yet we know that the jobs 
that are created here pay into the system. Yet if we continue 
to outsource, we will not have those jobs out here.
    I want to hear your opinion in reference to what we should 
do to make sure the economy grows strong here in the United 
States, and we do not create jobs outside of the United States, 
because many of those manufacturers are leaving our areas. Just 
as Mr. Sanders said earlier, in Vermont, I am faced with the 
possibility of losing--my District in Ontario--163 jobs from 
General Electric that may be going overseas. I am very much 
concerned about this.
    Could you please address that?
    Secretary Snow. Well, I would be delighted to. We want to 
create as many jobs as we can in the United States. I am with 
you 100 percent. We want to make America the best place to 
invest. So capital comes in here and----
    Mr. Baca. If we do have that, then those people are able to 
pay into the Social Security system to make it solvent so we 
would not be in a--you would say in a crisis, you know. We 
would be in a challenge. That is basically what we are doing 
now is we are creating a situation by having these jobs leave 
the United States and not having those jobs that are created to 
pay into the system.
    Secretary Snow. We have got to keep the American economy 
capable of generating jobs. That means, in my view, keeping it 
innovative, keeping it focused on the principles of enterprise 
that have always been the strength of our country. Rewarding 
initiative, rewarding risk taking, rewarding innovation and 
entrepreneurship.
    I am confident, if we do all of that, we are going to 
continue to attract capital, to build innovative businesses and 
to create lots of jobs. That is our whole history.
    Mr. Baca. I hope we do that, because one of the other 
things that you stated in your opening statement is you 
indicated that raising--the standard of living has gone up. I 
am wondering for whom, because there are a lot of people out 
there that are unemployed right now, that their standard of 
living has not gone up.
    Then when you look at the estate tax and the tax breaks, 
yes, for them, the standard of living has gone up. But for 
those middle income and working families and others, they are 
unemployed and looking for skills and looking for jobs that 
they do not have here.
    Secretary Snow. Well, let me assure you, we are not 
satisfied. There are some 3 million additional people working, 
according to the Bureau of Labor Statistics.
    That is good, but we are not satisfied. The unemployment 
rate has come down to 5.2. That is good, but it can do better.
    Mr. Baca. It depends on how we are accounting. If sometimes 
we are accounting double or triple the same person now having 
to work two or three different jobs--because the manufacturers 
that used to be here, they used to get paid $25. Now that 
person has to work two jobs or three jobs, and yet sometimes, I 
believe we are double counting. Is that so, could it be?
    Secretary Snow. Well, this will be a long discussion if we 
got into it in any detail, which we can do otherwise. But there 
are two different surveys, as you know. There is the household 
survey, and there is the more widely used employment survey 
called the establishment survey.
    The household survey does look at multiple jobs and counts 
multiple jobs, and the other one does not. So there are some 
differences in the way the indices, the surveys are conducted.
    But basically, I think they both agree that we are creating 
a lot more jobs than was the case for 3 years ago.
    The Chairman. The gentleman's time has expired.
    Mr. Baca. I hope they are in the United States and not 
outside of the States.
    The Chairman. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. It is a privilege to be 
in your company, Mr. Secretary.
    Secretary Snow. Thank you very much, Congressman.
    Mr. Green. I represent the Ninth Congressional District in 
Houston, Texas. To many of my constituents, free trade is not 
free. Free trade, in fact, is, in their opinion, quite 
expensive. In their opinion, free trade is costing jobs and is 
impacting their lives adversely. Free trade is costing about 
$61 billion and a trade deficit. That is an expensive 
proposition.
    So when free trade is costing as much as it appears to be 
costing, to them, it is not fair trade, and that is why that 
term fair trade has gained momentum. People want to be treated 
fairly. They do not think they are being treated fairly with 
reference to our relationship with China.
    While we can be patient here and wait for change, I sense a 
growing impatience among my constituents. I suppose the 
question becomes, what do we do when flexibility is not 
demonstrated? How do we manage the relationship when 
flexibility is not demonstrated?
    I have a follow-up, if I may, once I hear the answer.
    Secretary Snow. Well, Mr. Green, I am not satisfied with 
the pace of progress here. We are disappointed that they have 
not moved.
    I do feel that the best way to get them to move is to 
pursue this financial diplomacy, if you want to call it that, 
that we have been engaged in. There are very visible signs that 
they are moving.
    They have taken any number of steps to prepare the way. 
They put in place a very strong bank regulator. They are taking 
on the nonperforming loans. They are capitalizing the banks. 
They are allowing people to take more money out of the country. 
They are allowing firms that earn profits out of the country to 
leave it out of the country.
    All of these are steps in the right direction, including 
the transaction they have negotiated with the Chicago 
Mercantile Exchange to put in a hedging arrangement for their 
currency. We are going to continue--let me show you, we are 
going to continue to press them.
    There are a lot of things that we are not happy about, such 
as intellectual property rights. Trade has got to be a two-way 
street. The counterfeiting that goes on is terribly unfair, as 
you are saying.
    All of that is on the agenda with the Chinese. We are 
focusing primarily on the currency side, but others in the 
Administration are focusing as well on taking the lead on other 
sides. It has got to be fair, it has got to be a two-way 
Street. I agree with you.
    Mr. Green. I will forego the follow up and just make a 
comment. You indicated earlier that the world economy is in 
good order and that we are in a sweet spot. But there is 
something that is unusual about this in that--and I would like 
to relate this to people right here in this country.
    We have this notion that a rising tide raises all boats. 
Unfortunately, in our country, women still make about $0.76 for 
every dollar a man makes, unless you happen to be an African-
American woman, and then you make about $0.66; or you happen to 
be a Hispanic woman, and you make about $0.55.
    So there are some people who find themselves living in a 
paradise, but they seem to be strangers in paradise. It is very 
difficult sometimes to be a stranger in paradise. I would hope 
that as we focus on all of these means by which the world 
economy is in a sweet spot that we can do something about a 
systemic problem right here in our own country.
    I do not expect you to solve that problem or to give me a 
response, to be quite candid with you. I just think that it is 
good for us to note that in these times of great prosperity 
that there are some who have stagnated and are not really 
benefitting to the extent that many others are.
    The Chairman. The gentleman's time has expired.
    The gentleman from Alabama in the back, clean up.
    Mr. Davis of Alabama. Thank you, Mr. Chairman.
    Let me say, Mr. Secretary, I am the only thing stopping you 
from getting out the door. I will try to hit on two or three 
topics with you.
    Let me go back for a moment to Mr. Manzullo's line of 
questions. He asked you--and you talked at length--about the 
anti-devaluation bill that is pending before the Senate. You 
responded to that.
    I do not remember you responding to his question about the 
countervailing duties bill. Senator Bayh, as you know is the 
Senate Democratic lead sponsor in the Senate.
    As you probably do not know, I am the lead Democratic 
sponsor in the House on that measure.
    Briefly, is the Administration opposed to legislation that 
would subject China to the same standards as the market 
economies?
    Secretary Snow. Congressman, I wish I knew the legislation 
better. I am not really familiar with this legislation.
    Mr. Davis of Alabama. Are you opposed to it in principle? 
If I can summarize it to you. What it does is very basic. It 
states that, as you no doubt know, market economies, if they 
subsidize their industries or are deemed to be in violation of 
the WTO's anti-subsidization rules, they are subject to 
countervailing duties. Right now, the nonmarket economies which 
shine as the most conspicuous are not subject to such duties.
    As a matter of theory, is there any reason in terms of 
fairness or equity or basic economics why the nonmarket should 
not be subject to the same rules as the markets?
    Secretary Snow. Subsidies, of course, are not good policy.
    Mr. Davis of Alabama. And more reason why----
    Secretary Snow. Yes, as a general proposition, they are 
sometimes defended with respect to developing countries on the 
grounds of, if an industry is--you know, I think even the great 
Alexander Hamilton defended some protection for domestic 
industry in the United States for a time as we became a 
developing country.
    Mr. Davis of Alabama. Does China fit in the developing 
country scenario at this point?
    Secretary Snow. They are--they are certainly, that is the 
terminology that is applied to them in these trade circles. 
They are a developing, not yet a developed country.
    Mr. Davis of Alabama. Do they appear to be a country that 
is hampered and incapable of competing with the rest of the 
world? Just what do you mean by developing?
    Secretary Snow. Well, it is a very uneven story with China, 
of course. Some parts of their economy are doing well, and 
others are still very rudimentary.
    Mr. Davis of Alabama. Let me try to move you along a little 
bit, because I am last, and my time is still limited. Does the 
Administration oppose or support or have any position on the 
countervailing duty bill right now?
    Secretary Snow. You know, I am going to defer to my 
colleague, who is responsible for this, Mr. Gutierrez?
    Mr. Davis of Alabama. Okay. Let me move to the second 
question to use the time more effectively.
    Another thing that you were asked about repeatedly today 
was the low savings rate.
    Secretary Snow. Right.
    Mr. Davis of Alabama. There certainly is no dispute on 
either side of this aisle that we have not been nearly as 
effective as we want to be in terms of generating savings.
    One theory that some economists have, as you know, is that 
part of the reason why people save so little in this country is 
because we have an exceptionally generous credit card industry, 
and the credit card companies are very, very quick to extend 
credit to high-risk individuals who are not good candidates to 
pay back the loan and often have to result to more borrowing to 
pay back the credit when they get credit.
    Does it stand to reason that we would do something to 
improve our savings climate if we made it harder for credit 
card companies to lend credit to high-risk individuals?
    Secretary Snow. I think we do a lot to deal with that 
issue. It is an issue, I agree with you. If we would advance 
financial literacy. And one of the things----
    Mr. Davis of Alabama. Well, that is a good question----
    Secretary Snow. We have to do is lead this effort on 
financial literacy.
    Mr. Davis of Alabama. Let me cut you off for one second, I 
do not mean to be rude. I just want to make the best use of my 
time. That is one strategy. I did not ask you to comment on 
that one.
    I will ask you to comment on the particular one I 
mentioned, which is making it harder for credit card companies 
to do what they do, which is to target low-income people. You, 
for example, may be aware they often target people after they 
file bankruptcy. They target college students. They target a 
variety of people, and that pushes them away from a savings 
mentality.
    So, short answer--short question, hopefully, short answer, 
doesn't it stand to reason that it would be good for our 
economy and would allow us to make some dent in the savings 
problem if we made it harder for credit card companies to 
extend credit so generously to high-risk people?
    Secretary Snow. Congressman, I am reluctant to get into 
that, because I just do not know enough about it. I am fearful 
that giving a broad answer, yes or no, to a detailed question 
like that might leave inferences that I am not--create 
implications for which I am not aware.
    Let me think about that, and I will get back to you.
    What I do know is that we have a real problem with 
financial literacy. We need to focus on financial literacy. We 
have got to make people aware of what happens with compounding 
interest, when it is in your favor and when it is not in your 
favor and that a lot of people are taking on credit card debt 
that they should not take on. I will agree with you on that.
    The Chairman. The gentleman's time has expired.
    Let me say to my friend from California.
    Ms. Waters. Thank you very much.
    The Chairman. He has to catch a plane.
    Ms. Waters. I know he has to catch a plane.
    I am going to submit my questions to the record for you to 
answer. I want to know the progress of negotiations and what 
you are doing to help provide the 100 percent debt cancellation 
and some information about the IMF and how you see that and how 
the off-market gold sales are something that you can share 
information with us about. You do not have to answer.
    Secretary Snow. Thank you.
    The Chairman. Without objection, that would be the case.
    Mr. Secretary, we thank you so much. I would make one 
request. The chair requests that you provide the Committee, for 
the hearing record, a list of all of the reforms undertaken by 
China in the last 2 years to prepare for a flexible exchange 
rate.
    Secretary Snow. We will be delighted to do that, Mr. 
Chairman.
    The Chairman. Thank you, Mr. Secretary, and again, thank 
you for your appearance.
    Secretary Snow. Thank you very much.
    Ms. Waters. Mr. Chairman?
    The Chairman. The gentlelady from California.
    Ms. Waters. Mr. Chairman, I would ask unanimous consent to 
enter my statement into the record.
    [The prepared statement of Hon. Maxine Waters can be found 
on page 58 in the appendix.]
    The Chairman. Without objection. Thank you.
    The Committee is adjourned.
    [Whereupon, at 5:15 p.m., the Committee was adjourned.]
                            A P P E N D I X



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