[House Hearing, 110 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 TENTH CONGRESS
FIRST SESSION
__________
JUNE 20, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-42
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
June 20, 2007................................................ 1
Appendix:
June 20, 2007................................................ 43
WITNESSES
Wednesday, June 20, 2007
Paulson, Hon. Henry M., Jr., Secretary of the Treasury........... 9
APPENDIX
Prepared statements:
Manzullo, Hon. Donald A...................................... 44
Waters, Hon. Maxine.......................................... 46
Paulson, Hon. Henry M., Jr................................... 56
THE STATE OF THE INTERNATIONAL
FINANCIAL SYSTEM
----------
Wednesday, June 20, 2007
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Present: Representatives Frank, Waters, Maloney, Gutierrez,
Watt, Ackerman, Sherman, Moore of Kansas, Hinojosa, Lynch,
Scott, Green, Cleaver, Moore of Wisconsin, Davis of Tennessee,
Hodes, Ellison, Perlmutter, Donnelly; Bachus, Pryce, Royce,
Paul, Gillmor, Manzullo, Biggert, Shays, Capito, Feeney,
Hensarling, Garrett, Neugebauer, Price, Davis of Kentucky,
Campbell, Bachmann, and Marchant.
The Chairman. The hearing of the Committee on Financial
Services will come to order. This is our annual oversight
hearing with the Secretary of the Treasury, and I am delighted
to welcome Secretary Paulson. I think all members of the
committee who have had dealings with him during his tenure will
agree we have had a very constructive and cooperative
relationship. We have made progress on a number of pieces of
legislation in which the working relationship has been a good
one. While there hasn't been complete agreement on things
ranging from the bill for foreign investment in the United
States, to the GSE legislation, through focusing on how we can
better help the FINCEN to work in ways that are best both for
law enforcement and for the ease of, the ability of the
financial community to work, we have cooperated and look
forward to this.
The Secretary obviously has major responsibilities, and the
frustration all of us will have, of course, is that 5 minutes
won't be enough to get into all of the issues. But I want to
begin with what I think is a central issue, and I want to
congratulate Secretary Paulson for helping to engage in public
education.
Mr. Secretary, you said about a month ago, I read in the
paper you were quoted as trying to explain to people for whom
increased openness to the world economy and openness in trade
was sort of obvious why there was resistance, and you noted,
not personally as your view, but to report to people, that
there is a degree of unhappiness that has become anger in many
places among a lot of Americans about what they see as
inequities in which growth goes forward aided greatly by
globalization, but the average citizen does not get to
participate. I believe that is one of our central problems.
This is a strong and growing economy. My own view, by the
way, is that the economy is much less subject to some of the
policy changes we make here at the margins than people might
think. We have had a strong economy under two very different
Administrations, that have pursued many different policies.
The American economy is a vigorous one. What has happened,
however, is that there has been a growth in inequality.
Inequality is, of course, not a bad thing, it is an essential
element in a capitalist system, and the capitalist system is
without question the best way ever stumbled upon, since no one
specifically devised it, to promote the greater prosperity of
the whole.
But there have been in recent years increasing trends
towards inequality. There is a debate about what causes that.
Some of it is the obvious result of trends in the economy, of
globalization of technology, of the great advantages that
capital has in terms of its mobility.
But we have in this country, from certainly the New Deal
days forward, institutional mechanisms that retarded the growth
in inequality. They were never aimed at doing away with
inequality, but they were aimed at countering what could be
tendencies for it to get out of hand.
I believe that inequality has clearly reached a
dysfunctional stage in America, not yet economically, although
there is one related aspect I hear from many of my friends in
the financial community, concerns that the savings rate is too
low, that Americans don't save enough. One prerequisite to be
able to save is to have some money left over after paying your
expenses so that you can save it. I believe that part of the
problem we have seen is while people have not dropped their
consumption yet, I think this is one of the reasons for the
problems with the low savings rate on the part of the average
citizen, which has consequences both for their retirements, but
also for the economy's ability to generate capital today.
While it is not clear yet what the economic consequences
are, it is clear what the political consequences are. I am in
general agreement with the President's approach to immigration.
The bill, you would have said, okay, here is the deal, it is
going to be President Bush and most of the Democratic
leadership and a lot of the Republican leadership, and the
business community; looks like a good chance to get a bill.
Anger over increasing inequality, and I don't believe they
are directly correlated, but people when they are angry don't
always connect the dots in the straightest possible line. There
is no question that the anger at a perceived unfairness in the
distribution of our increased wealth is a contributing factor
to the problems of the immigration bill.
Here in the House, Chairman Rangel of the Ways and Means
Committee, and Chairman Levin of the Trade Subcommittee, have
been working with you and others, the USTR in particular, to
come up with an approach to trade that would accommodate the
concerns many of us had about the rights of working people and
of the environment with trade. We are not completely there yet,
but their efforts have gotten opposition from some people who
say, oh, no, the inequality situation is so bad here that
nothing you can do can fix trade.
In area after area, we have a resistance to policies that I
know you believe are in our overall economic interest. Many of
them I agree with you on, some of them I would disagree, and we
have to deal with the inequality. Now we have reached a point,
and I appreciate your acknowledging it, when I think people
understand we have more inequality than is necessary. Recent
reports show the inequality by the common measure is greater
than it has been since 1929. That means we are now back to
being worse than it was under Hoover, not in absolute terms,
but in inequality terms.
The question is, what do we do about it? And there are some
who say, nothing. There are some who say, well, education will
take care of it. I think education is an important potential
way of dealing with it, but can't carry the weight people give.
Part of it has to do with institution. One is government. And
we are going to do 20 minutes on each side, and I am going to
apportion the time appropriately.
One issue is government. I do not think it is possible for
us to diminish the growth of inequality to an excessive point
while simultaneously denouncing and demonizing government and
always calling for it to shrink. Education is an example. Yes,
I do believe that a better spread of education for the new
kinds of work can help diminish inequality, but the way in
which we finance particularly higher education in America today
reinforces inequality. It does not undercut it. As State after
State after State cuts funding for the public universities, we
suffer.
Community colleges. Mr. Greenspan always cited community
colleges as one of the best ways to get people the job training
that will help them get the kind of jobs that aren't going to
be outsourced, that are going to be good, solid, well-paying
jobs. I have a community college in my district where we have a
great need for nurses in the hospitals. A great nursing
program, young people in the area who could do well as nurses,
but they only have 42 slots, when they could use 3 or 4 times
that many, because the funding has been cut. It is a State-
funded institution.
You cannot simultaneously diminish government at all levels
and fund higher education in an equitable way. There are other
things we have to do that help.
So I do note that I very much agree with your emphasis on
debt relief and on doing more to help the impoverished
countries. But understand that in an era in which the budget is
shrunk for the Department of Health and Human Services, in
which we have to fight to get decent housing for older people,
if you shrink all those programs in the United States, people
shouldn't be surprised when there is resistance to putting more
money into our international obligations. You can't shrink the
pot and dip into it more deeply in some areas and not get that
kind of resistance.
The other area is labor unions. As long as many in the
business community and on the Republican side have as their
goal a constant shrinking of the role of labor unions, we will
not get the kind of social peace in this country that we need
if we are going to be able to come together in a progrowth
approach that diminishes inequality. That is true both
domestically and internationally.
One of my problems is within the World Bank. For example,
if you look at their rating systems on the way in which they
allocate IDA funds, if you look at the World Bank and IFC,
countries get credit for not treating the workers very well.
They don't say it explicitly, but the more social network there
is for the workers, the more workers have protections against
arbitrary firing, the more there are vacation days, etc.,
literally then people get downgraded.
I want to continue to work together on this progrowth
agenda. I think this committee on both sides has shown an
understanding of the importance of the financial sector, in
particular the intermediation function that the financial
community performs of gathering up money from a large number of
people and making it available for capital investment. But we
have to do a better job of dealing with inequality.
While we now have an agreement that is a problem, as long
as there is a view that government is a bad thing and unions
are worse, we will not make the kind of progress towards social
cohesion in this country that will allow us to substantially
diminish inequality and go forward.
The gentleman from Alabama.
Mr. Bachus. I thank the chairman, and I thank the Secretary
for being here with us this morning. Let me start by commending
the job you have done. You have done a wonderful job, you are a
credit to the Administration, and I think that this committee
on both sides is very pleased with your performance and your
initiatives.
The chairman mentioned income and equity and worker rights
and jobs, the quality of jobs. Let me say that we
conservatives, or we Republicans or liberal Republicans, so I
would say this side of the aisle, is also concerned about the
income and equities. We are obviously concerned about worker
rights, safety conditions on the job, and employment.
The good news is that Americans are making more, they are
earning more, and they have more, and they are able to buy more
with what they earn. Good-paying jobs are being created at a
tremendous pace, and workers' safety is at historic rates, and
most Americans face a choice of actually two or three jobs,
choosing which job, not the fact they can't find a job. So our
economy, as you said in your report, is very strong.
I want to address one thing, and that is China, and just
ask you this: You said on page 3--and I am glad you said it, I
wish the American people realized this when they talk about
China and how the Chinese people save money--you said it is
important to address the structural reasons why Chinese
households save so much and consume so little.
They don't have Social Security, they don't have Medicaid,
they don't have Medicare. They have to usually buy their
children their first home, a lot of the middle class. Their
educational costs, college educational costs, are tremendous.
They have to save for that. So they have to save to simply
exist.
I believe that addressing exchange imbalances, trade
imbalances, can be a key to the United States and China having
a mutually beneficial relationship, which is actually going to
be key for our children and grandchildren, for these two strong
countries which account for 40 to 50 percent of the growth
across the globe to have a beneficial relationship.
In that regard I want to ask or just mention two or three
things. The Industrial and Commercial Bank of China and other
banks are wanting to do business here. They have approached the
Federal regulators to allow them to open up. I see that as an
occasion--you announced in your statement this morning that you
have reached some financial agreements with the Chinese. I
believe that you can use the occasion of Chinese banks wanting
to set up here and operate here as a further opportunity for
them to open their markets to U.S. banks.
I don't know what is going to happen, I don't know if we
are going to open our markets. We are in an open economy, and I
think that is very good, but in opening our economy, I think it
is an opportunity for us to ask that they open their economies.
As I have said, the Chinese people have to save a lot of
money. They have to try to provide for their retirement. Here
in the United States we have something they don't have: We have
great investment opportunities. They don't. That is why the
Shanghai stock market today is--the P ratio is 46, 48 percent.
You have heard the stories, you have been to China. I have
talked to people in China where ordinary citizens are taking
that nest egg, they are taking the money out of their
mattresses and out of their bank accounts, and they are
basically doing a crap shoot on their stock market. Now, if,
which some people predict, that stock market tanks, you are
going to have political and economic instability in China,
which is very bad for the Chinese, and it is very bad for us.
I would ask, and if you would like to comment this morning,
why the Chinese people cannot invest in the United States. Now,
the government recently took their reserves, and they are
investing their reserves around the world. But an excellent
opportunity, a win-win situation would see instead of the
Chinese bank overvalued and limited opportunities on the
Shanghai exchange, are there any serious discussions about
letting the Chinese people buy in the American markets?
Now, I am not talking about the Blackstone Group. We all
read about how China is investing in the Blackstone Group.
Those are not the Chinese people. That is not the middle-class
Chinese.
I believe one answer to the Chinese people being able to
provide for their retirement, and save for the future is their
ability to invest in the United States. It is a win for us, and
a win for them. I would like your comments maybe on that later
on.
Let me conclude by saying this: We have all talked about
their currency being undervalued to our currency; in fact, some
government reports say 25 percent, other private reports say 28
percent, and I believe it is actually closer to 50 percent.
But the one thing that I think the American people miss is
that there are detriments. Our goods are not as competitive in
China, but there are advantages. We can buy goods from them
very cheaply, and my concern is that if that currency revalues
too quickly, it causes inflation in the United States, and it
also drives up the costs for American households.
That is why, again, I believe a much more practical
approach is for a gradual increase in their currency and at the
same time allowing them to invest what is a tremendously
growing amount not only of savings, but of reserves as the
country has invested in the United States.
Thank you, Mr. Secretary.
The Chairman. The gentleman from Illinois is recognized for
5 minutes.
Mr. Gutierrez. Good morning, and thank you, Chairman Frank,
for holding this timely hearing on the state of the
international financial system. I want to use my few minutes to
discuss what I believe is an ongoing currency misalignment and
manipulation by China, the effect this practice has on the
American economy, and what I and others perceive to be the lack
of an effective response.
During my subcommittee hearing on the issue of Asia
currency valuation in the Ways and Means Committee, Trade
Subcommittee, together with the Energy and Commerce Committee,
Trade and Consumer Protection Subcommittee, we framed this
issue as one of Wall Street versus Main Street. To an economist
on Wall Street, that may seem a little oversimplified, but I
can tell you that for the American worker it certainly feels
like they are being forced to battle Wall Street and both ends
of Pennsylvania Avenue in addition to overseas competitors.
For the American economy, the American worker, currency
undervaluation by China, in particular, is reaching critical
mass. For over 10 years, China has fixed its exchange rate by
intervening in currency markets. Economists estimate that the
one is undervalued by at least 9.5 percent, and by as much as
54 percent. Many economists, including Federal Reserve Chairman
Bernanke, characterize this undervaluation as a subsidy for
exports from China.
Suffice it to say, we cannot compete with this kind of
ongoing government subsidy, and we cannot continue down the
current path with our second largest trading partner, because
the imbalance hurts U.S. workers and businesses and threatens
the long-term stability of our economy.
In 2006, the U.S. goods trade deficit with China rose by
almost 15 percent in 1 year to nearly $233 billion. That is a
record high. Meanwhile, because the Chinese Government must buy
U.S. dollars to keep the value of their yuan low, China holds
more in foreign currency reserve than any country in the world,
or in history, for that matter.
Although there are other factors at play, the Chinese
Government's daily intervention in the currency markets plays a
key role in expanding U.S. trade deficits. It is not exclusive
to that. That is why I was extremely disappointed last week
when the Treasury Department, in its semiannual report to this
committee on exchange rates, once again declined to find that
China is engaging in currency manipulation.
I understand that under the current standards, the issue of
intent may be an impediment to a finding of manipulation, and
for that reason I believe that Congress should take a serious
look at removing the intent requirement from the currency
manipulation standard.
I would like to take this opportunity to applaud Secretary
Paulson for making our economic relationship with China a
priority and for launching the strategic economic dialogue
between the two countries. I believe the dialogue will help
make inroads when it comes to U.S. financial services firms
gaining access to the Chinese market.
I am less confident, however, that the dialogue will help
in getting the Chinese to allow their currency to fluctuate,
and I think the difference is a matter of priorities from our
side of the negotiating table.
I am looking forward to hearing from Secretary Paulson
today on the issue of China currency valuation in general, the
reasoning behind the Treasury Department's latest currency
report on China, and its thoughts on the prospects of SED
yielding any success on this issue.
In addition, several bills addressing currency valuation
have been introduced in this Congress, and I would like to hear
Mr. Paulson's thoughts on those bills, and in particular the
idea of removing intent from the manipulation standard.
I thank you again, Mr. Chairman, and I thank Secretary
Paulson for joining us this morning.
The Chairman. The gentleman from Texas, the ranking member
of the Domestic and International Monetary Policy, Trade, and
Technology Subcommittee, is recognized for 5 minutes.
Dr. Paul. Thank you, Mr. Chairman.
Welcome, Mr. Secretary.
The recent sharp rise in interest rates may well be
signaling the end to the painless, easy money decade that has
allowed us to finance our extravagant welfare spending with
minimal productive effort and no savings. Monetary inflation
and foreign borrowing have allowed us to live far beyond our
means, a type of monetary arrangement that always comes to a
painful end. As our problems worsen, the blame game will
certainly accelerate, claiming it is all due to China's
manipulation of its currency, and demanding protectionist
measures while unfortunately continuing to gain considerable
attention.
Unfortunately, there is little concern for how our own
policies, monetary, tax, and regulatory, have contributed to
the problems we face. Too often officials ignore, and even
distort, important economic information that could be
beneficial in making market decisions.
Accurate money supply rates are vital in anticipating
future price levels to the degree of malinvestment and the
chances for financial bubbles to form. Since March of 2006, M3
reports have been discontinued. Private sources now report that
M3 is increasing at a significantly high 13 percent rate. It is
said that the CPI is now increasing at a rate of 2.5 percent,
yet if we use the original method of calculation, we find that
the CPI is growing at a rate of over 10 percent.
Since money growth statistics are key to calculating
currency depreciation, it is interesting to note that in this
era of global financial markets, in a world engulfed with fiat
currencies, what the total world money supply is doing. Since
1997, the world money supply has doubled, and money growth is
inflation, which is the enemy of the poor and the middle class,
but a friend to the banks and Wall Street.
Monetary depreciation is clearly a sinister tax placed on
the unsuspecting poor. Too many well-meaning individuals
falsely believe that deficit finance assistance programs can
help the poor, while instead the results are the opposite.
Welfare and warfare, guns and butter philosophy always
leads to harmful inflation. We had severe problems in the
1960's and the 1970's, and we are doing the same thing once
again. We have only started to pay for the extravagance of
financing the current war and rapidly expanding the entitlement
system by foreign borrowing and creating money and credit out
of thin air.
There are reasons to believe that the conditions we have
created will be much worse than they were in 1979 when interest
rates of 21 percent were required to settle the markets and
reverse the stagflation process. Congress, and especially the
Financial Services Committee, must insist on total transparency
and accuracy of all government financial statistics. Any market
interference by government agencies must be done in full public
view.
All meetings, decisions, and actions by the President's
Working Group on Financial Markets must be open to public
scrutiny. If our government is artificially propping up the
dollar by directly manipulating gold prices or colluding with
other central banks, it is information that belongs in the
public domain.
The same is true about any interference in the stock, bond,
or commodity markets. A free-market economy requires the
government keeps its hands off and allows the consumers to
exert their rightful control over the economy.
A strong case can be made that our economy is not nearly as
robust as our government statistics claim. Unemployment
numbers, inflation rates, tax revenues, and GDP growth all
indicate that there is little to worry about, but in my
estimation we should be much more concerned about the reality
of the situation we face.
I yield back.
The Chairman. The Chair wants to apologize. I had forgotten
there is a rule that says when a Cabinet officer or the
Chairman of the Fed testifies, that we limit opening statements
to the chairman and the ranking member of the committee. So I
apologize to other members, but we are going to abide by the
rule.
I am going to call on the chairwoman of the Financial
Institutions Subcommittee for an introduction of the witness,
since he is her constituent.
Mrs. Maloney. I join my colleagues in welcoming you to the
committee, and we thank you for your decision to serve our
country as Secretary of the Treasury.
Secretary Paulson brings a lifetime of experience and
leadership in financial institutions, capital markets, the head
of Goldman Sachs, which is located in the district that I am
honored to represent. He has been a leader not only at this
fine institution, but a recognized and respected leader
nationally and internationally in finance. His decision--
although there were many offers for him to lead many
organizations, he made the decision to serve our country, and
we are very grateful.
As a New Yorker, Mr. Chairman, I have to thank him for
recognizing that homeland security is part of financial
security, and his leadership on TRIA and CFIUS are very greatly
appreciated.
We look forward to your comments on how to keep America
competing and winning, and keeping our competitive advantage.
We thank you for your decision to be our Secretary of the
Treasury. Thank you for being here.
The Chairman. Mr. Secretary, please go ahead.
STATEMENT OF THE HONORABLE HENRY M. PAULSON, JR., SECRETARY OF
THE TREASURY
Secretary Paulson. Thank you for, first of all, for making
me feel so welcome. I thank you, Mr. Chairman, Ranking Member
Bachus, Congressman Gutierrez, Congressman Paul, and
Congressman Maloney, for that introduction. Thank you all very
much. I am delighted to be here today to discuss the state of
the international economy and financial system.
As you know, the Bush Administration is committed to
strengthening U.S. and global economies by promoting domestic
and international growth. Our policies encourage openness,
competition, financial stability, and development, both at home
and abroad.
As countries around the world have reformed and opened
their economies, global integration has provided businesses
with greater access to markets around the world, provided more
choices for consumers, and reduced the prices of goods and
services, which is a real benefit, especially to those with
lower incomes in the United States and abroad.
Our aim is to help ensure that more people share in the
benefits created by economic growth and trade opportunities, to
help every nation reduce poverty, and to build a strong middle
class.
A strong U.S. economy benefits the international economy,
and the U.S. economy is strong. Most recent data showed that
employers are hiring more than 100,000 people per month,
businesses are starting to invest again, and consumers are
spending at a healthy pace.
Additionally, strong growth helped reduce the fiscal year
2006 fiscal deficit to 1.9 percent of GDP, from 3.6 percent of
GDP in 2004. This is considerable progress, and we are on track
to further reduce that deficit figure in 2007.
A strong international economy benefits the U.S. economy,
and we see economic growth in nearly every corner of the world.
It is especially positive that the world economy is growing
significantly faster than in either the 1980's or the 1990's,
and that developing economies are growing twice as fast as
their recent 10-year average. I might also say they are growing
3 times as fast as industrial economies.
Growth in Europe and Japan has also accelerated, giving the
global economy greater balance and more stability. However,
Europe and Japan each need further structural reform and
further, faster domestic-based growth on a sustained basis.
Rapid growth in China has helped power the global economy,
and as a major global economic participant, China must also
address the need for structural reform. China is taking the
steps to transition from a planned economy to a market-driven
one, and this process will continue for a number of years.
While we agree with the Chinese on the direction of change in
their economic reforms, we differ over pace. I believe there is
more danger for the Chinese in moving too slowly than in moving
too quickly, and I advocate an increased pace of reform at
every opportunity.
Our relationship with China is multifaceted, and we welcome
China's growth and integration into the world economy. As our
relationship with China matures, tensions will naturally
emerge. Less than 1 year ago, President Bush and President Hu
established the Strategic Economic Dialogue, which is a focused
and effective framework for addressing issues of mutual
concern. The first SED meeting was held in Beijing in December,
and the second one was held last month here in Washington.
We have tangible results to show for our work so far, such
as agreements in civil aviation, energy, the environment, and
financial services. Through the SED, which allows us to speak
to senior Chinese officials with one voice, avoiding the
stovepiping that sometimes characterized past discussions, we
can work to strengthen the U.S.-China economic relationship. It
is very important to both of our countries that we get this
right.
We have pressed China to move beyond the minimal
requirements of the WTO commitments, and to continue to open
their economy to competition from foreign goods and services,
and to move more quickly towards a market-determined currency.
You recently received a foreign exchange report which
emphasizes the need for stronger action from China.
Additionally, the Chinese need to accelerate the structural
reform necessary to increase domestic consumption and reduce
the reliance on investment and exports to drive growth.
I share your frustration about the pace of change in China.
I have been, and will continue to be, an outspoken advocate for
maintaining and extending open trade. This is fundamental to
the long-term competitiveness of the U.S. economy. As the world
opens its doors, we must resist the sentiment that favors
economic isolationism. This is not the time to retreat from the
principles which have made America so strong and so
competitive. I share the Chairman's comments on this at the
beginning.
In May, the President reaffirmed our commitment to an open
economy and that our Nation welcomes direct foreign investment.
Foreign investment strengthens the U.S. economy, improves
productivity, creates jobs, and spurs healthy competition. It
is a vote of confidence in our economy when other nations
invest here.
I appreciate this committee's efforts to improve and
strengthen the CFIUS process. Your legislation will contribute
to this rigorous process for the assessment of national
security risk in the very limited investment cases where it may
arise. We have worked hard to open markets and liberalize trade
in order to promote economic growth and development worldwide.
The Administration is working hard to complete the Doha Round,
which has the potential to lift hundreds of millions of people
out of poverty.
Last month, congressional leaders and the Administration
reached bipartisan agreement on labor, environmental, and other
issues related to pending free trade agreements with Peru,
Panama, Colombia, and Korea. We are hopeful that congressional
approval of these agreements will unlock their important
benefits.
We also have a strong stake in maintaining the relevance
and the legitimacy of the international financial institutions
including the IMF. The IFIs are indispensable to global
prosperity, which is more effectively pursued through
multilateral means.
The IMF is undergoing significant reforms, and we believe
that successfully completing the reform process is critical to
the IMF's future credibility. The Administration has pursued a
proactive reform agenda on development. As you know, the
President has nominated Ambassador Robert Zoellick to be World
Bank president. Positive feedback from my extensive
consultation with foreign ministers around the world reinforced
our confidence in Ambassador Zoellick's ability to lead the
Bank's vital mission of economic growth. I believe he will
rightly keep Africa at the center of the Bank's focus and
continue the vital campaign to fight corruption and reduce
poverty.
The United States seeks to preserve the gains made under
recent historic debt relief initiatives and to end the lend-
and-forgive cycle that has plagued many of the poorest
countries in recent decades. Lifting unsustainable debt burdens
from these countries allows a greater focus on economic growth
and frees up resources that can be spent on poverty-reduction
priorities.
Taken together, policies to embrace openness, promote
trade, and assist developing economies will enhance economic
security and prosperity for the American people and people
around the world. These goals reflect what is best in the
American people, and I look forward to working with you to
achieve them.
Thank you, and, Mr. Chairman, I now welcome your questions,
and questions from your committee.
The Chairman. Thank you, Mr. Secretary.
[The prepared statement of Secretary Paulson can be found
on page 56 of the appendix.]
The Chairman. The first question I want to address, I know
we are going to be talking about this more, the Presidential
Working Group will be coming to testify, but it deals in part
with hedge funds, but the particular ownership form is not the
issue, but I think what many, many of us agree is there was
some concern about whether or not people are able to keep
adequate track of the derivatives and the liabilities there.
Recently Assistant Secretary Ryan made a speech which
surprised me a little bit because it seemed to express a little
bit more concern about the potential systemic problems that we
weren't fully on top of in that area before. Is there some
greater concern than there was, say, 6 months ago?
Secretary Paulson. No. Our thinking, Mr. Chairman, hasn't
changed, but let me address this. As you know, our principles
of regulation revolve around two primary tenets, investor
protection and systemic risk. This is going to be very
important as--
The Chairman. Let me say that I don't think investor
protection is a great concern at this point. It is more the
systemic risk potential.
Secretary Paulson. I think it is.
Let me get then to hedge funds, because what we said at the
President's Working Group is, looking at hedge funds and
looking at derivatives, that by and large they have made the
financial markets more competitive, more liquid, and more
efficient. They have helped disperse risk.
The Chairman. We do have limited time, and I know you said
that, but my question is whether Mr. Ryan's speech was somewhat
of a move off that because it seemed somewhat different in
tone.
Secretary Paulson. No, because what Assistant Secretary
Ryan's speech said is that we have never said there is no
reason to have concerns, and we have never said that the
guidelines and the frameworks that came out of the President's
Working Group was an endorsement of the status quo. What we
attempted to do there was to say we had all the regulators come
together and speak with one voice and call for heightened
vigilance, and what we said is that there are four groups that
really need to be very vigilant. First of all, the regulators
are looking very carefully at the risk, and looking at the
relationships between the regulated entities and these private
pools of capital, the managers of these private pools, looking
at it from the investor side and from the prime broker side.
And so there has been a real focus on transparency, but
transparency between the regulated entities, the big banks that
provide credit to them.
The Chairman. Clearly we have an historic situation where
securities transactions were regulated in the country in which
they occurred by the country in which they occurred. That is
decreasingly a description of reality. We are not sure now. The
rapidity of movement, the hedge funds have increased.
Are we on an adequate path so that 10 years from now we
will have in place a regulatory system that is adequate to this
really much more transactional approach?
Secretary Paulson. I think that is a great question because
what we have seen is global financial flows that have dwarfed
the trade in goods and services, and they are increasing at a
very quick rate; that the global financial flows in 2005 were
on a net basis over $6 trillion, and as a percentage of GDP
they doubled since 2000. As part of that, we have seen global
financial institutions--it used to be if you go back to 1995,
we had roughly $20 trillion managed by institutions. It is now
around $50 trillion, and it is managed very much on a global
basis with diversity of investments from around the world.
The Chairman. My time is expiring.
Secretary Paulson. So given that, I do think the way we
need to think about these private pools of capital, hedge funds
and so on, is to think about them increasingly on a global
basis, and we are talking actively with regulators--the members
of the President's Working Group are talking actively with
regulators in Europe, in the U.K., and around the world, as to
how to deal with these issues.
The Chairman. I appreciate it. Whatever dangers there are
of not having a handle on it multiply almost geometrically when
they are international.
I do mean to change to one other question, Mr. Secretary. I
appreciate what you are doing on China. Now, some of the
concerns have been here, well, the Chinese have been
penetrating our economy too much, and we have to sort of defend
against that, they have unfair advantages, some of which I
agree with. But we had a hearing the other day on the reverse
situation, the severe restrictions the Chinese continue to have
on American financial institutions to prevent them from
penetrating the Chinese economy on the grounds that we would be
better at it.
To some extent it seems to me that the Chinese performed a
great engineering feat and made the Pacific Ocean one way; that
when they have a competitive advantage, the argument is let
them benefit, but in areas where our financial institutions can
have a competitive advantage, there are restrictions.
I would certainly think there would be strong sentiment
here that the time has come for reciprocity. This is a pretty
mature economy. And when Chinese financial institutions now
come looking to be able to operate in the United States, if
there are not reciprocal rights for Americans to do the same
over there, I would hope we would be resistant.
Secretary Paulson. Let me say that I agree with you on the
need to open up their financial system. I actually went to
Shanghai and gave a speech. By coincidence, it was about a week
or 10 days after there was shakiness and volatility in their
market.
I have argued that this is not only right out of fairness,
but will be very important to them and to us because their
economy is not going to develop the way they need it to develop
in a balanced, structured way where there is domestic
consumption. They are not going to be able to get to the point
where they have a currency that is market determined unless
they have competitive capital markets. And they won't have
competitive capital markets unless they open up to competition.
The example I use, which I think is getting some traction
in China, is that they have $2 trillion in savings in banks
getting a 2\1/2\ percent return in China, which is a negative
return after adjusting for inflation.
The Chairman. Can we do anything about it, more than just
talk?
Secretary Paulson. I think we are making progress. They
have taken some steps. I think they are going to keep taking
additional steps, and we are going to be leaning on them
because it is in their best interest as well as ours.
The Chairman. Thank you.
The gentleman from Alabama.
Mr. Bachus. Thank you, Mr. Chairman.
I have discussed with the Chinese delegation, and I know
the Secretary has, I believe, that the Chinese are beginning to
realize that it is a win-win situation, and when we say open
their markets, it is to their benefit, and their middle class
desperately needs the investments that are open to America.
The ranking member of the subcommittee, Mr. Paul, and
others have expressed concerns about leverage and about
liquidity. We have tremendous liquidity and leverage in the
international markets today, which can actually be a good
thing, but they can be like a rubber band, and with the
currency imbalances, and our trade deficits, it is a cause of
concern.
With the markets becoming more international, and our
ability to regulate those markets becoming more compromised, I
will use that word, or ineffective in many cases, what can we
do? Is there anything we can do we are not doing?
Secretary Paulson. I think there is, because one of the
things that we have emphasized is the need for competitive,
transparent capital markets around the world. So when the
concern about capital markets' competitiveness came up, I have
always been very careful how I have defined it. I believe we
should welcome strong, liquid, transparent, well-regulated
capital markets everywhere in the world because they have a
multiplier effect on economies. If our trading partners have
stronger economies, we will do better, and there will be less
risk.
My focus is on how do we make our markets stronger and
better, and applaud the progress that others make. I do believe
strong, efficient, competitive capital markets make a big
difference in terms of economic growth and development. Also,
Congressman, we will always have financial shocks from time to
time. There is nothing we can do to make financial shocks go
away.
Today we have a strong global economy. Inflation is
relatively low. This is as strong an economy as I have ever
seen globally. But there is always some risk that there will be
financial shocks. We need to be prepared to deal with financial
shocks by having good relationships with our counterparts
around the world, and also by having a global financial system
that is efficient, modern, and functions well.
I think that was part of what the chairman was also getting
at with his question on dealing with hedge funds and private
pools.
Mr. Bachus. Let me go to a much smaller question as far as
a very specific question. You are going to meet with FINCEN on
Friday, I think it is. This committee has bipartisanly
overwhelmingly passed legislation to reduce the cost of CTRs on
seasoned customers, regular ordinary customers. Bill Fox, when
he was FINCEN Director, embraced that, and the new Director is
again taking a look at it.
The largest cost of regulation to the financial industry,
banking industry, is the Bank Secrecy Act. It is a necessary
act, but a lot of the regulation, quite frankly, is burdensome
and unnecessary. How can we reduce the cost to both the
customer, bank customers, and to the institutions by really
taking a serious step on some of these unnecessary CTRs?
Secretary Paulson. Well, thank you for that question.
First of all, one of my big focuses has been on keeping our
financial system not just safe and sound, but secure and free
of abuse, and we are also looking at regulatory burdens. Now,
in many instances when we look at regulatory burdens, we say,
how do we balance keeping the integrity of our markets versus
having unnecessary burdens?
I do believe that in this particular area there may be ways
in which we can make changes that will accomplish both, which
will have us do a better job, and a more effective and more
efficient job of law enforcement, while at the same time
reducing some of the regulatory burdens.
And so our emphasis here is on how can we be more effective
and efficient and do a better job of getting the bad guys and
getting at abuse. In doing that, I think we may naturally drive
toward some things that make a positive difference on the
regulatory side.
Mr. Bachus. I can tell you that the legislation this House
passed by over 400 votes will reduce cost, and it will actually
make things more clearly relevant to the law enforcement. It
will basically assist them by eliminating millions of CTRs that
have no law enforcement value whatsoever.
The Chairman. The gentleman from Illinois, chairman of the
subcommittee.
Mr. Gutierrez. Thank you very much.
Secretary Paulson, could you talk to us a little bit about
why you didn't find China manipulating its currency last week
in your report?
Secretary Paulson. First of all, thank you for the
question.
We clearly found that the currency is undervalued. It
doesn't reflect economic reality. We have been quite clear on
that point, not only in the report, but also very clear
publicly and privately with the Chinese.
Now, you need to recognize that in July of 2005, the
Chinese began to reform their currency. They revalued the
currency, and since then it has been appreciating. The currency
has now appreciated about 8.6 percent, and over the last year,
the pace of appreciation has accelerated. The Chinese have
publicly said that they are going to continue to allow the
currency to appreciate, and they have cited the reason for not
moving quicker as the need to have stability.
Now, we disagree with the assessment. I think there is more
risk in them moving too slowly, and it is dangerous for their
own economy and for the world economy. But in terms of
manipulation, that gets to intent. As a matter of fact, the way
the law reads is if we had found them guilty of manipulation,
what we would be asked to do would be to negotiate directly
with them and press the case and work with them, through the
IMF and on a multilateral basis.
We have also been negotiating directly with the Chinese and
making the case as to why it is in their best interest. In
terms of the IMF, I have personally, and the U.S. Government
has worked very hard to get the IMF to come into the modern
world, to recognize that the days of Bretton Woods have long
since gone. I am very encouraged by what the IMF has just put
in place, and I commend Director Rodrigo de Rato for the job
that he has done.
Mr. Gutierrez. So we all agree, how undervalued is their
currency, in your opinion?
Secretary Paulson. I am not going to give you an opinion.
Because, do I know? No. You gave a big range. I think the
important thing is to have more appreciation in the short term
and get to a point where we have a market-determined currency
so we are not debating it anymore, and so therefore a big part
of what we are doing is pushing for structural reforms, opening
up their capital markets so they can in the intermediate term
have their currency determined in a competitive marketplace.
Mr. Gutierrez. I understand. But, Mr. Secretary, you said
that it is undervalued. You have a responsibility, Treasury has
a responsibility. So if it is undervalued, you are saying yes,
but, Congressman, they are moving to correct the imbalance. You
said they are moving to correct it.
Secretary Paulson. I said they are not moving quickly
enough.
Mr. Gutierrez. Not moving quickly enough, but they are
moving. So you are cognizant, I am cognizant, we are all
realizing it is undervalued. Why don't we just say that they
are manipulating it?
Secretary Paulson. Because manipulation, as I said, gets to
intent, and they have a clear policy, and they are moving. But,
again, rather than focus on the term, what I would focus us on
is what do we do about it?
Mr. Gutierrez. So you think it is accidental, the
disparity? Either they did it intentionally, or it is
accidental. Tell me how it happened or how you believe it
happened.
Secretary Paulson. Let me begin by saying that there are
many, many countries in the world that don't have market-
determined currencies. China just happens to be by far the
biggest one. To me, it is an unnatural act to be as integrated
as they are in terms of goods and services and not in terms of
capital markets and currency.
Now, what I have said is that they made a decision to
reform their currency. They said they were going to allow the
currency to appreciate gradually, that they recognize the
principle, but that they also place a big premium on stability.
Mr. Gutierrez. The chairman has been very kind, but I just
want to suggest two things. Look, it hurts our workers, and the
trade imbalance between our country is affected because of the
very nature of this inequity in our currency, and we need to do
more to fix it. It is not fair to American workers and our
American economy.
Secretary Paulson. We are in agreement on that. But the one
thing I would just say very quickly: it is very important to
deal with the currency, but even if the currency were dealt
with, we would still have a very large trade deficit because
there need to be major structural changes. A big part of our
focus is then on those structural changes in addition to the
currency.
The Chairman. Thank you.
I would say, Mr. Secretary, when you said the question was
intent, and you said they agreed to raise it, but they decided
to do it at a slow pace for stability, that sounds like intent
to me.
The gentleman from Alabama has a request.
Mr. Bachus. I have a unanimous consent request to introduce
two studies on undervaluation and overvaluation. One is all the
countries of the world. In fact, Iceland and Sweden are greatly
overvalued. So we do have imbalances. I would introduce those
two studies. One is a recent study.
The Chairman. Without objection they will be introduced. We
could also pass them out during the hearing.
Mr. Bachus. One is 26 percent undervalued, another is 55
percent.
The Chairman. 26 and 55 percent regarding China?
Mr. Bachus. In China. The Chinese currency.
The Chairman. If there is no objection, they will be put in
the record, and the gentleman from Texas is now recognized.
Dr. Paul. Thank you, Mr. Chairman. There is a lot of
concern in the Congress for the trade imbalances, and we talk
about some currency problems, but I don't think we ever get to
the bottom of that issue. There is a great deal of discussion
about what China should do or shouldn't do, and I would like to
concentrate more on what we should do for ourselves, because
that is where our responsibilities are.
So often I think about how we have monetary problems here,
we have tax problems here, and tax policy, regulatory policies,
and also some of the things that we could do even in trade
policies that could help. So I don't see how putting all the
blame on China is necessarily helpful when so many are now
calling for a solution such as putting tariffs on them. I think
sometimes they forget a tariff is nothing more than a tax, and
most likely a tax that would be borne by the poor who now are
able to buy goods at a cheaper rate. So there is no easy
solution there.
In the beginning of your statement, you mentioned that our
policies are to encourage openness. I want to address that a
little bit, and I have a question that has to do with the
President's Working Group on Financial Markets. We have a
program called the FDIC. It is not a free-market insurance
program, but everybody knows about it, and there is
reassurance, and so far the moral hazard has not been so bad
that it hasn't been helpful at least to keep the old-fashioned
run on banks from occurring.
In some ways I see the President's group as some type of an
insurance program to look at the unruly markets that may or may
not come, and yet we don't know a whole lot about it. I am
interested in knowing more about this particular group and the
meetings, whether there are minutes held, what are the
discussions, have actions ever been taken; because if the group
is truly an activist group, we as legislators and Members of
Congress should have full knowledge of this because the four
major departments and individuals who make up this group have a
lot of influence over stock markets and bond markets and
commodity markets and currency markets. And if we don't know
what it does, it creates some speculation, and we do read
articles in the paper about the speculation of what this group
may or may not be able to do, and I think that that speculation
can be harmful.
So could you let us know a little bit more about how this
group works, and have you taken any precise actions to
interfere in the market?
Secretary Paulson. Well, thank you for your question. We
have, I think, always tried to be very open about what this
group is. I chair the President's Working Group on Financial
Markets and its members consist of the Chairman of the Fed, the
Chairman of the SEC, and the Chairman of the CFTC, and we have
been asked on a number of occasions to come up with a study.
There is a study on TRIA for Congress, I think it actually may
have been for this committee.
But we talk about issues that are primarily related to the
markets, and one of the things that we spend a fair amount of
time on is looking at a systemic risk. There have been a lot of
changes in the market, the markets continue to evolve, the
global economy continues to evolve. One of the things we have
said is that none of us is predicting a financial shock anytime
soon. As a matter of fact, economic conditions would seem to
indicate that it is not particularly likely, except financial
shocks often come when they are not expected. They come from
time to time, and the next time we do have a financial shock,
it will be interesting because the United States is even more
integrated into the global economy.
There has been an increase in derivatives and private pools
of capital are playing a bigger role. So we have thought about
it and are planning along those lines. The most recent thing we
have done is to come out with guidelines and principles and a
framework for dealing with some of the challenges posed by
hedge funds and other private pools of capital.
And so this had the benefit. This was a forum where you
could have the regulators come together and speak with one
voice.
The Chairman. The gentlelady from California.
Ms. Waters. Thank you very much, Mr. Chairman. Mr.
Secretary, I thank you for being here today. And I would like
very much to talk with you about the IMF or Bolter Funds or
China, but I am not going to do that. I have decided that my
work over the next few years will be focused on doing
everything that I can to protect American citizens, to be a
real advocate to correct the ills of government, or the private
sector as it relates to schemes and rip-offs that our people
have to endure in this Nation.
There are many people who are already forgetting Katrina,
for example; we have just thousands upon thousands of people
who were harmed, and still have not been made whole. But today
while you are here, I am going to focus on Enron because you
have a role to play in Enron. I have been following for some
time now, after the biggest corporate crime in America was
perpetrated on the people of this country and on the workers,
what has happened to the victims. And I am very, very surprised
to find out that our government, this Administration, and you
have decided that you are more interested in protecting those
with third party liability as relates to Enron and some other
cases than you are in protecting the citizens who got ripped
off with this corporate crime.
I was very disappointed to read that the solicitor general
did not file an amicus brief in support of the defrauded
investors in the Stoneridge investment part of this case
currently pending before the Supreme Court. This is important
because this would decide what happens to those Enron victims.
Those Enron victims lost about $40 billion; about $7.3 billion
of that has been recovered by the attorneys and lawyers.
However, I understand--and maybe you can answer this
question. Why is it an apparent policy position of the Bush
Administration to favor public enforcement of a private
enforcement at all relevant to a case involving the
interpretation of an SEC rule that governs both public and
private litigation? The issue before the Supreme Court in
Stoneridge involves who may be sued for participating in a
scheme to defraud under Rule 10(b).5, not whether the private
right of action should be scaled back. Why should the
Administration view that our--as you have called it--overly
litigious society is harming U.S. financial markets, whether
valid or not, have any bearing on the correct interpretation of
scheme liability in Rule 10(b).5 of the securities law? Isn't
that a question for Congress, not the courts?
Now, I understand that Mr. Cox sides with the victims of
Enron and that the SEC voted that they should be able to be
sued and that they should be able to recover. And again, some
of these banks have been forced to pay up. But you and the
Administration are standing in the way. Can you explain that?
Why would the government be against the people of Enron who
were defrauded and those banks that literally were in collusion
with Enron? Should banks be let off and not have to pay?
Secretary Paulson. Thank you very much for that question.
Let me begin by saying that I think you are referring to the
Stoneridge case, and that is what you mentioned. The Stoneridge
case is about a cable company, Charter Communications, and a
couple of suppliers, one of which was Motorola. So that is what
that case is about, Charter Communications and a couple of
suppliers. Let me step back, before addressing that case and
say that I am a strong advocate of the protections against
security fraud. I think the SEC and the Justice Department have
been particularly vigilant, and the hundreds of millions of
dollars of fines that have been paid and recovered are very
significant.
Now, I asked the Treasury Department to send a letter to
the solicitor general on the Stoneridge case, which involves
Charter Communications and Motorola, and some other suppliers.
I did this because I thought it had enormous implications for
the U.S. economy. And here's the reason, that when you are
looking at the uncertainty of primary liability which could go
to third parties--and as far as I am concerned this would
create a very uncertain legal environment for all of the
individuals and all of the public companies that deal with
public companies, all of the parties that deal with public
companies in the United States--I think that is ultimately
harmful to our economy and to the--
Ms. Waters. I am reclaiming my time for just one second,
Mr. Secretary. Is it not true that the lawyers were able to
recover $7.3 billion from three big banks--those banks are
Citi, JP Morgan, and the Canadian bank--in the Enron case?
Secretary Paulson. As I said, you are talking about Enron
and the investors in those cases. I am talking about
Stoneridge.
Ms. Waters. No, but the relevance of Stoneridge to Enron
raised in the Stoneridge case is whether those who participate
in a scheme to defraud investors under Section 10(b) and Rule
10(b).5 of the U.S. securities laws can be held liable where
the participants knowingly engaged in fraudulent financial
transactions with the public cooperation to falsify its
financial statements even though they did not themselves make a
public statement. Isn't that the case?
Secretary Paulson. I was going to say that the principle is
important to me in terms of competitiveness and is important to
people on both sides of the aisle. Senator Schumer and Mike
Bloomberg did a study that looked at our capital markets and
the impact on our economy. What did they cite? Excessive
litigation risk is a big issue. I had a panel who looked at
this, and Bob Rubin saw this as a big issue. My concern is that
by exposing all sorts of third parties that happen to do
business with a public company to primary liability, without
clear lines is a risk to our economy, to our competitiveness,
and to jobs. And as I said, I asked the Treasury to write a
letter to the solicitor general on the Stoneridge case.
The Chairman. The gentleman from California, Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman. I guess we are looking
at some of the practical effects in the market today in terms
of decisions that we have made in the past, but we have the
outflow of capital from the U.S. markets, to London and to Hong
Kong--Hong Kong, China, and it appears to be occurring at a
pretty heavy pace. Only 2 of the 20 initial public offerings
last year went public here in the United States, and if we
looked back to 2000, there were 9, and there were 12 in 2001.
So we have a trend that I think is a serious problem. And there
is this argument that the current status of our legal system
and the impact on an overly litigious society has been a factor
in driving these decisions from entrepreneurs and investors not
to take advantage of the capital markets of the United States.
You referenced the Bloomberg-Schumer report, and the
conclusion of that report is that the prevalence, they say, of
meritless securities lawsuits and settlements of the United
States has driven up the apparent and the actual cost of
business and driven away potential investors. It is not the
only report that comes to that conclusion. But Mr. Secretary,
with some recent developments regarding third party liability,
it appears that this problem may only get worse.
And I would also just like to touch on Sarbanes-Oxley.
Section 404 has frequently been cited as a likely cause of the
outflow of capital. I would like to ask if you see a need to
redress the burdensome regulatory environment facing our public
companies on that front. And I would also just like your
thoughts.
You mentioned the case of Stoneridge v. Scientific Atlanta
concerning secondary liability. The question seems to be
whether attorneys can sue not just a company that engages in
wrongdoing, but any company that has done business with a
wrongdoer. And if we went back to the 1996 case of Central
Bank, the Court at that time said Congress never intended this
language to cover secondary companies. At that point, the Court
argued, trying to determine just who is liable in a civil
setting is problematic here. And they warned of the excessive
litigation that would come and the difficulties in costs that
would be experienced by client companies and investors, the
cost to investors under a case like that, the Central Bank
case.
Do you think it is precisely that sort of case that could
cause even more companies to decide that they are better off
listing their shares over in London or in China? That is what I
would like to ask you.
Secretary Paulson. Well, I thank you very much for the
question. Yes, there is no doubt that when you go around the
world, and even here in the United States, one of the
impediments to listing in the public capital markets in the
United States is the question of executive litigation risk. And
as I said, in the Stoneridge case what concerned me was
exposing a wide range of individuals and businesses in the
United States that happen to do business in some way with
public companies to primary liability without bright lines. And
so that was the case. Reasonable people disagree on this, but
there are plenty of people on both sides of the aisle that
share my concern there. And so that is a concern.
Now, in terms of your Sarbanes-Oxley question, I believe
that Sarbanes-Oxley is by and large good legislation, and that
the principles are all the right principles. Some of the issues
have had to do with implementation. The biggest issue had to do
with, as you said, Section 404. I think that there have already
been major steps taken by Chairman Olson of the PCAOB and
Chairman Cox to rewrite the auditing guidelines, and I am
optimistic that you are going to see that we have to remain
vigilant, but we are going to see that implemented in a more
efficient and effective manner.
Mr. Royce. Thank you, Mr. Chairman.
The Chairman. Thank you. The gentlelady from New York.
Mrs. Maloney. Thank you. First, I would like to thank the
Secretary for working with this committee on the anti-terrorism
risk insurance which we will be bringing up later on this week,
and also for working with us on the legislation to strengthen
the CFIUS process that reviews foreign direct investment for
national security concerns. In the wake of the Dubai Ports
World crisis, it occurred to us that we needed to strengthen
the process and that we needed a certain and fair process to
encourage safe foreign direct investment.
One of the first bills reported out of this committee was a
CFIUS reform bill, and it passed the House 423 to 0. You don't
see that with many pieces of legislation. I believe that this
bipartisan bill really strikes that balance. It was
reintroduced in the Senate this year and it followed most of
the House versions on all the key points. One area where it
differs from the Senate version is that it allows for the
delegation of sign-off to the Assistant Secretary level, where
the House had no official sign-off lower than the Under
Secretary. It was the Secretary, the Deputy Secretary, then at
the urging of Treasury we lowered it to the Under Secretary.
And I am concerned about returning to the level of the
Assistant Secretary. I want to note that it wasn't an Assistant
Secretary who signed off on the Dubai Ports World transaction.
And my question is, do you support the Senate language to
allow for sign-off at the Assistant Secretary level?
Secretary Paulson. Thank you very much for that question.
Let me begin by saying that I appreciate your leadership and
the work of this committee, and that your bill is a strong
bill. The Senate bill is a strong bill. You have highlighted
one difference. I was not here at the time of Dubai Ports. I
have heard various comments and I am not going to comment. I
don't know where the sign-off occurred, but I will say to you
that I have a strong, clear preference for sign-off at the
Assistant Secretary level. It is a Senate confirmed level, and
I believe this for a couple of reasons:
First of all, I think that this bill will give us a lot of
changes and that it is going to make a big difference. And we
are focused on national security in a very significant way. But
the signal it sends to the rest of the world, which says that
we are open for investment, but that it takes an Under
Secretary or above to sign off on a CFIUS case, to me there is
a bit of a disconnect there. And also, as someone who is trying
to run a business, at the Department of the Treasury, we have
one Under Secretary for International Affairs, and we have one
Assistant Secretary for International Affairs, and just in
terms of getting things done, it is not very efficient. I have
talked about this before. There weren't very many areas we had
of disagreement, but this is one of them, and on this I just
respectfully disagree.
Mrs. Maloney. But in your Department, you can structure it
to the number of Under Secretaries who are there and the number
of Assistant Secretaries. And considering the fact that the
Dubai Ports World transaction was signed off at the Assistant
Secretary level, aren't you concerned, as some of us are, that
Assistant Secretaries don't reliably have the political and
substantive judgment necessary to make these decisions? The
biggest criticism of Dubai Ports World was the fact that no one
of stature or great leadership in the Treasury Department
signed off on it. It was a criticism of the level of sign-off,
and to lower it to a lower level of sign-off really depletes
the purpose of the bill to strengthen accountability in the
process.
Secretary Paulson. I think that would be a gross
oversimplification of the Dubai Ports World case. And again, I
can just tell you that I would be most comfortable having an
Assistant Secretary be able to sign off. I take responsibility
for my role in CFIUS and the Department does. And I think in
terms of letting us operate efficiently and sending the right
signal to the rest of the world an Assistant Secretary is a
better route. You and I respectfully disagree. We agree on most
things on this issue, and, I guess, why don't we just leave it
at that.
Mrs. Maloney. How many Assistant Secretaries are there at
Treasury now?
Secretary Paulson. We have one Assistant Secretary for
International Affairs and we have one Under Secretary, and the
idea of saying you could have--
The Chairman. We only have 5 minutes. That was a fairly
simple question. How many Assistant Secretaries are there? It
probably ought to be able to be answered fairly quickly.
Secretary Paulson. Well, we have multiple Assistant
Secretaries, but they--
The Chairman. I understand that. But again, we only have 5
minutes.
Secretary Paulson. We have one Assistant Secretary in the
international area.
Mrs. Maloney. That is the total number?
Secretary Paulson. Yes.
The Chairman. The gentleman from Connecticut.
Mr. Shays. Thank you, Mr. Chairman. I would think it would
be a pretty exciting time to be a Secretary, and given how well
the world economy is doing and the U.S. economy it would be a
pretty heady business. Yet I get the sense from the American
people that they don't feel the economic security that the
indicators would seem to say they should feel. My sense is they
don't feel that sense of comfort because the world is
extraordinarily competitive and so they don't have a sense of
job security. But when you talk about this among your
colleagues, what is your conclusion for why public confidence
doesn't match the statistics?
Secretary Paulson. In terms of the way--
Mr. Shays. The strength of the economy, the fact that
unemployment has gone down, very real growth in GDP. And yet
there isn't this sense among the American people that their
life is secure and their economy is doing well.
Secretary Paulson. I think this is a feeling in the United
States and in a number of other places around the world. I
think part of it may be related to the point that the chairman
made earlier on the widening income gap. Part of it may be
related to the pace of change, part of it is related to the
technological advancements which are continuing to force people
to change and giving more of an advantage to those who know how
to use technology.
Mr. Shays. So the future of our being able to compete is
going to be based on how well our populace is educated and how
willing we are to allow people with technical skills to
immigrate into this country. Do you as Secretary of the
Treasury get involved in those issues or are those issues that
you have to punt to someone else?
Secretary Paulson. Get involved in immigration issues?
Mr. Shays. Immigration and technology and making sure that
Americans are keeping pace.
Secretary Paulson. Those fall in other people's areas.
Mr. Shays. Let me ask you, with regard to what you refer to
as a historic debt relief initiative, how are you able to make
sure that it is not lend and forgive as you talk about this
cycle?
Secretary Paulson. Well, I have to say that is always a
challenge. I think there is much more buy-in when you talk to
people at the World Bank and to my counterparts from around the
world at the G-7. I think there is a growing consensus and a
structure for reducing the likelihood.
Mr. Shays. But is there anything concrete that your people
talk about that say this is going to be different because we
are going to not only--the debt relief is historic. It is
larger than any time in past history and it is global. I mean,
there is great participation. But is there anything that the
United States is doing in a concrete way to make sure that we
are not going to just see a repeat of this in a few years?
Secretary Paulson. I think that is a good comment. I think
a lot of this is not just going to be the structure that is put
in place in the highly indebted countries--the poorer
countries. There is going to have to be restraint and
discipline from those that lend. There has been a lot of
discussion about making sure that the developed countries and
the multilateral institutions act in concert.
Mr. Shays. Let me put it in my own words. Is your basic
point that whereas we have lent in the past, that countries are
in a unified way going to be a lot stricter on how we give out
credit?
Secretary Paulson. Yes, and that there is a big focus on
debt sustainability when we look at new lending. And there is a
big focus on trying to discourage other nations from coming in
and free-riding and following this forgiveness by making new
loans.
Mr. Shays. Thank you.
Ms. Waters. [presiding] Mr. Ackerman.
Mr. Ackerman. Thank you, Madam Chairwoman. Welcome, Mr.
Secretary. Good to see you. I want to thank you first for the
good work that you are doing, and especially including the
section in your prepared comments, the issue of strengthening
the international framework against illicit finance and how
important your role is and the role of the Treasury in fighting
terrorism. You possess tools that are very, very important to
winning this war on terrorism and providing whatever
transparency we can in the international community where
people, players, companies, and sometimes countries are helping
to finance terrorism and terrorist activities. Thank you for
the good work that you are doing in the areas of nuclear
proliferation, etc., specifically with regard to North Korea
and Iran.
I have basically one question this morning, and that goes
to the issue of the Iran Sanctions Act. This Act has been on
the books. Unfortunately and regrettably, not one entity was
sanctioned during the whole duration of the existence of this
bill during the time of the Clinton presidency, and that wasn't
a good thing. And in addition to that we have seen the same
exact thing throughout the Bush presidency, which was greatly
heralded, that if you harbor terrorists, it is just as bad as
if you are a terrorist kind of approach, yet the Administration
has not sanctioned anybody. And we know who some of these
people are. We know what some of them are doing, and yet there
are no sanctions.
It may be above your pay grade because you don't do the
sanctioning; the President does that. So you may feel
uncomfortable commenting on that as it might be above your pay
grade.
Secretary Paulson. Let me make a couple of comments. First
of all, we have been, the Administration has been, and Treasury
has been very active in terms of taking financial measures
against a number of Iranian entities, including Bank Saderat,
which has been active in financing terrorists, and then with
Bank Sepah, which has been a big financer of proliferation and
missiles, and weapon systems acquisitions. So we have been
quite active there, and we have been quite active in engaging
private sector banks from around the world.
Mr. Ackerman. I know indeed that--
Secretary Paulson. To answer your question, I think that
engaging in secondary boycotts, sanctioning companies in other
nations, I think it is our collective judgment that this would
work against what we are doing right now, which has the
potential to be quite successful, building a multilateral
consensus.
Mr. Ackerman. I understand that is your opinion.
Secretary Paulson. Yes.
Mr. Ackerman. But you also, as we, are sworn to uphold your
constitutional responsibilities and the Constitution and the
laws. We passed a law and nobody is enforcing that law. Nobody
has put anybody on this list. And whether you consider it a
secondary or a tertiary or quaduciary boycott of a company that
is participating in something that is going to result in
destruction in the United States and want to observe the
niceties of not doing that or not, that is your opinion. But I
would suggest that the President should be, a President could
and should have, this is a nonpartisan comment, should have
some countries and some companies on that list. We do not.
But something that I think you can comment on, because
indeed with both Bank Saderat and Bank Sepah you have been
doing some good work, and you do have people from Treasury and
different places in the world trying to convince them not to do
business. Could you give us the names? That is something you
can do. Give us the names of some companies that are not
cooperating with Treasury on this.
Secretary Paulson. In terms of--
Mr. Ackerman. Which is the number one company that is not
cooperating?
Secretary Paulson. Well, in terms of--I will tell you
this--
Mr. Ackerman. That is investing in Iran.
Secretary Paulson. I would say in terms of the financial
sector around the world--
Mr. Ackerman. Mr. Secretary, with all due respect, we each
have only 5 minutes.
Secretary Paulson. Right.
Mr. Ackerman. And you can run the clock on each of us if
you would like. I would like you to give me three names, Mr.
Chairman, if I might, I would like you to give me three names
of companies anywhere in the world that you like that are not
cooperating. You can do that. I know you can.
Secretary Paulson. That are not cooperating?
Mr. Ackerman. Do you want me to repeat the whole thing? I
know you understand me, so let's not run the clock and repeat
the question again. Give me three companies that are not
cooperating with us.
Secretary Paulson. I am not prepared to single out three
companies.
Mr. Ackerman. Would you get back to us in writing on that
or you just don't want to?
Secretary Paulson. I will get back to your question in
writing, but I doubt, just to be very direct with you, that you
will get a list from the Treasury Department of companies that
aren't cooperating. If we find companies that are violating the
law, we are going to take action against them.
Mr. Ackerman. And you have a reluctance to cooperate with
the Congress and providing the companies that are not
cooperating with U.S. law.
Secretary Paulson. There are a variety of nations that we
would like to get more support from, but we are getting support
and we are building support.
Mr. Ackerman. We would like to help you with that, but--
The Chairman. The gentleman's time has expired. The
gentleman from Texas.
Mr. Hensarling. Thank you, Mr. Chairman. Mr. Secretary, I
don't think I have heard a discussion today about the patterns
of entitlement spending within the Federal budget. Recently
Chairman Bernanke of the Fed said that without early and
meaningful action to address the rapid growth of entitlements
the U.S. economy could be seriously weakened with future
generations bearing much of the cost. He said that at a House
Budget Committee hearing.
Recently Controller General Walker of GAO said that the
rising cost of government entitlements are a fiscal cancer that
threatens catastrophic consequences for our country and could
bankrupt America. Most of the models I have seen from OMB and
CBO and others, who slice and dice the numbers here, have us on
a collision course over the next several decades of either
having a Federal Government consisting of a little more than
Medicare, Medicaid, and Social Security or a doubling of taxes
on the next generation just to balance the budget. So far I
have seen no evidence in this Congress that there is an
interest in attempting to reform these entitlement programs.
My question is, do you concur with the assessment of
Controller General Walker and Chairman Bernanke and, if so,
what could be the long-term implications for America's
competitiveness in the international economy?
Secretary Paulson. I do concur and I do believe that
perhaps the two biggest intermediate to long-term structural
economic issues we have are the need for entitlement reform and
energy--those would be the two that I would cite. In the
entitlement area we have a fiscal situation in the short term
which is manageable and getting better. But if you look out a
number of years, we have an entitlement issue which is driven
by two factors--demographics and rising health care costs going
up much quicker than the economy overall. This is frustrating
because the sooner we deal with these as a country, the more
flexibility we will have and the less onerous the penalty will
be. Also, the price paid by the younger generation will be
less.
So this is something--and I would tend to leave it with one
positive comment--that I believe is a bipartisan issue. I do
believe that people on both sides of the aisle understand it. I
really do hope that sometime over the next several years we
will all get together to solve it, because it is not going to
go away, and the longer we wait, the more expensive it is going
to be to solve the problem.
Mr. Hensarling. Returning to the issue of Chinese currency,
possible Chinese currency manipulation, I rarely have an
opportunity to quote my mother at these hearings, but my mother
once said that life is often full of lousy options, and it
appears to me we may have a lousy option in dealing with
Chinese currency. Isn't it true whether through market forces
or through currency manipulation or through acts of divinity
there will be winners or losers every time there are
adjustments in the currency exchange rates? If you are in the
export business or the import business, depending on which way
the currency fluctuates there will be winners and losers. For
those who are advocating various tariffs and sanctions won't
that simply drive up the cost of many of our manufactured goods
that could have a detrimental impact on the disposable income
and the standard of living for low- and middle-income
Americans?
Secretary Paulson. If your question is do low-income
American consumers benefit from low prices from cheaper
imports, I think the answer to that is yes. As China moves
toward a market determined currency, the winner will be the
global system the world overall. It will benefit the United
States and China. I believe we have a responsibility of
fairness to press the Chinese toward getting to the point where
they are not just partway integrated into the global system.
The global system is not going to work over time unless those
that play such a big role selling goods and services are truly
integrated in terms of the financial markets and their
currencies.
Mr. Hensarling. Thank you.
The Chairman. Thank you. The gentleman from California.
Mr. Sherman. Thank you, Mr. Chairman. First I would like to
thank you for the clarity of your answer to Mr. Ackerman. He
asked you about the Iran Sanctions Act and why it did not apply
to a single company, and your response was you thought it was
bad public policy to sanction foreign companies. And I think
that clarifies really the Administration view toward Congress,
which is the laws that we pass are advisory and when they
constitute bad public policy they will be ignored. Other than
that you think it is terrible public policy, is there any
reason at all legally, if you were just going to follow this
statute, not opine on whether it is good public policy, that
this Administration has not identified a single oil company
that has invested more than $20 million in Iran?
Secretary Paulson. Again, I take your point.
Mr. Sherman. Thank you. Sir, I am going to go on to the
next question.
Secretary Paulson. I will advise other people within the
Administration. But the point that I was respectfully trying to
make--
Mr. Sherman. Sir, I will reclaim my time. I think your
answer is very clear.
Second, I would just like to clarify for the record the
exchange of correspondence that I had with the Treasury
Department over whether there should be an emergency plan for
dealing with a 20 percent decline in the value of the dollar in
any week or similar catastrophe or a 40 percent decline in a
single month. The response from your Department has been that
we don't need to worry about that.
I would urge you to work with my office if there is any
legislation that you think would give you the tools necessary
to deal with such a catastrophe, and I urge you again to work
with the other Agencies of the Administration to put together
an emergency plan. If, however, you don't think it is worth
your time, that is fine. It is entirely up to you.
It has been widely reported the extraordinary efforts the
Administration made to save Mr. Wolfowitz's job. You, yourself,
made phone calls. When it comes to keeping the World Bank from
making disbursements to Iran, the Administration voted against
those loans, as you are required to by law, and in this case
you actually followed the law. But how hard--can you describe,
compare the extraordinary efforts that you made to save Mr.
Wolfowitz's job with energy expended to try to prevent the
World Bank from disbursing loans to Iran. Actually, I will ask
that as a more specific question. Have you made any phone calls
at the ministerial level urging that we stop making
disbursements on the $1.3 billion of World Bank loans headed
for Iran?
Secretary Paulson. I have not made any personal phone calls
on that.
Mr. Sherman. Did you make any personal phone calls to help
keep Mr. Wolfowitz's job?
Secretary Paulson. I made personal phone calls with regard
to Mr. Wolfowitz to make sure that there was a fair process.
Mr. Sherman. I am glad that this is how we have allocated
our chits in power in the World Bank. But let me move on to
another question.
We have had two Iranian banks that you have prevented from
doing business.
Mr. Bachus. Mr. Chairman.
The Chairman. Yes.
Mr. Bachus. I would ask in fairness--
The Chairman. We will stop the clock during this
conversation.
Mr. Bachus. I would ask in fairness that the Secretary, if
he is asked a question, that he does have a chance to answer.
The Chairman. I would say the general rule is that the
member controls the time. If the Secretary at the end wants to
add something he can. I would say that I think the Secretary is
having trouble adjusting to the 5-minute rule. In several
cases, people have asked questions and the answers have been,
it seems to be, more discursive.
Mr. Bachus. Mr. Chairman.
The Chairman. I am sorry. It is not my time. I recognize
the gentleman and I am trying to explain what is going on. The
Secretary has on occasion been more discursive and has frankly
repeated stuff that everybody knew. But if at the end he feels,
the members control the time, that he wants to add, I would be
glad to recognize him for that.
Mr. Bachus. I thank the chairman. I think that in this
case, the Secretary was asked a question, and after two words
he was cut off.
The Chairman. Well, members control the time. And members
do have a right, it seems to me, to ask a specific question and
try to get a specific answer, particularly under the 5-minute
rule.
The gentleman from California is recognized.
Mr. Sherman. Thank you. It is only in the Senate where you
are allowed to filibuster. You have prohibited two Iranian
banks from doing business with the U.S. Fed and U.S. banking
system. Why not all of them?
Secretary Paulson. We have a general prohibition against
them doing business in the United States. We took action
against the two banks because we had very hard intelligence and
very strong evidence of clear wrongdoing. As a result, it was
possible to go around the world, and with this conduct of clear
misbehavior build a multilateral consensus. So we are looking
at all of our options.
Mr. Sherman. I am reclaiming my time. You do need
cooperation from the rest of the world on some things, but you
could stop every bank that is of assistance to the Islamic
Republic of Iran and is located in the Islamic Republic of Iran
from doing business with the Fed without seeking international
consensus.
Secretary Paulson. They are excluded from the United
States.
Mr. Sherman. They got the U-turn transactions.
Secretary Paulson. They got the U-turn.
Mr. Sherman. And we could stop the U-turn without this
lobbying effort?
Secretary Paulson. That is one thing that we are
considering. But as I said, and I spent a lot of time on this,
Congressman, I believe that when we can show people that we
have hard evidence, it is a lot easier to get the kind of
support that we are currently getting from around the world,
which I think is isolating Iran from the global financial
system.
Mr. Sherman. Let me just point out that the centrifuges in
Iran continue to turn and I wish we were as willing to
inconvenience international corporations as we have
inconvenienced American soldiers fighting in Iraq, and I yield
back.
Secretary Paulson. I have spent a lot of my time on this
issue. It is very important to me, and we share the same
objective here.
The Chairman. The gentleman from California, Mr. Campbell.
Mr. Campbell. Thank you, Mr. Chairman. And thank you very
much, Mr. Secretary. A few kind of relatively broad questions,
unlike some of what you have been getting. What do you see as
the greatest risks to business and capital formation in the
United States? I mean some people will say Sarbanes-Oxley is a
big one. I suspect from your previous answer you don't agree
with that. Litigation risk perhaps. What do you see as the
biggest impediments to people forming companies and capital in
the capital markets in the United States?
Secretary Paulson. Congressman, when people say Sarbanes-
Oxley, I think they are using that as code for a lot of things.
Not just the Sarbanes-Oxley Act, but the way it is implemented,
all of the new listing rules that have come into place, the
different changes in the boardroom, and the changes to the
accounting system. Because the business scandals in this
country were largely accounting scandals, and that is what
Congresswoman Waters commented on with respect to Enron and
others, there were big changes in accounting. And some of the
secondary, and tertiary effects of those changes have not all
been positive. We had, for instance, around 1,500 restatements
last year in the accounting area.
I believe that all of these changes taken together have
been a deterrent to public listing in the United States. At the
Treasury Department, we focused on three things: First, the
accounting industry and how that works and how the accountants
relate to boards and to managements and to shareholders and how
to deal with the restatements and the time and effort and money
that is spent in that area, number one.
Second we are focused on regulatory structure. We have a
regulatory system that has been built up in this country over
many years. And so how we resolve some of those issues. And
then the enforcement, legal system and getting at, again, the
issues that we had an opportunity to discuss earlier with
Stoneridge. And so I would say those are the three areas we
focused on.
Mr. Campbell. Okay. And litigation risk is kind of that
third?
Secretary Paulson. Yes.
Mr. Campbell. There is a lot of talk around here about
raising the tax rate on capital gains and dividends, either
straight up or through on the higher income taxpayers, let us
say, through the modifications in the Alternative Minimum Tax.
What effect would that have, do you believe, on growth, capital
formation, and job formation?
Secretary Paulson. Well, I think it would be a negative. I
think that the tax reform reducing the capital gains rate,
equalizing it with dividends, was a major improvement. It was
not only a reduction in taxes, but also a major reform that
eliminated some of the biases that we have in our tax system.
It has also helped drive jobs and growth, and I think it has
been very positive. And, given where we are in our business
expansion today, I wouldn't recommend increasing the dividend
and capital gains rates.
Mr. Campbell. And as a final question, we have a lot of
angst about our savings rate, but yet globally there is a lot
of global liquidity. Chairman Bernanke has called it a global
savings glut. What does that mean for us, what does that mean
for the economy, what does that mean going forward in this
global savings glut?
Secretary Paulson. What has happened is that there has been
a wall of money from around the world. Asia, Germany, Russia,
something like $450 billion last year from the 10 oil exporting
nations, $6 trillion in capital flows. Now, that money needs to
find a home, and the U.S. economy is very attractive relative
to other places, looked at historically or going forward. To me
the key is to continue to keep our economy strong, to have
policies that enhance confidence in our economy, to be open for
investment, and to encourage foreign investment because we have
attracted a lot. The U.S. economy is 25 percent of global GDP,
but we have 40 percent of global financial assets here in this
country, and that is very important.
Mr. Campbell. Thank you, Mr. Secretary.
The Chairman. Mr. Secretary, we have a vote that is
probably going to take about 30 minutes. We have some members
here. Is it possible for you to take a break and come back at
about say 12:40 and stay for another 40 minutes or so.
Secretary Paulson. Okay.
The Chairman. I have to accommodate the members who are
here. I will not allow any members who have not already been
here.
Secretary Paulson. I have a lunch and then I am supposed to
speak to a group of international students at 1:45.
The Chairman. Where is that going to be?
Secretary Paulson. That is going to be at the Executive
Office Building. I am supposed to chair an economic principles
lunch at 1:00, so the idea would be that I would come back at
12:45 and be here until 1:15.
The Chairman. If we can. We will try to accommodate as many
members as possible. I appreciate it. We will finish some more
questions now.
Secretary Paulson. Could we do whatever we can to get me
out of here by 1:15?
The Chairman. Yes.
The gentleman from Kansas.
Mr. Moore of Kansas. Thank you, Mr. Secretary, for being
here. Mr. Secretary, international currency policies, and
particularly China's exchange rate policy, are a concern for
American manufacturers and other folks as well. I would like to
stay on the topic of currency policy, but I would like to draw
focus to another side of the issue.
According to the most recent Treasury statistics, today
foreign nations hold over $2.2 trillion, or 44 percent, of all
publicly held U.S. debt, with China alone holding over $400
billion of our public debt. This makes China the largest
foreign lender of the United States Government. I am concerned
that we may be too reliant on foreign countries as creditors,
some of whom may not have our best interests at heart. Add to
this the Wall Street Journal and others have reported that
China may be considering riskier investment strategies with its
foreign currency reserves which could result in fewer purchases
of investments like U.S. Treasury bonds and more buying of
investments that are riskier but have better long-term returns.
Mr. Secretary, do you have any concerns, or are you
concerned that China may be leaning towards a more aggressive
investment strategy with our foreign reserves and what dangers,
if any, does this pose to our country as a result of China's
holding a substantial portion of our public debt?
Secretary Paulson. Thank you very much, Congressman. I have
spent a lot of time over my career looking at government bond
markets, and I would begin by saying that roughly 50 percent of
our treasury debt is held globally outside of the United
States. That is very similar to many other governments. And in
my judgment it is good to have a diversity of holders and to
have people want to invest here. The Chinese, as you point out,
own roughly $400 billion of our treasury debt. The Japanese own
more than that, maybe another $200 billion.
U.S. treasuries trading volume is about $500 billion a day,
so the Chinese own less than one day's trading volume. I
believe they own our securities and invest in this country
because it is in their best interest. They do so because they
get the best return on a risk adjusted basis. In terms of what
they are doing with their sovereign wealth funds, this is a
trend we see around the world, and it is one you expect to see
with countries that have a substantial amount of reserves,
countries are going to want to invest their reserves in the way
that makes the most sense for them. I see that as an
opportunity, too, because I do believe they are going to want
to make investments in the United States, foreign direct
investments, which I think will be a good thing. But again, I
am not alarmed by holdings of U.S. treasuries, whether they be
in China, Japan, the Middle East or wherever. I think this is
good for our country and it is not unusual.
Mr. Moore of Kansas. Thank you, Mr. Secretary. What would
you expect the result would be if for whatever reason China
decided to sell off or not hold any more our debt? What would
be the impact on interest rates in this country?
Secretary Paulson. Interest rates are lower by virtue of
the fact that U.S. treasuries are held around the world. If
China decided to sell off U.S. treasuries slowly over time,
which I don't expect because I am not quite sure where else
they would want to invest their money, I don't think it would
have a big impact. Because as I said, it is less than one day's
trading volume.
Mr. Moore of Kansas. If it wasn't sold off slowly what
would be the impact, if it happened over just say a period of
months?
Secretary Paulson. I wouldn't speculate about that. I don't
think it is a major concern or a major risk.
Mr. Moore of Kansas. I hope you are right. Thank you.
The Chairman. The gentleman from New Jersey will be the
last questioner in this period and we will resume at 12:45. The
gentleman from New Jersey.
Mr. Garrett. Thank you, Mr. Chairman. And my colleague from
Texas, as he very rarely gets to quote his mother at these
hearings, and I have never quoted his mother, but I am sure she
has said to him at one time, son, always obey the rules. When
it comes to small businesses in this country, specifically
Sarbanes-Oxley, the rules that are about to be imposed upon
them are pretty large and monumental. With regard to the entire
Sarbanes-Oxley, some people have described it as being use of a
sledgehammer to try to fix a problem when maybe just a little
tap would have been more appropriate. We all agree
accountability, transparency, they are laudable goals, but we
are wondering whether we could have done it in a more
competitive fashion. As you said before, and we all know we are
in a global economy, but I often think that the burden we put
on these companies, $4 million to $6 million per accelerated
filer, 50 times what the original SEC estimates cost, are
burdensome, but even more so on the small companies. The big
ones we know what the outcome of Sarbanes-Oxley is. Some of the
studies show that only 1 of 24 listings, over $1 billion, have
been in the United States as opposed to foreign exchanges. I
think the studies will show if we do go forward with some of
these implementations on the small companies it is going to be
even more detrimental.
Now, I will say this also, that I commend the SEC and the
PCAOB, the work they are doing to try to revise this system,
and the rules and what have you are good, but I think it may be
a little unfair to the small guys because they being right in
the middle of the year, calendar year so to speak, with the
rules just coming forward and being enacted and implemented or
asked to be implemented may be a burden on them.
So my first question is this: I just dropped in a piece of
legislation, it is a bipartisan piece of legislation, that
would extend for another year the current exemption for the
small guys, for the smaller businesses, because the burden is
greater on them. One study says, out of Nasdaq, it indicates
that the burden of compliance as a percentage of revenues is 11
times greater for small companies, and there is probably a good
reason for that. Again, in light of the fact that we are sort
of in the middle of the game here and we are trying to throw
that on to them, I want to know what your thoughts are of that
idea of just giving a 1-year extension to allow them some
breathing room.
Secretary Paulson. I share your concern about small
business, and it is very important that Sarbanes-Oxley be
implemented in a much more efficient way that looks at the--
section 404 should look at the costs versus benefits. Now, with
regard to small businesses, they have a need also, if they are
public, to have good control systems. And right now my
understanding is that the earliest that these regulations would
go into effect for the smallest businesses would be 2008.
Mr. Garrett. Let's have a clarification for my benefit.
That would mean for the filing of that period of time, correct?
Secretary Paulson. Well, it would be for the filing which
would, I think, be at the end of 2008. And so given the changes
that have been made to section 404, and the changes that are
being made, and given the fact that there is a delay, that I
have been comfortable with the way--
Mr. Garrett. For my benefit here, if that is the case, in
which case the filing would be for 2009 or 2008, I would be in
agreement with you.
Secretary Paulson. I thought it is was going to go into
effect for the 2008 year.
Mr. Garrett. But if it is not, if it is for the filing--
Secretary Paulson. If that would be the case, they would be
filing the statement whenever they did, which would be early
2009. They would be living with the rules in 2008.
Mr. Garrett. It is just for section B for that period of
time, but for the others the management reports would be still
for 2008 looking back towards where we are now?
Secretary Paulson. That is right.
Mr. Garrett. Which is the problem, that they would be
looking for--basically we are right in the middle of 2007 with
the regs still coming down and they will be looking to
implement them. It is not as bad for the large guys who have
already been basically implementing some system and we are just
asking them to change it as we are going along, but for the
small guys, isn't it an added burden because they haven't done
it so far?
Secretary Paulson. You and I are discussing something we
are in agreement on. I wanted the burden to be less and less
for the smaller firms. The large firms have been dealing with
it for a number of years now, and as I understand it, the
regulations have been greatly modified. Through the
conversations I have had with the PCAOB and with Chairman Cox,
I am comfortable with the current path, but I understand your
point of view.
Mr. Garrett. But are you comfortable with them having to
implement it for the other provisions in filing 2008 or 2007
for regulations that are just now being implemented.
Secretary Paulson. I think they will have time to
transition, yes.
Mr. Garrett. Okay.
Secretary Paulson. I am sorry, I understand your concern
but--
Mr. Garrett. If the Chair lets me, where is their
transition period if they are really just being thrown the
regulations right now, because it is not just a filing in 2009,
it is a filing in 2008?
Secretary Paulson. The larger companies have been dealing
with this now for a couple of years.
Mr. Garrett. But the small guys haven't.
Secretary Paulson. The small companies haven't and so there
has been a modification. They have had a chance to look at what
is going on. The rules are being modified. So, again, I would
be happy to have some of our people talk with you about this
off-line and I am sure that Chairman Cox would also.
Mr. Garrett. Thanks.
The Chairman. We will recess. I thank the Secretary. We
will start promptly at 12:45 p.m..
Mr. Bachus. Mr. Chairman, I would like, and this is my
personal opinion, but I would like to express to the Secretary
my compliments. I think you were badgered, and your patience
under fire was commendable.
Secretary Paulson. I didn't look at it as badgering. It is
my job to come up here and to respond. Thank you.
Mr. Bachus. I did not mean Mr. Garrett. I meant earlier.
[Recess]
The Chairman. The committee will reconvene.
Mr. Scott.
Mr. Scott. Thank you, Mr. Secretary, for your patience and
your generosity of time and staying with us for this session.
Let me first start off, Mr. Secretary, with a few
questions. In your testimony you were very positive about the
economy and our policies of international financial security
around the world. Let me ask you, first of all, do you know the
unemployment rate in the African American community?
Secretary Paulson. Too high.
Mr. Scott. Do you know what it is?
Secretary Paulson. I don't know the exact number. I have
seen numbers getting way up there.
Mr. Scott. And specifically not just in the African
American community but among African American males.
Secretary Paulson. Yes.
Mr. Scott. It is catastrophic--over 40 percent, and in some
areas even higher than that. That is not a good sign certainly
for that community. I would like to ask you to take a close
look at that.
As our top economist, as our Secretary of the Treasury, to
have a segment of our constituency hovering at 40 or 50 percent
unemployment is intolerable, and I would like to see us address
that, find some reasons for that, particularly when you are so
glowing with the soaring aspects of the economy otherwise, but
for the African American community it is a serious case of
extreme depression.
The other point I wanted to discuss with you is the squeeze
on the middle class, another great area of concern. And if we
look at how the middle class has contributed and has downsized,
so to speak, we can almost see it in direct proportion to the
loss of manufacturing jobs in this country.
So when we look at this economy I think, and the sector of
African Americans especially and the squeeze on the middle
class, the squeeze of middle class jobs, which are basically
manufacturing jobs, and the loss of this has been directly tied
to what I see as a very warped trade policy that in effect
rewards companies and gives tax incentives for our companies to
move overseas, to set up manufacturing plants overseas, and
then if they make profits and keep those profits overseas, they
are not taxed in our system. That is another area that we have
to address.
And I agree with you, the world is too short, globalization
is too important, the world economy is too important. We are so
involved in it that isolationism is certainly not the answer.
But perhaps some protectionism, something to realize now that
we have to come home in so many measures, because America is
suffering, America is not satisfied.
The polls for the President of the United States are
devastatingly low, and for us in Congress, it is even lower:
something in the area of 18 or 19 percent dissatisfaction of us
in Congress, and around 20 percent as far as the President of
the United States.
So America is upset about a few things. But there is no
trade policy that exemplifies what is wrong with our trade
policy, what is wrong with this country than the Korean Free
Trade Agreement that is impending. Are you familiar with that,
Mr. Secretary?
Secretary Paulson. Yes, I am.
Mr. Scott. If you look at that, it shows what is wrong with
our trade policies. Here we are with a country like South
Korea. Are you aware, for example, that last year 700,000
automobiles were imported into this country from Korea and yet
less than 5,000 United States automobiles were imported into
Korea. Within this agreement, that is one thing, their tariffs,
their complexities of them all are arranged in such a way to
give this a terribly bad deal for the United States.
But the other point is as a part of these agreements they
have what is known as these sort of economic industrial zones
that are created--
The Chairman. If he is going to have time to answer.
Mr. Scott. My point is on that point--that are created
basically to employ North Koreans who come in and work and take
the money back into the North Korean economy. My bottom line is
I would like to get your response on this agreement, your
thoughts on it, would you, please?
Secretary Paulson. Congressman, thank you for your
comments. I very much share your concern with unemployment
among young African Americans and males. Now with regard to the
Korean Free Trade Agreement, I will pass on your comments to
Ambassador Schwab and ask her to get back to you. But in terms
of the auto sector, that is one that was focused on, so I am
aware of the numbers you cited. I also am aware that Ambassador
Schwab believes that there were a number of breakthroughs on
this agreement that are going to make it much easier to import
automobiles to Korea in the future.
Also with regard to manufacturing I would just have this to
say to you, and it is very interesting. In 1950, we had 14
million manufacturing jobs in the U.S. economy; that was 30
percent of the employment. Today we have 14 million
manufacturing jobs; that is 10 percent. Manufacturing has
shrunk as a percentage of the U.S. economy. We have 7 times as
much output as we did in 1950 and we are still the largest
manufacturer in the world, 2\1/2\ times greater than China,
bigger than Japan, a couple times bigger than Germany, but it
has been automation.
I would just simply say to you, and I am not debating it, I
understand the issue, but that there are many other industries
that have taken their place, and that of the top industries,
many are in service industries right now--engineering, computer
sciences, we can just go through that long list.
But I think the name of the game is transitioning people
from manufacturing jobs to other good jobs and finding good
jobs, so we agree on that. I am not disagreeing with you, I am
just saying that there have been changes all over the world
that have been driven by automation.
The Chairman. The gentlewoman from Minnesota.
Mrs. Bachmann. Thank you, Mr. Paulson, for your willingness
to come back to this committee and speak to us this afternoon.
I am the lone Republican holdout on this side. But thank you,
Mr. Secretary, for coming back to this committee. I appreciate
your time.
The question was asked of you earlier regarding entitlement
spending, and that is an area of deep concern of mine as well.
The untold story that so many Americans aren't talking about is
really the great prosperity that we are enjoying right now, low
unemployment, the markets are doing great, and the stock market
is doing great. We have a great success story, but it is a very
short window that we have before the great drawdown on
entitlements will begin to occur, and I know members in this
room may disagree on how we should address this situation, but
I think there would be very little disagreement on the fact
that we can't sustain what we are doing now.
I wonder if perhaps, and I have several questions I would
like to ask you, but I first wonder if you would answer what
would be your first suggestion for what at a minimum Congress
should begin to do this session to address the entitlement
looming crisis that we are looking at.
Secretary Paulson. Okay. I think you are wise to say that
the time to address these problems is during a time of economic
strength. Now I don't want to sound like Don Quixote here, and
even though I think it is unlikely, I still believe there is
always a possibility we could get people on both sides of the
aisle to come to the table and come with open minds to put
forward their best ideas and come up with solutions.
There have also been budget proposals put forward by the
Administration, including in the Medicare area, to slow down
the rate of growth of spending and the trajectory of growth as
it relates to things like program efficiency.
Mrs. Bachmann. Reclaiming my time, the Federal budget is
very misleading, and this is something I wonder if you can
comment on. It encourages Congress to over commit to future
entitlement spending because the true long-term costs are not
properly accounted for. This is something that I am concerned
about. It seems that we could benefit from a process that would
incorporate present value calculations of our overall
commitments under current law and not just over a limited time
horizon, like maybe 75 years, an estimate of all future sources
of revenues and outlays, then split into major spending
categories, Medicare, Social Security, and the rest of
government.
I am just wondering, Mr. Secretary, if you agree that that
would be helpful or do you think that Treasury's annual
financial report to the Federal Government would be a good
place to include such an estimate? Because having good data to
work off of helps us.
Secretary Paulson. I agree with you, good data to work off
of helps, but there are so many different reports and analyses.
But as I talk to people, I don't find disagreement as to the
problem. I don't have a lot of people in either party standing
up saying there is no problem.
Mrs. Bachmann. Right, I agree with that.
Secretary Paulson. So I really do think it is more about
political will than it is about economic analysis.
Mrs. Bachmann. I agree absolutely. Mr. Secretary, that is
why I am wondering, what would be your minimum goal for
Congress this term in beginning to address this problem? If we
agree there is a problem, what would be the minimum goal, in
your estimation?
Secretary Paulson. A minimum goal I had was to talk about
this issue with as many people as I could, and depoliticize it
in order to get agreement on both sides that there is a
problem, so it would be easier whenever that time comes to come
together to solve it.
Mrs. Bachmann. I think we can get there. But what I am
wondering is, on the solution side of the equation, Mr.
Secretary, what would be your minimum goal on the solution side
of the equation?
Secretary Paulson. Other than what I have just suggested,
which is to make progress toward understanding the problem and
agreeing that it needs to be solved, the minimum would be to
have people on both sides agree to come together and sit down
with an eye towards solving the problem.
Mrs. Bachmann. I guess we will end with that, Mr. Chairman.
The Chairman. I thank the ``Lone Ranger'' for her comments.
And now the gentleman from Texas.
Mr. Green. Thank you, Mr. Chairman.
I thank you for the ocularity that you provided at the
genesis of this hearing. You made some most important comments
about equality and inequality, and I would like to just for a
moment make a few additional comments and thank the Secretary
of for being here today.
Mr. Secretary, you have indicated that you have concern for
reducing poverty, building a strong middle class, and that you
want to see people around the world, I suppose, share in the
benefits of this economic growth. In this country, we have
persons who work full time and live below the poverty line. We
are the richest country in the world--1 out of every 110
persons is a millionaire--yet we still have people working full
time and living in poverty.
We mentioned saving. Many times, much of the time what
persons who are full-time workers are doing is not saving, they
are postponing consumption, and there is a difference between
saving and postponing consumption. They literally have things
that they could consume that they forego so as to have some
semblance of savings.
There is also the inequality of opportunity that the
chairman talked about very briefly, and it has to do with, in
my comment, earnings. We have CEOs who are making much, much
more than the average worker, 500 times and even more in terms
of increases in their salaries.
And then we have the inequality of the opportunity to
learn. In my opinion, we are not putting enough into the
institutions of higher education so that all persons can have
equal access to education.
With that said, I now go to your statement wherein you
indicate that you want to end the policy of lend and forgive,
the policy that has to some extent benefited many of the
nations of Africa. Given our history as it relates to Africa,
our history in this country, it seems to me that we have a
moral imperative to do more than anyone else on the planet when
it comes to Africa.
My concern with ending the lend and forgive policy is in
which direction will it take us if you do this? Will we cease
to lend, or will we accord more grants? There are many
directions that we can go in, and the phrase ``end lend and
forgive'' causes me some degree of concern.
So I would like for you, if you would, to tell me, will we
continue to lend? Is that a yes or no? If you would, I would
beg you to begin by saying yes or no, because sometimes when
people finish, I don't know whether they have said yes or no.
If you could.
Secretary Paulson. Congressman, you took a while to ask the
question, and I would like just a minute or two to answer.
Mr. Green. I agree that you should say all that you desire,
Mr. Secretary, after you just tell me whether you think we will
continue to lend--
Secretary Paulson. Obviously.
Mr. Green. I take that as a yes.
Secretary Paulson. In terms of this Administration, I can't
think of any Administration that has ever worked so hard or
done so much to make a difference in Africa, and we could just
tick off all of the various things in terms of what has been--
Mr. Green. Without ticking them off, let me mention one
other thing. You indicated in your comment that you have made a
call on behalf of Mr. Wolfowitz because you wanted to make sure
there was a fair process. You did say this. My concern is this:
Given that there has never been a female to head the World
Bank, never in the history of World Bank, have you made any
calls to indicate that it may be time for a capable, competent,
qualified female to head the World Bank?
Secretary Paulson. The last time I was asked the question,
I was asked whether I made a call on lending to Iran. Now,
there haven't been any votes to lend to Iran since I have been
Secretary.
With regard to this situation, I worked to make sure the
proper governance process was in place as it related to Paul
Wolfowitz. Once that was done, I called around the world to
listen to what leaders around the world wanted, and what I
heard was they wanted someone--
Mr. Green. Do you agree that there are capable, competent,
qualified females? Did you make any phone calls to assist any
female, any female who is capable, competent, and qualified to
hold this position?
Secretary Paulson. I did not, and I think it would be a
great day when a woman runs the World Bank.
Mr. Green. What have you done to accelerate the movement
toward that great day? Things don't happen by accident; they
usually happen by design. What have you done by design to
assist in the process, since you were willing to assist Mr.
Wolfowitz?
Secretary Paulson. What I was doing with regard to Mr.
Wolfowitz was working to assure a fair process, and then what I
did after that was to make sure that we would get someone who
was very well regarded and considered an expert around the
world to lead the efforts for development and for lending to
poor countries, and someone who has a big--
Mr. Green. Thank you, Mr. Chairman. I yield back the
balance of my time.
Thank you, Mr. Secretary.
The Chairman. Mr. Secretary, may I ask you, we have been
joined by one member who was not here at the close. I think we
can fit them both in if you can do that.
Secretary Paulson. I will be very brief.
The Chairman. We may have to cut the gentleman to 3 or 4
minutes. The gentlelady from Wisconsin under our agreement will
go first and then finish with the gentleman from Illinois.
Ms. Moore of Wisconsin. Thank you so much, Mr. Chairman,
and thank you, Mr. Secretary, for sticking around.
I do have a question about vulture funds. As you know,
vulture funds are specialized asset management companies that
buy the distressed commercial debt of the poorest and most
indebted countries, most notably in Africa, and knowing that
the multilateral debt relief has put the governments in these
countries in a better position to pay.
These companies are formed specifically to prey upon a
particular country, and then they sort of disappear. They buy
these debts at a deep discount and then go after them in courts
of countries, particularly United States and Britain. We even
have a couple of cases, the Elliott case, where they paid $11
million for the debt of Peru and recovered $55 million from a
New York court. And, of course, the resident of Washington,
D.C., Michael Sheehan, from Donagan International, which bought
debt for $3.8 million from Zambia. I did that just as
background information for those people who may be watching us
here.
A third of the countries receiving this debt relief have
been targeted by lawsuits and 38 litigating creditors with
judgments awarded in 26 of these cases. And I say all this to
say that I am very, very concerned that vulture funds didn't
come up in the G8 meeting. Your testimony has perhaps some
vague reference to those vulture funds on page 6, paragraph 4.
I am not even sure you are referring to them.
You spent a lot of time answering questions of the
gentleman from Texas Mr. Green, and Mr. Shays earlier, talking
about placing more restraints on lenders, but you really didn't
talk about what we could do with these vulture funds. The
Department of the Treasury has been briefed by NGOs like the
Debt Relief International, which has given you really a
thorough briefing on what you can do, but yet in your testimony
you say, oh, we are working with various fora, thinking about
what we might do, exploring what we might do. And what you
could be doing right now is providing some technical assistance
and legal assistance to these countries like Liberia where the
predators are just waiting to prey on them. You could be giving
them advice about what to do before they come, during these
lawsuits, and the Treasury is missing in action on this. Why?
Secretary Paulson. I would just say to you, Congresswoman,
that I have been asked not to overreact to some questions, but
let me say when you say we could be doing more for Liberia,
maybe we could always do more. But we have been so active and
Treasury's Office of Financial--
Ms. Moore of Wisconsin. Listen--reclaiming my time. Listen,
I know that this Administration has done a lot for Africa. I
want to stipulate to that, I want to acknowledge that. I am
talking about why aren't we giving technical assistance to
these countries to stave off these vulture funds?
Secretary Paulson. I would say this: We are doing
everything we can to help them, and I deplore what the vulture
funds are doing, and we use moral solutions. But the vulture
funds have the rule of law on their side. When countries enter
into debt agreements, laws apply. And so the one thing I take
some comfort in is that they haven't been overly successful.
The judgments they have realized at the end have not been as
high as they might have been.
But this is a problem, it is a difficult problem to deal
with because of the way our legal system works, and it is one
that we are focused on.
Ms. Moore of Wisconsin. Why aren't you advising Congress
about what we might do since these cases are being brought
primarily in the United States? Why didn't you bring it up in
the G8 where these nations could change their laws?
Secretary Paulson. I wouldn't know how to change the law,
because how could you change a law that says--
Ms. Moore of Wisconsin. There is no transparency.
Secretary Paulson. This is not about transparency. The law
basically says if you borrow money, you have an obligation to
pay it back.
Ms. Moore of Wisconsin. We could define ``odious debt.'' if
there are illegitimate regimes that have changed, there are
ways that we can define. You could use the forum of the G8 to
define ``odious debt.''
The Chairman. The gentlewoman's time has expired. Now, 3
minutes for the gentleman from Illinois, and 3 minutes for the
gentleman from Tennessee.
Mr. Manzullo. Secretary Paulson, thank you for your service
and your patience. I was disappointed that the Treasury
Department once again did not label China as a currency
manipulator--not disappointed in you, but disappointed in the
decision. I think you are doing a great job over there.
In previous years, the excuse of Treasury was that China
did not meet the two conditions required by law, that you
needed a trade surplus with the United States, and with the
rest of the world to be a currency manipulator. Now they have
both, about $400 billion; 177 billion with the rest of the
world, the rest with us.
In your prior testimony you said that we clearly found
China has manipulated its currency. You also said it is an
unnatural act. Then you also said you have to show intent.
Well, I can't see how intent could be shown any more clearly
than every day the Chinese intervening in the market.
I mean, we are just at the point now where we need Treasury
to say, hey, we have given them enough rope, we are going to
label them as a currency manipulator. Mr. Secretary, how much
more evidence do you need before you find out that they are a
currency manipulator?
Secretary Paulson. We are not arguing over how the currency
is valued, and we don't have a difference of opinion as to what
China needs to do. And what the act in question says, that if
we had found them a manipulator, which we didn't, the remedy
would have been to do what we are doing right now, which is
work to press them directly through negotiations and work with
the IMF.
We have had big success with the IMF. Recently--I think it
was on Friday--they had a successful vote which is going to
allow them to approach their currency surveillance process in a
different way, which I think will help us in our work to
achieve--
Mr. Manzullo. But when you make the official designation,
that goes a long way nationally and internationally as a
currency manipulator. That encourages them more to clean up
their act.
Secretary Paulson. There are many, many countries in the
world that don't have market-determined currencies. There are
many--
Mr. Manzullo. But it is not killing our manufacturing base.
Secretary Paulson. Here we have a country that has
recognized the principle and is moving its currency. So to say
they are manipulating to gain an unfair advantage in trade gets
to motive.
Mr. Manzullo. So it may be against their motive, but not
against what they are doing, especially when you represent a
highly industrialized manufacturing district and people that
could compete, but they are getting killed because of the--
Secretary Paulson. I appreciate your comments. I am
certainly not here to defend China's currency practices. Any of
the Chinese who have sat down across the table from me know
that I am not patient.
The Chairman. The gentleman will suspend.
The gentleman from Tennessee.
Mr. Davis of Tennessee. Mr. Chairman, thank you very much.
Secretary Paulson, it is good to see you here. I am glad
that you spent the time that you have, and you certainly had
several questions that have been asked of you, and I appreciate
your engagement to answer some. And some I wonder if you have
actually answered those, at least not to my satisfaction;
others you may have.
I live in Tennessee. I represent an area where low-wage,
low-skilled jobs have been leaving almost at a rate of--
Secretary Paulson. I missed the industry.
Mr. Davis of Tennessee. Lower-skilled, lower-wage
industries have been leaving almost as if it is a rabbit
fleeing with hounds behind him. There is a saying we have is
that you have to be careful; you can eat corn out of the crib,
but not the seed corn, because you will be hungry the next
year.
My fear is that our economic policy is gradually chipping
away at that sackful of seed corn, that we may ultimately
destroy or at least have a significant impact on our industries
in America. I look at China that has probably 20 percent of the
world population and India with another 20 percent, being 40
percent from those two nations, and I would assume, and I
believe I may be correct, that probably when you look at the
production of those two countries, it is mainly for export, it
appears to be.
In our country probably 90 percent of the people can
actually purchase what we produce in this country, maybe 10
percent can't, but most, if it is a house, or an automobile.
Most can afford clothing, things we can buy. But in India and
China, 40 percent of the world's population cannot purchase
what is being produced in their own country. I think that is a
bad--you talk about globalization. I don't think that is a real
plus to say we are in a globalized economy.
Number two, I look at this trade policy that we have, and I
look at our debts that we are adding up, and I heard someone
today talk about entitlements, is that really going to destroy
our economy. I wonder if they realize in the budget is $2
billion a year in Iraq to no-bid contractors, which seems to be
an entitlement to them, is also having a tremendous impact on
our economy in this country and our ability to invest in our
own country.
So we have had a lot of talk today that I believe tries to
justify each person's positions rather than look at America
itself.
The question I want to ask you--and there was an editorial
in the New York Times today that discussed bipartisan
legislation introduced in the Senate last week that calls for a
gradual process of imposing economic and political pressure on
China unless they move faster to increase the flexibility of
their exchange rate.
I am inclined to agree with the legislation itself, but
what the editorial suggests is that maybe we need to look at
other areas of globalization rather than just China opening up.
The Chairman. If the gentleman wants an answer, we will
have to wrap up that question soon.
Mr. Davis of Tennessee. I would like your opinion on the
legislation, if you are familiar with 1607; if not, the
economic pros and cons of threatening China mildly or strongly
to take more action in the immediate future.
Secretary Paulson. Congressman, at the beginning of your
statement you talked about the need for major structural reform
in China, where most of their growth is exports, manufacturing
for exports. We are going to have a big imbalance, a trade
imbalance, until China engages in widespread structural reform,
until they have the kinds of social safety nets where their
citizens don't have to have precautionary savings, savings at
the 50 percent level.
So I do believe that what it is going to take over time is
direct engagement, but it is going to be more of a gradual
process because it is difficult or impossible for us to mandate
structural reform in China. So that would be my answer. Thank
you.
Mr. Davis of Tennessee. So that safety net you are talking
about is an entitlement?
The Chairman. Mr. Secretary, thank you for coming. And the
hearing is adjourned.
[Whereupon, at 1:17 p.m., the hearing was adjourned.]
A P P E N D I X
June 20, 2007
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