[Congressional Record Volume 144, Number 140 (Thursday, October 8, 1998)]
[Extensions of Remarks]
[Pages E1950-E1951]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


               INTERNATIONAL CAPITAL FLOW AND IMF POLICY

                                 ______
                                 

                         HON. MICHAEL G. OXLEY

                                of ohio

                    in the house of representatives

                       Wednesday, October 7, 1998

  Mr. OXLEY. Mr. Speaker, I would like to bring to the attention of my 
colleagues a column published today by James K. Glassman of the 
American Enterprise Institute. As the International Monetary Fund and 
the World Bank hold their annual meetings this week, his thoughts are 
especially timely.
  As the international financial community continues to struggle to 
find a solution to the growing Asian contagion, some commentators are 
beginning to call for international capital controls. The underlying 
argument behind this position is that the free flow of capital has 
contributed to our current problems and that barriers must be erected 
to prevent this flow in the future.
  However, as Mr. Glassman makes clear, ``capital does not flee sound 
economies.'' Rather, investors move their resources in response to 
changes in the market conditions of a given economy--they move money 
out of investments in economies as risk rises and into investments 
where the risk level is more acceptable. Thus, capital is efficiently 
allocated. Efforts to limit this movement, then, are inherently heavy-
handed and counterproductive.
  Again, Mr. Speaker, I commend the following column by Mr. Glassman to 
my colleagues.

              [From the Washington Post, October 6, 1998]

                                Cool It

                          (James K. Glassman)

       Judging from the panicky pronouncements of politicians, 
     journalists and financiers, you would think we were on the 
     brink of another Great Depression. On Friday, President 
     Clinton declared that the world was on a ``financial 
     precipice.'' The cover of Newsweek trumpets ``The Crash of 
     '99.'' And the folks whose limousines are now clogging 
     Washington for the 53rd annual meeting of the International 
     Monetary Fund and the World Bank--Super Bowl Week for the 
     global credit set--are rushing to erect a new, complex 
     architecture, backed by new money, to keep the world from 
     crashing down around them.
       But not so fast. Before we make the errors of haste, let's 
     recall that never in history have businesses been better run. 
     Never have markets been freer and wealth more abundant. Never 
     has technology for communicating, producing and healing been 
     so widely available. Rarely has inflation been less 
     threatening. Rarely have the raw materials of industrial 
     growth--from copper to wheat to oil--been so cheap. Rarely 
     has the world been so peaceful.
       The truth is, the international economy was neither as 
     terrific as practically everyone said it was in the spring, 
     nor is it as terrible as practically everyone says it is in 
     the fall. So, let's cool it before we do something 
     irrevocably stupid.
       While countries such as Brazil have undeniable short-term 
     troubles, the solutions are not mysterious. They need sounder 
     currencies, linked to the dollar, less public spending, lower 
     taxes and less regulatory red tape, borders that are more 
     open to trade and capital, and governments that are more 
     candid, less corrupt and less apt to meddle in the private 
     sector.
       None of these improvements requires the ministrations of 
     the IMF. Markets enforce a more efficient discipline: A 
     country that complies with conditions hospitable to capital 
     will get that capital, which is continually scouring the 
     globe, seeking the best returns. Talk of ``contagion'' is 
     nonsense: capital does not flee sound economies, as monetary 
     historian Anna Schwartz shows clearly.
       Still, the financial bureaucrats gliding down Washington's 
     streets in their limos this week think differently. They 
     believe that, since the world is on the brink, smart people--
     i.e., like them--need to do something to save it.
       That's the danger. British Prime Minister Tony Blair wants 
     a ``new Bretton Woods,'' birthplace of the IMF and World 
     Bank. The problem with another Bretton Woods is that it 
     assumes that these institutions can actually have a 
     beneficial effect today on economies in trouble. The opposite 
     seems the case.

[[Page E1951]]

       The IMF bears responsibility for Asia's troubles. With the 
     U.S. Treasury in 1995, it delivered unprecedented sums to 
     bail out banks and investors who made reckless loans to 
     Mexico. That rescue then encouraged investors to make riskier 
     extensions of credit to Asia, Russia and Latin America. That 
     led to overcapacity--too many factories unprofitably 
     producing computer chips, cars and clothes, often under 
     government direction--and to the current crisis.
       Instead, incredibly, ``the free market and the unfettered 
     flow of capital across borders are being vilified as causes 
     of this disaster,'' writes economist John Makin of the 
     American Enterprise Institute. The French and the British 
     actually want to give the IMF more power, and plans to 
     restrict capital flows abound.
       Still, someone has kept his head. Treasury Secretary Robert 
     Rubin has advanced a sensible proposal: Make credit available 
     to sound countries that may be suffering liquidity problems 
     (that is, need cash) but that haven't fallen into deep 
     crisis.
       I'd like to expand this idea and obviate the need for an 
     IMF altogether. Set up a streamlined international lending 
     institution that would have constantly available funds, under 
     these four conditions:
       (1) Loans would be made only at ``penalty rates''--
     certainly higher than the 4.5 percent that Korea recently 
     paid.
       (2) Nations borrowing money must put up their best 
     collateral, such as U.S. Treasury bills or gold.
       (3) Borrowers must allow foreign banks to operate within 
     their borders and be able to purchase their domestic banks. 
     The best way to reform a rotten financial system is to admit 
     good, free-market bankers.
       (4) Borrowers must subscribe to a new bankruptcy convention 
     that would adopt laws similar to those in the United States 
     and Europe. Lenders have to know that they can seize assets 
     in a default.
       At the same time, the world's financial moguls need to: (a) 
     pressure Japan, another villain in the tale of Asia's 
     collapse, to fix its banking sector immediately and reflate 
     the yen; (b) reaffirm the importance of free trade and reject 
     restrictions on the flow of capital; and (c) use the World 
     Bank to alleviate the suffering of innocents in countries 
     such as Indonesia, victims of economic crimes committed by 
     others, including the IMF.
       As for the extra money that the IMF wants and Congress has 
     failed to approve: for credit under these new arrangements, 
     as long as Japan reorganizes its banking sector, yes; 
     otherwise, no. Right now, withholding cash is the best 
     leverage for reform that we've got.

     

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