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THE STATE OF THE INTERNATIONAL

FINANCIAL SYSTEM

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 17, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–92

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

ROBERT U. FOSTER, III, Staff Director 

(III)

C O N T E N T S 

Page 

Hearing held on: 

May 17, 2006 ..................................................................................................... 1

Appendix: 

May 17, 2006 ..................................................................................................... 39

WITNESSES 

WEDNESDAY, MAY 17, 2006

Snow, Hon. John W., Secretary, U.S. Department of the Treasury .................... 7

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 40

Baca, Hon. Joe .................................................................................................. 43

Waters, Hon. Maxine ........................................................................................ 44

Snow, Hon. John W. ......................................................................................... 47

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hinojosa, Hon. Ruben: 

Letter from Timothy D. Adams, Under Secretary for International Affairs, U.S. Department of the Treasury ...................................................... 54

Moore, Hon. Dennis: 

A Message From the Secretary of the Treasury ............................................ 55

(1)

THE STATE OF THE INTERNATIONAL 

FINANCIAL SYSTEM 

Wednesday, May 17, 2006

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:09 a.m., in room 

2128, Rayburn House Office Building, Hon. Michael G. Oxley 

[chairman of the committee] presiding. 

Present: Representatives Oxley, Leach, Bachus, Castle, Royce, 

Ney, Kelly, Paul, Gillmor, Miller of California, Kennedy, 

Hensarling, Garrett, Pearce, Neugebauer, McHenry, Campbell, 

Frank, Waters, Maloney, Watt, Carson, Sherman, Lee, Moore of 

Kansas, Capuano, Hinojosa, Crowley, Clay, McCarthy, Baca, 

Lynch, Scott, Davis of Alabama, and Green. 

The CHAIRMAN. The committee will come to order. Pursuant to 

rule 3(f)2 of the Rules of the Committee on Financial Services for 

the 109th Congress, the Chair announces that he will limit recognition for opening statements to the Chair and ranking minority 

member of the Full Committee and the chair and ranking minority 

member of the Subcommittee on Domestic and International Monetary Policy, Trade, and Technology or their respective designees to 

a period not to exceed 16 minutes, evenly divided between the majority and the minority. The prepared statements of all members 

will be included in the record. 

The Chair recognizes himself for an opening statement. Today 

the Financial Services Committee meets to hear the annual report 

of the Secretary of the Treasury on reform of the International 

Monetary Fund and the state of the international financial system. 

This hearing is mandated by the Fiscal Year 1999 Foreign Operations Appropriations Bill which sought to ensure that the IMF 

would effectively use the funds appropriated to it on behalf of the 

United States. Congress included that requirement at the request 

of Representative Mike Castle, the senior member of this committee. 

I look forward to your testimony, Secretary Snow. I am pleased 

to see you here today back before the committee and I thank you 

for serving our country so well. 

Certainly our strong and growing economy is in part a testament 

to the steady hand that you have had at the Treasury Department. 

The traditional focus of the Secretary’s testimony at this hearing 

is on reform of the international financial institutions. This has 

been a longstanding priority for the Bush Administration and the 

President’s Fiscal Year 2007 budget request for Treasury interVerDate 0ct 09 2002 10:51 Dec 13, 2006 Jkt 031038 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 F:\DOCS\31038.TXT HFIN PsN: TERRIE
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national programs reflects a continued commitment to these reforms. Despite foreign policy challenges abroad, the President has 

maintained that he will remain committed to ensuring the multilateral development banks work toward relieving the burden of 

unsustainable debt for countries with sound pro-growth economic 

policies. 

I have always believed that free trade and growth through exports are the fundamental building blocks for economic prosperity 

and democracy both here and abroad. 

The Treasury Department supported the establishment of programs aimed at creating market-based economies that are open to 

trade. I am encouraged by the work of the World Bank president 

in eliminating corruption and promoting a level playing field to 

international lending institutions. 

Level playing fields are vital to fair and free trade. With that in 

mind, I am particularly looking forward to Secretary Snow’s comments on last week’s report to Congress on international economic 

and exchange rate policies. After years of ignoring free market 

principles, the Chinese have evidently begun to relax the hold over 

their currency. In the past, this currency control has created unfair 

advantages for Chinese exporters, all too often at the expense of 

American business. 

Since the middle of last year, however, China has instituted a 2.1 

percent reevaluation of their currency against the dollar, and has 

introduced various regulatory measures to free up capital flows 

across its borders. The Treasury report noted that China needs to 

move quickly to introduce exchange rate flexibility at a far faster 

pace, a subject which is of great interest to this committee in light 

of continued engagement with China and maximization of this important trading relationship. 

Though China is the country so often cited as driving the global 

economy, we must not lose sight of America’s trade relationship 

with Europe, Japan, and our neighbors to the north and south. 

U.S. corporations continue to make strides in productivity and a 

rising global economy has created myriad opportunities for U.S. 

multinational corporations and for investors looking for growth opportunities in foreign markets. Particularly in Latin America, 

remittences have generated real economic growth in emerging markets. Transactions such as these between established and emerging 

economies foster growth in both, and merit ongoing considerations. 

We look to reform the international financial system. 

On another topic, this year our colleague Deborah Pryce, Chairwoman of the Subcommittee on Domestic and International Monetary Policy, Trade, and Technology, led the way in reauthorizing 

the Multilateral Investment Fund at the Inter-American Development Bank. This is a good time for Treasury to take all possible 

steps to start similar programs at the other development banks. 

The MIF is an outgrowth of the Enterprise for the Americas initiated by the first President Bush. While this is obviously now a 

multilateral effort, the MIF is in many ways a perfect exporter of 

U.S. values, a forum where a good idea, hard work, and fair access 

to credit can provide a healthy way for any number of people. 

The MIF is an incredible success story. Combining modest grants 

for small- and medium-sized businesses, this program has encourVerDate 0ct 09 2002 10:51 Dec 13, 2006 Jkt 031038 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 F:\DOCS\31038.TXT HFIN PsN: TERRIE
3

aged private sector development and leveraged the power of remittances through Central and South America. The result has been 

the growth of small businesses here and abroad. As we all know, 

small businesses are the engine of job growth. 

We are all committed to the big projects spearheaded by development banks; water and sewer system construction, infrastructure 

development, and the building of hospitals. Given the ‘‘bang for the 

buck’’ we get out of the MIF at $25 million a year, however, we 

should seek to clone that program at the other development banks 

and try to do the same thing bilaterally through the Millenium 

Challenge Corporation and other international financial institutions. We must be on the lookout for programs such as this that 

exhibit the best practice of government here and abroad. 

Secretary Snow, I commend your continued oversight over the reform of the international financial system and your ongoing commitment to opening markets for our financial services firms abroad. 

Welcome back again to the Financial Services Committee, and I 

now yield to the gentleman from Massachusetts for an opening 

statement. 

Mr. FRANK. Thank you, Mr. Chairman. 

Mr. Secretary, I appreciate the courteous way you have conducted your office, and you have always been very careful to try 

and stay in touch with us. 

First, let me say, I want to agree with some of what the chairman just said. I do that with some trepidation because sometimes 

when I agree with the chairman, I get him in trouble in other quarters, so let me say, there remain vast areas of disagreement between the chairman and myself. And he sometimes gets it right, 

and I do have to acknowledge that. 

This committee, and it actually goes back to the chairmanship of 

the gentleman from Iowa, has a record that I think hasn’t been 

fully noted of cooperation on international economic matters and 

particularly with regard to the international financial institutions. 

I believe that there has been significant improvement in the 

World Bank and the IMF and some of the other development 

banks. If you go back a few years, there was great controversy, the 

50 years campaign. There was a major effort to curtail, wipe these 

institutions out, and many of us agreed that there were some severe failings in the way in which they had operated, but we didn’t 

think termination was the proper approach. 

Things like debt relief and pushing for transparency and making—setting up a review panel, there is a history of this committee 

in a bipartisan way; because we have done it in a bipartisan way, 

there hasn’t been a lot of controversy, people haven’t noticed it. But 

it goes back to the chairmanship of the gentleman from Iowa who 

has been a leader in the international financial area, been fully 

continued by the gentleman from Ohio. The chairs of the subcommittee and the ranking members of the subcommittee have cooperated; we have the gentleman from New York here. 

Obviously, there is a lot left to be done, but I think we are now 

focused on specific ways to improve the functioning of the international financial institutions as opposed to the great controversies 

when we had these reports and efforts to abolish them. This comVerDate 0ct 09 2002 10:51 Dec 13, 2006 Jkt 031038 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 F:\DOCS\31038.TXT HFIN PsN: TERRIE
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mittee has played a major role in defusing the controversy not by 

suppressing dissent but by helping to work for improvements. 

We do have a ways to go and the issue that concerns me transcends what these international financial institutions can do, although they had, particularly IMF, been part of the problem. 

I am a capitalist. I think it is very clear that a free market system is the way to produce wealth. I also believe, however, that 

there are those who mistakenly think that once you have a functioning capitalist system, there is no reason for public sector policies that deal with some quality of life issues and some equity 

issues. 

I think the consequence is that we now have in much of this 

world an attack on free market principles based on inequitable results that in my judgment goes much too far, but I don’t think we 

counteract it simply by saying, but you are wrong. I think we have 

got to do a better job of forging a new synthesis. 

The old so-called Washington consensus would seem to me excessively to focus on the free market and assume that, in a particularly stupid metaphor, the rising tide would rift all boats, because 

if you don’t have a boat and you were standing on tiptoe in the 

water, the rising tide is not good news. That, unfortunately, has 

turned some people against the whole notion of capitalism. 

We see it now in Latin America—it is a rare election in which 

the presidential candidate, most antithetical to the free market system, doesn’t start out way ahead. We see a distrust of this elsewhere. We see in my judgment, here in our own country, an excessive skepticism towards international cooperation in a number of 

areas. 

Now I think there needs to be some tempering. I haven’t voted 

for any of the trade bills because I think they need to be done better. Many have gone too far. We, I believe, have made progress in 

abandoning this Washington consensus which was really more in 

my judgment religion than economics. It was a fundamentalist belief in the free market to the exclusion of elsewhere. 

Instead, however, we have not forged the new consensus, and I 

think it is important for us to be actively working, and I believe 

under Mr. Wolfowitz, the bank began to try to deal with this. With 

Mr. Wolfowitz, with whom I agree far more today than I did in his 

former life, and vice versa, I should point out fairly, I think we are 

on the road to that, but we haven’t done it well enough. 

I think it is in the interest of those who understand the value 

of capitalism to do a much better and more active job in addressing 

the equity issues. It is clear that much of the world has said that 

if all you are going to give us is the free market and let us then 

live with the distributional consequences, you can take your free 

market and peddle it elsewhere. 

And so I think we, as the United States and the international financial institutions, have to continue the movement. We have 

moved away from an excessive and rigid insistence on the free market only, but we haven’t moved far enough in the other direction, 

and if we continue this, if we continue to neglect—and I think, 

frankly—and I will take 30 more seconds—I think people who are 

strong supporters of the free market system underestimate its 

power, overestimate its fragility. I think it has a greater capacity 

5

to provide equity, a greater capacity to take care of people who will 

not do well on their own in a free market system than people 

think. I do not think the capitalist system is going to be jeopardized by a greater concern for equity. And until and unless we begin 

to do this in a better way, we are going to see what I think is a 

continuation of an unfortunate trend away from what is the best 

system for people. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Ohio, Mr. Ney. 

Mr. NEY. Thank you, Mr. Chairman. 

Welcome, Secretary Snow. I just want to focus in my opening 

statement on the economy. In an area I represent in the State of 

Ohio and across the country, we are trying to recover, but too many 

factory jobs have been lost, doors have been closed, and jobs have 

been sent overseas. And even though we are trying, we have a continued unfair trade practice because of Communist China. And 

they continue to be a major impediment to our growth and our jobs 

in our Nation, I believe. For this reason, I have been an outspoken 

opponent against a range of unfair trade practices by Communist 

China. 

The continued rise in the U.S.-China trade imbalance and complaints from U.S. manufacturing firms and workers of the competitive challenges posed by Chinese imports have led several members 

including myself to call for a more aggressive U.S. stance against 

Chinese trade policies that are absolutely unfair to American workers. 

I think we are turning a blind eye to this. Among these is China’s refusal to adopt a floating currency change rate system. While 

the Treasury Department did not go so far as to brand China a manipulator of its currency, I am very concerned they have made far 

too little progress in making the exchange rate more flexible. 

Last July, China ended a decade-old peg to the dollar saying it 

would manage its currency against a basket of currencies, yet the 

Chinese currency has appreciated just 1.3 percent since then. So I 

think it is clear that the Communist regime has failed to fully implement its commitments to make its new exchange rate more 

flexible and refuses to increase the role of market forces that determine its current value. This has led to a significantly under-valued 

Chinese currency vis-a-vis the U.S. dollar. 

And as far as the free trade agreements, in 1994, we were $30 

billion in the hole, and now we are $202 billion in the hole. So I 

think that says what free trade has done for American workers. 

And because we might have a free trade agreement, which I don’t 

believe in permanent status for China, with this currency situation 

we are not going to win on jobs. As a result, U.S. production and 

employment have been hurt in several key U.S. manufacturing sectors that are forced to compete domestically and internationally 

against artificially low-cost goods from China. 

In Ohio, for example, this devalued currency is allowing Chinese 

metal producers to undercut business from American mills. There 

is no level playing field for American workers whatsoever. The Chinese government’s actions towards its currency value are just anVerDate 0ct 09 2002 10:51 Dec 13, 2006 Jkt 031038 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 F:\DOCS\31038.TXT HFIN PsN: TERRIE
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other example of its complete unwillingness to compete fairly in the 

global marketplace. 

I will just sum it up by saying that Congressional concerns about 

our economic relationship with China will only intensify in the 

coming years unless the Communist party leadership takes concrete steps to moderate its export-led growth strategy, including 

implementing a market-based exchange rate. Without a proper response, American manufacturing jobs will continue to be in jeopardy, and I think we have to push for tougher action. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from New York, Mrs. Maloney. 

Mrs. MALONEY. Thank you, Mr. Chairman, and welcome Secretary Snow to this hearing on the state of the international financial system. We have a great deal to talk about because, frankly, 

I am worried about the state of the international financial system 

and the contribution of our own policies to that troubling situation. 

You are part of a record setting Administration, but they are the 

wrong records. We have seen the Federal budget deficit set a 

record in dollar terms on this President’s watch. We have seen the 

national debt rise to a record level, over $8 trillion, and this Administration has raised the debt ceiling four times. The budget before us today includes yet another provision to raise the debt ceiling for the fifth time. And in my district, there is a clock that notes 

that each American owes $28,000 because of this debt. And most 

disturbing of all, we have seen our indebtedness to the rest of the 

world rise to yet again another record level. 

In 2005, the U.S. current account trade deficit, our trade deficit 

was $805 billion, an amount equal to 6.4 percent of the GDP. That 

is how much Americans, including the Federal Government, had to 

borrow from the rest of the world just last year to cover the difference between our current income and our current spending. We 

have become the world’s largest international debtor. The Federal 

Government is a big part of that problem. Since President Bush 

took office, foreign holding of U.S. Treasury securities have more 

than doubled, rising from $1 trillion in January of 2001 to $2.1 trillion in March 2006, the most recent month for which we have data. 

The entire increase in the public debt over that period was not 

much larger than the $1.1 trillion increase in debt held by foreigners. Think about that. Almost all of the increase in publiclyheld debt since President Bush took office is account for by purchases of U.S. Treasury securities by foreigners, including foreign 

governments and not by Americans. 

It is one thing when we owe the debt to ourselves; it is quite another when we owe it to the rest of the world. Repaying that debt 

with interest will erode the standard of living of our children and 

our grandchildren. Foreign holdings of U.S. Treasury securities 

have increased by 106 percent since January of 2000. Japan is the 

Treasury’s largest creditor, with holdings of $640 billion, an increase of 105 percent since 2001. China is in second place and has 

increased its holdings of Treasury securities by 423 percent. Much 

of that increase has resulted from purchases by China’s central 

bank to keep its own currency from appreciating. 

7

Mr. Secretary, you may not be willing to say that China is manipulating its currency, but you surely cannot be happy with China’s role in creating the large payments, and the large trade imbalances that threaten the stability of the international financial system. 

I hope you would be equally unhappy with our own role in creating those imbalances. Running large Federal deficits that drain 

our national savings and financing and an increasing portion of our 

national investment through foreign borrowing rather than our 

own national savings are the wrong direction and the wrong way 

to run fiscal policy. Creating conditions in which we are a large 

international debtor is bad for the international financial system, 

and it is also bad for our own future standards of living. 

Mr. Secretary, I look forward to your testimony and to exploring 

with you the steps we can take to create an international financial 

system in which the United States and its trading partners in both 

the developed and developing world can prosper. I look forward to 

your testimony. 

The CHAIRMAN. The gentlelady’s time has expired. 

We now turn to the distinguished Treasury Secretary. 

Secretary Snow, it is good to have you back again, and we appreciate your participation in this important hearing on international 

issues, and the floor is yours. 

STATEMENT OF THE HONORABLE JOHN W. SNOW, 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

Secretary SNOW. Thank you very much, Mr. Chairman. 

I am delighted to be back here for this annual opportunity to 

meet with you on the state of the global economy, and I always 

look forward to this opportunity to respond to your questions and 

continue this important dialogue on what is clearly a critically important subject. 

Overall, the state of the global economy is good. We have witnessed the best GDP growth that the globe has seen in decades; 

sustained growth, not inflationary growth, and it is touching all 

parts of the globe, including Sub-Saharan Africa, which has seen 

growth rates approaching 5 percent, which is important to lift people out of poverty in that part of the world. Clearly, India and 

China are growing at very fast rates, 7, 8, 9 percent and becoming 

larger and larger players in the global economy. 

It is important that the institutions of the global economy better 

embrace the changing nature of the players and the flows that 

make up the global economy. One of the reforms that we are pushing, Mr. Chairman, at the IMF is better representation on the 

board at the IMF and through the quotas of the IMF of the 

changed nature of the participation in the global economy. 

As for the U.S. economy, it continues to do well. It has done quite 

well for the last 3 years and is on a good course for sustained 

growth here. As you know, for the last 3 years, we have had growth 

rates at about just under 4 percent, which is well above the longterm sustainable trend line. As a result, we have drawn many new 

resources into the economy. Plant utilization has risen. Employment has risen. Aggregate hours worked have risen. We now have 

8

5.2 million additional workers. We are beginning to see wages rising, which is what you would expect at this stage of a cycle. 

Business investment has strengthened significantly. Equity markets have picked up. And while there has been some increase in 

headline inflation, core inflation remains well contained. And we 

have done this, Mr. Chairman, in the face of some serious, serious 

developments like $75 oil in Katrina and Rita, which clearly take 

a toll on our economy. 

So, overall, I think the American economy, the global economy 

are on a good path, but we need to continue to focus on the things 

that you and I have talked about so often, the U.S. deficit, which 

I think will come down nicely over the course of the next few years 

with good spending control and with the very, very important surge 

in revenues we are seeing. 

You may have seen, CBO is now indicating that the deficit will 

be much lower this year than had originally been forecasted. We 

will do our mid-session review soon. Given the surge in revenues, 

April was the second highest month we have ever seen. We are 

running well above estimates and well above last year. 

It is pretty clear that the deficit is on a good path come down. 

We will meet the President’s target, I think exceed it, and do so 

ahead of time. 

The fundamental problem the global economy continues to face 

is slow growth rates in large parts of the world and Europe, Japan 

particularly, that are under performing. Their growth rates are 

well short of their potential. That is having real effects, material 

effects that show up in things like the global current account, our 

current account deficit in the global flows. 

So we need to work on our savings rates in the United States. 

We need to deal with our deficit. Those industrialized parts of the 

world that are growing short of their potential need to take steps 

to grow faster, create more investment opportunities, absorb more 

of the world savings, and then the third part of this equation is 

that in those parts of the world where the adjustment process is 

frustrated by lack of currency flexibility, we ought to continue to 

encourage more currency flexibility. 

Congressman Frank, I agree with what you said, I think this 

committee has played a very important role in focusing attention 

on the global economy and on the institutions of the global economy, the multilateral development banks, the IMF, the World 

Bank, and has encouraged a set of reforms that clearly have those 

institutions performing better now and on a path to perform even 

better in the future. 

With that, Mr. Chairman, I thank you very much for your comments. 

[The prepared statement of Secretary Snow can be found on page 

47 of the appendix.] 

The CHAIRMAN. Thank you, Secretary Snow, and we, again, appreciate your appearing here. I just recently returned from a trip 

with the Speaker in which we visited India and Vietnam, and I 

think neither the Speaker nor anybody on the delegation had been 

to either of these countries, and it was a fascinating opportunity 

to see some parts of the world we had not seen and to visit with 

leaders both in India and Vietnam, and you specifically had menVerDate 0ct 09 2002 10:51 Dec 13, 2006 Jkt 031038 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 F:\DOCS\31038.TXT HFIN PsN: TERRIE
9

tioned India is one of the largest, fastest-growing countries. In fact, 

the Speaker was clear that we represented the oldest democracy in 

the world, and they represent the largest democracy. Soon they are 

going to be the largest country in the world, and the issues that 

we dealt with including of course the peaceful use of nuclear energy was critically important and particularly India’s desire to have 

closer relationships with the United States. 

Then when we went to Vietnam, I don’t think anybody knew 

really what to expect. I certainly didn’t, and the fascinating part 

about that trip, and I appreciate your comments on this, we had 

a meeting with the prime minister there, and this is still a oneparty country; they were getting ready for the party conference. 

And all of the banners were out there and the hammer and sickle 

and the like. It is still a Communist country. But I was struck by 

the fact that the prime minister acknowledged to our delegation 

that after the war, Vietnam adopted an Eastern European style 

economy with all of the obvious implications. He said that was a 

disaster. It was a failure. 

And since that time, about 10 years later, they adopted a market-based economy that has led to significant growth rates, stability, and their major plea to us was to give them permanent normal trade relations as we did with China, for example, because 

they desperately want to join the WTO and become part of the 

world community. 

I took that as an incredible step forward, given the history that 

we have with Vietnam, that a country which is still controlled by 

one party, the Communist party, has adopted a market-based economy and wants to be part of the World Trade Organization, and 

the acknowledgment that there was a failure of the past and an 

embracing really of American principles of their economy. I just 

wonder if you care to comment on that. 

Secretary SNOW. Yes, Mr. Chairman. Thank you very much. I, 

too, have traveled to that part of the world. I recently came back 

from India, where I had a series of meetings with leaders, as you 

did, including the prime minister. In India, there is real progress 

being made, but I think more progress could be made there, and 

in Vietnam, with further openings. 

One of the issues that India suffers from is lower rates of development of their financial institutions than otherwise would be 

available if they raised caps on insurance and on banking in terms 

of foreign direct investment and ownership. The same is true of retailing. I am sure that came up when you were there, the restrictions on putting in place investment in retailing to create a more 

modern retailing structure. 

I think the government is committed to moving in those directions. I think they know that is the right path, but there are internal political issues that affect the pace of the path they are on. But 

the path they are on is a good one, and the current prime minister 

was the finance minister in 1990 or 1991 when this reform movement began when they said we are going to open up, we are going 

to go to more open trade, we are going to go to more open markets, 

we are going to move in the direction of a more market-based economy. 

10

The economy is showing the benefits of that, I think. I think the 

case is pretty clear that when countries adopt good policies, market-based policies, they get better results. One of the problems I 

think we see in the global economy is that market economies don’t 

work unless there is clearly an environment of anti-corruption. 

That is where the World Bank and IMF are playing an important 

role now. Unless there is respect for law and property rights, market economies can’t work. These are the institutional frameworks 

within which market economies function, and they only function 

well if that investment is in place. 

To that extent, I would agree with other Members of Congress 

who have spoken to that, and other members of the committee who 

have spoken to that. So we are encouraging a market approach. We 

are also encouraging the environment in which markets can work, 

including, as you said, micro finance, which has a much, much 

larger role to play in creating opportunities for small- and mediumsized enterprises. 

The CHAIRMAN. Thank you. My time has expired. 

The gentleman from Massachusetts. 

Mr. FRANK. Mr. Secretary, I agree with much of your statement, 

but I confess to some trouble with your citation of the rise in hourly wages. What is the CPI increase over the past 12 months; do you 

know? 

Secretary SNOW. It came out recently, as you know. 

Mr. FRANK. 12 months. 

Secretary SNOW. 5, 5.1. 

Mr. FRANK. You have got 3.8, and I believe that is nominal. That 

is not adjusted for inflation. My understanding is, even in the past 

12 months, which are your best 12 months, hourly wages have 

barely kept up with inflation, and I think frankly you are cherry 

picking to take 12 months. 

But you would acknowledge that 3.8 percent increase in wages 

is nominal, not adjusted for inflation, correct? 

Secretary SNOW. I have to go back and check these numbers. 

Mr. FRANK. That is not a tricky question. Is 3.8 nominal or real? 

Adjusted for inflation or not? 

Secretary SNOW. For the 12 months, it is nominal. For the first 

quarter, that is the real number. 

Mr. FRANK. For 12 months is what you have in your statement. 

So, frankly, I think it is misleading to talk about 3.8 over 12 

months when that doesn’t take into account inflation, which was 

very close to that. Also, I ask you to submit what has it been over 

24 months, 36, 48, because real wages have dropped; correct, compared to inflation and the nominal increase? 

Secretary SNOW. Wages have not, as you would expect, caught up 

with where they will be. 

Mr. FRANK. As you expected; my expectations are a little lower. 

Secretary SNOW. It is just that we have gone through a recession. 

Mr. FRANK. You are comparing it to previous ones. I think it is 

a mistake to talk about only the past 12 months and in nominal 

terms. 

Let me ask you then, secondly, we have an enormous balance of 

payment deficits, and you talk about your hopes to get the budget 

deficit down. What is the long-term 10-year prospect. Ten years 

11

from now, are we going to continue to have this kind of trade deficit or is our debt that we owe the rest of the world going to grow, 

is there an exit strategy or a downward tide path. How do you see 

this going forward? 

Secretary SNOW. I think we are putting in place, the finance ministers, central bank governors, leaders of the institutions of the 

global economy are putting in place a pretty good adjustment 

framework which, over time—over time will see the imbalances— 

Mr. FRANK. What is your projection for the United States 5 years 

from now, trade deficit? Are we going to owe the rest of the world 

more? 

Secretary SNOW. If we continue to do the things that I talked 

about and the rest of the world does the things that I talked about, 

higher growth rates, flexible exchange rates, I can’t give you a 

number, but we are going to see that trend line reversing and 

begin to come down. 

Mr. FRANK. Begin to come down; 5 years from now, will it be 

down noticeably? 

Secretary SNOW. I don’t have a good prediction on that. I do 

think we will see an orderly and effective adjustment process that 

will put us on a course to reduce the imbalances. I am confident 

of that. But it does take these other things to happen. 

Mr. FRANK. Yes. The poet laureate Rudyard Kipling; ‘‘If’’ being 

the poem. 

Mr. Secretary, I am going to ask a question I would rather not 

have to ask, to be honest, and it is not a pleasant thing to ask and 

I respect you and I appreciate how you have dealt with this. I don’t 

mean to impute any fault to you, but we are talking about serious 

national and international policy, and I think we have to confront 

this. 

I am troubled by the constant report that your status is uncertain, that the Administration has failed to give you the kind of confidence it has given other people. There has clearly been a contrast 

between the President’s conversations about your tenure and that 

of Secretary Rumsfeld. 

You are a lead person in negotiating a lot of these things. You 

just in your answer correctly pointed out progress in this area depends on negotiations with other central bankers and other finance 

ministers with the World Bank, with the IMF. I mean, credibility 

is, I perceive, very important here. 

I assume that you don’t think your ability has been undercut, but 

why do we have this? It just seems to me unfortunate, and of the 

major Cabinet officers, you are the only one about whom we read 

this. Have you addressed this with the Administration? I apologize 

for addressing the elephant in the room. I wish this elephant 

wasn’t in the room. I wish other elephants weren’t in the room. 

Maybe we will change that. But that is a separate issue. 

I do think we have to address this. You are a very important 

man holding a very important job in this country. You have a 

major agenda that requires a lot of negotiations and acceptance of 

your word, and it is troubling to have your position undercut as it 

has certainly been in the media, and it does not seem to me the 

Administration at the highest levels has done what they should to 

12

give you the kind of strength that you ought to have to carry us 

forward. 

Secretary SNOW. Well, thank you, Mr. Frank, and I never comment on rumors, of course. There is no serious purpose to be served 

by commenting on rumors and speculation. A great leader of the 

Labour Party, Aneurin Bevan, once observed in response to rumors 

and speculation that he was an avid—had an avid interest in fiction, and as a result, he read the daily newspapers. 

I think we have seen a lot of fiction here, and it doesn’t do any 

good for me to comment on rumors and speculation. But let me say, 

I do appreciate that word of support from you, and the rumors and 

speculation have not undermined my ability to be effective. 

We just had a very good IMF World Bank meeting, G–7 meeting, 

where the objectives of the United States, I think, were well advanced. The movement of the IMF into surveillance is something 

that was really our agenda item. The HIPC debt deal was one, as 

you know, we pushed awful hard. I think the anti-corruption agenda at the World Bank is grown right out of the U.S. book. 

I appreciate your comments and the sentiments behind them but 

I do think that we continue to be able to work effectively in the 

institutions of the global economy. 

Mr. FRANK. I just hope that your position isn’t further undercut 

as it has been by the fact that you are clearly the most conservative Secretary of the Treasury ever, quoting Aneurin Bevan, the 

most left wing of British Labour leaders. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Iowa, Mr. Leach. 

Mr. LEACH. Thank you, and welcome, Mr. Secretary. 

It seems that in all countries, literally all people seem to have 

a growing angst about globalization, and everyone seems to think 

that the system is stacked against them, and yet literally the impact of your testimony this morning is that reality rather than fiction as you just referenced is world GNP is growing, and U.S. GNP 

is leading the industrial world, and that is very impressive. 

And yet when you look at movements in countries, it appears 

that irrationality is growing. Lots of Latin countries want to move 

away from free markets. There is Latin leadership now against 

joining American free trade arrangements. 

In this country, it appears to many that this Administration is 

a little too unilateral in political policy, but it appears that the alternative political party is a little more unilateral in economic policy, and by that I mean leans a little bit more towards protectionism than the Republicans. 

Since your field is economics, I would like you to comment on 

what the alternatives policy-wise are to your policies in this sense; 

basically speaking, the anchor of your Department of the Treasury 

is free markets and restrained spending and restrained taxes. 

Whether we disagree or agree with all the elements of it, that is 

basically the marker. 

If one were to run it on an alternative policy, it would seem to 

be one of greater protectionism and maybe less restraint in spending and taxes. If that were the case, what are your projections on 

whether that would be good for the economy or bad for the economy, and what would that do to our position in the world? 

13

Secretary SNOW. Congressman Leach, the policies that we are 

following, I genuinely believe, are the right policies to advance not 

only the United States, but global prosperity, and lift people out of 

poverty around the globe. I am concerned that we are not making 

more progress on Doha because the Doha round offered more promise for people in the developing world than any other single thing 

on the economic policy agenda of the world today. Something like 

two-thirds, three-quarters of the benefits of that will go to developing countries. I think the record is just unmistakable here that 

embracing trade is beneficial to the poorest countries of the world. 

In terms of taxes, I think the low tax rates that the President 

has advanced make sense. They remove distortions from the code. 

They encourage work and effort and risk-taking, and they encourage investment. You always get less of everything you tax, so if you 

tax those things less, you get more of them. 

But they can only be sustained, and I have tried to be clear on 

this, you can only sustain a low-tax environment if you are sustaining a discipline on spending because ultimately the consensus 

breaks down on low tax rates if you have large deficits. So we as 

advocates of this set of policies have to be equally forceful on 

spending restraint as we are on low taxes or else we won’t be able 

to sustain low taxes. 

Now I think the other side of that, higher taxes is not as well 

calculated to give us high long-term growth rates, which is what 

we want. You get high long-term growth rates when you encourage 

savings and investment. Today’s savings and investment creates tomorrow’s higher GDP, tomorrow’s higher real standard of living. 

Lower tax rates encourage that, but we won’t get the benefits of 

those encouraging more savings and investing today for higher 

growth in the future if we are ransoming the future by having to 

borrow to fund large deficits. That will just drive up interest rates 

and defeat the whole beneficial cycle that I just described. 

So I think if you want low tax rates as I do, we have to also 

press hard for spending constraints. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from California, Ms. Waters. 

Ms. WATERS. Thank you very much, Mr. Chairman, for this 

meeting, and I would like to thank Secretary Snow for being here 

today, and for his cooperation. Whenever I have had the opportunity or the need to seek information from him, he has always 

been very responsive, and I am very thankful for that. 

I have a lot of questions that I would like to ask you, but I would 

like to focus on Haiti, Liberia, and Sudan. As you know, Haiti was 

not included in the multilateral debt relief initiative. I understand 

that the World Bank and IMF have recently agreed to include 

Haiti in the heavily indebted poor countries initiative. However, 

they may not receive complete debt cancellation from IMF and the 

World Bank under the MDRI until 2009. 

Now, Mr. Preval, the newly-elected president, has been invited to 

the White House. The Secretary of State and the President have 

all signaled their desire to be of assistance to Haiti. They were responsible for removing the past democratically elected president 

from Haiti. 

14

Now what are you doing, and what should we be doing to make 

sure that Haiti can be successful? They can’t wait until 2009. What 

is going on? 

In addition to that, Liberia is in a very similar situation. We had 

a great ceremony here for President Johnson. She was invited to 

the White House. We have talked about how wonderful it is that 

she is now the President of Liberia. We had a codel that is there, 

and they are in very difficult straits there, and there is no way that 

she can be successful without having access to the HIPC debt relief. 

There is a sunset clause, as I understand it, that is currently 

scheduled to become effective as of the end of 2006, and that five 

of the countries—well, Liberia is included, and those countries who 

may not be able to apply for the debt relief. 

And then, of course, I see that Sudan is one of those countries, 

but I am not pushing for any help for Sudan. I want to know if 

you are involved in support for any sanctions for Sudan for the 

genocide. 

Those are the three areas; Haiti, Liberia, and Sudan. What do 

you know, and what are you doing? 

Secretary SNOW. Thank you very much, Congresswoman Waters. 

You and I have had good discussions on these subjects in the past, 

and we worked cooperatively to advance some important initiatives. 

On Haiti, as you know, the United States is the largest bilateral donor to the country, and we—I think it was $194 million last year, 

and we are requesting a like sum for this year in the 2007 budget. 

Our aid there, we know it is critical; it is used for humanitarian 

needs and strengthening the government and improving security 

and fostering broadbased economic recovery. 

On the question of the international institutions, the World 

Bank, IDB, and IMF all have initiatives underway where we are 

working with them. The World Bank has a 2-year strategy to make 

available something on the order of $140 million, including the 

same sort of things that we have talked about, transportation, electricity generation, community development, and education. 

At the IDB, they are actually very heavily engaged in Haiti, 

with, I think, it is 9 or 10 projects totaling $350 to $400 million, 

covering again the same subjects; economic recovery, basic services, 

agriculture, roads, and those things. 

Finally, the IMF has extended this emergency post-conflict assistance program to Haiti in consultation with us. We did that last 

year. That was $25, $30 million, some number like that. 

Ms. WATERS. Mr. Secretary, I don’t want to interrupt you but let 

me stop you because I think that you are struggling a bit there, 

and I think the reason is because there is not a lot happening in 

Haiti at this point. We know that there were some attempts to do 

some humanitarian assistance. No money has gone to this new government. No money has been invested in the infrastructure. They 

practically have no water system in Haiti. And all of the efforts 

that you are alluding to are just not happening. 

What I would really like, Mr. Treasury Secretary, I would like 

you to go to Haiti. I would like you to get with the heads of each 

of these agencies in Haiti in a summit that is called by you along 

15

with the Members of Congress who will be happy to go down there 

with you so that we can get a handle on what is real and what is 

not real. 

The CHAIRMAN. The gentlelady’s time has expired. 

Ms. WATERS. I ask unanimous consent for 1 more minute. 

The CHAIRMAN. The gentlelady is recognized. 

Ms. WATERS. Thank you. 

This is very important. Otherwise you won’t have the information that you really need to understand. We can either advance 

Haiti, or it can continue to deteriorate, and this new president 

won’t have a chance. 

What about Liberia, quickly? 

Secretary SNOW. Similarly, we are working with the government. 

As you said, leadership of the country was invited to the White 

House. We had meetings with them, pledged support, and are continuing to work directly and through the international institutions. 

Ms. WATERS. They are desperate, Mr. Secretary. Nothing is happening quickly enough. I would suggest that you use your leverage 

and your power with IMF and the World Bank to try to speed up 

some assistance to Liberia or they will be not successful. 

Thank you, and I yield back the balance of the time. 

The CHAIRMAN. I yield back to the gentleman from Alabama, Mr. 

Bachus. 

Mr. BACHUS. Thank you. 

Mr. Secretary, I might account for some of the rumors about the 

job you are doing at the Treasury. I think you have done—been 

such a success that maybe the rumors are people are trying to hire 

you away from the government because you—the economy is very 

strong, it is stable, consumer confidence is at record highs, and I 

can’t imagine any basis for those rumors other than maybe there 

is some competition for your services. 

Secretary SNOW. Thank you very much. 

Mr. BACHUS. Thank you. 

Let me pursue what Ms. Waters was talking about. She mentioned Sudan. Do you have concerns that the Chinese are coming 

into Sudan as we are—they are eligible for debt relief. We are encouraging countries to get out from under debt relief, and yet, at 

the same time, Mozambique and Sudan; the Chinese are loaning 

them money and seem to be to be worsening the situation. 

Secretary SNOW. Well, China is—there is certainly evidence that 

China is extending its influence around the globe, as you are suggesting, and we continue to monitor and see signs of that, absolutely. 

Mr. BACHUS. Okay. Thank you. 

Eighteen countries have been approved for debt cancellation by 

the IMF, the World Bank, and the African Development Bank. But 

my question is, is the Inter-American Development Bank and the 

Asian Development Bank, they have not gone forward as these 

other institutions have. Can you give me—do you know if they 

have future plans to fully engage? 

Secretary SNOW. Congressman Bachus, we are meeting with 

those institutions and making it clear that we think that a HIPClike program there would be desirable, and we will continue to 

press that case. In fact, I have had that very discussion with the 

16

presidents of—Mr. Moreno, Ambassador Moreno, former ambassador, president of the institution of the Inter-American Development Bank on that subject. He knows that the United States wants 

to see progress on that, and through our ED’s at those institutions 

we are continuing to try and build broad-based support for it. It 

has to get the support of the board of those banks, but we are doing 

our best to build support for them. 

Mr. BACHUS. I just think the members of this committee ought 

to realize that there have been some laggards in this effort. I use 

that term— 

What about the prospects for opening up debt cancellation beyond the 42 countries? I think it is 42 countries now. I know some 

in Britain think that maybe 67 countries— 

Secretary SNOW. Well, my own view is we can continue to look 

at that, but the focus ought to be on getting the first wave accomplished. We are still a long way off from getting the full contingent 

of countries through that process, 18 or 19. 

Mr. BACHUS. Yes, and I agree. Earlier on, there was a thought 

to that. Now the debt relief, we are getting such wonderful reports 

back from these countries about the education levels, and, you 

know, we are seeing health standards, we are seeing vaccinations. 

We now know that it does work if it is properly instituted, and I 

think that ought to give us some urgency to extend it to those other 

countries. 

Secretary SNOW. I think it does work. Congressman, you are absolutely right. And of all the things I have worked on in the last 

3-and-a-half years, there is none I think I am prouder have having 

had a handle on, as well as many others, in getting the G–7 to 

move forward on that and then getting it approved through the 

IMF and the World Bank, which was something of a struggle, as 

you know. 

Mr. BACHUS. And let me say this, the Administration—you have 

done an excellent job. You have helped stabilize and strengthen 

several of these countries so they are not a problem for the United 

States from a security, national defense case, and I guess—because 

it is good news. And, you know, you would think that hundreds of 

thousands of children attending school for the first time, little girls 

attending school for the first time in their lives in some of these 

countries, that it would be headline news, but I guess that doesn’t 

sell newspapers. But I think the Administration and Treasury 

would be commended because you have pushed these other institutions and I think we have made tremendous progress. 

Secretary SNOW. I think it is fair to say that, unless the United 

States has been in the forefront of pushing these HIPC initiatives, 

they would not have occurred. 

Mr. BACHUS. All right. I want to just ask one final question. I 

have some concern about this. Some of the economic policy reforms 

includes—one of the conditions is mandating privatization of electric and water systems, and I would like to revisit that. Because, 

for instance, in my area we have the TVA. Now a lot of us have 

said we would like to look at privatizing a lot of these operations. 

They would be more effective. It is more of an economic argument. 

I am not sure that we ought to tell these countries that they ought 

17

to privatize their water systems, and their electrical systems. I just 

ask you to take another look at that. 

And my other and final concern, and I won’t ask any question, 

just any suggestions you could give me in writing for ways to speed 

or add progress to moving these countries from the decision point 

to completion point would be helpful. You know, in certain cases, 

it looks like it is going to be 6 to 8 years. 

Secretary SNOW. I will do that and look forward to a chance to 

talk to you about that, because it is a concern of ours as well. 

Mr. BACHUS. Thank you. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from New York, Mrs. Maloney. 

Mrs. MALONEY. Thank you. 

Mr. Secretary, would you comment and elaborate further on China’s growing influence over our economy? According to Treasury 

statistics, China’s ownership of U.S. debt has increased 5-fold since 

January of 2001, from about $60 billion to now over $300 billion; 

and their overall reserves have grown even more. So if China’s not 

buying dollars to keep their exchange rate from appreciating, what 

are they doing? 

Secretary SNOW. China and the United States play a critical role 

in each other’s economy and in the global economy. The Chinese, 

of course, are running a large current account surplus with the 

United States and a sizable surplus with the world as a whole. As 

a result, they are—in effect, their savings exceed their investments; 

and the savings that they have, the excess savings they have find 

a way into the rest of the world, some of it into the United States—

not all, but some of it into the U.S. markets. And that reflects the 

numbers you just cited, which are the right numbers. 

They have been increasing their holdings of long-term U.S. securities. But, despite this increase in holdings, there is still a relatively small part of the U.S. Treasury securities, about, oh, 7, 7-

and-a-half percent, something like that, and of course even smaller 

part of the total U.S. capital market. 

One of the great strengths of the United States is that we have, 

as you have heard me say many times, the deepest, most liquid, 

and most resilient capital markets in the world; and foreign ownership of U.S. securities should be viewed as a vote of confidence in 

U.S. markets. 

As I think Chairman Bernanke said when a question like this 

came to him sometime recently, foreigners aren’t buying our securities because they want to be nice to us. They are investing in the 

United States because they like the returns, the best risk-adjusted 

returns which they can get for the quantity of investments they 

want to make. 

So the important thing here is, we have the best financial markets and they are investing in our markets. Foreign investment in 

our markets is really a vote of confidence in us. 

But this policy has kept their exchange rate from appreciating, 

and I would like to know concretely, what are we as a government 

doing, what steps are we taking to encourage China to look to its 

own domestic demand as a source of growth, rather than relying 

on exchange rate management to promote its exports? 

18

Many of us are very concerned with the indebtedness of our 

country to China, and to Japan. It is the largest ever in the history 

of our country, and what would happen if they decided not to buy 

our Treasury notes? Would the value of the dollar fall? And what 

are we concretely doing to get them to stop using this policy to basically keep their own exchange rate from appreciating and helping 

with their exports? 

Secretary SNOW. Well, Congresswoman Maloney, you are absolutely right to focus on that central issue of their domestic savings 

rates, their very high domestic savings rates and the failure to develop domestic consumption. 

Now when President Hu was with us several weeks back he 

made a commitment to strengthen domestic consumption, in other 

words, to reduce focus on exports and to drive more of the economic 

activity of China into domestic consumption. That is something 

that we have suggested—we, the U.S. Treasury, have been suggesting for 3 years now. They are now committing to reducing their 

surplus with us and the world, to developing their domestic consumption market, reducing focus on exports, and it is in their own 

self-interest to do it. In the end, the best thing we can do is to appeal to their own enlightened self-interest. 

Mrs. MALONEY. Is there any enforcement for this commitment? 

And I would like to request that Mr. Hinojosa’s opening statement be placed in the record and a letter from Treasury stating 

that the North American Development Bank will not be closed. If 

unanimous consent from Mr. Hinojosa— 

The CHAIRMAN. Without objection. The gentlelady’s time has expired. 

The gentleman from Texas. 

Mr. PAUL. Thank you. 

Good morning, Mr. Secretary. 

I have three questions for you. I would like to ask all three, 

though, before you answer the first. 

The first one deals with inflation. If we look at the April statistics, we find the PPI was up at an annualized rate of over 10 percent and CPI was up at a rate of over 7 percent. I think that this 

relates to the comments made by the gentleman from Massachusetts that, when prices go up, it is as if taxes were placed on these 

goods, and it is a detriment to the wage earner, since, of course, 

real wages do go down. But most economists recognize that prices 

go up because of a monetary phenomenon, when we increase the 

supply of money, credit prices subsequently go up; and many of us 

believe that M3 has been the best measurement of this inflation 

and what is happening. Yet that number is no longer given to us. 

The first question is, do you have any strong objection to a Congressional request for that number to be once again reported? 

The second question I have deals with China. There has been a 

lot of pressure on you and the Administration to demand that the 

Chinese revalue their currency to strengthen the yuan against the 

dollar. And they give the so-called benefits from this, and sometimes they are true and sometimes they are not and sometimes 

they are fleeting. But I would like to know from you, what are the 

disadvantages? Is it a zero-sum game? Do some people receive 

some disadvantages from a weaker dollar and a stronger yuan? I 

19

think we too often look at the so-called benefits, which aren’t always forthcoming. 

The third question deals with currency flexibility, which you 

have talked about already, but I am interested in currency flexibility here within the United States, and this deals with—and I 

would like to talk about that in relationship to gasoline prices. 

Most people think Iraq and immigration are the two top issues, 

and they are very high in the poll numbers that are being taken, 

but gasoline prices are very high on the agenda as well. 

But because of my concern about the appreciation of the dollar, 

I have followed the constitutional mandate that only gold and silver be legal tender, and yet legal tender laws force us to accept 

paper money. But because I have been old fashioned enough to deal 

with a gold dollar, the price I pay for gasoline is about 9 cents. Five 

years ago, I was paying 27 cents, so the price of my gasoline is 

going down. The more our government and our Congress depreciates the money, the cheaper my gasoline gets. 

Yet, although I can do that, it is difficult, and there are a few 

things in the way of this. That is the legal tender laws which dictate and mandate that depreciating paper money is the only currency of the realm, and yet the Constitution is very clear that only 

gold and silver should be legal tender. 

My question is, is there room to start talking about fluctuating 

rates here domestically? We know that trillions of dollars are traded internationally, and it serves as a market mechanism to adjust 

these currencies that are created by the various central banks at 

different rates. The market performs an amazing service, and I see 

no reason why that couldn’t be done domestically, but it would require really two things. One would be to repeal the legal tender 

laws and the other would be to adjust our tax codes so that gold 

would be recognized as money and not as a strictly a commodity 

that has to be taxed as a commodity. 

Since this is such a benefit to people who would prefer to be on 

a sound currency where prices go down rather than up, I would 

like to know if there is a time and place for discussion of this sort. 

Secretary SNOW. Congressman Paul, I think there certainly is on 

all these subjects room for a good discussion. You take me back to 

discussions I have had in the past with my good friend, the former 

Member, Jack Kemp, who has advanced some of these ideas in the 

national debate. 

It is interesting, when you think about the United States and the 

issue of flexible exchange rates, we have a fixed exchange rate system really, don’t we? A dollar is worth what a dollar is worth in 

Utah, Indiana, Ohio, New Mexico, or Michigan. Everywhere we 

have the dollar, it is worth a dollar. 

The reason that system of fixed exchange rates works is because 

it really is a fixed exchange rate across all 51 jurisdictions; we have 

the free flow of capital and the free flow of labor. So it is the market processes that allow the adjustments to occur, and nobody ever 

says, is Massachusetts in surplus or deficit with Wyoming? Nobody 

knows the answer to that, and it is not relevant to anything. 

On the subject of—so, yes, I think you are raising subjects of farreaching intellectual interest, and sometime I would be delighted 

20

to sit down and try and understand where you are coming from 

and how I might be able to respond better. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from California, Mr. Sherman. 

Mr. SHERMAN. First, Mr. Chairman, the meteorological comment. 

The rumormongers told us that, come spring, Snow would be gone, 

but here we are in May, and Snow is still here. And I want to say 

that the persistence of Snow does not disprove the theory of global 

warming. 

One thing we, as politicians, understand is regimes and individual politicians survive when they bring home the bacon. That 

applies in Iran. Even though bacon is not halal, they understand 

the concept, too. 

The World Bank, both under the prior Administration and this 

Administration in your tender, Mr. Snow—Secretary Snow, has approved loans to Iran on a concessionary basis. This is important to 

the Iranian regime not only because it provides capital at low rates 

but, perhaps more importantly, what stamp of approval could one 

have from the world economic community that would be more solid 

than concessionary loans from the World Bank? 

Now I have talked to your predecessors on this before, and they 

have all responded, we have done enough, we voted ‘‘no’’. Well, you 

voted ‘‘no’’ because statute requires that the Treasury Department 

cast a U.S. vote ‘‘no’’ on sending World Bank loans to terrorist—

terror states. But what the Treasury Department has not done up 

until now is do anything other than vote ‘‘no’’. You vote ‘‘no’’, you 

lose. The loans are approved, and you go have tea and crumpets 

with the people who outvoted us. The United States has never publicly indicated that our continued involvement in the World Bank 

could be diminished if the World Bank is sending, in effect, U.S. 

tax dollars to Tehran. 

Couple of questions, how would you come to my district and defend Brad Sherman, who has been in support of foreign aid, when 

some of that foreign aid is going to Iran? And what steps is the 

Treasury Department going to take to make sure that these loans, 

which have been approved, are not actually dispersed? 

I would point out that, thanks to this loanness of bureaucracy, 

three-fourths of the money has not actually reached Tehran. Any 

chance that we have a friend perhaps running the World Bank who 

could make sure that it takes another decade or so before these 

funds are dispersed? 

Secretary SNOW. Well, thank you very much, Congressman Sherman. 

The U.S. position on this, as you know, is clear. We oppose that 

sort of funding. We work with the other ED’s to try to persuade 

them to accept our view. We haven’t yet been as successful as I 

would like to be. 

Mr. SHERMAN. Mr. Secretary, because I have such limited time, 

perhaps I can sharpen the question and say, have we told anyone 

our enthusiastic monetary involvement in the World Bank would 

be impaired in any way if they just say, shut up, we are sending 

the money to World Bank whether you like it or not, and we are 

sending the money to Iran whether you like it or not? 

21

Secretary SNOW. We have made it clear that we are totally opposed to the policy. 

Mr. SHERMAN. And the loans have gone through anyway, whether we have done anything about it. 

Secretary SNOW. We have expressed our serious opposition. 

Mr. SHERMAN. Effectually and continually, loan after loan after 

loan is approved. We keep doing the same thing even though it 

doesn’t work. Imagine coming to a town hall in any of our districts 

if the people there knew that we voted for foreign aid and some of 

that foreign aid was going to Iran, sir. Thank God—you know, you 

can be lucky that you have the job you have and not one that involves explaining why American foreign aid is going to Iran. 

But I want to shift to another topic. We have had a failed trade 

policy that has failed working Americans. That is not just this Administration; it is the prior Administration. We have the largest 

trade deficit in history by far. Do you think it is prudent for us to 

develop a plan to deal with what is a real possibility, and that is 

the sudden decline in the value of the U.S. dollar versus other currencies? And when I say sudden, I mean 20 percent in 1 week, 50 

percent in a month. Do you think prudence requires that we have 

such a plan, perhaps involving circuit breakers, or do you think we 

should just dismiss that as a possibility and not have a plan to deal 

with it? 

Secretary SNOW. Congressman, as I am sure you are aware, prudence requires we take steps to see that the global economy functions well, and part of the way the global economy functions well 

is to have an adjustment process so that sharp breaks of the sort 

you suggest don’t occur. And I— 

Mr. SHERMAN. So, Mr. Secretary, are you saying it is impossible—it is so unlikely for this to occur that it is not worth developing a plan because you are so confident in the smooth realignment of currencies that there is no reason to have a plan for a sudden and catastrophic decline in the value of the dollar? 

Secretary SNOW. No, I think that prospect is remote. I think the 

most important priority we have is— 

Mr. SHERMAN. Mr. Snow, do we have such a plan? 

Secretary SNOW. We continue to monitor contingencies. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Well, Mr. Secretary, you have heard a number 

of members of this panel show a great amount of concern about the 

Federal deficit and obviously try to tag the Administration with 

that deficit number. If I read the Treasury reports correctly 

though, since we passed the President’s economic growth package 

in 2003, frankly, we are awash in new tax revenues. I think—and 

correct me if I am wrong—we have now had tax revenues increase, 

I believe, for 3 years, and last year we had tax revenues increase 

by approximately 15 percent. Is that correct, Mr. Secretary? 

Secretary SNOW. That is absolutely right, Congressman. 

Mr. HENSARLING. And do we appear to be on track to do the 

same thing for this fiscal year? Or is it in the 10 to 15 percent 

growth for range for tax revenues? 

Secretary SNOW. I think we came in at about 11-and-a-half percent, just under 12 percent, for April. 

22

Mr. HENSARLING. So if we are awash in tax revenues and we continue to have a deficit, that might suggest that part of our challenge is on the spending side. I have noticed that there tends to 

be a correlation between those who tend to cry deficit the loudest 

tend to vote for great amounts of spending. 

As concerned as I am about the Federal deficit, I am even more 

concerned about our unfunded liabilities for our social entitlement 

programs; Medicare, Medicaid, and Social Security. I guess it was 

about a week ago, less than a week ago, that we received the latest 

report from the Medicare and Social Security trustees saying, if I 

recall correctly, that in their estimation Social Security will go 

broke a year earlier than originally thought, and I believe Medicare 

will go broke 2 years earlier than originally thought, and the unfunded obligations increased by some astronomical figure that no 

one in America can comprehend because it begins with a ‘‘T’’, as 

in trillions of dollars. And yet there are those in the body who fight 

every single effort to do something to reform those programs. What 

are the long-term economic implication if we do not address the 

growth rates in these entitlement programs? 

Secretary SNOW. Congressman Hensarling, the long-term consequences, as we have tried to point out in the trustees’ reports, 

are devastating for the country. They are really just not sustainable. Those programs, unless reformed, put on a sound financial 

basis, will absorb virtually all of the revenues of the United States, 

meaning there is nothing left for any other programs. 

Now, that clearly can’t be allowed to occur. It would take roughly 

a doubling of taxes to cover the—more than a doubling, because 

you never—if you double, you don’t get double. You have to do 

more than double to get double because of the way people react to 

higher tax rates. No, we would put the American economy in serious jeopardy if we allow these unfunded obligations to continue to 

be on automatic. 

Mr. HENSARLING. So is it a fair assessment to say that those who 

refuse to reform these programs have de facto advocated doubling 

taxes on the American people? 

Secretary SNOW. Or huge borrowing in the future to fund it. 

Mr. HENSARLING. Let me change subjects to the Chinese currency issue and perhaps give you a perspective that you haven’t 

heard here today. In your testimony, you have spoken about a need 

for China to show greater exchange rate flexibility, and certainly, 

if I was a citizen of China, I would want that to happen. But every 

time the prices change, there is going to be somebody who wins 

and somebody who loses. 

I believe in the marketplace, and I wish the Chinese would let 

their currency flow. But, at the same time, when we have bills, I 

believe, like S. 295, that are threatening retaliatory sanctions and 

tariffs on China if they don’t allow their currency to flow, ultimately, all this is about making their exports more expensive and 

making their imports less expensive. 

I got into the fatherhood business 4 years ago, so I know a lot 

about toys, and my 4-year-old daughter—I am fairly certain I have 

this right—her swing, her favorite teddy bear, her Dora the Dancing Cowgirl doll, and her Wiggles lunchbox were all made in China. 

23

And I assume they are made in China because American consumers can buy them at a cheaper rate. 

Now my family has the benefit of living off of a Congressional 

salary that many Americans can only dream of. So if we are going 

to engage in a policy of de facto trying to get China to raise the 

cost of their exports, aren’t you essentially trying to take toys away 

from America’s children to benefit manufacturers and labor union 

workers? 

Secretary SNOW. I wouldn’t put it quite that way, Congressman. 

Mr. HENSARLING. You wouldn’t? 

Secretary SNOW. No. What we are trying to do is to get the global 

economy to function the way it needs to function. And if it is to 

function right, one of the fundamental rules of the game is trade, 

free trade, free capital flows and not pursuing begger thy neighbor 

policies with your currency. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentlelady from California, Ms. Lee. 

Ms. LEE. Good to see you again. 

Secretary SNOW. Thank you. 

Ms. LEE. Let me ask you a couple of questions. 

Let me first mention a meeting that you probably are aware of 

that Representatives Blake, McGovern, Waters, and I held. This 

was in March, and it was with the Office of Foreign Assets Control 

and the State Department. We held this meeting to discuss religious travel to Cuba, and we wanted to develop constructive solutions to allow religious exchanges to continue. 

Not only have we not received an answer to that meeting, but 

it has come to our attention that decisions to further restrict contact between the United States churches and religious organizations and Cuban churches and religious organizations are moving 

forward. And, once again, I understand that this is in the absence 

of any consultation with American religious organizations and 

churches and faith groups that might be affected by these limitations, restrictions and prohibitions which have placed their ability 

to meet with their counterpart—their religious counterparts in 

Cuba for spiritual and religious fellowship and support. 

We talked about this at length in the meeting, and, of course, we 

understand that if there are those bad actors who have violated the 

law or regulations then you address them individually as such. But 

what in the world is going on and why are these restrictions moving forward on religious travel? 

Secretary SNOW. Congresswoman Lee, I am aware of your meetings and your long interest in this issue. In fact, I think you have 

had some effect on this. OFAC and the Department of State, the 

State Department, have actually been having meetings on the 

question you have raised because you have raised it the way you 

have raised it. 

I don’t want to say for sure what is going to come out of it, but 

it is—it looks like we might have an expectation of some new regulations that will come out from the Cuba Commission here at some 

point. 

Ms. LEE. Right. That is coming out fairly soon, I understand. 

Secretary SNOW. Fairly soon. I want you to know we have communicated your concerns to both, you know, OFAC, NSC, the NaVerDate 0ct 09 2002 10:51 Dec 13, 2006 Jkt 031038 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 F:\DOCS\31038.TXT HFIN PsN: TERRIE
24

tional Security Council, and the State Department; and we are 

going to stay engaged and maintain the dialogue with you and the 

Commission. 

Ms. LEE. Well, Mr. Secretary, we would like an answer to some 

of the questions that were raised in the meeting. This was, quite 

frankly, raised in March, and if these regulations are coming up, 

we would at least like to see a draft of them and know what is 

going to be in them and weigh in on them. 

Secretary SNOW. I will see what I can do to follow up. 

Ms. LEE. Following up on Congresswoman Waters’ question with 

regard to the Sudan, as you know, numerous divestment campaigns like State pension plans, universities, and State public employment retirement systems are moving forward as a result of the 

horrific genocide that is taking place in Darfur. 

I would like to find out how this committee could receive a list 

of United States companies that have investments in multinational 

companies which are doing business in Sudan and also just your 

general thoughts about divestment and sanctions as a means of 

force and an end to these horrible atrocities that are taking place. 

Secretary SNOW. Right. Well, as you know, Congresswoman Lee, 

the State Department has the lead on that. Deputy Secretary 

Zoellick is just back from a visit there and I think has focused a 

lot of his time and effort on that. Let me talk to him and then try 

to get back to you. 

Ms. LEE. Sure. Because we need this list. It has been very difficult to find a list of companies that—and some groups want to sell 

these lists. You know, I think they should be made available to the 

public. So we would really like to have that. 

Finally, let me just ask you, with regard to the progress on the 

G–8 agreements on the 100 percent debt cancellation, you talked 

a little bit about that earlier, but I wanted to find out if the President intends to request any additional funding to pay for debt cancellation in his remaining years in office, and is he willing to put 

the necessary pressure on Congress to ensure that this funding is 

provided? 

Secretary SNOW. Well, the approach we laid out to the debt forgiveness contemplated either replenishments being helpful in funding that process, so, yes. 

Ms. LEE. So you do intend to—well, hopefully you intend to put 

more money in. 

Okay. Thank you very much, Mr. Chairman; and I will yield the 

balance of my time. 

Mr. MILLER OF CALIFORNIA. [presiding] The gentleman from New 

Jersey, Mr. Garrett, is recognized for 5 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. And as I begin, let me 

just say that I am heartened by the fact that the Secretary does 

not intend to take the Wiggles dolls away from the kids across 

America. If nothing else that we leave with today, we leave with 

that. 

But, on a serious note, along those lines—and I just have two 

questions for the chairman. It was a comment from both gentlemen 

from Texas, Mr. Hensarling and Mr. Paul, and perhaps when I am 

done, you can—you were not able to address all of Mr. Paul’s questions, but both these gentlemen raised sort of the same question 

25

with regard to the China issue and the currency trading issues. 

That is, in the capital aversion, is it a zero-sum game if we achieve 

what many advocate that we achieve? That is the first question. 

And the second question goes along the line or at least down the 

road of what Mr. Royce was raising. What happens if we take an 

alternative approach, a different approach? Some of the suggestions 

you were making here in your testimony, you have indicated that, 

at the end of the day, your ultimate goal is to go to that proverbial 

level playing field. As far as trade is concerned, in order to have 

capital growth you have to have free capital flow and free trade. 

But one of the areas that we have heard from and prior testimony in another committee just down a different road is, with regard to restrictions that we are placing on ourselves here at home, 

with regard to equity interests and equity investments in this 

country, one of the facts and figures that came out was an estimated 90 percent of international small companies have chosen to 

list abroad on other exchanges rather back here at home. 

So my question on the second line is, what impact will that have 

on our ability to have free trade and free flow and long-term—if we 

don’t become on the same level playing field as other countries in 

this area as far as the exchanges are concerned, will that have a 

negative consequence to the U.S. economy? 

Secretary SNOW. Right. Thank you, Congressman, thanks. 

On the first question, it is not a zero-sum game at all. It is very 

much a positive-sum game. Because by getting the price signals 

right—and that is what exchange rates are; they are the price signals for the global economy—we are encouraging the better, more 

efficient use of resources. 

One of the problems with suppressing exchange rates is that the 

price signals get confused and producers are led to believe they 

really are efficient at producing something when they aren’t as efficient as somebody in some other part of the world, which means 

that resources are being misallocated, that the production ought to 

occur somewhere else rather than the way it is occurring. Canada 

found that out very much when it moved for the fluctuating exchange rates, that there was a freeing up of resources from less efficient uses to more productive uses. 

I think China, as it moves to a market-based system of exchange 

rates, will find a rebalancing within its own economy, that some of 

the export activities that are attracting capital and resources won’t 

attract as many and more domestic activities will attract more. 

That would make the resources of the world more effectively utilized, which means the size of the total output of the world would 

be greater. And what I just gave you is a definition of a positivesum game. 

On that second question, I think it is an important issue. We 

have got to make sure that, whether it is through our regulatory 

policies or through any changes in the CFIUS process or whatever, 

we don’t discourage investment in the United States. Investment in 

the United States is one of our great strengths. It has created 5-

and-a-half million jobs and jobs that pay well above the median. 

So I share your concern. Absolutely. We have to be on guard 

against actions that would send a signal to the world that America 

isn’t open for investment. 

26

Mr. GARRETT. Thank you. 

Mr. MILLER OF CALIFORNIA. The gentleman’s time has expired. 

The gentleman from Kansas, Mr. Moore, is recognized for 5 minutes. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman, and Mr. Secretary, thank you very much for being here. I want to join Chairman Oxley’s and Ranking Member Frank’s comments to you about 

the courtesy and civility and respect you have always expended to 

members of this committee as well as to Members in general, and 

I think you have set a very positive example for all of Congress. 

I do appreciate your comments about the sustained economic 

growth of our economy, but I want to ask you some questions, too, 

about the other side of that. I guess to start off with the debt—and 

I want you to correct me if my numbers are not correct. But the 

debt that I read, in 2001, was about $5.8 trillion for our Nation, 

the national debt; and it now stands at about $8.35 trillion, which 

is an increase of just about $2-and-a-half trillion. Is that correct, 

sir? 

Secretary SNOW. The total public debt, yes, sir. 

Mr. MOORE OF KANSAS. And the deficit—and I am going to read 

these numbers, which I believe are correct, but please correct me 

if I am not correct—was, in 2002, was about $158 billion as reported; in 2003, $378 billion; in 2004, $413 billion; and in 2005, 

$319 billion. And the projected debt deficit for 2006 is $371 billion, 

although you said you hope that is much lower than that. Is that 

correct? 

Secretary SNOW. That is correct, Congressman Moore, for all the 

years 2002 through 2005. I think the evidence now is pretty clear 

we are going to come in considerably below the $371 billion. 

Mr. MOORE OF KANSAS. I hope you are right. I hope you are 

right. 

You, as Secretary of the Treasury, are required to issue a financial report of the United States, and you did issue such a report 

in December of 2005, is that correct, sir? 

Secretary SNOW. Yes, sir. 

Mr. MOORE OF KANSAS. And, in fact, one of the first pages in the 

report was a message from the Secretary of the Treasury, signed 

by John W. Snow, correct? 

Secretary SNOW. Yes. 

Mr. MOORE OF KANSAS. And you indicated in there that the projected deficit—or the deficit for 2005 was about $319 billion but 

that the—on the accrual-based net operating cost, it would be $760 

billion for 2005, is that correct, sir? 

Secretary SNOW. Yes, it is. 

Mr. MOORE OF KANSAS. And, in fact, the first method of calculating is using the cash basis and the second, the $760 billion figure, was based on the accrual method of accounting, is that correct, 

sir? 

Secretary SNOW. Yes. 

Mr. MOORE OF KANSAS. What do most major corporations in this 

country use? Do they cash-based accounting or accrual-based accounting? 

Secretary SNOW. Normally accrual-based. 

27

Mr. MOORE OF KANSAS. In fact, when I talked to corporate execu- tives about the numbers $319 billion and $760 billion, they kind of 

smiled at the $319 billion because they are required to use accrual 

and not cash-basis accounting, correct? 

Secretary SNOW. That is the standard general accounting practice. 

Mr. MOORE OF KANSAS. Mr. Chairman, I would ask that this 

statement be received as an exhibit in the record, please. 

Mr. MILLER OF CALIFORNIA. Without objection. 

Mr. MOORE OF KANSAS. I am concerned, Mr. Secretary—and this 

is not to be partisan at all, because I tell people back home that 

85 percent of what we deal with up here shouldn’t be about Democrats or Republicans. It ought to be about taking care of our people 

and our country. I truly believe that, and I believe that you act 

that way as well. 

I am very concerned that we are mortgaging the future of our 

children. Even though the sustained economic growth may be up 

and at a good rate right now, I am very concerned about what we 

are doing. I have children and grandchildren, and I think that we 

are putting them in a hole so deep they may never be able to climb 

out if we don’t change the way we are doing business, and if Republicans and Democrats don’t come together and change the way 

our country is doing business. 

I guess I hear so much talk up here about values and from the 

President, from Members of Congress, and I don’t think it is a family value to pass on massive debt to our kids and grandkids. I am 

just hopeful all the good people in our government—and I think 90 

percent of them are good people—on both sides can come together 

and change the way we are doing business here. 

And it is not just new spending, but I think we have tax cuts 

sometimes—and I voted for the President’s first round of tax cuts 

back in the first year when we had a projected surplus of $5.6 trillion, but that turned around dramatically 2 or 3 years when the 

President asked for the second round, and I voted against it. I am 

just hopeful we all come together and do what is right for our country. 

Thank you, Mr. Secretary. 

Mr. MILLER OF CALIFORNIA. The gentleman from Texas, Mr. 

Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Secretary. Good to have you 

back. 

I want to go back to what I thought was the subject of this, and 

that is talking about our global economy and how it is doing. One 

of the things that I noticed with interest here this week is kind of 

the news that has been coming out that our trade deficit is actually 

for, I think, for the second time—quarter in a row or second month 

in a row, is less, even with high energy prices—that we look across 

the globe and economies in Europe, in Asia are growing at fairly 

rapid rates, and the economy in the United States is extremely 

good right now. 

One of the things that I wanted to get your perspective on is, we 

look at this trade deficit. That is good news. Is that related to the 

fact that these other economies are growing at a better rate now, 

and does the falling dollar also kind of contribute to that? 

28

Secretary SNOW. You know, one of the great mysteries of the 

global economy is to look at a month or 2 months—and what we 

have now is 2 months—and to say, uh-huh, we really understand 

what is going on. So I am—I have too much respect for economic 

data to take 2 months and say we have a real clear sense of what 

is happening there. 

But Europe and Japan have both reported better growth rates, 

and that is important because if they have higher growth rates 

they create more disposable income. More of that disposable income 

will—if they have more disposable income, some part of it will 

come our way and help our exports. 

And you did see in those two reports that exports were going the 

right way. 

The counter side of that is that, when the United States grows 

much faster than our trading partners, as we have been, we are 

creating more disposable income here. We have a high propensity 

to consume and a high propensity to import. So that drives our imports up. 

We don’t want to see the current account deficit solved by the 

United States having slow growth rates. We want it to have high 

growth rates. But if we are going to sustain high growth rates and 

not—and see that our exports continue to rise, we need stronger 

growth than the rest of the world. I agree with you. 

Mr. MILLER OF CALIFORNIA. Thank you. 

The gentleman from Georgia, Mr. Scott, is recognized for 5 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman, and Secretary 

Snow, let me just say that I think you have handled your job in 

a first-class manner. 

Secretary SNOW. Thank you. 

Mr. SCOTT. Certainly with all the rumors swirling about your future, I think you have handled that situation with class and dignity and I want to commend you for that. It is not an easy task, 

I know. 

But now let me talk about the debt, because I think that is the 

most pressing issue facing not just the country but the future of 

this country. You know great civilizations have all gone down because of a number of issues—global over-reach, dwindling resources 

at home, like we have with our oil, failure to take care of our borders—but, most importantly, huge debt in the hands of foreign governments. That spells disaster for our way of life and our civilization. 

Let us look at the facts. The facts are these: 

Number one, you and this Administration in the last 5 years 

have borrowed more money from foreign governments than all of 

the previous 42 Presidents and Administrations combined. That is 

extraordinary. To say that in the last 5 years this country, under 

this President and this Administration, with the sanction of this 

Congress, has borrowed more money than in the history of the 

country from 1789 until 2001, that is disastrous. 

In the last 211 years leading up from 1789 to 2001, this country 

borrowed $1.0.1 trillion from foreign governments in foreign banks. 

In the last 5 years under this Administration and this Congress, 

we have borrowed $1.0.5 trillion dollars from national—from govVerDate 0ct 09 2002 10:51 Dec 13, 2006 Jkt 031038 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 F:\DOCS\31038.TXT HFIN PsN: TERRIE
29

ernments and foreign governments and banks; and that is putting 

us in a very precarious position. 

You talk about the current accounts balance. We have now in the 

last—in 2005, just this past year, we have borrowed from foreign 

governments $800 billion—our government, our businesses, our 

folks. This spells rank disaster; and I am wondering, when is this 

Administration going to come clean with the American people and 

say we need to put some controls on this? 

When we also add to that fact that we are putting this burden 

on our young people, on our children and our grandchildren, which 

saddens me, that fact even makes it even more dramatic. 

But here is the other point, the tax cuts that we are borrowing—

and I want to talk about the tax cuts for a minute because I, too, 

voted for the first round of tax cuts because I thought it was a prudent thing to do to stimulate the economy; and I must say it did. 

But now to wage this war in Iraq on tax cuts, to make a tax cut 

at the time the country sacrificing as it is, is terribly wrong. 

The other point that I would like for you to address is, given this 

go-along cowboy mentality of this President in dealing with foreign 

nations has placed us even in a more precarious state—situation. 

Many of our allies have been defeated in elections: Spain, defeated; Italy, defeated; and poor Tony Blair is just hanging on by 

his fingernails. And even if we go to some of the oil petroleum 

countries like in Venezuela, Chavez and others. 

So I want you to respond honestly, as we look to the future of 

this country, and we have to, what are the plans in the last 2 years 

of this Administration to address this debt, admit to what we are 

doing, and put some pay-as-you-go principles in place so that we 

can bring down this debt and cut not only this addiction to oil for 

foreign nations that we have but this addiction to their money. Because there is great worriation from financial markets all around 

this world that the dollar—our dollar could crash. Then what? 

Secretary SNOW. Well, again, Congressman, thanks for those nice 

sentiments. I appreciate your comments. Let me try and address 

your question. 

The debt levels have risen, as your numbers suggest, but, compared to most of the rest of the countries of the world, our debt levels are quite low; and even if you go back in history, our debt levels 

are quite low today, relative to the levels that they have been in 

the past. So I don’t think that we should be alarmed. 

And I do think we should address it. There is no doubt about the 

fact we need to continue to address the debt level and bring it 

down in absolute terms and as a fraction of GDP. But it is comforting to know that, when you look at the rest of the world, we 

are at the low end of debt; and when you look at most of American 

history, we are still at the low end of debt as a percentage. 

One reason that public debt number has gone up so much is that 

we have a number of trust funds, like Social Security, that are currently in surplus; and under laws of the Congress, of the country, 

under the laws of the land, those surpluses can only be invested 

in debt instruments of the U.S. Treasury. So when the Social Security system wants to make an investment, they have to make an 

investment in U.S. Treasuries, and we issue a Treasury note. 

30

Mr. MILLER OF CALIFORNIA. The gentleman’s time has expired; 2 

minutes over, sir. 

Mr. SCOTT. One second, please. 

Mr. MILLER OF CALIFORNIA. No, the gentleman’s time has expired. 

Mr. SCOTT. Will the dollar crash? 

Secretary SNOW. I don’t comment on the exchange rate values of 

currencies, but I think the set of policies that we have put in place 

are the right policies to ensure stability in the global economy. 

Mr. MILLER OF CALIFORNIA. Thank you. 

Mr. Snow, one of my top priorities since I have been in Congress 

is the concept that anybody who wants to own a home in this country should be able to. We have had numerous hearings with Secretary Jackson. I talked to him privately on numerous occasions 

about the most difficult impediment we have to deal with is down 

payment. Most people—just a lot of people don’t have the down 

payment to be able to get in a home. 

There are many organizations that are nonprofits that are organized for the purpose of just helping people with down—buyers’ 

down payments assistance programs. HUD is permitted to use 

these programs in conjunction with FHA. So, basically, I would assume that was an approved program. But, recently, the IRS issued 

a ruling that virtually put most of these good groups, I thought, out 

of business. Can you please explain that to us? 

Secretary SNOW. Chairman Miller, I think what the IRS did was 

to enforce the charitable laws of the country in a way they thought 

were consistent with the intent of Congress. And I did not participate in that decision. That is an IRS enforcement decision. But, following up with information on what they did, it was a desire on 

their part to see that the tax laws weren’t being evaded. 

Mr. MILLER OF CALIFORNIA. The problem I think most have with 

this, is that Congress has been encouraging this. We have had 

hearing after hearing encouraging it. In fact, the Government is 

talking about trying to help with down payment assistance. We 

have encouraged these nonprofits. We have had hearings where the 

Secretary has basically applauded them for the good work they 

have done and all the people they have put in homes. 

The problem I have with it, and many people that I have talked 

to that are members have said we are going back now on people 

and these organizations for actions in the past rather than issuing 

a ruling that would take place on any transaction in the future. 

How do we justify doing that? 

Secretary SNOW. Well, only because the conduct as observed and 

reviewed and analyzed by the IRS wasn’t consistent with the tax 

laws of the countries. That was their finding, Congressman. 

Mr. MILLER OF CALIFORNIA. Why did it take so long then? 

Secretary SNOW. I suppose because of the inherent complexities 

in the matter. But, as I say, it was an enforcement action by the 

IRS; and, under the rules, Treasury Secretaries are supposed to 

stay out of those enforcement actions. 

Mr. MILLER OF CALIFORNIA. I think it something we need to look 

into, because this is going to have devastating consequences in the 

future on the possibility of those with low income getting into 

homes. 

31

The other one is something I have been working on since I have 

been in Congress, and it is the Spanish-American War tax on 

phones. It was considered a luxury in 1898. In fact, I actually got 

the bill to President Clinton one time in a much larger tax bill, and 

he happened to veto that bill or we would have struck it from the 

law. 

You have long distance services still being taxed. The third U.S. 

Circuit Court of Appeals became the fifth appellate court to rule 

against the Treasury Department, saying that this is not a legal 

tax to collect, and the IRS seems to ignore what the courts say, and 

they are continuing to tax us. 

You think about all the young people who are away at college 

and calling mom or grandma at home or dad, and they are being 

taxed for making that phone call. Or grandma is wanting to call 

the grandchildren, and she is being taxed for that phone call. A lot 

of these taxes are impacting people with very low income levels. 

What do you plan on doing in the future? 

Secretary SNOW. Well, we haven’t had a very good batting average, as you know. The handwriting seems to be on the wall with 

respect to, I guess, the Fourth or Fifth Circuit Court that came 

down that way. We have to review that, meet with the Justice Department people, and come to a final determination. 

Mr. MILLER OF CALIFORNIA. Are you going to take into consideration the entire phone tax or just on long distance calls? 

Secretary SNOW. That would be one of the issues we would have 

to think about. I think they have ruled that local is still permissible; the long distance isn’t. So I think we would have to take a 

look at the whole subject. 

Mr. MILLER OF CALIFORNIA. I hope you take into consideration 

the entire phone tax, and I would strongly encourage you to, if you 

have an opportunity, to look into the nonprofit Down Payment Assistance Program. When HUD has worked with them in conjunction of making an FHA-insured loan, we send a message somehow 

that this is acceptable. So we have one section of the Government, 

HUD, working with these nonprofits, saying obviously it is okay, 

because we are working together. Then we have, after the fact, the 

IRS coming in and ruling, no, it is not a legal transaction; it is taxable. That sends a conflicting message, and I would like, hopefully, 

to get that resolved. 

Secretary SNOW. At a policy level, I will try and take a look at 

that. I can’t get into the enforcement, though. 

Mr. MILLER OF CALIFORNIA. Mr. Green, you are recognized for 5 

minutes. 

Mr. GREEN. Mr. Chairman, I will yield to Mr. Davis, if permitted 

to do so. 

Mr. MILLER OF CALIFORNIA. It is your time, sir. 

Mr. GREEN. Mr. Chairman, will I be able to be held after Mr. 

Davis? 

Mr. MILLER OF CALIFORNIA. You have 5 minutes. 

Mr. DAVIS OF ALABAMA. I would be happy to yield back. 

Mr. GREEN. I will use my time. 

I thank you, Mr. Secretary for appearing today. 

Mr. Secretary, I would like to talk for a moment about currency 

manipulation. 

32

Mr. MILLER OF CALIFORNIA. If you want to allow him to take 

your time now and you have 5 minutes later, that is acceptable. 

Mr. GREEN. That is what our intention was. 

Mr. MILLER OF CALIFORNIA. The gentleman is recognized for 5 

minutes. 

Mr. DAVIS OF ALABAMA. We will trade the 5 minutes if the Chair 

will allow it. 

Mr. Snow, let me get your attention back, since we settled that. 

Let me make a general observation and get you to respond to it in 

two contexts. 

One of the most consistent criticisms we have had on our side of 

the aisle—but, frankly, on the other side of the aisle sometimes has 

to deal with whether or not your Administration is always susceptible to the power of evidence and whether or not your Administration is willing to rethink positions based on empiricism; something 

is working well and something is not working as well. 

Some of us, again, on both sides of the aisle, have occasionally 

had the impression that you and some of your colleagues at 1600 

Pennsylvania Avenue tend to dig into a position regardless of what 

the facts appear to be. So I want to test that proposition in two 

areas. One of them has to deal with the extension of the tax cuts. 

As you know, both Houses last week narrowly voted to extend 

the cuts on dividends and the cuts on capital gains. You and others 

have argued for extending the personal income tax cuts, and I 

think you have—others have argued making permanent the repeal 

of the estate tax, and the consistent point that you and others have 

made is we can do all of this irrespective of the deficit. 

Let me ask you hypothetically, Mr. Secretary, is there a point 

that this deficit could reach that could cause you to rethink your 

support for extending these tax cuts? 

Secretary SNOW. Congressman, look, I came to Washington as a 

budget hawk and I will leave it as a budget hawk. Budget deficits 

aren’t a good thing, but, as we have discussed earlier, the deficit 

is now coming down. 

Mr. DAVIS OF ALABAMA. I understand that. Because time is limited, I do want to press this point with you. 

Is there a point—let’s say the numbers turn around. You know 

very well they fluctuated the last several years, revenues fluctuated the last several years, and you know this is not just a contemporary question, it is a question the next few Congresses will 

face. At what point does this deficit have to reach or what number 

would the deficit have to reach to make you rethink your support 

for extending all the tax cuts? 

Secretary SNOW. Well, I am going to say what I have said over 

and over again. 

Mr. DAVIS OF ALABAMA. That was my concern. 

Secretary SNOW. We are not going to get there. We are bound 

and determined not to get to that point. 

Mr. DAVIS OF ALABAMA. Let’s say that we got there. What about a $450 billion deficit? Would that cause you to rethink? 

Secretary SNOW. Again, we are on a path to bring this way below 

that number. 

Mr. DAVIS OF ALABAMA. Let’s say that we got to $450 billion. Is 

there any number—I am not trying to play a game. 

33

Secretary SNOW. Sure, there is some number. It doesn’t serve a 

useful purpose to speculate on it when we have before us the 

chance to avoid that. 

Mr. DAVIS OF ALABAMA. Let me make my point. I think you get 

my point. I am not trying to play a game with you, but hypothetical 

numbers—I am trying to make the point that there ought to be 

some correlation between our deficits and our tax policy. We can’t 

distance the two. I am simply trying to make the observation that 

there could come a point at which we have to rethink, which is, 

frankly, more than your Administration has conceded. 

The second point relates to trade. The Administration has essentially locked into the policy that we will do trade agreements with 

willing partners as long as they agree to enforce their own labor 

laws. All of the agreements contain that provision. The countries 

enforce their own labor laws. 

Are there countries in the world, Mr. Secretary, who might be 

willing trading partners of the United States whose trade policies 

and whose labor laws are so poor or so weak we would refuse to 

enter into an agreement with them? 

Secretary SNOW. That is a good question for your former colleague, Mr. Portman, and his successor. Treasury doesn’t negotiate 

those trade agreements— 

Mr. DAVIS OF ALABAMA. I understand that. 

Secretary SNOW. —so I don’t want to tread on the jurisdiction of 

others in the Cabinet. 

Mr. DAVIS OF ALABAMA. You do routinely give us your policy perspective, and you have done that all day. 

Secretary SNOW. Oh, yeah, the policy of open markets, free capital flows, flexible exchange rates is the right policy. But the details 

of negotiating trade agreements I better leave to people who do 

that for a living. 

Mr. DAVIS OF ALABAMA. Let me close on this point, because my 

time is about to run out. 

I know, Mr. Secretary, that you may or may not be moving on 

to something else in the next few months. I would make this observation with you. If you have occasion to reenter the private sector 

in the next several months before the Bush term is complete, 

frankly, I would like to invite you to come back to the committee. 

Because I would love to hear your perspective on these issues without the constraint of the ‘‘Mr. Secretary’’ title. 

Secretary SNOW. Thank you. 

Mr. MILLER OF CALIFORNIA. The gentlelady from New York, Mrs. 

Kelly, is recognized for 5 minutes. 

Mrs. KELLY. Thank you. 

Secretary Snow, I appreciate your being here and putting up 

with such a long period of questioning. 

I questioned Under Secretary Kimmet about the financing of the 

Dubai Ports World deal through Islamic finance. I did it in writing, 

and I received a written follow-up response from the Treasury several weeks later saying, and I am quoting: ‘‘The Department of the 

Treasury cannot comment competently on Dubai law.’’ 

That wasn’t exactly what I was expecting, and I appreciate their 

candor, but it wasn’t what I really wanted to hear, Mr. Secretary. 

You and I both know that Dubai has long been an open financial 

34

channel for terror networks and nuclear proliferators. You and I 

both see the signs indicating that Iran is financing its acquisition 

of nuclear weapons through Dubai. You and I both know that Islamic financing is one of the fastest growing sectors of the global 

economy. I think we need to better understand the vulnerabilities, 

especially in the UAE, so we can address them more effectively. 

I am circulating to all of my colleagues in the House a letter to 

the UAE about the gaps in their financial defenses which have implications for our national security. And my concern with this 

whole idea of CIFIUS is that they are not looking behind a deal 

to finance—to look at what the financing is. 

So what I hope is that you can give me some guidance about 

what steps are being taken by Treasury to develop expertise in the 

financial laws of Dubai and the UAE for both Western and Islamic 

financing. Are there other resources that we can give to you from 

Congress. What do you need? 

Secretary SNOW. Thank you very much. Interesting you would 

raise that question. Because we have had with us at Treasury, understanding the importance of knowing more about Islamic finance, 

a leading student of Islamic finance and how they carry on financial activities in light of their religious rules on interest rates. I 

think we are getting a better understanding of that. 

I will be in Egypt this weekend meeting with the finance ministers from that region; and one of the subjects that we will be putting on the table both in the general meeting and in the bilaterals, 

where I hope to meet with the UAE as well, is just this subject of 

managing our way through the whole set of finance issues in the 

world of Islamic finance, which does take some special attention, 

I agree with you. 

Mrs. KELLY. I would like your thoughts about some comments 

that were made by the UAE’s central bank governor in the aftermath of the Dubai Ports deal. He essentially threatened the failure 

of the deal would damage financial and trade relations between the 

U.S. and UAE. You may remember that. He talked about selling 

dollars to boost their Euro holdings. Have you seen anything so far 

that might be construed as a sponsor retaliation from the UAE for 

the failure of the Dubai Ports World deal? 

Secretary SNOW. No, we have not. 

Mrs. KELLY. I would hope that we would be able to establish 

something with CIFIUS in their background checks, as I repeat, in 

their background checks on any deal that is being constructed by—

from an outside-of-the-United-States company coming here. I think 

the depth of their research on where the finances came from was 

not enough. 

I think the response that came from Secretary Kimmet was honest, but I think that it is very important that we follow through 

with what you said. I hope you will follow through with what you 

intend to do, and that is take a look at both the UAE law and the 

other Arab countries that we are dealing with. 

You and I both know that there are essentially two constructs of 

financial constructs there in Dubai. You and I also know that anyone can register with their local tribal authority and evade the 

laws in Dubai. That needs to be looked at. I hope you will address 

that. 

35

Secretary SNOW. We are, and we will, and I will keep you fully 

advised. 

Mrs. KELLY. Thank you. I would appreciate that. 

I yield back. 

Mr. MILLER OF CALIFORNIA. The gentleman from Texas, Mr. 

Green, is once again recognized for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. It is a rare occasion when 

I have the opportunity to speak twice. 

I thank you again, Secretary Snow, for being here today. 

As indicated earlier, I would like to talk for a brief moment about 

currency manipulation, what I would call initial invidious currency 

manipulation. As you know, the exchange rate with the yen broke 

the psychological 8 yen per dollar level on Monday. I believe it is 

at 7.9982 for the first time. At this level, we are finding that the 

manufacturing sector, they have certain criticisms, analysts have 

Criticisms. The analysts are saying that by allowing this to happen 

and not formally accuse China of currency manipulation we are 

going to allow the yen to rise further. Our manufacturers contend 

that the yen is undervalued by as much as 40 percent, giving 

China exporters an unfair price advantage overseas. 

Now with these circumstances in place, assuming that there is 

some degree of credibility in what is being said, are we reaching 

points where we have to officially designate China as a currency 

manipulator? First question. 

Secretary SNOW. Well, we looked hard at that question, whether 

China should be designated, and concluded, based on all of our 

analysis that is laid out in that report in some detail, that the statutory criteria wasn’t met. But we also made it very clear we are 

not happy with where China is today. 

China needs to do more, and they are being too cautious. They 

should move faster. I am pleased to see it is moving some, but I 

think there is a lot of room for it to move more, and we are going 

to continue to make that case. 

Mr. GREEN. When we accuse China of manipulating, how does 

that technically—once we do that, how does that benefit us to do 

so? 

Secretary SNOW. Well, if we make that designation, then under 

the statute we would be required to enter into formal discussions, 

formal negotiations really, under the statute with the Chinese; and 

we are already having effectively those sorts of conversations with 

them. 

The designation would, in my view, play out in ways that might 

not be helpful. If we find that their behavior meets the statutory 

test, we would certainly make the designation. But when I say it 

might not play out as favorable, I cite a number of commentators 

who in recent commentaries on our report have said that because 

Treasury has now taken away the threat of the negotiation, China 

is in a better position to move their currency in the direction that 

Treasury and the United States would like to see it move. 

Mr. GREEN. One final question, if I may, Mr. Chairman. If so 

designated formally and officially, are we required to take certain 

action, and, if so, what actions are we required to take? 

Secretary SNOW. Congressman, the only action we are required 

to take is have these formal discussions and negotiations. 

36

Mr. GREEN. Thank you, Mr. Chairman. I yield back. 

Mr. MILLER OF CALIFORNIA. The gentleman from New Mexico, 

Mr. Pearce, is recognized for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. Following Mr. Sherman’s lead, I 

would comment that we have had no snow in New Mexico for several years, no spring runoff. You could help me answer when the 

drought is going to end there, so I would invite you out at any 

time. 

I would encourage you to think the opposite direction as my colleague Mr. Davis on the tax rates. Looking at the Irish America, 

when they set up the 10 percent foreign tax rate and the Europeans said, you have to rethink your tax rates, they did; and they 

came back down from 36 percent to 12 percent, for the domestic 

corporations, too. It created such a strong economy that they came 

in and built a $200 million plant right outside the Second District 

in New Mexico. 

So I would encourage you, if we get the $450 billion deficit, we 

consider cutting our tax rates and getting more foreign investment 

in here. 

The idea of exchange rates is awfully important. In the Second 

District in New Mexico is the last manufacturer of Christmas ornaments, glass balls. It is just now down to China and the United 

States. 

When China let their exchange rate vary just a little bit, the guy 

called me—we are not in weekly conversation but in constant conversations—and called and said, they blinked today on their exchange rate. I got a 2-and-a-half percent increase. I will be able to 

stay in business this last year. 

This stuff is really huge for jobs here, and I would encourage you 

to continue doing the things you are talking about in your report. 

Another item that he points out is that the state corporations 

there don’t have to repay the loans to the state banks. That at 

some point we must deal with. It is bad enough this is the last guy 

in the world that has kept up with the Chinese. He has done it 

through productivity, through cost control, but there is nowhere 

left to squeeze. The last two competitors went out this year that 

were in the United States, so we really do need to take a look at 

the way the Chinese are manipulating the market. 

When Mr. Bernanke was here, he made a comment that is directly opposed to your comment that you say we need to encourage 

greater savings rates. He mentioned there is not a problem with 

saving in United States; there is a problem in other countries of 

under-consumption, meaning too much saving. That to me was 

kind of a different take than I had heard. Can you help me understand the difference between your position and his position? 

Secretary SNOW. I don’t think there is any real difference, Congressman. The current account deficit is simply the difference between a countries savings rates and its investment rates. The 

United States has low savings relative to our investment opportunities. China has very high savings, India has high savings relative 

to their investment opportunities. As a result, a country like China, 

with high savings rates, net savings rates, over-investment, is generating savings that are used by the rest of the world. So what I 

37

think the chairman had in mind is what I said earlier, that we 

want to encourage China to move to stronger domestic consumption 

markets to absorb those savings. 

We were pleased—I was pleased that President Hu, who said as 

much when he was here, pledging to reduce emphasis on exports 

and strengthen emphasis on domestic consumption. 

Mr. PEARCE. I agree with you. It would be a strong possibility. 

You had mentioned the idea of private property rights being essential for the reformation of the world economy. Do you take an 

internal look at the United States? There are certain slippages. I 

look at it like a transmission pulling uphill. There is slippage. 

If I look at Los Alamos, New Mexico, I find a town that is completely encased in Federal land, and the Los Alamos lab is a Federal Government entity. I have said repeatedly, they have issued 

their 5-year forecast. They were going to release some land and 

allow some expansion, but they never quite get to it. Along interstate highways, States are increasingly saying that same thing. 

This is such a captive market. If we go into the gasoline business, then we can really do well. Because people really won’t go 20 

miles for gas. They will stop at the state-owned thing, even if it is 

not as good. 

Then, finally, with regard to the aviation industry, hangers of 

the FAA is encouraging local airports to put fixed leases. At the 

end of 15 years, your hangar belongs to us. What we are doing is 

incrementally—no one— 

Mr. MILLER OF CALIFORNIA. The gentleman’s time has expired. 

Mr. PEARCE. —incrementally depressing our economy. 

If you would like to make a comment on the U.S. policy. 

Secretary SNOW. On the Celtic miracle, I think you are absolutely right. At the heart of the Celtic miracle, it took the poor man 

of Europe, about the most prosperous economy in Europe, was 

lower tax rates and less regulation, to your last point. 

We are trying to encourage China to have less support for those 

SOE’s, those state-run enterprises, which means they have to stop 

these loans that are never repaid, which are really a form of indirect subsidy or direct subsidy. 

On the role of the private sector, obviously, Government can encroach on the private sector in ways that the private sector can’t, 

do what the private sector does best, create jobs, invest and grow 

the community. So I am in sympathy with you. 

Mr. MILLER OF CALIFORNIA. The gentleman from Missouri, Mr. 

Clay, is recognized for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for your appearance today. 

My questions are more along the lines of the domestic side of the 

issues. One, the IRS revenue ruling 2006–27 would take away the 

501C3 status of down payment assistance housing organizations 

that help low- and moderate-income folks become homeowners. 

Have you answered this question already? 

Secretary SNOW. Well, the chairman gave me his views on it, and 

I told him that I would follow up and try and take a policy look 

at the question and answered the rationale for the action the IRS 

took as best I could, explaining, of course, as he knows, that we at 

the Treasury are not engaged in the enforcement side of the IRS. 

38

Mr. MILLER OF CALIFORNIA. If the gentleman would allow, he can 

talk to Mr. Frank. 

Secretary SNOW. It has been brought to my attention, Congressman. 

Mr. CLAY. I look forward to the response, also. 

Let me ask you then, how much money from the war on terrorism has been seized in the last 6 months and what is Treasury 

currently doing in this area? 

Secretary SNOW. Treasury, of course, is on the front line of the 

financial war on terror, and we continue to track terrorist moneys 

and to try and intercept them, break up their networks and follow 

the flows. When people use the financial system—if a terrorist used 

a financial system, he creates an audit trail; and we are trying to 

follow that audit trail. So we are very open about the fact that 

Treasury is going to use every lead we can get, every terrorist lead 

we can get and follow it through and use the leads to deter and 

detect and break up terrorist financing and terrorist networks. 

Mr. CLAY. Mr. Secretary, apparently, you must look at some of 

the habits that terrorists have as far as what kind of tools they use 

and where they bank and all of that; and so it must be pretty apparent that these systems can be easily stopped. Is that your impression? 

Secretary SNOW. As a broad observation, terrorists can only carry 

on their evil activities with money. They have to get airplane tickets and find a way to live and travel and pay people for services. 

When they use the financial system, we want to be in a position 

to follow any trail that is left. 

They also, though, knowing that we are using the financial system to track them and follow them and detect them, use couriers 

and these money changing operations that are below the radar 

screen, which is why we need to continue to enforce the laws on 

things like amounts of currency that can be carried and things like 

that. 

Mr. CLAY. I thank you very much for your responses. That is all 

I have, Mr. Chairman; and you have a good day. 

Mr. MILLER OF CALIFORNIA. Secretary Snow, thank you very 

much for your testimony today. You were extremely candid responding to the questions. I know you are saddened that there 

weren’t more questions, so we are going to allow 30 days to submit 

questions in writing for the record. Welcome, sir. It is good to have 

you here. 

This meeting is adjourned. 

Secretary SNOW. Mr. Chairman, thank you very much. 

[Whereupon, at 12:25 p.m., the committee was adjourned.] 

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