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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

FIRST SESSION

APRIL 19, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–18

(

(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 

PETER T. KING, New York 

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 

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: 

April 19, 2005 ................................................................................................... 1

Appendix: 

April 19, 2005 ................................................................................................... 39

WITNESS 

TUESDAY, APRIL 19, 2005

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

APPENDIX 

Prepared statements: 

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

Pryce, Hon. Deborah ........................................................................................ 42

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

Snow, Hon. John W. ......................................................................................... 46

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Waters, Hon. Maxine: 

Written questions to Hon. John W. Snow ...................................................... 56

Snow, Hon. John W.: 

Written response to questions from Hon. Michael G. Oxley ......................... 60

Written response to questions from Hon. Brad Sherman ............................. 59

Written response to questions from Hon. Maxine Waters ............................ 58

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THE STATE OF THE 

INTERNATIONAL FINANCIAL SYSTEM 

Tuesday, April 19, 2005

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

The Committee met, pursuant to call, at 3:02 p.m., in Room 

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

[chairman of the Committee] Presiding. 

Present: Representatives Oxley, Pryce of Ohio, Royce, Paul, Manzullo, Biggert, Hensarling, Pearce, Davis of Kentucky, McHenry, 

Frank, Waters, Sanders, Maloney, Watt, Baca, Scott, Davis of Alabama, Green, Cleaver, and Moore of Wisconsin. 

The CHAIRMAN. The Committee will come to order. 

Mr. Secretary, it is good to have you back again this afternoon 

and welcome back to the Committee. 

We are glad to have you here for the Financial Services Committee for another annual testimony on the state of the international financial system. We meet as the group of seven countries 

strive to make structural changes identified in the Agenda for 

Growth. Global imbalances are global challenges that all parties 

need to meet in order to safeguard continued economic growth 

around the world. At the same time, G-7 leaders are considering 

how best to fund development and manage the IMF’s assets. 

U.S. leadership in the G-7 has generated innovative approaches 

for addressing the challenges and opportunities presented by China’s growth. I hope that real progress on these issues can be made 

in time for the G-7 summit later this summer. 

I note that this is the Secretary’s first testimony since Congress 

passed and the President signed the Intelligence Reform and Terrorism Prevention Act. That Act included a requirement authored 

by my colleague, Mrs. Biggert, that this annual testimony include 

an assessment of international cooperation and coordination from 

the IMF, World Bank and other multilateral policymaking bodies 

in the fight against terrorist finance. I look forward to your testimony on this topic. 

Economic resilience and continued growth are critical components to providing peace, stability and freedom around the world. 

As President Bush has noted, economic and political freedom gives 

hope to millions who are weary of poverty and oppression. 

As your testimony rightly points out, a 5 percent expansion in 

sub-Saharan economies over the next 2 years would lift nearly 30 

million people out of poverty. One important method for promoting 

economic development is to foster conditions for more balanced 

2

growth worldwide. Stronger economies create more demand, promote economic opportunity and ownership and provide a foundation for political stability. I look forward to hearing your ideas for 

how we could support European efforts to make the necessary labor 

and other structural reforms that are so needed. 

I continue to support the President’s efforts to express America’s 

compassion for the world’s most vulnerable people through a wide 

range of development initiatives. I also support the increase by 

$100 million for multilateral development assistance for the International Development Association and the African Development 

Fund and the increased proportion of grants. 

The UK’s presidency of the G-7 is wisely spent focusing on development issues. I commend our cousins across the Atlantic for their 

vision, even as I question whether all the proposals make sense. I 

will be interested to hear your views on the proposed International 

Financing Facility. I expect we will evaluate the IDA and ADF replenishment requests in light of progress made to implement performance-based assessments as well as efforts to increase transparency anti-corruption programs and accountability. 

We need to make sure that development dollars are allocated efficiently and are going to the people who need it most. I hope the 

new president of the World Bank will adopt as a high personal priority continuation and expansion of the bank’s anti-corruption efforts. 

This could help counterbalance potential bureaucratic backsliding and competitive pressures among other regional MDBs to 

lower standards. Regarding proposals to mobilize some of the IMF’s 

gold reserves to fund debt relief, I note that U.S. negotiation to sell 

IMF gold cannot be conducted without Congressional authorization 

starting with this Committee. We have not received such a request, 

and I understand there is no consensus, at least at this time, in 

favor of gold sales within the G-7. Therefore, I assume that no such 

negotiations are underway. 

In the area of trade liberalization, at all levels can be more effective than development assistance in fostering economic growth. 

Trade is not a zero sum game, and all participants benefit from liberalization. I look with cautious optimism at the broader Doha 

round of negotiation in the WTO, as well as efforts within the 

group of 20 to support progress on the global trade agenda. 

I would urge you, Mr. Secretary, to be actively and personally engaged to move along the financial services negotiations. 

Last, but certainly not least, I focus on Europe and the Financial 

Markets Dialogue. We meet as the U.S. and the EU for forging a 

reinvigorated relationship following the President’s successful visit 

to Europe last month. The Treasury Department has done an excellent job of leading this informal forum in which regulators from the 

U.S. and Europe can discuss regulatory differences. 

Finally, concern exists that the Treasury Department may not be 

appropriately staffed internationally. Consequently, I, together 

with Chairwoman Pryce and Ranking Members Frank and 

Maloney, commissioned a GAO study yesterday to assess Treasury’s international staffing structure and whether changes can facilitate the Department’s conduct of international economic policy. 

3

We at the Committee share with you an interest in insuring that 

the Treasury Department has adequate staff and a good structure 

to meet the strategic economic policy challenges of the 21st Century. 

I now yield to the gentleman from Massachusetts, 

Mr. Frank. 

Mr. FRANK. Thank you, Mr. Chairman. 

Mr. Secretary, welcome again, and I will, in the question period, 

get into the debt relief question, because I think this is an important opportunity for us. But I want to talk about here is the issue 

you that affects both the international economy and our own, and 

it is obviously the number one issue for us, and that is our own 

economic picture. 

I am troubled. We have had, in the past couple of years, a good 

degree of economic growth. What is troubling to me is that this economic growth has been accompanied by less job creation than historical standards would have predicted. The best job creation that 

the Administration has predicted and even with the job creation, 

a stickiness in wages, stickiness being a nice word for they ain’t 

going up. What we have seen consequently is an erosion of the position of a large number of average Americans. 

I have problems with that from the standpoint of equity. I think 

it is troubling when the country grows but inequality also grows. 

I welcome for the fact that, for instance, Chairman Greenspan of 

the Federal Reserve agrees that that is a problem. 

But growth can be an economic and political problem. It can be 

a economic problem if we begin to see kind of a slowdown in consumer spending, which could be the result of this lack of income 

in those categories. It is clearly already a political problem. You 

have now an increasing degree of resistance on the part of a lot of 

Americans to the kinds of things you advocate in the international 

field, because they see themselves as the victims of globalization 

rather than participants in the benefits. 

We are reaching an unhealthy state in the country, not just 

internationally but domestically, where there are more and more 

people who feel that they read good news but they are not getting 

much of the action. 

Now, let me document what I am talking about. I want to talk 

about some statistics on job growth the ups and downs of job 

growth. 

In June of 2003, the Council of Economic Advisors in this administration said that we would get job growth of 305,000 per month—

305,000 jobs. They do pay a little bit more than the dollar. 305,000 

jobs per month. That was the prediction in June of 2003. 

Then in October of 2003, Mr. Secretary, you were the more realistic than the Council of Economic Advisors. You said everything 

you knew about economics said we would get 200,000 per month. 

Then the CEA decided you were a piker, and they raised you and 

themselves in the 2004 economic report to 325,000 a month. This 

year’s economic report, suddenly, you are the optimist again, 

175,000 a month. 

So, on the projections from the Council of Economic Advisors, it 

is very troubling, and there is no explanation of this. I read the 

Council of Economic Advisors report, and maybe you have to wait 

4

for the DVD to come out, but we have gone from a projection from 

the Council of Economic Advisors to 325,000 jobs created a month 

to 175,000 jobs created a month a year later. We lost 150,000 jobs 

a month just looking at the CEA report. 

Now the problem is that with all of those, and you were the low 

man in the prediction until the CEA came out again at 175, you 

were 200. But, in fact, for the five quarters since we started this 

recovery, and since you made your prediction in October of 2003, 

the actual total has been 165,000 a month. There have been a couple of good months, but there have been a couple of really lousy 

months. 

You said, Mr. Secretary, that everything you knew about the 

economy said, we would get 200,000 jobs a month. Well, we have 

had 165,000 a month since then. That is troubling. I don’t think 

it is you learned the wrong things, I think it is that we have new 

things in the economy. I think what we are doing is we are seeing 

a situation in which what is good news can become bad news, the 

bad news is that productivity is going up and that we are able to 

make more things. We are able to provide more services. We are 

able to create more wealth with fewer people. 

But because of our social arrangements, we are turning that good 

news into bad news for some people so that we appear to be getting 

fewer jobs per unit of increased wealth than we used to. Again, 

your number was 200,000. We had 165. The Council of Economic 

Advisers—this has not been very well noticed, but the Council of 

Economic Advisors—I would have thought this would have required a little bit of explanation when you go from projecting 

325,000 jobs per month in 2004 and a year later you project 

175,000 jobs per month. 

Now, I think that is an implicit recognition that things have 

changed in the economy. There are limits to what government can 

do. I will close this briefly. There are limits to what government 

can do to undo that trend. 

But here is the problem. We are in a situation where it does appear, contrary to all the predictions that have been made, that 

things have come about in the economy, where wealth is less evenly shared than it used to be. What it would seem to me appropriate 

would be for the public sector in that situation to try to mitigate 

the consequences of this increased inequality. Instead, and this is 

where I fault our public policy, we have exacerbated it. 

So we have a national—we have economic trends, national economic trends, globalization, productivity, information technology 

which tend to exacerbate inequality, which tend to allow us to create more wealth with fewer jobs. Public policy has unfortunately 

been reinforcing that tendency rather than trying to slow it down. 

The consequence is a country which is becoming increasingly hostile to many of the measures you want to think—I will be supporting debt relief for the highly impoverished highly-indebted poor 

countries. 

I am very glad we don’t have a national referendum on this subject, because while I think it is a very important thing for us to 

do, I don’t think we could carry a referendum nationally on that 

because of the kind of resentment that is building up because of 

5

these kinds of figures, so I hope you will help us figure out what 

we do if not to stop this trend, to at least mitigate its effects. 

The CHAIRMAN. The gentleman’s time has expired. The 

gentlelady from Ohio, the chairwoman of the subCommittee. 

Ms. PRYCE OF OHIO. Thank you, Chairman Oxley, and welcome, 

Secretary Snow. Thank you very much for taking the time to discuss with us the state of the international financial system. We all 

know that the health of the U.S. and the EU economies are inextricably bound together in trade and cross border investment flowing and linking our capital markets. 

The recent historic enlargement of the EU, through the accession 

of 10 new Member States, only magnifies that region’s importance. 

The increasing closeness of the U.S.-EU relationship has underscored a growing trade in financial ideas, talent, technology and 

capital across the Atlantic. 

I commend you, Mr. Secretary and your staff, for opening a dialogue with the EU dedicated specifically to financial services issue. 

I hope to hear more during this hearing on how the Treasury is 

working to improve trade in financial services between the U.S. 

and the EU. 

Mr. Secretary, as you know, U.S. and international financial regulators have been negotiating the capital requirements for banks in 

the Basel Committee over the past several years. Many of us are 

concerned about the seeming lack of transparency in this process 

as well as cooperation among our own regulators. 

I know other members on this Committee share my concern and 

would appreciate your thoughts on the Basel II process, specifically 

first noting how the U.S. regulators are working together, and, second, the competitive impact Basel might have on banks that do not 

opt in. 

Additionally, the G-7 recently made a political commitment to 

provide ‘‘as much as 100 percent debt relief’’ to relieve the debt 

burdens of the poorest countries in the world, but they failed to 

provide a view on how this could be funded. In light of the G-7’s 

agenda on development and debt relief for this year, I am hoping 

you will touch on recent discussions to have the IMF sell some of 

its gold stock and use the anticipated profits to relieve the highly 

indebted poor countries debt. 

As you recall, the last time this idea was raised in 1999, the initial creation of the HIPC program brought it about, gold prices 

plummeted to a 20-year low. News of the G-7’s proposal to sell gold 

from the IMF stockpile to pay debt relief sent gold prices down 

again last October, not only affecting the gold-rich United States, 

but also the developing countries that depend on their own gold for 

export revenues, the very countries that we are trying to assist. 

Finally, as the Chairman noted, and I am sure you are aware, 

U.S. law prohibits the Treasury from engaging in negotiations on 

this matter without consultation and approval from the Congress. 

So we will be waiting to hear from you or not to hear from you either way on that. 

I do thank the Secretary for his appearance today. I look forward 

to your testimony. 

With that, Mr. Chairman, I am happy to yield back any balance 

of my time. 

6

The CHAIRMAN. The gentlelady’s time has expired. 

The gentlelady from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman and welcome, Secretary Snow, and thank you for being here. Given the time constraints, I want to highlight three areas of great concern to me. 

The deficit, a debt relief and international cooperation in the war 

on terror. Mr. Secretary, as you are well aware, this Administration holds the absolute record for debts and deficits. Over the last 

4 years of the Clinton administration, President Clinton reduced 

the national debt by a total of $453 billion, and he turned over to 

President Bush a $236 billion surplus and a national debt of $3.3 

trillion. 

Yet the budget that the President has sent Congress for the coming year projects a deficit of over 390 billion, a record high, and a 

debt of 5.1 trillion, another record high, and this Administration 

has voted three times to raise the debt ceiling to over $7 trillion. 

This budget does not include the future costs of Iraq or Afghanistan missions, nor does it include the CBO estimated 1.9 trillion 

cost of making the President’s tax cuts permanent, and it does not 

include the projected 2 trillion more dollars that the Republicans 

want to borrow from foreign countries for the private accounts that 

will change and undermine Social Security as we know it. 

Just this month, we learned we had another record, another unfortunate record, and this was with the trade deficit and goods and 

services of well over 61 billion in February, again, a record high for 

a single month. The goods and services deficit was a record of 617 

billion for all of 2004, again another unfortunate record for deficits 

that this Administration has given to us. 

The broader current account deficit, which is the best measure 

of how much we have to borrow from the rest of the world, was a 

record 655.9 billion in 2004 and it hit yet another record 6.3 percent of the GDP in the fourth quarter of 2004. 

I am concerned that should foreign investors lose confidence in 

our economy and reduce their investments, our constituents could 

face serious consequences, including a dangerously weak dollar and 

increased credit card, home mortgage rates and a sluggish economy, to say the least. 

While the Administration claims its new budget will address the 

situation, the Bush record is consistently rosy predictions followed 

by a consistently ballooning deficit and debt. The budget put forth 

by the Administration for fiscal year 2004 which allows similar proposed caps to nondefense discretionary programs would seem to be 

more of the same. 

I am also interested, as are my colleagues on both sides of the 

aisle, and your comments on the Administration’s support for the 

heavily indebted poor countries. I strongly support the HIPC program. I personally authored a debt relief bill for Iraq with Chairman Leach just last Friday. 

I joined with other members of the Committee, too, Mr. Secretary, in urging you negotiate over the past weekend multilateral 

debt cancellations to poor countries. 

I am also very, very concerned and look forward to the update 

from you on the cooperation the Department is receiving on the 

international effort to track and cut off terror financing. I am conVerDate 0ct 09 2002 10:55 Nov 18, 2005 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\DOCS\24399.TXT FIN1 PsN: MICAH
7

cerned by the news in many of the financial papers today of the 

third day slide in the stock market, the continuing slide in the dollar, and what does that mean for our country. 

I, likewise, join this Committee in its joint effort on the Basel decision to make sure that our financial institutions are not disadvantaged in capital requirements in the world global market in 

the competition that we face in the global economy. So we have 

many challenges ahead of us. I am deeply, deeply concerned over 

a never-ending debt deficit, trade deficit, all record highs. 

One of my constituents has given the country what he calls a 

debt clock, and is placed on 42nd Street and 7th Avenue. Every day 

it puts up the debt which every man, woman and child in this 

country owes to the Federal budget, the debt that each of us carry. 

It is well over $26,000 per individual. This is extremely troubling 

to me, and very strong indicators of trouble ahead in the economy. 

So I hope—I look forward to your testimony today, and your comments. Thank you. 

The CHAIRMAN. The gentlelady’s time has expired. We now turn 

to our distinguished witness, Treasury Secretary Snow, and I know 

that technically you are not here voluntarily, because you are required under the law to testify before this august Committee once 

a year. Actually, in the first quarter, according to statute. 

So that time is running out on that first quarter, and we appreciate your appearance here today, Mr. Secretary, and look forward 

to your testimony. 

Mr. FRANK. Time has run out on the first quarter. 

The CHAIRMAN. Yes, I guess we have—by the way, the energy 

bill keeps an extension of daylight time by 1 month on one end and 

1 month on the other. So I guess if we can do that, we can effectuate your testimony in the second quarter. 

STATEMENT OF HON. JOHN W. SNOW, SECRETARY, UNITED 

STATES DEPARTMENT OF THE TREASURY 

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

Member Frank, Ms. Pryce, Mrs. Maloney—Congresswoman Pryce, 

Congresswoman Maloney. It is always a great delight to be up here 

before this Committee, and whether I was required to or not, Mr. 

Chairman, I would welcome the opportunity to share thoughts with 

you on the important subject of the international economy and 

where things stand, where we see it going and trying to take it, 

what some of the pressure points are and what we are trying to 

do with them. 

We just concluded the spring meetings of the IMF and World 

Bank, where finance ministers, development ministers, Central 

Bank, governors convene; we also held a meeting of the G-7. And 

I think it would be a fair assessment of the conclusion of these 

meetings that the world economy seems to be in good order, in sort 

of a sweet spot. We have seen high world growth rates, the highest 

growth rates according to the IMF and World Bank in 30 years. 

The United States is leading the way with the highest growth 

rates among the industrialized world. There are no recessions in 

any major economies anywhere. There are no financial crises in 

any major economies anywhere on the globe. A marked contrast to 

circumstances we have seen in the past. 

8

We think good policies promoted by the United States government are helping to contribute to higher growth, greater prosperity 

and more stability in the world economy. There are three principal 

goals of the Bush administration when it comes to our international economic agenda, and it won’t surprise you, increasing 

economic growth is a critical part of it, raising standards of living 

and reducing poverty across the globe. 

Secondly, stability, increasing economic stability, allowing for 

steady growth in the economy and reducing the hardships and 

sufferings that result from financial crises. 

As I say, I think the world is in a much better order today than 

has been the case in the past. Thirdly, we want to use our international economic policy to advance our foreign policy objectives, 

combating terrorism, promoting the reconstruction in Iraq and in 

Afghanistan, spreading economic freedom throughout the Middle 

East, through the broader Middle East, North Africa initiative, 

things like that. 

I think we are making pretty good progress on a lot of these 

fronts. As I say in the developed economies, the United States is 

leading the way. We grew at 4.4 percent over the past 12 months, 

creating 2.4 million jobs over that 12-month period, coming in at 

about 200,000 jobs a month, as Mr. Frank indicated. 

It is the result, I think, of the inherent strength of this economy. 

It is resilient, it is responsive, it is adaptive. But it is also the result of well-timed monetary and fiscal policy. 

I give high marks to Chairman Greenspan and the Federal Reserve. I think they pursued a set of policies that were appropriate, 

accommodating higher growth levels that were needed in job creation. I give credit to the Bush administration and the Congress for 

acting on the fiscal policy front, reducing tax rates that clearly, in 

our view, helped stimulate the economy and move it forward. 

We can’t rest; we can’t be complacent. As Mr. Frank indicated, 

there are problems. We need to deal with them. We need to keep 

pressing forward to improve the performance of the economy. To do 

that, I would agree with you. We are reducing the deficit which, 

Congresswoman Maloney, has to be a priority. We are focusing on 

that and want to talk to you about that. There are other things 

that are important, dealing with these large unfunded obligations 

for the future, represented by things like Social Security, while preserving and protecting the promises of the system are important. 

You know, the President has called for broad-based tax reform, 

appointed a panel, a panel that appoints reports to the Treasury 

Department here in a few months, the end of July. I would see us 

engaging with you in broad-based tax reform later this year. Regulatory reform is very much on the agenda, as is energy legislation. 

As I look at our trading partners in the G-7, I am struck by the 

fact that we in the industrialized world are suffering from what 

can only be styled a growth deficit. That has serious implications 

for the developing world, as well as for the United States and the 

trade deficit itself, which is directly related to lower growth rates 

in the rest of the world. 

Japan, the second largest economy in the world, is showing improvement but it is still growing at a rate that is well below its potential. The same is true of Germany. The Euro zone as a whole 

9

is lagging, growth rates less than half the United States. That 

means they are creating less disposable income there, compared to 

the disposable income we are creating, which directly relates to 

this question of the current account deficit. 

At the G-7, we have established something, and this is joined in 

by all the members of the G-7, something that we initiated, called 

the Agenda for Growth, where recognizing the need for more 

growth in the global economy, each of us is committed to take on 

in our own countries and through our own political, administrative 

and regulatory processes, the things that most stand in the way, 

the things that most impede growth in our economy. 

There is a real commitment to do that. Progress is slower than 

we would like to see, but progress is real. There is a commitment. 

It is not a commitment just of word, it is a commitment of actions. 

We put a clock on ourselves and we audit our open results, and 

that audit process will be the subject of the October meeting of the 

G-7. 

In the emerging market countries, I think the most notable 

things there that I would remark on is the fact that economic 

growth is very, very strong. Latin America came in last year at 

about 6 percent. The emerging Asia countries came in at over 7 

percent. The emerging European—the so-called succession countries—the emerging European countries came in at well over 6, 6.5, 

all in the absence of financial crises and all with spreads on paper 

that are moderate and all with inflation down. 

This is a truly stark contrast to the 1990s, 

Mr. Chairman. Why has this happened? I think it is because better policies are being put in place by these countries, through the 

leadership, the political leadership and economic leadership, better 

economic policies make a difference. We are seeing better economic 

policies applied, better fiscal policy, better monetary policy and 

there is no better example of this in my view than what President 

Lula and Finance Minister Palocci are doing in Brazil, which has 

turned the corner and is producing really strong and very good results. 

Let me comment briefly on China. I know that is on the minds 

of everybody. Our policy, with respect to China, clearly calls for 

them to move to a flexible exchange policy. We have urged them 

to take the steps to get their economy ready for a flexibility exchange rate. They have taken a lot of steps, we can discuss them 

later. 

They are now, in our view, ready to move to greater flexibility 

on their exchange rates. My colleagues and I at the G-7 have called 

on China to move to greater flexibility. We did so in the communique that was issued just over the weekend. 

On the developing countries, in the poor developing countries, we 

also see significant progress in lifting people out of poverty. Clearly 

the prime cases here are China and India, which are moving at a 

rapid pace with very substantial growth rates, 7, 8, 9 percent. Millions, actually tens of millions of poor people have been lifted out 

of poverty because of the progress in those countries. 

In sub-Saharan Africa, which is still a troubled part of the world, 

with population rising and concerns about growth rates rising fast 

enough to sustain higher standards of living, I am pleased to say 

10

that growth is now estimated to have been about 4.5 percent over 

2004. It can be better, it will be better, if we follow the right policy. 

We want to support those policies. 4.5 percent is a nice pickup from 

where they have been. 

That is a result of their policies and the stronger, the stronger 

world economy. One of the Committee Members asked me to comment on the reforms of the international financial institutions. We 

are pressing them hard for reform agenda. We have called for a 

strategic review. We have asked for them, working with the G-7 

and the other board members to think through their mission. 

The fundamental conditions have changed dramatically from the 

time they were put in place. The World Bank was put in place initially to deal with the post-conflict situation in Europe, reconstruction of Europe after the Second World War and quickly moved off 

into other arenas. 

The IMF was put in place to deal with a balance of payments adjustments in the context of a fixed exchange rate. Now, of course, 

large parts of the world have flexible or floating, freely floating exchange rates. 

So we are working to make sure the missions of these agencies 

are appropriate to the current conditions of the world economy. 

We are pressing those multilateral development banks, I think 

you would agree we should, to produce measurable results to put 

greater focus on grants rather than loans, to end this cycle of give, 

forgive, give, forgive. The paradigm of it creates the unsustainable 

debt levels. 

We are also encouraging on the subject of using private sectorled growth of nurturing the private sector as the best engine of 

long-term growth and of creating an environment of respect for law 

and property, anti-corruption regimes, that will encourage foreign 

capital coming in, and, of course, importantly, encouraging transparency, encouraging real accountability. 

One area where the United States is taking the lead, an area I 

know is very important, Mr. Chairman, to you and to the Committee, is on the effort to reduce the debt burdens on poor countries. 

We have a proposal to reduce the debt, cancel the debt up to 100 

percent for the HIPC countries. I think we made some progress 

over the weekend in building support for our 100 percent debt cancellation proposal with our colleagues in the G-7, a subject we will 

return to at the G-7 meetings in June. 

The subject of trade has come up in your comments, critically important that we continue to push for open markets, trade liberalization, for financial services. This is a priority for us in the Doha 

Round trade talks and in our bilateral FTAs. It is important that 

we make progress here for ourselves, for the rest of the world and 

for the global financal system. 

Finally, I think we are making, real progress on the subject of 

antiterrorist financing. We will come back to that, I am sure, as we 

go forward. The World Bank, the IMF, the multilateral development banks now have active participants in this effort to set standards, to audit, to be vigilant, to shape the global effort to deal with 

antiterrorist financial activities. 

11

At every meeting of the G-7, we have a session on that at every 

meeting of the APEC, at every meeting of the G-20. This is very 

much a matter of intense focus on part of the finance ministers and 

central bank governors of the world. I was pleased by the legislation last year to strengthen Treasury’s hand, as you mentioned, 

and we have now appointed an under secretary, Stewart Levy, who 

is playing a critical role in overseeing the terrorism and intelligence functions of the Department. 

In that sense, the Department is really on the front ranks of 

dealing with anti-terrorism and national security. 

With that, Mr. Chairman, I am delighted to try to respond to 

your questions. 

[The prepared statement of Hon. John W. Snow can be found on 

page 46 in the appendix.] 

The CHAIRMAN. Thank you, Mr. Secretary, for your testimony, 

and particularly at the end when you talked about the anti-terrorism activities on the part of the Treasury. And really, in many 

cases to the point of the spear as it relates to terrorist financing 

and the IFI issues. We met with Mr. Levy last week, and certainly 

he is energetic and focused on the task at hand. 

Let me ask you about the G-7, since it is a recent meeting that 

took place. I think our country has shown great leadership in including first Russia and China in some of the G-7 events, and I 

think that perception clearly is also the reality that bringing in 

those two large countries, at least in part, has proven to be very 

effective, as has our work in the Middle Eastern countries as well. 

Other models with Brazil and Mexico, and the G-20 record for sustained growth, I think have all shown, as your testimony indicated, 

some real progress there. 

On the other hand, there are those out there who have expressed 

concern that the G-7 is ineffective and is badly in need of reform. 

Do you agree with this in a general sense? 

Secretary SNOW. Mr. Chairman, I think the G-7 continues to be 

a very important component of stability and progress in the global 

economy and in the global financial order. We recognize that other 

countries are growing more rapidly, China, India, Brazil, and there 

needs to be outreach to them. But the G-7 remains the largest component of GDP in the world, and it is playing, I think, a true leadership role. 

As you mentioned, we have tried to embrace other countries to 

broaden the dialogue. We have done that through having China 

come, Russia comes, other countries have come. We have tried to 

keep the agenda relevant, focused on the things that really count, 

global growth, risk to the global economy, stresses in the global 

economy, things, financial, the war on terror. 

So I think it is a very important but can’t be the only fora for 

bringing thoughtful consideration of these large issues that face the 

global economy. 

The CHAIRMAN. I was, this morning, in New York at a conference 

sponsored by the EU dealing with the Euro and with the new regulatory structure in the EU. Will the EU enlargement going from 15 

to 25 affect the EU members participation in G-7 meetings in any 

way? 

12

Secretary SNOW. I don’t think so, Mr. Chairman. It might affect 

some of the policies that are reflected in their comments. I am very 

positive about the accession. I think is going to add an element and 

dynamism and energy to the G-7. I think the Euro people, the Euro 

side of the G-7 feel that as well. But I don’t think it would lead 

to a change in the composition of the G-7 itself. 

The CHAIRMAN. Let me ask you about diversified capitalize flows, 

Mr. Secretary. Mexico and Canada last year purchased 55.4 billion 

in U.S. Treasuries, agency securities, corporate bonds and equities. 

China purchased only 47.3 billion and Euro zone purchased 45 billion. 

These numbers would seem to indicate that we have a fairly diversified pool of capital coming into the U.S. market. Would you 

agree with that assessment? 

Secretary SNOW. Yes. Yes, I would. 

The CHAIRMAN. Do these statistics indicate that gradual diversification by Asian central banks of their U.S. dollar asset holdings 

might not be as significant as headlines might suggest? 

Secretary SNOW. Oh, I think there have been a lot of misplaced 

headlines. 

The CHAIRMAN. Well, that is a new one. 

Secretary SNOW. Those headlines should have been in other 

parts of the paper or not occurred at all, given the factual content 

of the stories that followed. 

The CHAIRMAN. Yes. I couldn’t agree more. The statistics, then, 

do you feel fairly comfortable with them given the diversity out 

there? The diversification? 

Secretary SNOW. Absolutely, Mr. Chairman. I am confident that 

the U.S., we know it is, and I am confident that it will remain an 

attractive place to invest. We have the deepest, the richest, the 

broadest, the most efficient capital markets in the world, and the 

best risk-adjusted returns. Our job is to keep them that way so we 

can continue to attract capital. 

The CHAIRMAN. Finally, let me ask you, your testimony includes 

an impressive statistic, I thought, that I wanted to focus in on. 

That is: 5 percent expansion in sub-Saharan economies over the 

next 2 years would lift nearly 30 million people out of poverty. That 

is quite extraordinary, and I think we all share that commitment 

to what we are trying to do. Can these kinds of growth rates be 

achieved through development assistance and debt relief alone, or 

do we need to continue to push for trade liberalization? 

Secretary SNOW. Oh, I think, Mr. Chairman, trade liberalization 

is really critical here. I had a meeting over the weekend with 6 or 

7 of the finance ministers from the region, and was encouraged by 

their commitment to these good policies, by their commitment to 

routing out corruption. It happened just within a week or 2 that 

the President of Nigeria had, in effect, removed two or three members of his parliament and criminal sanctions were brought against 

them and against the Speaker of the House. Here is a country with 

a population that represents 20 to 25 percent of all of Africa adopting really good policies, committed to the right things. Minister 

Megosi is on the front of doing—of driving results, and there are 

other ministers and presidents in the region. It is something we 

just have to continue to reinforce. 

13

Debt forgiveness will help. The financial support from the world 

community will help. But it will only happen, in my view, if good 

policy and trade opportunities continue to be the order of the day. 

We knew trade liberalization is awfully important for continued 

growth and prosperity in that region. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Massachusetts. 

Mr. FRANK. Mr. Secretary, I agree with you on the importance 

of stressing anti corruption. I am not sure you picked the example 

most likely to appeal here when you cited a President moving 

criminal prosecution against the Speaker of the House and indicting members of the parliament. Maybe there are some other examples you might want to put forward in another context. 

The debt relief question is important, obviously going forward 

with any corruption. Two words, I kind of perked up when you said 

we are for debt relief up to 100 percent. I want to help you get up 

to it. 

There are a couple of issues here. One of the problems, I understand, is that some of the debt is IMF debt. I understand it is a 

smaller percentage overall. But I also understand that if you look 

at when it comes due, debt payments, debt service payments, IMF 

debt is a much greater percentage than 10 percent in the near 

term. It is also the case, while it is 10 percent across the board, 

that doesn’t necessarily mean it is 10 percent for any one country. 

What is the problem with also doing IMF debt? Now, I believe 

that we ought to go ahead with gold sales. I think we can do that. 

I think the gold sales we did previously were useful moneys, I will 

put in the record, Mr. Chairman, unanimous consent, a description 

of some of the benefits that came around from the last round of 

HIPC debt relief. We did this in a bipartisan way, was supportive 

and it had a good impact. Why not include the IMF debt? 

Secretary SNOW. Well, Congressman Frank, the reason we are focusing on IDA and the African Development Fund is that is the 

great proportion of the debt. 

Mr. FRANK. Why not do both? 

Secretary SNOW. Well, I think we are building towards a consensus on the HIPC for IDA and the African Development Fund. 

I don’t see a consensus at the other side of the IMF yet. We have 

had discussions on it. We will continue to have discussions. But we 

are right on the verge, right on the cusp, I think, an historic coming together, a meeting of the minds on the need for——

Mr. FRANK. I hear that, but I don’t think there is a contradiction 

to working on that. To the extent there is arbitrary reluctance to 

do gold sales again, I think that is a great mistake, particularly if 

I am wrong, you can correct me, but according to the people with 

the data, who have generally been accurate, always accurate to me 

is, in terms of the debt service payments, about 50 percent right 

now is going to IMF debt, so even though the overall debt is less, 

given the timing of the debt, so that you really are only putting out 

a significant chunk by guarding that weight. 

Secretary SNOW. As I say, Congressman Frank, whatever the 

merits of moving on the IMF side of the debt, we don’t have anything close to the consensus, and we are focusing our efforts 

now——

14

Mr. FRANK. Well, you ought to tell——

Secretary SNOW.—on getting this done. 

Mr. FRANK. You ought to negotiate with them. I think you ought 

to tell those people, whoever we weren’t able to get a consensus, 

I hope you will be able to convey there will be considerable unhappiness if people think that is where we stop. 

Simply with regard to IDA, and I appreciated Under Secretary 

Taylor, who has done a very good job with this, was very useful, 

and I agree that in addition to forgiving the debt, we should go to 

grants instead of loans. I disagree with people who for some reason 

don’t agree with that. 

But I then do—there is a fair question. What do we do about the 

future? Yes, you can deal with this in terms of the period of debt. 

You can do it by testing the debt relief. But what do we do to make 

sure that IDA is in a continued position to make those grants? 

I agree with you that grants are better than loans, but to the extent that the loan flows were some of the source of revenue, are 

we committed to replacing that or are we making sure through our 

appropriations process that there will be funds going through for 

IDA? 

Secretary SNOW. Yes, we indicated there would be no—under our 

policy, Congressman, there would be no reduction in net resource——

Mr. FRANK. Even if that would require appropriation going forward? 

Secretary SNOW. Yes. We have said that we want to make sure 

that there is no reduction in the net, net flows. 

Mr. FRANK. All right. I appreciate that, because I think, with 

that, then there shouldn’t be a problem. Let me go back now to the 

job creation issue, because you said that—you had used the figure 

200,000 again, but the problem has been beginning in the third 

quarter of 2003 when things start to get better, unfortunately the 

average is only 165,000 a month. 

Now, you would have said 200,000 a month. But 35,000 jobs a 

month, as you know is quite significant. It makes a difference between getting to whittle down the unemployment rate and not, you 

are in that range. I know you are not responsible for the Council 

of Economic Advisors report, but aren’t we entitled to some explanation of nearly a 50 percent drop in their projection about jobs. 

In 2004, the Council of Economic Advisors said, it almost looks 

like there is randomness here. June of 2003, job projection by the 

Council of Economic Advisors, 305,000 per month. October of 2003, 

you say 200,000 a month. January of 2004, they are back up to 

325. Now they are down to 175, and, of course, the reality has been 

below everything. 

I mean, are people supposed to have confidence in this kind of 

bouncing around. At the very least, is there some reason why you 

are aware of that we have dropped in their projection from 325,000 

jobs a month to 175,000 jobs a month in just under a year? 

Secretary SNOW. Congressman, no, I am not an authority on how 

those estimates get made. As I recall, going back to my conversations with Dr. Mankiw, when he was chairman of the council—he 

has now returned to academic life. 

15

Mr. FRANK. He took 150,000 jobs a month with him. Can we get 

them back? 

Secretary SNOW. As I recall this, the job number that comes out 

of the——

Mr. FRANK. Black box. 

Secretary SNOW. Well, out of this process, they call it the Troika 

process, is a residual. It is sort of what comes after you figure 

growth rates and inflation rates and interest rates and all sorts of 

other things in the macro economic model, and this is a residual 

of that. So it is not so much an active forecast as the result of other 

things in the model. 

Mr. FRANK. Let me give you, Mr. Secretary, and I will finish, as 

someone who studied economics, I think about when you did, I 

share what I intuit is your nostalgia for the days when there were 

less formulae and more thinking and more words and fewer numbers when we did this economics stuff. 

But I don’t think it is truly—therefore, it does seem to me, looking at what you said, we do have to confront the prospect that we 

may be getting fewer jobs per unit of increased wealth than we 

were getting. We have to address that. 

I mean, the fact is that during the period in which the economy 

has been growing and growth has been good, over five quarters, job 

growth has averaged 165,000. It has bounced up and around. But 

I think 5 quarters, 165,000, it is been bouncing around, there has 

been no trend one way or another. That is a pretty solid set of 

numbers. I think it leaves us with fewer jobs than you reasonably 

expected. 

I think when you said that in October of 2003, you were reflecting historical experience. A year and a half later, it looks as if you 

were too optimistic, not because you were wrong then, but because 

of changes in the economy. I think we have got to begin to think 

about ways to address that. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. The 

gentlelady from Ohio. 

Ms. PRYCE OF OHIO. I thank you, Mr. Chairman. 

Mr. Secretary. Chairman Oxley and I wrote to you on March 

17th regarding our concerns that there is a looming crisis in the 

WTO services negotiations. Strong services provision in the Doha 

round are critical in our estimation. We were very happy that the 

services sector was finally given equal billing with agriculture and 

goods, thanks to a strong push by the U.S. and the EU back in 

July. 

But what can we do to convince developing countries of the benefits of services liberalization and how can we get them to do the 

internal political machinations to develop offers? Free trade and financial services is as important as free trade in goods or agriculture, as anything else. I just would appreciate your perspective. 

Secretary SNOW. Congresswoman, of course, I agree with you, it 

is absolutely critical. We were disappointed that more offers didn’t 

come in earlier in the year, and Dr. Taylor and I and Mr. Quarles 

all reached out to our counterparts to suggest that, you know, you 

should accelerate your efforts here. I think that produced some results, some additional offers came in. 

16

We are intent on making broad-based liberalization of financial 

trading, a key feature of the Doha round. I have talked with Mr. 

Mandelson, Peter Mandelson, who referenced Mr. Levine. I look 

forward to talking to Congressman Portman, as he takes on that 

new role. 

We think it is absolutely essential and going beyond WTO, it is 

absolutely essential that the developing countries begin to do it 

with themselves and trade with themselves. Because when you 

look at the picture, an awful lot of restrictions are within the developing countries on trade with themselves. 

But I want to assure you that this is absolutely a priority with 

us. I am going to be meeting tomorrow with EC Commissioner Troy 

on the subject of the dialogue and we will get into the subject of 

the services and opening up the transatlantic market. Mr. 

McGreevy and I will be talking about opening up the transatlantic 

dialogue on services. It is a priority for us. 

Ms. PRYCE OF OHIO. Well there is a growing impression, I think, 

in some circles, that this is a hostage to agriculture issues, and do 

you share that opinion? 

Secretary SNOW. Well, agriculture is really certainly the main act 

here. That financial services, we are going to make sure financial 

services doesn’t get forgotten. 

Ms. PRYCE OF OHIO. Thank you, let me shift gears. Ironically, the 

sale of IMF gold would impose a hardship on the very nations that 

the G-8 wishes to help, going back to that issue. Of the 38 HIPC 

nations, more than 30 are gold producers or potential producers. 

The falling gold prices in 1998 and 1999 resulted in the loss of 150 

million in annual exports earnings to these nations, and it turned 

into job losses, wage decreases and tax disruptions, all kinds of 

things. So given that, why are the IMF gold sales considered by 

anyone to be a credible alternative for debt relief? 

Secretary SNOW. You know, there is no consensus on this among 

the G-7 or the board of the IMF. I think that if you did a vote now, 

I haven’t ever taken a vote count, you would have as many or more 

against than in favor of the gold sales. There simply isn’t a consensus to move forward. The U.S. position is clear on that. It is inadvisable and not a course of action we could support, and we have 

made that clear. Why others continue to push for it, I don’t know, 

but I don’t see how they will ever be successful. 

Ms. PRYCE OF OHIO. Well, I don’t either, but each time it comes 

up, it shakes the market and I just wonder what is behind it. 

But thank you very much, Mr. Secretary, for your appearance 

here today and your candid answers, I yield back. 

The CHAIRMAN. The gentleman from Vermont, Mr. Sanders. 

Mr. SANDERS. Thank you, Mr. Chairman. 

Mr. Snow, good to see you again. Mr. Secretary, I find it hard 

to understand that, given the fact that last year we had a $617 billion trade deficit, that we had $162 billion with China, that any 

sensible person could continue saying that our trade policy is working when in fact the last number of years we have lost millions of 

decent-paying jobs because of PNTR with China and the NAFTA 

agreement. 

Coincidentally, Mr. Secretary, this morning I was at an event in 

Winooski, Vermont, where many people have lost their jobs. I want 

17

to ask you a very, very simple question. Up here, we make very 

good salaries. You make a good salary. You are a former CEO. If 

you were a worker in Winooski, Vermont, and you made $10, $12 

an hour—and, yes, there are people in America by the millions who 

make $10 or $12 an hour—and if the Secretary of the Treasury of 

the United States of America said, in essence, that it is appropriate, it is okay, it is right for American workers to compete 

against desperate people in China who make 30 cents an hour and 

who go to jail if they try to form a union or stand up for their political rights, do you think that that is right? Should American workers have to compete against folks that make 30 cents an hour and 

go to jail when they stand up for their rights? Yes? No? 

Secretary SNOW. Well, the reality is, of course, as you know, the 

United States lives in a big global economy; and probably the worst 

thing we could do for living standards of the American people is to 

seek to pursue isolationist policies. 

Mr. SANDERS. Nobody is talking about isolationist policies. Do 

you think I should be telling those workers that the Secretary of 

Treasury says that it is right and moral for them to have to compete against desperate people who make 30 cents an hour? 

I am hearing you say that that is globalization. Globalization 

didn’t just happen. It happened because corporate America spent 

millions of dollars trying to get this Congress successfully to pass 

permanent trade relations with China and NAFTA, which is a disaster. It doesn’t just happen. It happens because of policy. 

I want to ask you another question. We hear a lot of talk about 

patriotism and love of country. When the CEO of General Electric, 

a fellow named Jeff Immelt said, I quote, when I am talking to GE 

managers, I talk China, China, China, China. You need to be there. 

I am a nut on China. Outsourcing from China is going to grow to 

$5 billion, end of quote. What do you say to Mr. Immelt? Do you 

say, that is good? That is what we want American CEOs to do? We 

want you to move to China? Or do you say show some respect for 

American workers and the people who have made you a great corporation? 

What do you say to people like Mr. Immelt—and it is not just 

him—for all of corporate America that is selling out the American 

people that have made their corporations great and given them 

huge salaries? What do you say to those guys? 

Secretary SNOW. I haven’t had a conversation with Mr. Immelt 

on that subject, but it is clear that we need to keep this economy 

of ours flexible, adaptive, open, so we can create all the jobs possible so that everybody who is looking for work can find a job, so 

that Americans continue to prosper in this new economy. 

Mr. SANDERS. You know as well as I do that large corporations 

like GE are employing fewer and fewer Americans. 

My next question would be, given the fact that corporations like 

GE, IBM, Boeing, you name it, are throwing American workers on 

the street and heading to China, do you think they should be coming in to the Congress and asking for billions and billions of dollars 

in taxpayer subsidies and tax breaks or would you agree with me 

that if corporations are throwing American workers on the street 

they shouldn’t get welfare from the American taxpayer? 

18

Secretary SNOW. Often, I guess, we are dealing here with the eye 

of the beholder, but as a general proposition I am not in favor of 

corporate welfare. 

Mr. SANDERS. And you would share my concern, therefore, that 

in programs like the Export-Import Bank, we have given billions 

of dollars to large corporations who have thrown American workers 

out on the street and moved abroad? 

Secretary SNOW. I don’t know the specifics of that, but I am not 

a fan of corporate welfare. Now I qualify that by saying corporate 

welfare is often in the eye of the beholder. But as a general proposition, no, I am not a fan of corporate welfare. I think it results in 

a misallocation of resources and burdens that aren’t justified by the 

benefits. 

Mr. SANDERS. I look forward to working with you on some legislation. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from California. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Mr. Secretary, nice to have you back. We are here today to discuss the international financial system, and GSE debt has become 

a major source of investment in the global marketplace. In fact, 

Japan and China together own close to $200 billion in GSE debt. 

So, clearly, risk management practices of the GSEs do have global 

implications in terms of the effect on the markets. 

I wanted to get some of your opinions on the current legislation 

facing our Committee. In my mind, there is a significant difference 

between a regulator task to oversee safety and soundness and one 

focused on systemic risk in the entire global financial system. I 

know you and Chairman Greenspan are concerned about the potential systemic risk of the GSEs. What does the Administration think 

about the language authorizing the regulator to limit portfolio 

growth in the current Baker-Oxley bill in H.R. 1461? 

Secretary SNOW. I would like to look at the specific language. I 

support the intent to limit portfolio growth beyond what is required 

and necessary to sustain the primary mission of the GSEs, which 

is to make the secondary market. 

Mr. ROYCE. Let me ask you this, Mr. Secretary. What kind of 

specific guidance is necessary for the regulator in this regard? 

Secretary SNOW. Well, what I would propose is that the regulator 

operate in a statutory framework where there is recognition that 

systemic risk needs to be managed and dealt with; that systemic 

risk grows out of the ability of the GSEs today to grow their loan 

portfolios, which they have done in very significant—taken on substantial debt over the course of the last 15 years or so and invested 

in—in effect, arbitraged their low borrowing rate with MBSs and 

mortgage-backed securities and mortgage paper. And therein lies 

the potential systemic risk. The regulator needs to be alert to that. 

I would hope the statutory framework, the legislative language, 

the report language would frame the issue that way and then direct the regulator to limit the holdings of the GSEs in their investment portfolios to the amount of MBS and equities and other mortgage assets, hold them to a level not greater, maybe with a cushion—obviously, with some cushion—a greater level that is necessary to enable the entities to carry on their specific statutory 

19

mission in their charters to create liquidity for the secondary market. 

They would be allowed to hold all the cash they wanted, would 

be allowed to hold all the near cash and the treasuries, but I think 

they need to be limited in their ability to invest in interest-priced 

paper beyond treasuries. 

Mr. ROYCE. Thank you, Mr. Secretary. 

Another question I wanted to ask you about, I chair the International Terrorism and Nonproliferation SubCommittee over in 

International Relations; and there was a report released last 

Thursday on the IMF on its technical assistance program to assess 

country implementation of the Financial Action Task Force standards. What this report says is that the IMF has been hampered because expected donor funding largely did not materialize. This is a 

pretty important area. 

So I was going to ask you, why did the IMF expect additional 

funding for these reviews? Was the United States Executive Director to the IMF aware of these problems? And what can the United 

States do to ensure that implementation of these standards for the 

Financial Action Task Force is supported worldwide in the event 

that the IMF cannot serve as a partner in this effort due to their 

argument about resource constraints? 

Secretary SNOW. This is a subject that is regularly under review 

with us and the IMF and the G7 and the other finance minister 

meetings. I have not reviewed that report yet, but I do know that 

there is enormous effort going into this standard-setting engagement and to building broad-based support, not just for signing up 

but for actually doing the implementation through the banking system and financial institutions and the bank regulators that is essential to make it work out. I will send you some comments on 

their report, but I have not seen their report. 

The CHAIRMAN. The gentleman’s time has expired. 

Gentlelady from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

Mr. Secretary, a strong economy at home is going to help the 

world economy; and, as a New Yorker, I am deeply concerned about 

the need to act promptly to extend the Terrorism Risk Insurance 

Act. After the attack on 9/11, the one program that helped New 

York move forward more than any grant, more than anything, was 

the joint effort by the Chairman and Ranking Member with the 

leadership and support of the President and the Administration 

that created the Terrorism Risk Insurance Act. It expires at the 

end of the year. 

I know you will be coming out with a report in June, and that 

will add greatly to the debate. But, right now, the financial service 

industry, the real estate industry and the business community at 

large are very, very concerned. They are knocking on the doors of 

Congress, wondering if we are going to move this program forward 

and reauthorize it. 

And my question to you, what is your view on the need to extend 

TRIA? Will you be providing leadership? This is essential to the 

economy of New York City and I would say every major urban—

Washington, D.C., and every area that is mentioned as a terrorist 

target. 

20

Secretary SNOW. Yes, Congresswoman. We are moving along well 

with the study that you have asked us to do. I think the deadline 

for the study is the 8th of June. We plan to have the study up certainly by that date, hopefully even sooner. 

I know it is an issue of enormous importance. We have had tremendous volume of input from both sides of the market, the insurers and the people who buy the policies. We are going to give it the 

best analytical effort we can. The support from the industry and 

the users of insurance policies has been terrific. But I better wait 

until we finish our report because I am not sure quite yet. 

Mrs. MALONEY. Thank you, and keep a deep concern and focus 

on it. It is important. 

If your explanation of the trade deficit is correct, that it is an imbalance of payment between exports and imports, why hasn’t the 

weakening of the dollar caused the trade deficit to improve? It has 

gotten worse. With the weakened dollar, by that definition, would 

it not improve the trade deficit? 

Secretary SNOW. There are a lot of things that affect that current 

account balance: differential monetary policies, differential savings 

rates, differential growth rates, differential rates of creating disposable income and differing expectations for currency values in the 

future and so on. It is maybe the single most complex set of economic relationships and impossible to model or really predict with 

any accuracy. 

What we have tried to do is lay out the things we think are most 

important in that adjustment process. One is growth rates that I 

have talked about. 

Second, higher growth rates in our trading partners so they will 

generate more disposable income and buy more from us. Second 

part of it, though, is the U.S. savings rates. We are saving too little. We know that and acknowledge it. The deficit is too high, as 

you suggested earlier, and I agree with you, and we have to bring 

the deficit down both short term and long term. We are trying to 

encourage higher household savings rates. They are nearly zero. 

We just don’t save very much in the United States. So higher savings rates would help us. 

Thirdly, we are intently focused on currencies that aren’t flexible; 

and that is the Asian zone, primarily China. We have indicated 

that it is time for China, in our view—China has taken the steps 

to fix their financial infrastructure and time for them to move to 

a flexible currency. 

The combination of those things is what it takes to address this 

global imbalance. People talk about the U.S. current account deficit. It is a shared deficit. And the other side of the Capitol dubs 

it that the current account deficit is the large capital account surplus. We have to view this as a shared responsibility. 

Mrs. MALONEY. To finance our trade deficit last year, we had to 

borrow over $650 billion from the rest of the world. What would be 

the consequences for the U.S. economy and the world financial 

markets if foreigners suddenly decided to dump our dollars? Is it 

good for the U.S. economy to be borrowing so much from abroad? 

You testified earlier, it is shared with various countries, China, 

Japan and Mexico and Canada. But won’t the repayment of that 

debt and the associated interest costs be a drag on our future and 

21

our future standard of living? And isn’t it troublesome? This is the 

first time that we have borrowed so much from the rest of the 

world. And your comments. 

Secretary SNOW. My comments are, I wish we had higher savings 

rates in the United States, wish our deficit would come down. I am 

confident our deficit will come down. We have proposals pending 

before the Congress to help savings rates go up. Sure, I wish we 

had higher savings rates. I also wish the rest of the world was 

growing a little faster so they would create more opportunities to 

use their higher savings for investments in their countries. And I 

wish China would move to a flexible exchange rate soon so that the 

adjustment that that would introduce to the global economy would 

be allowed to play out and it would have a beneficial effect, I am 

sure. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Texas, Mr. Paul. 

Mr. PAUL. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. I want to make one real quick comment 

about something you had in your written report that I found fascinating. Seemed like you were praising the Japanese for moving 

to privatization of their post office, and I was wondering if that was 

a subtle suggestion to us that maybe we ought to consider the same 

thing. 

But I am interested in your comments dealing with the need for 

international financial stability as well as economic stability; and, 

obviously, I think we all are. In answer to one of the questions, you 

talked about why the lower dollar so far hasn’t sorted out our current account deficit. But the one issue that wasn’t mentioned, that 

I think is important, that someday we have to think about, and 

that is the special status that the dollar has. 

As a remnant of the gold exchange standard which ended in 

1971, we still have a currency that is recognized as a reserve currency. So, therefore, it gets a bonus and people are more willing to 

hold dollars than any other currency. So we don’t save. We supplement our savings with the creating of credit out of thin air, and 

then we spend it. In some ways, the instability or the lack of the 

arrangement we want with the Yaun is actually a tremendous benefit for us because we print money and then we spend it over there 

and we get cheap goods. 

When the day comes when finally there is a flexible exchange 

rate between the Yaun and the dollar, some people are going to be 

unhappy because interest rates may go up and it may have a cascading effect and others may want to raise their currency in relationship to the dollar. 

So I think we are far from stable. When you gave your optimistic 

report at the beginning, I hope it is all true, but I was tempted to 

knock on some wood in hopes that it truly is that positive. But I 

just think that the nature of the currencies, when every country is 

putting money at a different rate, there is no anchor to it. It is naturally unstable, and we have a lot more to deal with than any of 

us realize. 

In talking about debt relief, I am interested in this subject as 

well because we talk about selling gold and getting the currency to 

help debt relief, and we talk about appropriations. But I would like 

22

you to comment on this when you get a second. Why is it we need 

to appropriate money? Why don’t they just default? This whole idea 

that you have to first loan them the money, then they don’t pay 

it back and we have to appropriate money so they can pay their 

debts off. It seems like they ought to default and there should not 

be any need to sell gold and should not be any need to appropriate 

more money from the American people. 

I assume from your comments that there is not going to be a request from the Congress to agree to sell the gold. Is that more or 

less what I should expect? 

Secretary SNOW. Yes. 

Mr. PAUL. No request. But gold essentially by the financial community and our governments and international monetary fund, everybody has agreed that gold no longer is money. Either the money 

was stolen from the American people and was taken from them at 

$20 an ounce—we defaulted on the bonds. We defaulted with the 

foreigners at $35 an ounce in 1971. That is stolen money. Why isn’t 

it just returned to our government? And why doesn’t our government that no longer wants to use gold as money, why don’t we sell 

this gold? Why is this clinging on to gold when it is no longer 

money? How do you look at this gold issue? 

Secretary SNOW. The gold is part of the financial reserve of the 

IMF. It is, in effect, a balance sheet item at the IMF. They have 

very substantial gold reserves which they carry on their books, and 

it represents a substantial part of the basic assets of the Fund. So 

it affects their financial condition. 

Mr. PAUL. Why do we have to appropriate money to pay off debt? 

Why can’t they just default on the debt they owe? Why would we 

have to sell the gold? 

Secretary SNOW. It is because of the way we budget debt. When 

we take on these obligations, it becomes a budget item in the U.S. 

accounts. 

Mr. PAUL. We just can’t write it off? 

Secretary SNOW. Well, we need, basically, Congressional approval. 

Mr. PAUL. Is the debt owed to the government or to banks, private banks? 

Secretary SNOW. The debt we are talking about here is owed to 

the multilateral development banks, to basically IDA, which is a 

part of the World Bank, and to the African Development Fund. 

Those two entities hold most of the debt we are talking about. 

The CHAIRMAN. Gentleman’s time has expired. 

The gentleman from Georgia, Mr. Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Welcome again, Mr. Secretary. Always a pleasure. Going to ask 

a series of questions, if I may, so work with me in my 5 minutes. 

First, it is true that the G7 is going to be meeting in Scotland 

in July and on that table will be the issue of a plan to ease the 

debt particularly to the impoverished nations. Given the concern 

that terrorists are one of our biggest concerns in the fight against 

terrorism, these impoverished countries are basically incubators because of that poverty. With that understanding and background, 

knowing we have an extraordinary obligation to deal with this, 

where is the problem between Great Britain and the United States 

23

that is preventing at this point an agreement on how we are going 

to come up with a plan to deal with world debt as it affects these 

impoverished countries and what do you expect to happen coming 

out in July? 

Secretary SNOW. Congressman Scott, I can give you an optimistic 

answer there. I think the U.S. and the U.K. are narrowing their 

differences as we develop a better understanding of each other’s approach. I am talking about IDA and the African Development 

Fund. We are really getting close. 

I had a good chance to talk with Chancellor Brown over the 

weekend, and Dr. Taylor talked with people in the British delegation. We are in continuing discussions with them. 

I think we can narrow the differences to the point that we are 

almost in agreement. I think we now agree on 100 percent forgiveness. I am not sure they are fully to where we are in going forward 

saying it is all grants and not loans. In other words, for a long period, you don’t make any more loans, you just give grants. But I 

think there is a movement there. 

I think we have narrowed our thoughts—they keep talking about 

additionality, more money going in. We keep saying, let us make 

sure there is no net reduction in resources going into the HIPCs 

over this time. We are understanding them better, and they are 

understanding us better. I think really good progress is being 

made. I look forward to meeting with the Chancellor and our British counterparts in June when we are in London this time in anticipation of the heads of state meeting. I am encouraged, and so 

are our British counterparts. 

Mr. SCOTT. Is the point of contention in the fact that we all agree 

in alleviating the debt but that the United States is balking at 

wanting to give more aid? 

Secretary SNOW. That issue is part of the difference, but we have 

indicated that there may be a misunderstanding there. We are 

committed to making sure that the net transfers remain the same, 

that there is no reduction for the HIPCs and for the other nonHIPC poor countries in the resources available to them. I think 

there may have been confusion on that score. We don’t think you 

have to put more money in. We are prepared to talk about that. 

But if you forgive all the debt, and that means the debt service 

goes as well and you don’t take on additional debt for this extended 

period of time—I think it is 2010 we are talking about—I mean, 

2015—and during that time grants occur, the balance sheets of 

those countries will improve dramatically and the reflows, that is 

the payments on the debt service, are not required, it is going to 

put the HIPC countries in a much better position. 

Mr. SCOTT. I have a little bit more time, and I have two more 

questions I wanted to get to. We have been receiving some complaints from foreign countries doing business in this country on 

being able to follow the rules with the Sarbanes-Oxley law. We will 

be having hearings coming up on Sarbanes-Oxley. Do you recommend—in relationship to responding to these complaints from 

foreign countries, do you recommend any changes be made in Sarbanes-Oxley? 

Secretary SNOW. No, I wouldn’t; and I think the SEC has 

shown—I don’t think you need changes in the basic law. It is a 

24

matter of implementation. I think the SEC has shown some good 

flexibility here, some good accommodating behavior on the part of 

the regulator to deal with the problems of—that our European 

counterparts have had. 

I am sympathetic to some of their concerns. We have a notion of 

independence in a director that is somebody who has no major 

stake in the firm other than being a director. He is not a consultant and not being compensated by the firm, is disinterested. Some 

of the European countries have a different conception of a corporation, where suppliers of services to the company are like labor and 

expect to be on the board. We have to find a way to get convergence, and that is the very subject of the U.S.-E.U. dialogue that 

the Treasury is chairing. 

Mr. SCOTT. I want to get this last point in. We are involved right 

now in trying to provide leadership on simplification of the Tax 

Code and tax reform. You mentioned the commission the President 

has put forward, and later this summer we are coming up with recommendations on that. Wouldn’t this be an excellent opportunity 

to address one of the issues that you pointed out we need to for 

the future of this country, for the economic health of this country, 

which is increasing our savings and our investment, if we could 

find a way as we are addressing reformation of the Tax Code that 

we put incentives into the Tax Code to encourage savings and investment? 

Secretary SNOW. Absolutely. Absolutely. I think the Administration has come forward with some proposals along that way. There 

may be better ways to do it, but absolutely. 

Mr. SCOTT. We have legislation moving in that direction. Would 

you support us on that? 

Secretary SNOW. I support the broad idea of encouraging savings, 

and one good way to do that is to allow investments to build up 

in accounts in a tax-free way or go into the account in a tax-free 

way so that the tax bite on savings is lower. Yes, that broad idea 

is something that I certainly support. The details we would have 

to look at, but the broad concept I support. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Georgia, Mr. Price. 

Mr. PRICE. Thank you, Mr. Chairman. 

I appreciate the opportunity to ask you a few questions. I welcome you back, Mr. Secretary; and I want to comment how judicious it was for you to respond to the inquiry about changes to Sarbanes-Oxley in the manner in which you did. I noted the smile on 

the face of the Chairman. 

Oftentimes, we hear comments from folks who you would think 

that they were Chicken Little and the sky was falling as it relates 

to our debt and our deficit. And although neither are exactly where 

we want them to be, I wouldn’t mind if you would please share 

with the Committee your comments about our debt and deficit level 

vis-a-vis the world economy, the international economy, and how it 

is viewed in that light. 

Secretary SNOW. Well, you are right. I mean, we are working 

hard to bring our deficit down and our debt to GDP levels down, 

because they are higher than we would like to see them. But we 

are in a pretty good spot relative to most of the rest of the world. 

25

Japan has debt levels that are over 100 percent of its GDP. We are 

in a much better position than most of the rest of the world. We 

can’t be complacent about it. We have to continue to focus on it. 

But I am confident, as we do, we are going to find our deficit level 

come down to a level which will be low by historical standards, 

below 2 percent of GDP, and that is going to occur because we keep 

the economy strong and revenues come in and spending—tight 

spending controls as you are doing in the Congress. I feel very good 

about the path we are on for the fiscal deficit. The larger issue 

seems to me to be those outyears with the unfunded obligations. 

Mr. PRICE. What about in your conversations with financial leaders from around the world and the bigger picture of them looking 

at us? What kind of comments are they making to you regarding 

our debt and deficit? 

Secretary SNOW. The G7 ministers and the IMF people, the central bank people I have talked to take us at our word that we are 

committed to bringing the deficit down and we will bring it down 

and they applaud us for that. And they recognize that the United 

States has gone through a tough time. We have had a recession. 

We have had the terrorist attacks. We have had corporate scandals 

that led to the Sarbanes-Oxley legislation. All of this had its effect 

on the revenue side of the government, reducing the revenue government revenue stream. We are now getting the revenue stream 

coming back up; and that combination of the economy strong and 

the revenue stream coming up and some decent controls on spending—I think we will clearly get us to where we need to be. The rest 

of the world wants us to get there. 

Mr. PRICE. Is it fair to say that the rest of the world hasn’t lost 

confidence? 

Secretary SNOW. It is fair to say that the rest of the world still 

has confidence in the United States and depends on the United 

States as the strongest engine of growth in the world economy. I 

think we have got their respect and confidence that we are committed to dealing with the deficit issue and putting it on a path 

which is the right path to be on. 

Mr. PRICE. I will yield back my time. 

On the issue that Mr. Scott raised and others have raised and 

you raised about our savings rate, which is woeful, I think we had 

Chairman Greenspan here awhile back, and he commented on the 

types of mechanisms to attempt to increase savings in our Nation. 

One of the manners in which that can be most successful would be 

to move toward a consumption tax, as opposed to our current structure. Would you have any comments about whether or not a consumption tax increases the rate of savings? 

Secretary SNOW. By its very nature, that is what our consumption tax does. 

Mr. PRICE. A consumption tax by its very nature would assist in 

our debt and deficit, or as it is viewed in relationship to our global 

economy? 

Secretary SNOW. The idea behind the consumption tax is that 

you don’t tax savings and investment. You tax consumption. And 

the nature of such a tax system would be to tilt towards more savings and more investment. 

Mr. PRICE. Which is a good thing. 

26

Secretary SNOW. I think we need more savings in this country. 

I don’t want to comment on what is going to come out of this panel. 

I want to wait for the results of this panel. But, clearly, that is the 

argument for a consumption tax. 

Mr. PRICE. The gentleman yields back. 

The gentleman from California Mr. Sherman. 

Mr. SHERMAN. Thank you. 

I would like to identify myself with the comments of the 

gentlelady from New York on terrorism insurance and say that we 

also ought to look at disaster insurance being treated the same 

way. If this country suffers a 10 or $20 billion catastrophe, it 

doesn’t matter to many whether it is a manmade or a natural catastrophe. 

We do, I think, have huge problems with Sarbanes-Oxley affecting smaller public corporations, but I know we are going to have 

hearings on those in this Committee. I won’t take your time with 

those. 

My first two questions, I will ask you to respond for the record. 

The first is on the World Bank, which has provided over recent 

years $1 billion of concessionary loans to the Iranian government. 

We are subsidizing the very government that is building nuclear 

weapons, that will either use them or threaten to use them against 

the United States or its allies. I have offered legislation to give the 

Administration the power to take money appropriated from the 

World Bank and instead use it on AIDS worldwide. Secretary Powell praised the legislation, but, unfortunately, your Department has 

failed to embrace it. I would hope we would do more than just have 

tea and crumpets after voting no each time the World Bank votes 

to lend money to Iran. 

Second, when it comes to China, it flabbergasts me that we have, 

in effect, acquiesced to many years of wrongful currency manipulation as if China will eventually stop shafting us, that is okay. I 

hope you come to the San Fernando Valley and talk to people who 

have lost their jobs and families and became addicted to alcohol 

and lost their lives and explain to them that it is okay because 

China will stop doing to thousands of American families eventually 

when it finally is begged into ceasing its wrongful currency manipulation. 

But I do want to focus on the huge trade deficit. The world economy is built on a house of cards or a house of dollar-denominated 

security certificates, built like a house of cards in the vault rooms 

in Europe and Asia. And these huge trade deficits result from three 

major causes: a failed trade policy in both the Clinton and Bush 

Administrations, our enormous Federal deficits in the last 4 years, 

and currency values which have adjusted a little bit. But it is your 

Department, Mr. Secretary, that puts forward the strong dollar policy. We have seen an end to the slide of the dollar. And while the 

slide of the dollar doesn’t fill us with joy, it is the most benign possible outcome of this terrible circumstance where we have borrowed 

and borrowed abroad. 

I would urge you to change these three major policies, but I know 

you are not going to. Instead, what I would ask you is, are you willing to explore a plan to deal with a possible catastrophe, that is 

to say D day, the day the dollar drops—and I don’t mean by one 

27

quarter of 1 percent in a day; I mean like 10 percent in a day or 

30 percent in a week—the day the house of cards collapses? Will 

we be in a position, perhaps working with others, to freeze currency markets that are in a free fall, to freeze stock markets that 

are in a free fall? 

I will point out that it is perhaps unlikely that things will unravel this particular way, but it is unlikely we would have a tsunami in the Indian Ocean, and we just did. Given the fact that this 

could be more destructive than that tsunami, are you working not 

to embrace the idea that the dollar would crash or to suggest that 

it was even a significant possibility but rather to know that we are 

prepared to deal with a tsunami if it hits us? 

Secretary SNOW. Did you want me to offer verbal comments on 

Iran and China or just for the record? 

Mr. SHERMAN. I would for the record on Iran and China. Because, unless the Chairman yields more time, I would like you to 

focus on some sort of circuit breaker and emergency policy if the 

dollar declines suddenly, which is a possibility if not a probability. 

Secretary SNOW. What we are trying to do is make sure that we 

have stability in the global economy and we don’t confront disruptions. 

Mr. SHERMAN. Mr. Secretary, we can’t continue forever to borrow 

half a trillion dollars and call it stability. That is the stability of 

building a house of cards. It looks stable until it caves in. 

Secretary SNOW. What we are saying is we want to build the 

forces of adjustment in the global economy that will lead to, over 

time, the current account deficit getting into a better posture; and 

the things I talked about are the very things that need to be focused on. 

The CHAIRMAN. Congressman’s time has expired. 

The gentlelady from Illinois, Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman; and thank you for 

being here, Mr. Secretary. 

The OECD’s Financial Action Task Force has announced 48 recommendations for how countries should structure their efforts to 

combat money laundering and terrorist finance, and currently our 

pilot program is under way within the IMF and World Bank that 

assesses each country’s financial sector standards and laws. The 

G7 recommended making permanent the pilot program, and this is 

your first testimony on these matters since last year’s reform of the 

intelligence community. So I would like to know how important 

this World Bank IMF program in the fight against terrorist financing is and what role did the Treasury Department play in the formulation of the standards and their use within the IMF and World 

Bank? 

Secretary SNOW. I am glad to have that question, because we 

have played a very active role through our representatives, Executive Directors and deputy Executive Director at both of those institutions, and this is something we very much support. We want to 

see a more robust role for both of those entities in the war against 

financial terrorism. We think the standards are an awfully important way to go and strengthens our hand in dealing with terrorist 

finance, and I think the United States yields to nobody in that 

whole effort. In fact, we yield to nobody on the whole effort on a 

28

global basis to build the world community support for these initiatives. The U.S. has task forces and technical teams all over the 

world helping build the competencies on terrorist finance that otherwise wouldn’t exist. 

Mrs. BIGGERT. Well, some have suggested that the FATF may 

have reached its limits to prescribe standards for fighting the 

money laundering and terrorist financing and should focus on implementation in the near future. Do you agree with that? 

Secretary SNOW. Well, I think both—I think we can still broaden 

and deepen the effort, but we are at the point where the standards 

are largely in place. Competency levels have been developed, and 

the focus has to be implementation. Absolutely. I agree with you. 

Mrs. BIGGERT. I understand that a number of regional-style 

FATF groups have been created and there has been a recent meeting that occurred in the Middle East, North Africa region and the 

agenda included how to address the link between the Muslim charities and possible terrorist funding as well as trade-based methods 

for funding the terrorist activities through falsified trade documents. Did the United States participate in these meetings directly 

or on an observer basis? 

Secretary SNOW. I am not sure whether we did directly. Our 

presence was certainly felt, because we have engaged with all of 

the countries in the region on that subject. I have held two or 

three—Dr. Taylor and I have held three or four conferences with 

the ministers and central bank governors of the region in which the 

subject of anti-terrorist finance, dealing with charities, dealing with 

couriers, dealing with bank regulation to get at the problem has 

been the primary subject of our engagement. So, yes, whether we 

were there or not our presence was felt because of all these farreaching engagements we have had on this subject. 

Mrs. BIGGERT. What do you think about the assessment the 

progress that is being made by this type of FATF body? 

Secretary SNOW. I think there is good progress. There has clearly 

been a heightened understanding of the problem, a heightened 

commitment to it. Many more resources going into it, much higher 

competency level in going at the problem, but we are not satisfied. 

There is still a lot to be done, I would grant you that. But the difference between now and two years ago is really night and day in 

terms of the commitment to the issue. 

Mrs. BIGGERT. Do you think there are new tools that the international financial system may need to detect funds that finance 

terrorist activities? 

Secretary SNOW. Yes. I think we have got to continuously adapt 

as they adapt. They are continuing to change. As we harden up 

and tighten up in one area, they find routes around it, and we are 

continuously learning and responding. This is a integrative process, 

and now E-commerce is becoming a vehicle for the movement of 

funds. We can never rest. 

The CHAIRMAN. Gentlelady’s time has expired. 

Gentlelady from Wisconsin, Ms. Moore. 

Ms. MOORE. Thank you, Mr. Chairman. 

I am always stunned that I have the opportunity to ask a question; and thank you, Secretary Snow. It has really been a great 

29

hearing, and I really have appreciated your animation and really 

engaging on these questions. 

My questions relate to your written testimony on the current 

trade imbalances, and I sort of want to pursue some of the line of 

questioning that Mrs. Maloney raised with you earlier. Your analysis in your written statements say that—basically, you have said 

that the economic policies of countries, good and bad, really contribute to the global economy. And one of the things that you said 

in your testimony is that there is a gap, obviously, in the investment opportunities in the United States and the levels of savings 

in our economy. I am wondering if there is any connection or tie 

between the tax cuts that we provided and those beneficiaries not 

saving or investing in foreign instruments rather than in the 

United States instruments? Do you have any insight—that is my 

first question—into whether those tax cuts did or did not contribute to this gap? 

Secretary SNOW. Ms. Moore, I don’t think the tax cuts had much 

effect on—they certainly left people with more disposable income. 

Ms. MOORE. What did they do with it or didn’t do with it? 

Secretary SNOW. Left the government with less money and left 

people with more money. The tax cuts, it seems to me pretty clearly, have helped get the American economy growing faster. 

Ms. MOORE. Did they save it? 

Secretary SNOW. They clearly didn’t save a lot of it, as indicated 

in our savings rates, but we have much higher growth rates. Those 

growth rates have given people more disposable income; and some 

part of that disposable income, given our high propensity to spend, 

has been spent overseas to purchase imports. And certainly that 

has contributed to this imbalance. Our faster growth rate versus 

our trading partners has contributed to this imbalance. 

Ms. MOORE. We give tax breaks and then they spent it overseas. 

Secretary SNOW. Well, they spent it here and spent some part of 

it overseas. 

Ms. MOORE. You also mentioned during the questions that many 

of our Members have given on both sides of the aisle that raised 

important issues—you said, in response to a question about what 

we could do in those poor countries, that if there were some private 

sector investment in those poor countries that would obviate this 

borrow-and-then-we-bail-them-out cycle and borrow-and-bailout 

cycle. Were you talking about private sector investment from inside 

those countries or from Americans? 

Secretary SNOW. Well, successful economic development requires 

investments, and it is often led by foreign direct investment, where 

investors from outside the country bring capital to the country and 

expertise with it. 

Ms. MOORE. Wouldn’t it put these same countries in the same 

predicament? Right now, we are the strongest economy in the 

world; and perhaps that is the only thing that is keeping us afloat. 

But isn’t our essential problem—I mean, to quote you, you say really, at the most fundamental level, the problem that we are facing 

is that we have a lot of investment opportunities and very low savings. Is this a formula for failure to say to very, very poor countries 

who are not developed, just open yourself up to all these foreign investors versus things like grants and loan forgiveness and other 

30

things, to have foreign investors basically come in and put them in 

a debt situation with their private investments? 

Secretary SNOW. What I am talking about, that is where a foreign investor comes in and builds a plant and creates physical assets that invest in some cases in roads or in the textile manufacturing or in agriculture and that will strengthen the economy of 

that poor country. It will create new jobs, and it will raise their 

GDP. 

On the debts that I was talking about, those are primarily the 

debts that come from the lending of the World Bank and the other 

multilateral development banks that was intended to help the 

countries but has created nonsustainable debt levels. In our view, 

it is very simple and straightforward. These countries are getting 

buried in debt, and we want to help them. One way to help them 

is remove that debt. 

The CHAIRMAN. The gentlelady’s time has expired. 

The gentleman from Illinois. 

Mr. MANZULLO. Always good to see you and appreciate your patient attitude towards the Chinese with regard to floating the 

renminbi. We have talked about this in the past, and you have said 

it, and correctly so, that you can’t move too quickly on it because 

the Chinese structure was simply not in place to handle a floating 

currency. In your written testimony on the bottom of page 5 you 

state: the Chinese are now ready to adopt a more flexible exchange 

rate. They have sufficiently prepared their financial system to live 

in a world of greater flexibility and need to take action now. 

Members of Congress are grumbling. They are grumbling because now there is another free trade agreement that is being set 

before us, CAFTA; and there is resistance coming among the free 

trade circles, which is where I am, that the Administration has to 

do two things: One, there has to be dramatic decisive action to 

force the Chinese to float their currency; and, second, that China 

must be treated as a market economy so that when they subsidize 

their companies we can get countervailing duties against them. 

What do you think about attaching legislation to CAFTA or as 

a prerequisite to satisfy Members of Congress and I guess to satisfy 

yourself, Mr. Secretary? Because you have done everything you 

can. You waited it out. And the Chinese are experts at delaying. 

They have 6,000 years of recorded history. We have about 225. 

What can be done to now force the Chinese, because they are ready 

to float, what can be done to force them to float their currency? 

Secretary SNOW. Congressman Manzullo, the decision to float a 

currency is a sovereign decision. We have had long, intense discussions with the Chinese over a period of time. They have committed 

to do it. They have taken a lot of steps to put their financial system 

in place to enable the financial system to function well with the 

floating exchange rate, with a flexible exchange rate. And having 

taken all those steps, we are clear—we are telling them directly, 

you know, you made enough progress here. We commend you on 

the progress. That progress now should lead to the next step, which 

is the flexibility. 

I don’t support, as you know, the legislation that is being talked 

about that would impose a tariff on everything coming out of China 

by an amount that is estimated to be the difference between the 

31

current exchange rate and what the exchange rate would be if it 

floated. 

Secretary SNOW. I mean, I know, I am sympathetic to the 

ideas——

Mr. MANZULLO. Even the author does not support that. 

Secretary SNOW. But I am concerned it will not be effective. I 

want the result that I think you want, and that is flexibility in 

their currency. I just do not think that is the right way to get it. 

Mr. MANZULLO. I agree that tariffs, tariffs will not work. But 

what are you going to do? I mean, it has got to be in this dynasty. 

Otherwise, it will just continue the way it is now. That seems to 

be what they are doing. 

I mean, we are at the point where the folks back home are saying, Congressman, how can you even consider another free trade 

agreement when we are locked into this horrible mess? I mean, 

what about a Section 301 or what about legislation that would 

allow the US to bring an action under 301 for the currency imbalance? 

What about those remedies? 

Secretary SNOW. Well, we have looked, you know, in the past, at 

the 301 option and did not find it appropriate as a vehicle to deal 

with the currency, with the currency issue. 

Clearly, China is going to have to move here. The time has come, 

it is overdue. 

Mr. MANZULLO. They are not. Their hands are going to be forced 

so we will have to find a way to do it. I do not expect to have an 

answer within the next 15 seconds, but I think that is what Congress is really asking for is some solid concrete solution to get it 

done, and they will appreciate your leadership on that. 

Secretary SNOW. Well, thank you, we want to see it done. You 

know that. 

Mr. MANZULLO. Thank you, I yield back. 

The CHAIRMAN. The gentleman yields back. The gentleman, the 

very patient gentleman from California, Mr. Baca. 

Mr. BACA. Thank you, Mr. Chairman. 

The CHAIRMAN. Please turn your mike on. 

Mr. BACA. Thank you very much, Mr. Chairman. Thank you, Mr. 

Secretary for appearing before us. 

As you know, Mr. Chairman, one of the most important things 

for insuring the health of international financial systems is preserving the soundness of the U.S. economy. Many foreign governments have invested in our bonds, and it is important they continue to be able to have faith in the integrity of our system. 

Based on that and based on the opening statements, you indicated that the world economy is in good condition, no recession, no 

crisis, but yet you continue to indicate that we are at a deficit that 

is too high, and there needs to be more control on spending, I do 

agree with you there. 

In light of that, it seems like this Administration—we are very 

much concerned with this Administration’s budget. It continues to 

underestimate the cost of the war that continues to be high, somewhere around $400 some billion that we spent on the war. Now we 

are talking about Social Security and privatization. 

32

Before I get into that, you also indicated that we have created 

about 2.4 million jobs. Well, we do not know what kind of jobs were 

created and how many jobs were created two or three times, because we could have counted two or three times. We actually have 

lost about 2 million jobs. 

We have lost about 550,000 jobs in outsourcing, so we have lost 

alot of jobs. So it makes it very difficult as we look at another trade 

agreement, see if we can get another trade agreement because we 

are looking at the President’s plan to look at Social Security, 

privatizing, yet we know that the jobs that are created here pay 

into the system. Yet if we continue to outsource, we will not have 

those jobs out here. 

I want to hear your opinion in reference to what we should do 

to make sure the economy grows strong here in the United States, 

and we do not create jobs outside of the United States, because 

many of those manufacturers are leaving our areas. Just as Mr. 

Sanders said earlier, in Vermont, I am faced with the possibility 

of losing—my District in Ontario—163 jobs from General Electric 

that may be going overseas. I am very much concerned about this. 

Could you please address that? 

Secretary SNOW. Well, I would be delighted to. We want to create 

as many jobs as we can in the United States. I am with you 100 

percent. We want to make America the best place to invest. So capital comes in here and——

Mr. BACA. If we do have that, then those people are able to pay 

into the Social Security system to make it solvent so we would not 

be in a—you would say in a crisis, you know. We would be in a 

challenge. That is basically what we are doing now is we are creating a situation by having these jobs leave the United States and 

not having those jobs that are created to pay into the system. 

Secretary SNOW. We have got to keep the American economy capable of generating jobs. That means, in my view, keeping it innovative, keeping it focused on the principles of enterprise that have 

always been the strength of our country. Rewarding initiative, rewarding risk taking, rewarding innovation and entrepreneurship. 

I am confident, if we do all of that, we are going to continue to 

attract capital, to build innovative businesses and to create lots of 

jobs. That is our whole history. 

Mr. BACA. I hope we do that, because one of the other things that 

you stated in your opening statement is you indicated that raising—the standard of living has gone up. I am wondering for whom, 

because there are a lot of people out there that are unemployed 

right now, that their standard of living has not gone up. 

Then when you look at the estate tax and the tax breaks, yes, 

for them, the standard of living has gone up. But for those middle 

income and working families and others, they are unemployed and 

looking for skills and looking for jobs that they do not have here. 

Secretary SNOW. Well, let me assure you, we are not satisfied. 

There are some 3 million additional people working, according to 

the Bureau of Labor Statistics. 

That is good, but we are not satisfied. The unemployment rate 

has come down to 5.2. That is good, but it can do better. 

Mr. BACA. It depends on how we are accounting. If sometimes we 

are accounting double or triple the same person now having to 

33

work two or three different jobs—because the manufacturers that 

used to be here, they used to get paid $25. Now that person has 

to work two jobs or three jobs, and yet sometimes, I believe we are 

double counting. Is that so, could it be? 

Secretary SNOW. Well, this will be a long discussion if we got into 

it in any detail, which we can do otherwise. But there are two different surveys, as you know. There is the household survey, and 

there is the more widely used employment survey called the establishment survey. 

The household survey does look at multiple jobs and counts multiple jobs, and the other one does not. So there are some differences 

in the way the indices, the surveys are conducted. 

But basically, I think they both agree that we are creating a lot 

more jobs than was the case for 3 years ago. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. BACA. I hope they are in the United States and not outside 

of the States. 

The CHAIRMAN. Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. It is a privilege to be in 

your company, Mr. Secretary. 

Secretary SNOW. Thank you very much, Congressman. 

Mr. GREEN. I represent the Ninth Congressional District in 

Houston, Texas. To many of my constituents, free trade is not free. 

Free trade, in fact, is, in their opinion, quite expensive. In their 

opinion, free trade is costing jobs and is impacting their lives adversely. Free trade is costing about $61 billion and a trade deficit. 

That is an expensive proposition. 

So when free trade is costing as much as it appears to be costing, 

to them, it is not fair trade, and that is why that term fair trade 

has gained momentum. People want to be treated fairly. They do 

not think they are being treated fairly with reference to our relationship with China. 

While we can be patient here and wait for change, I sense a 

growing impatience among my constituents. I suppose the question 

becomes, what do we do when flexibility is not demonstrated? How 

do we manage the relationship when flexibility is not demonstrated? 

I have a follow-up, if I may, once I hear the answer. 

Secretary SNOW. Well, Mr. Green, I am not satisfied with the 

pace of progress here. We are disappointed that they have not 

moved. 

I do feel that the best way to get them to move is to pursue this 

financial diplomacy, if you want to call it that, that we have been 

engaged in. There are very visible signs that they are moving. 

They have taken any number of steps to prepare the way. They 

put in place a very strong bank regulator. They are taking on the 

nonperforming loans. They are capitalizing the banks. They are allowing people to take more money out of the country. They are allowing firms that earn profits out of the country to leave it out of 

the country. 

All of these are steps in the right direction, including the transaction they have negotiated with the Chicago Mercantile Exchange 

to put in a hedging arrangement for their currency. We are going 

34

to continue—let me show you, we are going to continue to press 

them. 

There are a lot of things that we are not happy about, such as 

intellectual property rights. Trade has got to be a two-way street. 

The counterfeiting that goes on is terribly unfair, as you are saying. 

All of that is on the agenda with the Chinese. We are focusing 

primarily on the currency side, but others in the Administration 

are focusing as well on taking the lead on other sides. It has got 

to be fair, it has got to be a two-way Street. I agree with you. 

Mr. GREEN. I will forego the follow up and just make a comment. 

You indicated earlier that the world economy is in good order and 

that we are in a sweet spot. But there is something that is unusual 

about this in that—and I would like to relate this to people right 

here in this country. 

We have this notion that a rising tide raises all boats. Unfortu- nately, in our country, women still make about $0.76 for every dollar a man makes, unless you happen to be an African-American 

woman, and then you make about $0.66; or you happen to be a Hispanic woman, and you make about $0.55. 

So there are some people who find themselves living in a paradise, but they seem to be strangers in paradise. It is very difficult 

sometimes to be a stranger in paradise. I would hope that as we 

focus on all of these means by which the world economy is in a 

sweet spot that we can do something about a systemic problem 

right here in our own country. 

I do not expect you to solve that problem or to give me a response, to be quite candid with you. I just think that it is good for 

us to note that in these times of great prosperity that there are 

some who have stagnated and are not really benefitting to the extent that many others are. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Alabama in the back, clean up. 

Mr. DAVIS OF ALABAMA. Thank you, Mr. Chairman. 

Let me say, Mr. Secretary, I am the only thing stopping you from 

getting out the door. I will try to hit on two or three topics with 

you. 

Let me go back for a moment to Mr. Manzullo’s line of questions. 

He asked you—and you talked at length—about the anti-devaluation bill that is pending before the Senate. You responded to that. 

I do not remember you responding to his question about the 

countervailing duties bill. Senator Bayh, as you know is the Senate 

Democratic lead sponsor in the Senate. 

As you probably do not know, I am the lead Democratic sponsor 

in the House on that measure. 

Briefly, is the Administration opposed to legislation that would 

subject China to the same standards as the market economies? 

Secretary SNOW. Congressman, I wish I knew the legislation better. I am not really familiar with this legislation. 

Mr. DAVIS OF ALABAMA. Are you opposed to it in principle? If I 

can summarize it to you. What it does is very basic. It states that, 

as you no doubt know, market economies, if they subsidize their industries or are deemed to be in violation of the WTO’s anti-subsidization rules, they are subject to countervailing duties. Right 

35

now, the nonmarket economies which shine as the most conspicuous are not subject to such duties. 

As a matter of theory, is there any reason in terms of fairness 

or equity or basic economics why the nonmarket should not be subject to the same rules as the markets? 

Secretary SNOW. Subsidies, of course, are not good policy. 

Mr. DAVIS OF ALABAMA. And more reason why——

Secretary SNOW. Yes, as a general proposition, they are sometimes defended with respect to developing countries on the grounds 

of, if an industry is—you know, I think even the great Alexander 

Hamilton defended some protection for domestic industry in the 

United States for a time as we became a developing country. 

Mr. DAVIS OF ALABAMA. Does China fit in the developing country 

scenario at this point? 

Secretary SNOW. They are—they are certainly, that is the terminology that is applied to them in these trade circles. They are a developing, not yet a developed country. 

Mr. DAVIS OF ALABAMA. Do they appear to be a country that is 

hampered and incapable of competing with the rest of the world? 

Just what do you mean by developing? 

Secretary SNOW. Well, it is a very uneven story with China, of 

course. Some parts of their economy are doing well, and others are 

still very rudimentary. 

Mr. DAVIS OF ALABAMA. Let me try to move you along a little bit, 

because I am last, and my time is still limited. Does the Administration oppose or support or have any position on the countervailing duty bill right now? 

Secretary SNOW. You know, I am going to defer to my colleague, 

who is responsible for this, Mr. Gutierrez? 

Mr. DAVIS OF ALABAMA. Okay. Let me move to the second question to use the time more effectively. 

Another thing that you were asked about repeatedly today was 

the low savings rate. 

Secretary SNOW. Right. 

Mr. DAVIS OF ALABAMA. There certainly is no dispute on either 

side of this aisle that we have not been nearly as effective as we 

want to be in terms of generating savings. 

One theory that some economists have, as you know, is that part 

of the reason why people save so little in this country is because 

we have an exceptionally generous credit card industry, and the 

credit card companies are very, very quick to extend credit to highrisk individuals who are not good candidates to pay back the loan 

and often have to result to more borrowing to pay back the credit 

when they get credit. 

Does it stand to reason that we would do something to improve 

our savings climate if we made it harder for credit card companies 

to lend credit to high-risk individuals? 

Secretary SNOW. I think we do a lot to deal with that issue. It 

is an issue, I agree with you. If we would advance financial literacy. And one of the things——

Mr. DAVIS OF ALABAMA. Well, that is a good question——

Secretary SNOW. We have to do is lead this effort on financial literacy. 

36

Mr. DAVIS OF ALABAMA. Let me cut you off for one second, I do 

not mean to be rude. I just want to make the best use of my time. 

That is one strategy. I did not ask you to comment on that one. 

I will ask you to comment on the particular one I mentioned, 

which is making it harder for credit card companies to do what 

they do, which is to target low-income people. You, for example, 

may be aware they often target people after they file bankruptcy. 

They target college students. They target a variety of people, and 

that pushes them away from a savings mentality. 

So, short answer—short question, hopefully, short answer, 

doesn’t it stand to reason that it would be good for our economy 

and would allow us to make some dent in the savings problem if 

we made it harder for credit card companies to extend credit so 

generously to high-risk people? 

Secretary SNOW. Congressman, I am reluctant to get into that, 

because I just do not know enough about it. I am fearful that giving a broad answer, yes or no, to a detailed question like that 

might leave inferences that I am not—create implications for which 

I am not aware. 

Let me think about that, and I will get back to you. 

What I do know is that we have a real problem with financial 

literacy. We need to focus on financial literacy. We have got to 

make people aware of what happens with compounding interest, 

when it is in your favor and when it is not in your favor and that 

a lot of people are taking on credit card debt that they should not 

take on. I will agree with you on that. 

The CHAIRMAN. The gentleman’s time has expired. 

Let me say to my friend from California. 

Ms. WATERS. Thank you very much. 

The CHAIRMAN. He has to catch a plane. 

Ms. WATERS. I know he has to catch a plane. 

I am going to submit my questions to the record for you to answer. I want to know the progress of negotiations and what you are 

doing to help provide the 100 percent debt cancellation and some 

information about the IMF and how you see that and how the offmarket gold sales are something that you can share information 

with us about. You do not have to answer. 

Secretary SNOW. Thank you. 

The CHAIRMAN. Without objection, that would be the case. 

Mr. Secretary, we thank you so much. I would make one request. 

The chair requests that you provide the Committee, for the hearing 

record, a list of all of the reforms undertaken by China in the last 

2 years to prepare for a flexible exchange rate. 

Secretary SNOW. We will be delighted to do that, Mr. Chairman. 

The CHAIRMAN. Thank you, Mr. Secretary, and again, thank you 

for your appearance. 

Secretary SNOW. Thank you very much. 

Ms. WATERS. Mr. Chairman? 

The CHAIRMAN. The gentlelady from California. 

Ms. WATERS. Mr. Chairman, I would ask unanimous consent to 

enter my statement into the record. 

[The prepared statement of Hon. Maxine Waters can be found on 

page 58 in the appendix.] 

The CHAIRMAN. Without objection. Thank you. 

37

The Committee is adjourned. 

[Whereupon, at 5:15 p.m., the Committee was adjourned.] 

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April 19, 2005

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