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S. HRG. 111–329 

FOREIGN POLICY AND THE GLOBAL 

ECONOMIC CRISIS 

HEARING 

BEFORE THE

COMMITTEE ON FOREIGN RELATIONS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 25, 2009 

Printed for the use of the Committee on Foreign Relations 

( 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html 

COMMITTEE ON FOREIGN RELATIONS

JOHN F. KERRY, Massachusetts, Chairman

CHRISTOPHER J. DODD, Connecticut 

RUSSELL D. FEINGOLD, Wisconsin 

BARBARA BOXER, California 

ROBERT MENENDEZ, New Jersey 

BENJAMIN L. CARDIN, Maryland 

ROBERT P. CASEY, JR., Pennsylvania 

JIM WEBB, Virginia 

JEANNE SHAHEEN, New Hampshire 

EDWARD E. KAUFMAN, Delaware 

KIRSTEN E. GILLIBRAND, New York 

RICHARD G. LUGAR, Indiana 

Republican Leader designee 

BOB CORKER, Tennessee 

JOHNNY ISAKSON, Georgia 

JAMES E. RISCH, Idaho 

JIM DEMINT, South Carolina 

JOHN BARRASSO, Wyoming 

ROGER F. WICKER, Mississippi 

DAVID MCKean, Staff Director

KENNETH A. MYERS, JR., Republican Staff Director

(II)

C O N T E N T S 

Page 

Kerry, Hon. John F., U.S. Senator from Massachusetts, opening statement ..... 1 

Lindsey, Lawrence, former director of the National Economic Council, Washington, DC ............................................................................................................. 13 

Prepared statement .......................................................................................... 15 

Lugar, Hon. Richard G., U.S. Senator from Indiana, opening statement ........... 3 

Soros, George, chairman, Soros Fund Management and Open Society, New 

York, NY ............................................................................................................... 9 

Prepared statement .......................................................................................... 11 

Wolf, Martin, associate editor and chief economics commentator, Financial 

Times, London, United Kingdom ........................................................................ 5 

Prepared statement .......................................................................................... 7 

(III)

(1) 

FOREIGN POLICY AND THE GLOBAL 

ECONOMIC CRISIS 

WEDNESDAY, MARCH 25, 2009 

U.S. SENATE, COMMITTEE ON FOREIGN RELATIONS, Washington, DC. 

The committee met, pursuant to notice, at 2:35 p.m., in room 

SD–419, Dirksen Senate Office Building, Hon. John F. Kerry 

(chairman of the committee) presiding. 

Present: Senators Kerry, Kaufman, Lugar, Corker, Risch, and 

Barrasso. 

OPENING STATEMENT OF HON. JOHN F. KERRY, 

U.S. SENATOR FROM MASSACHUSETTS 

The CHAIRMAN. The hearing will come to order. Thank you all for 

joining us this afternoon. 

Just when we think things may settle down for a moment, the 

markets have a way of deciding otherwise and sending a different 

message. I noticed today that the British bond sale failed, for the 

first time since 2002. And so, even today the implications of the 

current economic downturn are being felt globally, which is what 

we’re here to talk about today. 

The United States is not alone in confronting an economic crisis 

at this time. And what started here has now gone global and continues to reverberate beyond our financial systems into the daily 

economic lives of people everywhere. 

The reality is, we don’t quite know, yet, where the bottom is, or 

where the end is. And today’s hearing grows out of a roundtable 

discussion which the committee held on this last month, where we 

began to scratch the surface of the global implications of the financial challenges that we face. And we’re glad to do this before the 

full committee today. 

Dennis Blair, the Director of National Intelligence, recently told 

Congress, ‘‘The primary near-term security concern of the United 

States is the global economic crisis and its geopolitical implications.’’ That’s an amazing statement, given the ongoing risks that 

we face from terrorism, two wars, rogue nuclear programs in Iran 

and elsewhere. 

Blair warned that, ‘‘Time is probably our greatest threat. The 

longer it takes for the recovery to begin, the greater the likelihood 

of serious damage to U.S. strategic interests.’’ 

He also warned of regime-threatening instability. And today’s 

economic crisis has already brought down governments in Iceland, 

in Latvia, and helped spark riots in Europe. Just this week, the 

2 

Prime Minister of Hungary offered his resignation over the economic situation there. So, the crisis is likely to be a driving force, 

a geopolitical force, for some time to come, and the political ramifications could well become even more serious. 

If there is one lesson that we should take away from the experience of a number of these countries, it is to not underestimate the 

severity of these economic challenges, or the urgency of tackling 

them head on rather than deferring tough decisions. 

Last week, several of us had the opportunity to speak with Dominique Strauss-Khan, the managing director of the International 

Monetary Fund, and Bob Zoellick, president of the World Bank. We 

spoke about the snowballing financial crisis brewing in Central and 

Eastern Europe. They made it clear that if we don’t act quickly, we 

risk replacing an era of promise and progress with one of soaring 

unemployment, instability, and a rollback of the influence and 

ideals that we have spent decades building. We also spoke about 

the need to strengthen our international financial defenses, particularly the IMF. And I’m pleased to join with Senator Lugar in 

supporting a dramatic increase in the IMF’s capacity to respond to 

this crisis, just as Treasury Secretary Geithner has proposed. 

The IMF, along with the World Bank, is the best channel that 

we have to bolster emerging and developing markets as the economies and the banking systems and the political systems are all 

strained around them. 

The upcoming G–20 meeting in London is an important opportunity to enlist global support for decisive action on this issue. 

Strengthening the IMF, however, is only one component of a much 

larger challenge. We have to fix our banking systems, not just in 

America, but in every major financial center. 

To be sure, our economy and the global economy have reached 

this moment of crisis, but, as bad as the news has been, it is clear 

that, if we come up with the right solutions, if we move together, 

if we move with a certainty and confidence in the choices that we 

make, then there will be great opportunities, going forward. 

There’s a great advantage to being the first to move in global 

finance. Washington has waited too long, already, while financial 

institutions remain frozen. Lending will not happen until banks 

have removed their toxic assets, and we hope that the Treasury 

plan, announced this week, will help us do just that. 

As we put our own banking system in order, there will also be 

new challenges waiting for us abroad. We’re going to have to confront the potential for increased political instability, large-scale 

failures of other countries’ financial systems, escalating financial 

protectionism, economic nationalism or trade wars that could help 

to deepen the crisis, increased poverty and hunger in the developing world, and competitors exploiting financial instability in 

ways that diminish our influence. 

And these problems are not confined to traditionally unstable 

corners of the globe. Europe is facing some deep financial challenges. Turkey, Indonesia, Pakistan, three of our most important 

partners in the Muslim world, all face acute balance-of-payments 

crises. 

We also need to confront the fact that there’s a great deal of 

anger out there among people who blame the model that we exVerDate Nov 24 2008 13:21 Mar 31, 2010 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 H:\DOCS\GECRISIS.TXT SENFOR1 PsN: BETTY
3 

ported. Even as we restore confidence in our markets, we need to 

find a strategy to project leadership, share burdens, and spread 

stability as the problems reverberate on a global basis. And as we 

balance the domestic and global demands of this crisis, we need to 

be warned that, in cutting corners for short-term savings, we risk 

creating far greater costs down the road. 

We’re pleased with the panel that we have here today. The witnesses are a superb collection of innovative thinkers, all of whom 

think about, work in and around this sector on a daily and lifetime 

basis, and they will help us paint a fuller picture of the new foreign 

policy dynamics that these challenges create. 

Martin Wolf is the associate editor and chief economics commentator at Financial Times. George Soros is the chairman, Soros Fund 

Management and Open Society. And Lawrence Lindsey is president 

and CEO of Lindsey Group and former director of the National 

Economic Council. 

Senator Lugar. 

OPENING STATEMENT OF HON. RICHARD G. LUGAR, 

U.S. SENATOR FROM INDIANA 

Senator LUGAR. Well, thank you, Mr. Chairman. And I join you 

in welcoming a very distinguished panel, who will offer insights 

into the global financial crisis and recommendations for United 

States policy. 

As you pointed out, at this stage no one knows for certain how 

long or how deep this economic downturn will be. With the administration’s announcement of a plan to manage the so-called ‘‘bad 

assets’’ on the balance sheets of banks and corporations, we are at 

a critical moment in the resolution of our banking crisis. The fundamental strengthening of our banking system is a necessary precondition to the return to solid economic growth. 

I am hopeful that, as this plan is implemented, the U.S. Government will be judicious about sinking taxpayer money into banks 

and corporations that are insolvent. As many experts have suggested, we need a careful triage of financial entities to determine 

which ones can stand on their own, which could become healthy 

with a reasonable infusion of additional capital, and which are insolvent beyond repair. Banks that are insolvent should be either 

liquidated or, in some cases, merged with other banks. Depositors 

should be protected, but shareholders may have to take their 

losses. U.S. taxpayer funds should only be used for recapitalization 

of troubled banks in limited cases, and the terms for government 

assistance should be uniform and transparent. The goals must be 

to restore discipline to the banking sector, reestablish investor confidence in healthy banks, and ensure that banks have the capacity 

to contribute to economic growth. Actions to address our own economy are vital, but, given the linkages between our financial sector 

and that of other countries, we cannot achieve economic recovery 

in isolation from the rest of the world. 

The United States must provide leadership in restoring the 

health of the international financial system. In particular, the lending capacity of the IMF must be increased. The Obama administration has proposed increasing this capacity by $500 billion, of which 

the United States commitment would be $100 billion. I will be very 

4 

interested to learn from the witnesses views of this proposal and 

whether they believe it’s appropriately sized for the problem. 

As we work with other nations, our government must pay attention to how the global economy, and our role in it, can be rebalanced. Some level of deficit spending is appropriate at this stage 

of the crisis, but the United States budget deficits that are projected cannot be sustained without extreme risk to both Americans 

and the international community. We cannot depend indefinitely on 

China investing heavily in United States Government debt. Some 

thought must be given to how we work with China and other 

nations to establish more sensible global balance that depends less 

on demand by American consumers. 

We also must be cognizant of the incredible pressures this global 

financial crisis will place on stability and peace. We have to expect 

additional political, economic, or even national security shocks. We 

know, from history, that societies under severe economic stress 

often do not make good political choices. In the face of job losses, 

wealth evaporation, homelessness, hunger, and other outcomes, the 

fabric of many nations will be tested. The crisis is likely to stimulate nationalism that could lead to demagogic policies or governments. And under such conditions, some nations might experience 

a retreat from democracy. This, in turn, increases the possibility of 

violent conflict within and between nations. Consequently, maintaining international cooperation in addressing the economic crisis 

affects more than our own prosperity. 

The upcoming G–20 meeting must be a success, not just in the 

proposals that are adopted, but also in the tone that is established 

for subsequent cooperation. The meeting should offer a clear message that the major economies will cooperate on financial restructuring and resist protectionism. 

The United States must prepare itself for changes in its international role. We should ask ourselves, What will be the basis of 

United States national influence in the future? Why will nations 

continue to listen to us? What leverage over rivals can we preserve? And how can we ensure that we will still be able to rally 

friends behind vital United States objectives? 

The global crisis has increased the skepticism in emerging economies about American-style capitalism and is likely to reduce enthusiasm, within the United States and beyond, for liberalized trade 

measures that would greatly benefit our country. 

I do not believe that we are facing a precipitous collapse of 

United States influence, but we have to be far more deliberate in 

executing a rational plan that gets the most out of United States 

strengths and compensates for our new weaknesses. 

I thank the chairman for calling this hearing and very much look 

forward to the testimony of our witnesses. 

The CHAIRMAN. Thank you very much, Senator Lugar. 

Mr. Wolf, would you lead off? Mr. Soros, next, and then Mr. 

Lindsey. And we’re glad you were able to arrange to be here, Mr. 

Wolf; I know it’s not a normal role within your sphere, but we 

admire your voice and perceptions and, I must say, your home base 

is an important document for all of us to read, these days, and we 

appreciate its quality. 

5 

STATEMENT OF MARTIN WOLF, ASSOCIATE EDITOR AND 

CHIEF ECONOMICS COMMENTATOR, FINANCIAL TIMES, LONDON, UNITED KINGDOM 

Mr. WOLF. Thank you, Mr. Chairman and members of the committee. I’m very, very honored to be here to discuss—— 

The CHAIRMAN. Can you press your mike? The button, there? 

Mr. WOLF. I apologize. 

The CHAIRMAN. There you go. 

Mr. WOLF. Thank you, Mr. Chairman and members of the committee. It is my great honor to be here to discuss the current 

economic crisis and its impact on American foreign policy. 

May I add that, as a British citizen, and so, as a grateful foreigner, I am particularly honored and well aware of the extraordinary role of the United States in promoting freedom and democracy across the globe over the past seven decades. 

Yet, it is clear that we are experiencing the most dangerous 

financial and economic crisis since the 1930s. It is also a crisis for 

foreign policy, as you have noted. A deep recession—and that is 

sure—will shake political stability across the globe, and, as important, it threatens the very longstanding U.S. goal of sustaining and 

creating an open and dynamic global economy. And perhaps most 

important, the United States, rightly or wrongly, is currently seen 

as the source of the problem, more than of the solution, across the 

globe. 

The crisis is, therefore, a devastating blow to U.S. credibility and 

legitimacy as a world leader. If the U.S. cannot manage free-market capitalism, it is asked, who can? If free-market capitalism can 

bring such damage even here, why adopt it? If openness to the 

world economy brings such dangers, why risk it? 

As shock turns to anger, not just in the U.S., but across the 

world, these questions are unquestionably being asked. If the U.S. 

wishes to obtain the right answers, it must not only address the 

crisis at home, as is, of course, widely understood, but also do what 

it can to rescue innocent victims abroad. And this is not just a matter of charity, it is a matter of the highest enlightened self-interest, 

as American policymakers have understood for many decades. 

The decisions taken in the next year will, I believe, shape our 

world for decades. So, what has to be done? I’m going to make a 

few suggestions, in the limited time available to me, focusing, 

above all, on the G–20 and on the International Monetary Fund. 

First of all, we must realize that this is, indeed, a crisis of the 

global economy that the U.S. played a dominant role in creating. 

If that achievement, with all the promise it offers, is to survive, the 

crisis will also, by definition, have to be solved globally. 

Second, the meeting of the G–20 heads of government in London 

is a recognition of the global nature of this crisis. Management of 

the world economy can no longer be achieved by the leaders of 

advanced economies alone. While not all the countries there 

present are systematically important, all systemically important 

countries will be there. The world looks for achievement at this 

summit; it must not be disappointed. 

Third, the immediate priorities for this summit are to agree on 

how to sustain demand, fix the global financial system, and avoid 

a collapse into global protectionism. The longer term aim must be 

6 

to reconsider the regulation and structure of the global financial 

system and reform the system of international economic and financial governance. Some progress has already been made on these 

fronts, but it is not nearly enough. 

Fourth, there is a very good chance that this crisis will lead to 

a much deeper decline in the world economy than is even now expected, and thereafter, a mere—no more than a slow and limping 

recovery. This risk of extreme outcomes has to be eliminated, if at 

all possible. 

Fifth, if emerging economies are to trust themselves or the world 

economy in the future, it is essential to offer generous assistance 

now. At the moment, as I have remarked, they blame the West for 

what has happened to them. It has been helpful that the Federal 

Reserve and other central banks have advanced loans to a few 

selected central banks, but much more than that is needed. 

But, sixth, the current lending capacity of the IMF is only about $250 billion, which, as I think everybody knows, is grossly inadequate. The U.S. administration has proposed that this be raised 

to $750 billion. And that is the very least that is now needed. It 

is important to remember that global foreign exchange reserves 

overwhelmingly held by emerging economies rose from about $1.5 

trillion to $7 trillion between January 1999—that is, shortly after 

the Asian financial crisis—and the peak they reached last year. 

And this is surely, at least in part, an indication of the extent of 

the demand for reserves around the world. It will be far more efficient if reserves were pooled than if every country tried to insure 

itself in this extremely expensive way. And that is what the IMF 

exists to do, and it should be used for this purpose. 

Seventh, in addition to increasing its resources, the government 

of the IMF must be changed. Asian countries, in particular, still 

remember with bitterness the humiliation they received a decade 

ago at the hands of the IMF and, in their view, the U.S. Treasury. 

They will want a bigger say in the running of the fund if they are 

to trust it. An important step is a huge reduction in Europe’s voting weights, now about a third of the total, and also important is 

an end to the traditional practice of always having an American 

head of the World Bank and a European head of the IMF. 

Eighth, serious thought must be given to making an annual allocation of SDRs—that is specialty drawing rights—the IMF’s own 

reserve asset. This could satisfy the world demands for reserves at 

no cost in resources, and I have noted the recent remarks by the 

governor of the People’s Bank of China on exactly this point. 

Traditionally, the U.S. has regarded the SDR as a rival to the 

dollar as a reserve asset and treasured the ability to finance its 

external deficits through simple expansion of its own money supply. But, the economic developments of the past decade, and particularly the final consequences of the global imbalances, should 

have shaken this complacency. The ability to run very large current account deficits has turned out, in my view, to be a calamity, 

since it offers at least a part of the explanation for the current financial crisis in the United States and the world. 

Furthermore, the United States needs to be able to export its 

way out of its current recession—otherwise, it is likely to be stuck 

with these terrible fiscal deficits for the indefinite future—to offset 

7 

the higher domestic private saving and structural current account 

deficit. Increasing the purchasing power of emerging countries 

through an allocation of even as much as a trillion SDRs, a little 

less than 2 percent of the world GDP, would go a long way toward 

solving this problem. I fear that if this does not happen, a return 

to generalized protection becomes likely as a way for deficit countries, even the United States, to strengthen demand for domestic 

output and employment. 

What I have outlined above is only a small part of the agenda, 

but it is a vital part. The more imaginative and energetic the U.S. 

now is, the better able it will be to restore its reputation and influence across the globe. This is unquestionably a time of decision. 

The United States has a choice of either doing everything in its 

power to restore and strengthen the global economic system it itself 

worked so hard to create or fails to do so. Choices must be made 

between outward-looking and inward-looking solutions. As we all 

know, we tried the former in the 1930s, and this time, as we know, 

we must try the latter. 

Thank you. 

[The prepared statement of Mr. Wolf follows:] 

PREPARED STATEMENT OF MARTIN WOLF, ASSOCIATE EDITOR AND CHIEF ECONOMICS

COMMENTATOR, FINANCIAL TIMES, LONDON, UNITED KINGDOM

We are experiencing the most dangerous financial and economic crisis since the 

1930s. But it is also a crisis for foreign policy: A deep recession will shake political 

stability across the globe; and it threaten the longstanding U.S. goal of an open and 

dynamic global economy. Perhaps most important, the U.S. is currently seen as the 

source of the problem rather than of the solution. 

This crisis is, therefore, a devastating blow to U.S. credibility and legitimacy 

across the world. If the U.S. cannot manage free-market capitalism, who can? If 

free-market capitalism can bring such damage, why adopt it? If openness to the 

world economy brings such dangers, why risk it? As the shock turns to anger, not 

just in the U.S., but across the world, these questions are being asked. If the U.S. 

wishes to obtain the right answers, it must address the crisis at home, and do what 

it can to rescue innocent victims abroad. This is not a matter of charity. It is a matter of enlightened self-interest. 

The global economic crisis has become extremely severe: The financial system is 

on life support, with trillions of dollars of support by governments; three of the 

world’s four most important central banks—the Federal Reserve, the Bank of Japan, 

and the Bank of England—have interest rates at close to zero, with the European 

Central Bank likely to follow; governments are also loosening fiscal policy aggressively, with the deficits of advanced countries that are members of the G–20 forecast 

at 6.7 percent of GDP this year and 7.6 percent in 2010. 

This massive policy support comes in response to increasingly dire economic conditions: The International Monetary Fund forecasts that global output will shrink 

by between 0.5 percent and 1 percent this year, a downgrade of 1 to 1.5 percentage 

points in 2 months; it also forecasts that the economies of advanced countries will 

shrink by between 3 and 3.5 percent, the worst performance since the 1930s. 

None of this is surprising. Not only did the global financial system seize up at 

the end of last year, but the Asian Development Bank has reported that the total 

loss of worldwide market wealth is $50 trillion, close to a year’s world output. The 

loss of stock market wealth alone is $25 trillion. Demand for manufactures, world 

manufactured output and world trade in manufactures fell off a cliff at the end of 

last year: Germany’s industrial output was down 19.2 percent year-on-year in January, South Korea’s down 25.6 percent and Japan’s down 30.8 percent. 

Inevitably, and tragically, the most adversely affected are countries that have 

opened themselves up to global capital flows, particularly emerging countries in central and eastern Europe. These were the only significant group of emerging economies to be net importers of capital in the 2000s, with results often seen before over 

the past three decades when capital takes fright. These countries face the risk of 

a meltdown, precisely because they trusted both Europe and the capital markets. 

The consensus of forecasts for growth of Eastern Europe this year has fallen from 

8 

6 percent to minus 0.5 percent since last June. It will surely fall further. But all 

emerging economies are adversely affected by the loss of external demand, the 

shrinkage in global capital flows and the associated jumps in the price of borrowing. 

In a recent article for the Financial Times, which launched our series on the 

‘‘Future of Capitalism,’’ I argued that it is impossible to know where we are going. 

In the chaotic 1970s, few guessed that the next epoch would see the taming of inflation, the unleashing of capitalism and the death of communism. What will happen 

now depends on choices unmade and shocks unknown. 

Yet the combination of a financial collapse with a huge recession will surely 

change the world. The Great Depression transformed capitalism and the role of government for half a century. It led to the collapse of liberal trade, fortified the credibility of socialism and communism and shifted many policymakers toward import 

substitution as a development strategy. It led to xenophobia and authoritarianism. 

The search for security will strengthen political control over markets. A shift toward 

politics also entails a shift toward the national, away from the global. This is 

already evident in finance. But protectionist intervention is likely to extend well 

beyond the cases seen so far: these are still early days. 

In emerging countries, the number of people in extreme poverty will rise, the size 

of the new middle class will fall and governments of some countries will default. 

Confidence in local and global elites, in the market and even in the possibility of 

material progress will weaken, with potentially devastating social and political consequences. 

The ability of the West in general and the U.S. in particular to influence the 

course of events will also be damaged. The collapse of the Western financial system, 

while China’s apparently flourishes, marks a humiliating end to the ‘‘unipolar moment.’’ As Western policymakers struggle, their credibility lies broken. 

These changes will endanger the ability of the world not just to manage the global 

economy but also to cope with strategic challenges: Fragile states, terrorism, climate 

change, and the rise of new great powers. At the extreme, the integration of the 

global economy on which almost everybody now depends might be reversed. 

The decisions taken in the next year will shape the world for decades. So what 

has to be done? I suggest the following, focusing on the role of the International 

Monetary Fund. 

First, we must realise that this is a crisis of the global economy that the U.S. 

played a dominant role in creating. If that achievement, with all the promise it 

offers, is to survive, the crisis must be solved globally. 

Second, the meeting of the G–20 heads of government in London is a recognition 

of this fact. Management of the world economy cannot be achieved by advanced 

economies alone. While not all the countries there present are systemically important, all systemically important countries will be there. The world looks for achievement at this summit. It must not be disappointed. 

Third, the immediate priorities are to sustain demand, fix the global financial system and avoid a collapse into global protection. The longer term aim must be to 

reconsider the regulation and structure of the financial system and reform the system of international economic and financial governance. Some progress has been 

made on these fronts. But it is not nearly enough. 

Fourth, there is a very good chance that this crisis will lead to a much deeper 

decline in the world economy than is now expected and a slow and limping recovery. 

This risk must be eliminated, if at all possible. 

Fifth, if the emerging economies are to trust themselves to the world economy, 

it is essential to offer generous help now. At the moment, they blame the west for 

what has happened. It has been helpful for the Fed and other central banks to advance loans to a few selected central banks. But much more is needed. 

Sixth, the current lending capacity of the IMF is about $250bn, which is grossly 

inadequate. The U.S. Treasury has proposed that this be raised to $750bn. That is 

the very least now needed. Remember that global foreign exchange reserves, predominantly held by emerging economies, rose from $1.5 trillion to $7 trillion between January 1999, after the Asian financial crisis, and their peak last year. This 

is an indication of the demand for reserves. It would be far more efficient, however, 

if reserves were pooled than if every country tried to insure itself, in this expensive 

way. That is what the IMF exists to do. It should be used for this purpose. 

Seventh, in addition to increasing its resources, the governance of the IMF must 

be changed. Asian countries, in particular, still remember the humiliation treatment 

they received a decade ago at the hands of the IMF and the U.S. Treasury. They 

will want a much bigger say in the running of the Fund. An important step is a 

huge reduction in Europe’s voting weights, which are now about a third of the total. 

Also important is an end to the traditional practice of having an American head the 

World Bank and a European head the IMF. 

9 

Eighth, serious thought must be given to making an annual allocation of SDRs 

(special drawing rights)—the IMF’s own reserve asset. This would satisfy the 

world’s demand for reserves at no cost in resources. Traditionally, the U.S. has regarded the SDR as a rival to the dollar as a reserve asset and treasured the ability 

to finance its external deficits through simple expansion of the supply of dollars. But 

the economic developments of the past decade should have shaken U.S. complacency. The ability to run very large current account deficits, has turned out to be 

a calamity, since, in my view, it offers a large part of the explanation for the current 

financial crisis in the U.S. and so the world. Furthermore, the U.S. needs to be able 

to export its way out of its current recession. Otherwise, it is likely to be stuck with 

a huge fiscal deficit for the indefinite future, to offset the higher domestic private 

saving and structural current account deficit. Increasing the purchasing power of 

emerging countries, through an annual allocation of about 1 trillion SDRs (a little 

less than 2 percent of world GDP) would go a long way toward solving this problem. 

I fear that if this does not happen, a return to generalised protection would become 

likely, as a way for deficit countries, such as the U.S., to strengthen demand for 

domestic output and employment. 

What I have outlined above is only a small part of the agenda. But it is a vital 

part. The more imaginative and energetic the U.S. now is, the better able it will 

be to restore its reputation and influence across the globe. This is a time of decision. 

The U.S. can either do everything in its power to restore and strengthen the global 

economic system it worked so hard to create. Choices must be made between outward-looking and inward-looking solutions. We tried the former in the 1930s. This 

time we should try the latter. 

The CHAIRMAN. Very good. Thank you, sir. Very helpful, and we 

appreciate it. 

Mr. Soros, welcome. Glad to have you here. As a personal friend, 

it’s good to see you. And also, we have enormous respect for your 

thinking on these areas, so have at it. 

STATEMENT OF GEORGE SOROS, CHAIRMAN, SOROS FUND 

MANAGEMENT AND OPEN SOCIETY, NEW YORK, NY 

Mr. SOROS. Thank you, Mr. Chairman. 

The CHAIRMAN. Can you push your mike? There’s a button there. 

Thanks. Why don’t you just leave them all on, and then you guys 

can intervene when you want. 

Mr. SOROS. Thank you for the opportunity to testify today on the 

global financial crisis. 

I shall try to summarize briefly the main points of the argument 

I present at greater length in my written testimony. As you will 

see, my points are very similar to those of Martin Wolf. 

First, the current financial crisis is more severe and more widespread than any we’ve experienced since the 1930s. The international financial system has actually broken down and had to be 

put on artificial life support. 

Second, the countries on the periphery of the international financial system are even more severely affected than those at the center. The rich countries could effectively guarantee their financial 

institutions against default, but the less-developed countries, ranging from Eastern Europe to Africa, could not extend similarly convincing guarantees. As a result, capital is fleeing the periphery and 

it is difficult to roll over maturing loans—$1.4 trillion of bank loans 

are coming due in 2009 alone. 

Third, to stop the capital flight, the international financial institutions, particularly the IMF, must be reinforced and reinvigorated. The primary responsibility lies with the United States, both 

as the originator of the crisis and as the dominant financial power. 

If we fail to live up to our responsibility, we shall cease to be the 

10 

dominant financial power. If the multilateral system falls apart, 

every country will pursue its own interests unilaterally and China 

is liable to come out ahead. As things stand at present, China and 

the United States have a common interest in assisting the periphery countries. We must seize the opportunity, even as we address 

our own recession. 

Fourth, the upcoming G–20 meeting on April 2 is a make-orbreak event. Unless it comes up with practical measures to support 

the countries at the periphery, markets are going to suffer another 

sinking spell, just as they did on February 10, when the authorities 

failed to produce practical measures to recapitalize the U.S. banking system. 

In the preparations for the G–20 meeting, profound attitudinal 

differences have surfaced between the United States and Europe, 

particularly Germany. To put it in an oversimplified and exaggerated form, the United States wants to reinflate, Germany and 

Europe want to regulate. Actually, we need to do both, but the reinflation is urgent, and regulatory reforms will take time. Therefore, it should be possible to overcome the differences and find common ground in the need to protect the periphery countries from a 

calamity that is not of their own making. 

As things stand now, the G–20 meeting will, in fact, produce 

some concrete results. The resources of the IMF are likely to be 

doubled, mainly by using the mechanism of new arrangements to 

borrow, which will require congressional approval. The capital 

increase will be sufficient to enable the IMF to come to the aid of 

specific countries in difficulties, but it will not provide a systemic 

solution for the developing world. 

Fifth—and this is the most important point I want to make—a 

systemic solution is readily available in the form of special drawing 

rights, or SDRs. The mechanism exists and has already been used 

on a small scale. SDRs are highly complicated and difficult to 

understand, but they boil down to the international creation of 

money. 

The United States, Europe, and Japan are in a position to create 

their own money, and they are actively engaged in doing so in 

order to offset the collapse of credit. Less-developed countries can’t 

create money that is internationally accepted. They are the ones 

who need the special drawing rights. Rich countries should, therefore, lend their allocations to the countries in need. They could do 

so without incurring any costs or deficits. The recipient countries 

would have to pay the IMF interest at a very low rate, the composite average Treasury bill rate of all convertible currencies. They 

would have free use of their own allocations, but the standing of 

the borrowed allocations would be appropriately supervised. This 

should ensure that the moneys are well spent. It’s difficult to think 

of a scheme where the cost-benefit ratio is so favorable. 

Therefore, in addition to the one-time increase in the IMF’s 

resources through the use of the new arrangements to borrow, 

there ought to be substantial annual SDR issues, in the range of 

$250 billion annually, as long as the global recession lasts. So 

make this scheme countercyclical, the SDR issues could be made 

callable when the global economy overheats. 

11 

It’s too late to agree on issuing SDRs at the G–20 meeting on 

April 2, but if it were raised by President Obama and endorsed by 

others, it would be sufficient to give heart to the markets and turn 

the meeting into a resounding success. 

I very much hope that you will embrace the idea and encourage 

President Obama to propose it. It would make a tremendous difference to the world, and it would help the United States to resume 

its leadership position in the world. 

While this is the main message I want to deliver, I also want to 

endorse President Obama’s request for increased international 

assistance. The items included in the budget are well thought out. 

I would particularly comment, the increased support of the Global 

Fund to Fight AIDS, Tuberculosis, and Malaria, where our contribution mobilizes twice the amount from other donors, it would 

be a shame to cut it. 

And I’ll be happy to answer your questions. 

[The prepared statement of Mr. Soros follows:] 

PREPARED STATEMENT OF GEORGE SOROS, CHAIRMAN, SOROS FUND MANAGEMENT

AND OPEN SOCIETY, NEW YORK, NY 

The current financial crisis is different from all the others we have experienced 

since the end of World War II. On previous occasions, whenever the financial system 

came to the brink of a breakdown, the authorities got their act together and prevented it from going over the brink. This time the system actually broke down when 

Lehman Brothers was allowed to fail on September 15, 2008. That event transformed what had been a mainly financial phenomenon into a calamity that affected 

the entire economy. 

Within days the financial system suffered what amounts to cardiac arrest and had 

to be put on artificial life support. That came as a shock to the business community 

and the general public. Everybody retrenched. International trade was particularly 

hard hit and is now down nearly $4 trillion from a year ago. The decline in employment has not yet hit the bottom, and the International Monetary Fund (IMF) estimates that globally more than 50 million people could loose their jobs by yearend. 

The countries on the periphery of the international financial system are even 

more severely affected than those at the center. The rich countries could effectively 

guarantee their financial institutions against default but the less developed countries, ranging from Eastern Europe to Africa, could not extend similarly convincing 

guarantees. As a result, capital is fleeing the periphery and it is difficult to roll over 

maturing loans. Exports suffer from the lack of trade finance. Deutsche Bank estimates that $1,440 billion of bank loans are coming due in 2009 alone. 

The capital flight is abetted by national regulators intent on protecting their own 

financial systems by tacitly encouraging banks to repatriate funds. When history is 

written, it will be recorded that—in contrast to the Great Depression—protectionism 

first manifested itself in finance rather than trade. To stem the tide, the International Financial Institutions (IFIs) must be reinforced and reinvigorated. Unless 

effective measures are taken to protect the periphery countries against a storm that 

originated at the center, the international financial and trade system is liable to fall 

apart. 

The primary responsibility lies with the United States, both because it is the 

originator of the crisis and because it enjoys veto rights in the IMF. It is not just 

a moral issue but a matter of self-interest. We have derived great benefits from 

being at the center of the global financial system and we ought to do whatever we 

can to preserve that position. If the multilateral system falls apart, every country 

will pursue its interests unilaterally. Then China will be much better situated than 

we are. While we are, regrettably, still lagging behind the curve in dealing with the 

crisis, China is ahead of the curve. Its banking system is in relatively good shape 

and it can activate its large stimulus program faster than we can ours. The leadership realizes that it must ensure economic growth in order to avoid social unrest 

and it is both willing and able to apply additional stimulus if the current program 

is not sufficient. To support its export industries it will extend credit to periphery 

countries just as it did to the United States. As things stand at present, China and 

the United States have a common interest in protecting the periphery countries 

12 

from a storm that originated at the center. We must seize this opportunity even as 

we address our own recession. 

While the primary responsibility is ours, we cannot act without the support of the 

European countries which carry a disproportionate weight on the governing board 

of the IMF. Unfortunately the IMF is ill-suited to the novel task with which it is 

now confronted. It is used to dealing with the failures of government policy, especially at the periphery; now it is confronted with the failure of the private sector 

at the center. To make matters worse, the IMF is deeply unpopular with public 

opinion both at the periphery and at the center—and that includes Congress. Moreover, there is a profound disagreement between the United States and Europe, particularly Germany, about the nature of the problem and the right remedies to apply. 

The United States has recognized that the collapse of credit in the private sector 

can be reversed only by using the credit of the State to the full. Germany, traumatized by the memory of hyperinflation in the 1920s that led to the rise of Hitler in 

the 1930s, is reluctant to sow the seeds of future inflation by incurring too much 

debt. Both positions are firmly held and can be supported by valid arguments. In 

the case of Germany’s opposition to the use of the German state’s credit for the rest 

of Europe or the rest of the world, they are valid only from a narrow German point 

of view. Be that as it may, the controversy has dominated the preparations for the 

forthcoming G–20 meetings on April 2. 

That meeting is a make or break event. Unless it comes up with practical measures to support the countries at the periphery of the global financial system, markets are going to suffer another sinking spell just as they did on February 10, 2009, 

when the authorities failed to produce practical measures to recapitalize the United 

States banking system. To put it in an oversimplified and exaggerated form, the 

United States wants to reinflate, Germany and Europe want to regulate. It should 

be possible, however, to find common ground in the need to protect the periphery 

countries from a calamity that is not of their own making. Actually, we need to both 

reinflate and regulate but reinflation is urgent and regulatory reforms will take 

time to implement. The urgent task has to be carried out mainly by the IMF, imperfect and beleaguered as it is, because it is the only institution available. The regulatory reforms will involve reforming the IMF and establishing other institutions. 

Periphery countries need to protect their financial systems including trade 

finance, and to enable them to engage in countercyclical fiscal policies. The former 

requires large contingency funds available at short notice for relatively short periods 

of time. The latter requires long-term financing. 

When the adverse side effects of the Lehman bankruptcy on the periphery countries became evident, the IMF introduced a new short-term liquidity (STL) facility 

that allows countries that are otherwise in sound financial condition to borrow five 

times their quota for 3 months without any conditionality. But the size of the STL 

is too small to be of much use, especially while a potential stigma associated with 

the use of IMF funds lingers. That is now being remedied, but even if it worked, 

any help for the top-tier countries would merely aggravate the situation of the 

lower-tier countries. International assistance to enable periphery countries to engage in countercyclical policies has not even been considered. 

The fact is that the IMF simply does not have enough money to offer meaningful 

relief. It has about $200 billion in uncommitted funds at its disposal, and the potential needs are much greater. As things stand now, the G–20 meeting can be expected to produce some concrete results: The resources of the IMF are likely to be 

effectively doubled, mainly by using the mechanism of the New Arrangements to 

Borrow (NAB) which can be activated without resolving the vexing question of reapportioning voting rights in the IFIs. NAB will require congressional approval. 

The capital increase will be sufficient to enable the IMF to come to the aid of specific countries in difficulties, but it will not provide a systemic solution for the developing world. Periphery countries are reluctant to apply to the IMF for support as 

seen from the fact that the recently introduced short-term liquidity facility that 

allows qualified countries to borrow without any conditionality has had no takers. 

A more radical solution is needed. Such a solution is readily available in the form 

of Special Drawings Rights (SDRs). The mechanism exists and has already been 

used on a small scale. There is a pending issue of SDR 21.4 billion ($32.2 billion), 

which only requires approval by the United States to become effective. 

SDRs are highly complicated and difficult to understand but they boil down to the 

international creation of money. Countries that are in a position to create their own 

money do not need them but the periphery countries do. The rich countries should 

therefore lend their allocations to the countries in need. This would not create a 

budget deficit for them. The recipient countries would have to pay the IMF interest 

at a very low rate: The composite average Treasury bill rate of all convertible currencies. They would have free use of their own allocations, but the IFIs would superVerDate Nov 24 2008 13:21 Mar 31, 2010 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 H:\DOCS\GECRISIS.TXT SENFOR1 PsN: BETTY
13 

vise how the borrowed allocations are used. (The World Bank, which has devoted 

a lot of resources to developing poverty alleviation programs, would be better suited 

for this task than the IMF.) This should ensure that the borrowed funds are well 

spent. It is difficult to think of a scheme where the cost/benefit ratio is so favorable. 

In addition to a one-time increase in the IMF’s resources there ought to be substantial annual SDR issues, say $250 billion, as long as the global recession lasts. 

To make the scheme countercyclical, the SDR issues could be callable in tranches 

when the global economy overheats. It is too late to agree on issuing SDRs at the 

April 2 G–20 meeting, but if it were raised by President Obama and endorsed by 

others, it would be sufficient to give heart to the markets and turn the April 2 meeting into a resounding success. 

The SDR proposal, arcane as it is, makes eminent sense. The United States and 

Europe are actively engaged in creating money to replace credit. SDRs would provide money to less-developed countries which cannot create their own—at no cost 

to those who make their allocations available. 

One of the obstacles standing in the way is the well-known negative attitude of 

Congress toward anything connected with the IMF. The SDR issue does not require 

legislation. Nevertheless, it would be very helpful if Congress expressed a willingness to authorize the NAB, which does require congressional approval and supported the SDR issue in principle. 

As we have seen, the IMF is far from perfect, but it is more needed than ever. 

It has a new mission in life: To assist the less-developed countries to protect their 

banking systems and enable them to engage in countercyclical fiscal policies. How 

well it fulfills that mission will have a major impact both on the survival of the 

international financial and trading system and on our leadership position within 

that system. 

While my testimony focuses mainly on the role of the IMF, we also need to dramatically expand foreign assistance. President Obama pledged to double United 

States foreign assistance and the proposed budget moves us toward that target, if 

not as quickly as I would like. I urge you to do no less than he requested and to 

look to supplemental appropriations to meet more ambitious goals. We need to help 

countries deal with the immediate impact of the financial crisis and help ensure 

that we continue to make progress on critical areas such as HIV/AIDS. Now is the 

time to do more, not less. 

One particularly innovative funding instrument is the Global Fund to Fight AIDS, 

Tuberculosis and Malaria. It has demonstrated remarkable results in the last 7 

years, working to fill a gap not met by our bilateral programs. But for the first time, 

it faces a funding shortfall—there are more qualified proposals than there is financing available. Historically, the United States has provided one-third of the financial 

needs, and we should recommit to that goal. A particular benefit here is that the 

United States contribution mobilizes new money from other donors, increasing our 

impact. 

The CHAIRMAN. Thank you very much, Mr. Soros. 

Mr. Lindsey. 

STATEMENT OF LAWRENCE LINDSEY, FORMER DIRECTOR OF 

THE NATIONAL ECONOMIC COUNCIL, WASHINGTON, DC 

Mr. LINDSEY. Thank you, Mr. Chairman, Senator Lugar, members of the committee. I am grateful for this opportunity to be here 

today. 

I associate myself with the perceptions that were stated in your 

opening statements. I also associate myself with the bulk of the 

comments of my colleagues on the table. My comments are mostly 

a difference of nuance. 

I think that America is a cause as well as a country and we represent the concept of economic and political freedom, and actually 

that our security as a nation is inextricably linked with the survival and success of liberty around the world. That’s why I think 

policymakers must be particularly careful not to take actions that 

undermine those causes when they deal with current crisis. 

In my testimony, which I ask to be included in the record, I point 

out that there are a number of ways we can do a disservice to our 

14 

cause, and thereby to our country. And, listening to my colleagues’ 

comments, I would like to briefly comment on a third. 

First, although it is very common to think that this crisis was 

created by America, I think that the data do not actually support 

this conclusion. Obviously, we are the largest economy on the 

planet; we, therefore, have a disproportionate share of any financial crisis that may exist. On the other hand, I included in my testimony two charts, one on the global housing bubble, which shows 

that, in fact, the bubble in the rest of the world was actually greater than it was in the United States. And second, in the amount of 

leverage in the real estate market, which shows, essentially, that 

there is no difference around the world between the amount of leverage we extended and the amount of leverage everyone did. 

The causes of this crisis were global in nature, they were miscalculations by the global economics profession, miscalculation in 

the consensus view of global central bankers, and in the private 

sector. I don’t think it was uniquely United States the cause of this 

crisis. 

Second, I think that there are many calls today to reverse some 

of the policies that create greater economic and political liberty 

around the world. And because it was the expansion of liberty that 

led both to an unprecedented advance in global prosperity and the 

improvement in security in America over the last 25 years, I think 

it would be foolish for us to reverse it. 

In fact, the biggest threat to our security today derives from that 

part of the world in which political and economic liberty have made 

the smallest advances in the last 25 years, particularly the Middle 

East. I think we, therefore, do ourselves a disservice, both economically and to our long-term security as a nation, when we undermine liberty, either by our own actions or by failing to set an example in these areas. 

The third point that I would like to make today, that is not in 

my written testimony but was raised by my colleagues, is the 

strain that the United States is placing on total global resources 

today by our large and historically unprecedented proposed budget 

deficit. We are proposing a budget deficit, a public-sector borrowing 

requirement, in the President’s budget alone, of 16 percent of our 

GDP. On top of that, not in that budget were the borrowings that 

will be undertaken by various institutions, such as the TALF, the 

new PPIP, and the PPIF, which are off-budget borrowings. 

I am not a critic of budget deficits. I would even—I’ve been called 

Keynesian, and I probably am, but I’m a Keynesian who believes 

in using a sharp pencil. And when you start with 18 percent of 

GDP, and you start thinking about how one would finance it, obviously you can only get there through placing enormous strains on 

global resources or directly resorting to the printing press. Last 

Wednesday, the Fed announced that it would—seeing the same 

problem, would actually start using the printing press. 

I think we need to take the budget deficit, therefore, that we are 

contemplating, particularly in the long term, into account in its 

effect on global economic recovery and our claim on global resources. 

15 

These are the general principles I have in mind. I look forward 

to answering any specific questions the committee might have. And 

again, I thank you for the opportunity to be here today. 

[The prepared statement of Mr. Lindsey follows:] 

PREPARED STATEMENT OF LAWRENCE B. LINDSEY, FORMER DIRECTOR OF THE

NATIONAL ECONOMIC COUNCIL, WASHINGTON, DC 

Thank you, Mr. Chairman and members of the committee. It is my honor to be 

here to discuss the current economic crisis and its impact on American foreign 

policy. 

Let me begin by stating the basic principle that underlies my thinking. I believe 

that America is a Cause as well as a Country. From our inception as a new nation, 

we have been a champion of the cause of both economic and political liberty. Many 

generations of American patriots have given their lives to not only defend our own 

freedom, but to end tyranny abroad. They did so not only because they believed that 

it was the right thing to do, but also because our own freedom and our own security 

are inextricably linked to the success of liberty around the globe. 

I therefore believe that the biggest threat from the current crisis is the threat 

that it poses to liberty as governments react to events. Economic distress makes it 

easier for demagogues to come to power who are not friendly to either America the 

Country or to the Cause we represent. Even in the world’s established liberal democracies there is a risk that elected leaders adopt narrow self-interested parties 

that might seem to be a short-term remedy to a domestic political problem, but actually exacerbate a global downward spiral. 

Therefore, if we truly want to bolster the cause of American security we must by 

our own actions work to continue the advance that liberty has made around the 

world over the past quarter century. There are a number of specific things that this 

Congress can do in this regard. 

First, we must stop thinking and speaking of the current global crisis as one that 

originated in America. We demean ourselves by doing so and only encourage those 

who wish us ill. America played its role and made its share of mistakes, and the 

fact that we are the largest economy on the planet means that our mistakes were 

quantitatively larger than that of any other country. But an examination of the facts 

suggest that we did so not because we are Americans, but because we are humans, 

and humans just about everywhere on the planet were doing the same thing. 

Consider the first two charts attached to this testimony. The first chart shows 

house price appreciation around the globe during the recent bubble from 1997 to 

2008. We all know that one of the root causes of the current crisis was very rapid 

and unsustainable appreciation in real estate prices. But America does not stand 

out as at the top of this list; house price appreciation here was less than in most 

other places. The only two exceptions to rising house prices over this period were 

Japan, which was suffering from the ongoing collapse of its earlier bubble, and 

Hongkong, where it made a transition from governance as a British territory to its 

current status as a Special Administrative Region of China. 

The second chart shows that the excess leverage which contributed to our house 

price appreciation was also not an American phenomenon, but a human phenomenon. Our mortgage debt to GDP ratio was not exceptionally out of line with 

that of other countries. 

It is, and always has been, comforting for politicians in other countries to blame 

their own problems on America. There is nothing we can do about this since their 

only alternative is to blame themselves. But we shouldn’t encourage it. This was not 

an American created crisis—it was a globally created crisis. 

Some of the blame lies with the economics profession which developed a wrong 

headed consensus view that inflation targeting was the right way to conduct monetary policy. Unfortunately, their definition of inflation was focused on goods and 

services prices and left no room for the incorporation of asset prices. The Federal 

Reserve was a part of this process and the bulk of the American economics profession also held to this view. But it was a global consensus within the economics profession, and not just the American economics profession. 

Not everyone shared this view. We debated this issue on the Federal Open Market Committee while I was a Governor, most notably at our meeting on September 

24, 1996. In his famous Irrational Exuberance speech later that year Chairman 

Greenspan specifically warned of the risks inherent in not incorporating asset prices 

into our calculations, saying on December 5th: ‘‘But how do we know when irrational exuberance has unduly escalated asset values which then become the subject 

of unexpected and prolonged contractions, as they have in Japan over the past decVerDate Nov 24 2008 13:21 Mar 31, 2010 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 H:\DOCS\GECRISIS.TXT SENFOR1 PsN: BETTY
16 

1The transcript of that meeting reports that I said, ‘‘Everyone enjoys an economic party, but 

the long-term costs of a bubble to the economy and society are potentially great. As in the U.S. 

in the late 1920s and Japan in the late 1980s, the case for a central bank to ultimately burst 

that bubble becomes overwhelming. I think that it is far better that we do so while the bubble 

still resembles surface froth, and before the bubble carries the economy to stratospheric heights. 

Whenever we do it, it is going to be painful, however.’’ A very interesting analysis of the FOMC’s 

approach to this issue is provided in ‘‘Bubble Man’’ by Peter Hartcher of the Sydney Morning 

Herald. 

ade? And how do we factor that assessment into monetary policy? We as central 

bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the 

sharp stock market break of 1987 had few negative consequences for the economy. 

But we should not underestimate or become complacent about the complexity of the 

interactions of asset markets and the economy.’’ 1

But it was not just a consensus within the economics profession that was supportive of ‘‘inflation targeting’’ while simultaneously ignoring asset prices. Politicians around the world and of all political persuasions were also quite supportive 

of a monetary policy that let their constituents’ assets rise in value in an unlimited 

way as long as goods and services inflation stayed under control. 

The political reaction to the Greenspan speech was extremely negative, coming 

from members of both political parties. As a guest interested in adhering to good 

manners, I will not quote any of the reactions of Members of the Congress to the 

Greenspan speech. Those interested in researching the issue can easily do a nexus 

search of the topic. And I would add that there were plenty of members from both 

parties in both the Congress and in the Clinton and Bush administrations that opposed any actions that might have interfered with the asset price advance of the 

past few years. 

So, it is not an issue of a mistaken view of the economics profession any more 

than it is a mistaken view of Americans that led to the current crisis. It is a human 

phenomenon: Everyone loves the kind of party that occurred. In fact, the response 

among European decisionmakers was even more supportive of this asset-price inflating doctrine than here in America. When then-Chancellor of the Exchequer Gordon 

Brown established the rules that gave the Bank of England independence from Her 

Majesty’s Treasury, he explicitly made inflation targeting the sole objective of monetary policy. Moreover, he explicitly made the British Retail Price Index, similar to 

our Consumer Price Index, the measure of inflation that the Bank of England was 

to use. Like our CPI, the British RPI excludes asset price changes from its calculation. 

When the political leadership of Europe negotiated the treaty that established the 

European Central Bank they also created a single mandate of inflation targeting. 

Moreover, they chose an inflation index that also did not incorporate asset prices 

in the calculation. As a result, the European Central Bank has been far slower to 

react to the developing economic crisis than has the Federal Reserve. In addition, 

loans that supported asset prices that European banks made, particularly to Eastern Europe, were at least as egregious as those made in America. 

But a second set of policy mistakes that led to this current crisis were decidedly 

non-American in origin. During the 1990s, many of the world’s newly developing 

countries, most notably China, managed their currencies in a way designed to increase exports and build foreign exchange reserves. We used to call such policies 

mercantilism, but diplomacy got in the way of the modern usage of that term. During the 1990s China actually devalued its currency in the face of rising exports. 

America’s efforts in the current decade to get China to adopt less Mercantilist policies were slow to bear fruit. The small improvements that occurred in 2007 and 

2008 have begun to be reversed in recent months. 

The reason that this contributed to the Bubble and its Crash is that the result 

of a currency managed to maximize exports is a buildup of reserves which must find 

a place to be invested. China purchased hundreds of billions of dollars of U.S. Treasury and Agency securities, driving down our interest rates and facilitating the development of the housing bubble. The world saw the perverse economic result of Chinese workers and peasants being underpaid by their own government in order to 

finance the building of McMansions in America. 

But this result had its positive geopolitical side. After the fall of the Berlin Wall, 

a foreign policy consensus developed that the best way to incorporate China into a 

peaceful global community was to promote prosperity in that country. The argument 

was advanced that richer nations have more of a stake in both maintaining the 

peace and in preserving the existing world order. Chinese mercantilism, though ecoVerDate Nov 24 2008 13:21 Mar 31, 2010 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 H:\DOCS\GECRISIS.TXT SENFOR1 PsN: BETTY
17 

nomically inefficient, was a relatively painless and diplomatically acceptable way of 

advancing that cause because it led to rapid industrialization and capital formation. 

This observation about the relationship between the Bubble and Geopolitics leads 

to a very important second point we must bear in mind. As painful as the current 

crisis is, it follows at the end of a very long boom that brought tremendous gains 

to literally hundreds of millions of people on this planet. Perhaps half a billion people in Asia have joined the global middle class in Asia alone during the last 10 

years. The same is true for perhaps 200 million people in the former Soviet Empire 

and a similar number in Latin America. Hundreds of millions of children who would 

never have received anything more than the most rudimentary education now have 

acquired the skills to provide both for themselves and for future generations. Health 

care and life expectancy have increased tremendously. On a very real human level 

the past 25 years have meant improvements for the human condition on an unprecedented scale. 

Closer to home, real per capita disposable personal income in America grew 68 

percent between 1980 when we began our experiment with open capital markets, 

free trade, and less regulation While America the Country has been partially responsible for this, the real credit goes to the Cause that America represents: Economic and political liberty for the individual. Our foreign policy must keep this in 

mind as a central abiding principle and we must continue to assert American leadership in these areas. 

A more prosperous world has helped make America a more secure place. Indeed, 

the greatest increased threat to our security comes from one of the few parts of the 

world in which real per capita incomes have not increased since 1980: The Middle 

East. (There are a few exceptions to this in some of the smaller countries of the Arabian peninsula.) Our long-term global interests require us to continue to advance 

the causes which have led to global prosperity. If I could sum them up briefly these 

are the free movement of goods, capital, and ideas. 

Today many of those causes are under assault. Some mistakenly interpret these 

objectives as the cause of our current crisis. Some merely oppose these ideas to advance their own power or their own special interests. 

Since the end of World War II America has led the movement toward freer movement of goods across borders. This accelerated rapidly with the Kennedy Round of 

Trade negotiations in the 1960s, with the adoption of NAFTA under the leadership 

of Presidents Bush and Clinton, and the extension of that principle to a host of new 

free trade agreements. 

Today free trade is under assault. Congress recently, and probably inadvertently, 

set off a trade war with our second biggest export market, Mexico with a provision 

in the just-passed stimulus bill regarding access to America by Mexican trucks. 

Europeans have objected strenuously to the Buy America provisions in the stimulus 

package. By themselves these are relatively small measures. The great worry is that 

they might become part of a trend toward protectionism. We learned the hard way 

during the 1930s when ill-advised legislation—the Smoot-Hawley tariff—ignited a 

global trade war. We must not do it again. America should continue its historic leadership in promoting global free trade. 

There is also an attack on the free movement of capital and ideas. Our own Government has been guilty of this in both the case of the Dubai Ports case and in the 

matter of the purchase of Unocal by a Chinese oil company. Again, taken by themselves these are relatively minor matters. The risk is that they develop into a trend. 

But other countries are already beginning to do the same, placing limitations on foreign ownership of not only corporations, but also farm land. Isn’t it simple common 

sense that two countries that invest in each other are much less likely to go to war 

with one another than two countries without such cross-border investment? Obviously domestic security issues and intellectual property protection are essential. But 

shouldn’t those issues be addressed regardless who happens to own a particular 

company or sit on its board of directors? 

The free movement of capital and ideas is also under assault by some who are 

now proposing increased restrictions on a variety of global financial intermediaries 

including private equity firms and hedge funds. European politicians in particular 

argue that financial intermediaries such as hedge funds are to blame. But no hedge 

funds have been bailed out in this crisis. The bailouts have gone to regulated financial institutions such as banks and insurance companies. 

These regulated institutions often erred by taking risks that only hedge funds and 

private equity firms should take, but their mistakes led to bailouts because they 

lack the discipline that hedge funds have in having their limited partners, not depositors or contract holders, suffer whatever losses they might incur. Because they 

lacked that discipline, these regulated institutions actually took on greater leverage 

than the hedge funds and private equity firms they were trying to emulate. If we 

18 

are going to have a prosperous global financial system going forward then we need 

to make sure that we regulate those firms, such as banks and insurance companies, 

who are betting the funds of innocent people like depositors and holders of insurance contracts. 

I believe that the most straightforward way of doing so is to reinstate minimum 

leverage ratios for these institutions that are in addition to the supposedly more 

sophisticated risk-based capital rules that are in place. Risk weightings and even 

supervisory judgments are inherently linked to the recent performance of the particular asset class in question. Recent experience has taught us that recent performance is not necessarily a fool proof guide to future results. 

But we must also make sure that we leave a lightly regulated sector that can actually take the risks inherent in any economy that are inappropriate for the more 

heavily regulated sector. The tradeoff for little or no regulation is that it is the investors in those funds, and not the general taxpayer, enjoy the benefits of success 

and bear the burden of losses. In various global forums, the United States should 

defend the rights of financial intermediaries to operate with relatively light regulation provided that they do not possess any claim on the taxpayer. 

Our security as a nation depends crucially on a resumption of the path we have 

been on for the last quarter century toward ever greater global prosperity. But that 

prosperity requires a continued effort by the American Government to promote the 

causes that have made America great: Economic and political freedom in particular. 

That may not be the politically popular thing to do in times of economic stress, but 

putting the long-term security and prosperity of America and the world ahead of 

short-term political popularity is what leadership is all about. 

Source: Economist, The Lindsey Group. 


lind.eps
19 

Sources: National accounts; European Mortgage Federation, Hypostat Statistical; Federal Reserve; OECD Analytical Database; Statistics Canada; and IMF staff calculations. 

Senator LUGAR [presiding]. Well, thank you very much, Mr. 

Lindsey. 

Let me, on behalf of the chairman, call for a short recess. We 

have a rollcall vote that is proceeding; that is why the chairman 

left, hoping that he would be back by the time your testimony was 

concluded, Mr. Lindsey. But, any event, I know that we all want 

to raise questions of the three of you. So, if you’ll forgive us for a 

moment, I will call for a short recess and go vote. The chairman 

will arrive shortly and will proceed with the hearing. We thank you 

for your indulgence. 

[Recess.] 

The CHAIRMAN [presiding]. The hearing will come back to order. 

Thank you. I’m sorry, folks, about the vote, and I apologize, Mr. 

Lindsey, for having to run out on you, but I did read your prepared 

testimony, so I’m not wholly unprepared, here. 

Mr. Lindsey, you began your testimony by saying America is a 

cause as well as a country. And that is true. Is it important for us 

to make any acknowledgments here about how this began in order 

to have credibility in the fixing? And can we avoid some of the 

down sides that some people see if we don’t do that? Do you want 

to, first, respond to that, Mr. Lindsey? 

Mr. SOROS. Well, I think that it’s recognized—— 

The CHAIRMAN. Hit the mikes again. 

Mr. SOROS. I think one needs to understand what has happened, 

that basically in the last 25 years or so, we—the global—the international financial system has been developed on false premises, 

and it has collapsed. And we do have a very serious—— 

The CHAIRMAN. When you say ‘‘on false premises,’’ can you fill 

that out? 

Mr. SOROS. Yes. Basically, the assumption was that markets are 

self-correcting and should be left to their own devices. 

The CHAIRMAN. Is it fair to say that Alan Greenspan acknowledged that in public testimony before the Congress? 

Mr. SOROS. I’m sorry? 


lind1.eps
20 

The CHAIRMAN. Alan Greenspan came before the Congress, a 

month or so ago, and said, ‘‘I didn’t realize the degree to which the 

markets would not regulate themselves.’’ 

Mr. SOROS. That’s right. 

The CHAIRMAN. That was an open statement. 

Mr. SOROS. Yes. Yes. And I respect the fact that he has acknowledged this. And now we have to—we actually have two problems. 

One is that the system has collapsed, and we have to rebuild it on 

sounder grounds. We must rebuild it. We do want an open trading 

system, we want global financial markets, but we have to put them 

on sounder grounds. But, more urgent is to arrest the collapse, 

which is having devastating human consequences. So, the first task 

is to stop the collapse, to reinflate, in fact, in order to keep the financial system afloat. And the second, then, is to reconstruct it. 

And as Mervyn King, the—of the Bank of England, has—who 

has also acknowledged the mistakes of the past—has very wisely 

stated, what we need to do in the short term actually is directly 

opposed to what we need to do in the long term. In other words, 

right now we have to compensate for the collapse of credit by increasing the money supply, which we are doing through expanding 

the balance sheet of the Federal Reserve. And in the longer term, 

of course, we must avoid doing what we did in the past, which was 

to build up a chronic current account deficit and spending up to 61⁄2

percent more than we were producing. So, that’s the longer term. 

So, we—but, we can’t get back to a balanced position—— 

The CHAIRMAN. What’s the one-two-three of arresting the collapse? 

Mr. SOROS. Well, basically we have to increase the money supply 

to compensate for the decline in credit, we have to recapitalize the 

banking system, and we have to deal with the crisis in the housing 

industry and prevent housing prices from overshooting on the down 

side the way they overshot on the up side. So, those are the three 

domestic. And then the fourth—and we mustn’t forget it—and that 

is, in fact, the subject of the hearing—— 

The CHAIRMAN. The G–20 piece has to—— 

Mr. SOROS [continuing]. Today—is, we have to also look after and 

help those countries which are affected by the global economic 

recession and are not in a position, without international assistance, to do what we are doing, which is to reflate. We need to do 

that for—in our enlightened self-interest, because reinflating the 

economy is a global task, and we need the less-developed world to 

stimulate domestic demand. And the issue of SDRs would help 

them to do that. 

The CHAIRMAN. What do you think of that, Mr. Lindsey? 

Mr. SOROS. Pardon? 

The CHAIRMAN. I was wondering about Mr. Lindsey’s response. 

Mr. LINDSEY. I think that you will find very little disagreement 

on the overall strategy we should be following, on this panel. I’ve 

known both gentlemen for a long time. I do think there might be 

a small difference in the nuance with which we approach different 

tasks. 

The first challenge I think that we have to keep in mind here 

is the importance of fixing the banking system first. And that is 

going to require an enormous strain on capital—on global capital 

21 

markets, to fill a hole. The hole is here, the hole is in Europe; it’s 

even bigger in Europe. The hole is even bigger in Asia, as a share 

of their total banking capital. 

The CHAIRMAN. Effectively, you’re talking about a lot of banks 

that are insolvent. 

Mr. LINDSEY. Yes. 

The CHAIRMAN. That’s the bottom line. 

Mr. LINDSEY. Yes. We probably—I mean, there are a variety of 

estimates that are out there, and the answer is: No one knows for 

sure. But, in the United States the number is between $1 and $2 

trillion, as the size the hole. 

The CHAIRMAN. Right. 

Mr. LINDSEY. And I think it’s important that we fill that hole as 

efficiently as possible, because when we do it in an inefficient way, 

we put, like, $2 of strain on the—— 

The CHAIRMAN. What’s the most—— 

Mr. LINDSEY [continuing]. Capital markets in order to fill $1 

worth of hole. And I think that that’s a mistake, because—— 

The CHAIRMAN. Well, it’s fair to say that TARP probably fell in 

the inefficient category. 

Mr. LINDSEY. The TARP has fallen—the way it—yes, the TARP 

is in the inefficient category. I’ve felt that, a long time, yes. 

The CHAIRMAN. Now, I don’t want to make this into the Banking 

Committee, but I do want to understand how we’re proceeding forward here to restore confidence. The plan that’s currently on the 

table offers a public-private partnership to buy a certain number 

of assets. It seems to me that is going to help with liquidity, but 

I’m not sure that it addresses insolvency. 

Mr. LINDSEY. Yes, Senator. And I think that the Congress should 

take a closer look at the approach. I think the Secretary misspoke 

yesterday when he said that the public sector and the private sector share equally on the up side and down side. That is true for 

very small changes, but, in fact, on the down side, the public sector 

will carry about 92 percent of the losses, and the private sector, 

just 8 percent. 

The CHAIRMAN. Yes, I—— 

Mr. LINDSEY. Whereas, both share 50–50 on the up side. And I 

do think that, you know, before we proceed, discover that’s the 

case, and then try and do a clawback, like happened with AIG, 

which would destroy what credibility we have left, that we, you 

know, take a sharp pencil to it now, know that’s where it’s headed, 

and realize that that may not be the most effective way, or efficient 

way, of injecting money into the banking system. 

The CHAIRMAN. I’m not going to go down that road right now, 

because I want to keep the hearing moving on the international 

piece, but there is a lot to talk about with respect to that. But my 

time is almost up—on the international piece, Mr. Wolf, going back 

to what Mr. Soros laid out as one through four, we have increased 

the money supply, we have done a significant chunk on the housing, we’ve put a very significant stimulus up, as has China, we 

have now put forward a mechanism for at least removing some of 

the toxic assets. Let’s not worry about cost, for the moment; I’m 

worried about it, but, for the purpose of this discussion—the quesVerDate Nov 24 2008 13:21 Mar 31, 2010 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 H:\DOCS\GECRISIS.TXT SENFOR1 PsN: BETTY
22 

tion now is on the recapitalization. Is that fair? Is that the big 

hanging-out-there issue? In terms of the global sense of confidence. 

Mr. WOLF. In terms of the confidence people have in the U.S., 

specifically, rather than the global solution, I would agree that the 

question of whether the U.S. has a credible policy overall to fix its 

banking system over the next 12 months or so, ideally sooner, is 

certainly an extremely important one. I think that—— 

The CHAIRMAN. And the key to fixing our banking system—— 

Mr. WOLF [continuing]. In your—in the case of fixing your banking system. However, I would go along very much with what Mr.— 

Professor—Mr. Lindsey said. The—it is clear that, in all the respects that you listed, policy in other Western countries—and in 

this context, I am actually including Japan for this purpose—is behind on all those fronts. So, while I think, in every respect, the 

U.S. policy is far from having resolved the problems it faces, and 

is creating some new ones, as we discussed, in the fiscal and monetary areas, it is clear that the U.S. is ahead of most other places 

in addressing these problems. I think the reason for that is that 

the crisis became evident—we won’t need to discuss its origins; we 

don’t really have the time—in the U.S. before most other developed 

countries, and most other developed countries have, correspondingly, been relatively tardy in responding. 

The CHAIRMAN. Mr. Soros, you deal in the market in this way— 

is it your judgment that people are holding back with a kind of 

reserve wish that somehow, because of the things already done— 

the increase in the money supply, the reinflation, to some degree, 

through the stimulus and other things—that those assets that are 

currently toxic may somehow reappreciate and that they can avoid 

a crunch? Is there that calculated a sense of delay, or is it just that 

this is such a big chunk of money that people are having a hard 

time wrapping their hands around it? Certainly the response from 

Congress so far would indicate real reluctance up here for people 

to deal with reality. 

Mr. SOROS. No, I’m afraid that this will not be sufficient to 

recapitalize the banks or remove enough toxic assets to enable 

them to resume lending. 

The CHAIRMAN. But, do you think that is the calculation? 

Mr. SOROS. That is—it’s not sufficient for that. It may turn out 

to be useful, in conjunction with the stress tests that are currently 

conducted, which may result in the need for the banks to accept 

lower valuations for the toxic assets, in which case the asked and 

the—the two prices, bid and ask, may actually come together. As 

it is, I think that will only happen in the very high-class assets, 

where actually providing liquidity to the buyer does improve their 

ability to bid. So, yes, I could see, on AAA assets, bid and ask coming together, and actually thereby providing some liquidity to the 

banks. But, it does not solve the problem where it comes to the 

toxic assets. So, I think there is more work to be done, and this 

is just a one step along the way. 

The CHAIRMAN. Well, let me say, in fairness, without letting the 

cat out of the bag on this, I actually asked the President this at 

the caucus luncheon that we had today, and he made it very clear 

that he understands there is more to be done and there are next 

steps. So, I think the stress test is a very important measuring 

23 

point so that people can get a handle on exactly what the pricing 

might be and what the levels of toxicity are. 

Senator Lugar. 

Senator LUGAR. Mr. Lindsey, you mentioned your opposition to 

the size of the President’s budget request, and I, along with the 

chairman, do not want to get into a domestic quarrel today. Clearly 

one of the dilemmas that it presents, in whatever size, is—at least 

some of our staff have come up with the thought that $3.1 trillion, 

or 53 percent of United States debt, is now held by foreign investors and foreign governments. This is up from $1.5 trillion since 

the end of 2003, about 5 years ago. 

Now, it’s important to identify where we obtain the money to 

fund this budget formula. Presumably, much will be borrowed in 

the United States, but I think there’s a presumption that much of 

it will be borrowed abroad. 

Now, what are the problems posed by that? Without getting into 

specific detail, the Chinese are often mentioned, because they have 

pointed out recently, themselves, that they would like for the dollar 

to be pretty solid and want to make certain we’re doing the right 

things in our economy so that all their money that’s in dollars 

would not be depreciated. Likewise, just 2 days ago, they mentioned a potential international fund or currency or financial equivalent other than the dollar, in which they and other people in 

international finance might use to diversify their portfolio. Now, 

always there were hints that there might be a worry, in due course, 

about the Chinese loaning us money, but the fact that this has 

come up a couple of times from the Chinese themselves presents 

another worry. Perhaps the best bet is for everybody still to go to 

the dollar, in terms of safety, for reserves and sovereign funds. 

What is your own judgment about the parameters of this problem? 

And should this influence our domestic debate, quite apart from 

our international debate? 

Mr. LINDSEY. Senator Lugar, I think you’ve identified it correctly. 

Our budget is not just a domestic issue, it is very much a foreign 

issue. And simply because of the way the numbers are. If you go 

to the back of the President’s budget, there’s a page that’s hard to 

fiddle with, and it has to do with the total expected borrowing 

requirement. And in the current year the number in the President’s budget is $2.65 trillion. 

Senator LUGAR. Borrowing. 

Mr. LINDSEY. Of borrowing. That is—the CBO would estimate, is 

a little low, but why don’t we work with it. And—— 

Senator LUGAR. We were at $5.9, according to my figures, at the 

end of 2008, so $2.75 on top of the $5.9. 

Mr. LINDSEY. Yes. This is—now, we have 6 months left to the 

year, and we have borrowed about $700 of that $2,650, which 

leaves us with $1 trillion $950 billion more to borrow in the next 

6 months, by the President’s budget. On top of that, any borrowing 

you have for PPIP, PPIF, TALF, whatever it may be, would be on 

top of all that. But, let’s just focus on that $1.95 trillion. 

Now, our personal savings rate’s going up, and you said some of 

it will be financed domestically over that period. If we’re lucky, I 

guess, U.S. household savings, including paying off those credits 

and everything else, all of it, would be about $300 billion. 

24 

Senator LUGAR. Right. 

Mr. LINDSEY. OK? So, now we’re down to $1 trillion $650 billion 

to raise in the next 6 months. Well, there are exactly two—there’s 

three sources left. One, you can crowd out domestic investment. 

And that’s not good for the economy. Two, you can borrow it from 

abroad. And three, the Fed can print it. 

Last Wednesday, the Fed did the same math I just did and said, 

‘‘Oops, we’re going to have to be printing some of it, because we’re 

never going to get there.’’ Fed said we’re going to buy $300 billion. 

So, that takes the $1 trillion $950 down to $1 trillion $650 billion 

over the next 6 months. 

To put that into perspective, that is 100 percent of the GDP of 

China over the next 6 months. So, even if the Chinese didn’t need 

anything, didn’t buy a car, didn’t build a building, threw everything 

into lending it to us, we would just cover our borrowing requirements. 

Senator LUGAR. In the next 6 months. 

Mr. LINDSEY. Over the next 6 months. 

So, it is very much a foreign policy issue. And the mention was, 

well, yes, these other countries need money. Right? Iceland’s failing, and Hungary and the Czech Government fell, and what have 

you. Well, when we borrow from the rest of the world, we are 

crowding out those other countries. 

So, the only two answers are borrowing and global money creation. And I think we should just concede we’re going to have 

money creation; and both of my colleagues have. But, believe me, 

this is very, very much a foreign policy issue, and the President’s 

budget is, I believe, destabilizing to the global financial system. Not 

because I’m against budget deficits; I’ve got no problem with it. As 

I mentioned, I’m a Keynesian. But, I’m a Keynesian with a sharp 

pencil. And when you take the sharp pencil to it, it doesn’t add up. 

Senator LUGAR. What—explain to us what it means that the 

Treasury prints money or creates money. What’s—how is this done, 

and what’s the effect upon our economy of that kind of creation? 

Mr. LINDSEY. The Treasury doesn’t create money. My former colleagues at the Fed, that’s their job. And what they do is, they— 

well, we used to say ‘‘run the printing presses.’’ It’s now done with 

electrons instead of paper, most of it. But, they hit the button, and 

the electrons happen, and they generate $300 billion, and they buy 

$300 billion Treasury debt in the process. So—because, you know, 

I’m gray-haired, I think of it as ‘‘printing the money,’’ and—that’s 

basically what happens. We expand our money supply in order to 

buy the Treasury debt. 

Senator LUGAR. What are the implications, then, for us in doing 

that? 

Mr. LINDSEY. Well, I have no problem with the $300; I’m worried 

about the other $1 trillion, 650 billion. And I think the amount of 

money creation that would be necessary to cover the budget demands would be very troubling for the price level in the United 

States. 

Senator LUGAR. And that’s just for the next 6 months. 

Mr. LINDSEY. Yes. 

Senator LUGAR. You’re back in the same predicament, presumably, in the next year or the next two. 

25 

Mr. LINDSEY. We’re back in the soup. It’s a little bit—under current numbers, it’s not quite as bad, but it’s still bad enough, that, 

yes, there’s a problem. 

Senator LUGAR. Thank you, sir. 

The CHAIRMAN. Just to expand the dialogue, do either you—Mr. 

Soros or Mr. Wolf—want to respond to that? 

Mr. WOLF. Well, I would like to add something. The concern is 

a completely legitimate one, and we certainly cannot imagine that 

the world’s markets have an infinite taste for either the U.S. dollar 

or U.S. Government debt. It is striking, however, and it is particularly striking to many of us—for instance, people living in Britain—that here we have a country that appears to be in the throes 

of a very severe financial crisis, and its currency is strengthened, 

and its government long-term interest rate has been more than satisfactory, by any standards. So, it appears, at least at the moment, 

maybe surprisingly so, that world markets—and we are talking 

about integrated world markets; we can’t separate American for 

foreigners; they’re all in the same market—are perhaps extraordinarily complacent about this situation and seem to be quite 

happy about accepting this amount of paper. And I wouldn’t wish 

to conclude from that, that that will necessarily be true in the 

future, because, of course, as we have perceived very well in recent 

years, markets can change their minds. And when they change 

their minds, they can change their mind very brutally. But, it is 

important to remember that the U.S. dollar and the U.S. Government have a number of very substantial advantages, in terms of 

credibility, liquidity, long record, unquestioned survival, which 

other competing currencies or bond markets do not have. Other 

governments are going to have very large fiscal deficits. There is 

clearly very substantial money creation in other countries, because, 

indeed, they’re affected by similar crises. The question of the survival of the euro is at least—I’m not saying it will disappear, but 

certainly it’s a more natural question than the survival of the 

dollar. 

So, for all these reasons, I am actually somewhat more relaxed, 

in the short run, by which I mean the next 2 or 3 years, about the 

ability of the United States to sell all this paper and to sell these 

dollars, and for the rest of the world to hold it. There is an extraordinary demand for safe assets out there in the world, and there 

will be, without question, an extraordinary increase in desired savings across the whole world, because that’s what this sort of recession means. 

So, I’m not panic-stricken in the short run. The crucial thing, 

however, is that this doesn’t go on for many years, because then 

the question of credibility will unquestionably come into play, and 

that is why having a global solution which allows the U.S. partly 

to export its way out of this, have a stronger world economy as part 

of the solution, and a credit fiscal package—profile or path out of 

this, does indeed become essential. 

The CHAIRMAN. With the indulgence of my colleagues, I just want 

to interject because I think this is an important point to be making 

here. There is an agreement and I think, Mr. Lindsey, you agree— 

there’s been pretty near unanimity that we’ve got to spend some 

money to get out of this hole. 

26 

Mr. LINDSEY. Absolutely. 

The CHAIRMAN. We’ve got to spend some money to stem the 

housing issue. We’ve got to spend some money to put people back 

to work and turn the confidence around. We’ve got to spend some 

money to recapitalize the banks. We’ve got to spend some money 

to strengthen the IMF and keep some of these Eastern European 

and other countries afloat. There’s almost unanimity on that. So, 

you’ve got to be a little careful about holding out this great big debt 

as something preventing action—we’re forced into this situation. A 

lot of us are really unhappy about it, because, for the last few 

years, we’ve actually been fighting against some of the policies that 

have helped put us here. But, we’re here. The President has made 

it clear, his budget in the out years is clearly focused on reducing 

the deficit. But, you’ve got to grow the revenues to be able to begin 

to get there. 

Go ahead, Mr. Lindsey. 

Mr. LINDSEY. Senator Kerry, I agree. I have no problem spending 

money. I would simply point out that if you’re in this bind, it is 

essential to spend money as efficiently as possible. And therefore, 

if you have a, why don’t we call it, a $11⁄2 trillion hole in the banking system to fill, it would be imprudent to borrow $3 trillion to 

have some jury-rigged system—— 

The CHAIRMAN. Do it the right way. 

Mr. LINDSEY [continuing]. To come up with filling up the 11⁄2. The CHAIRMAN. I agree with you. That’s a good point. 

Mr. LINDSEY. And that’s where I would start, and that was my 

comment on the—— 

The CHAIRMAN. Let me cut myself off, here, because I know some 

colleagues are time-sensitive. 

Senator Kaufman, do you mind if Senator Corker were to go and 

then we come back to you? 

Senator CORKER. I really don’t want to jump in front. 

The CHAIRMAN. OK, all right. 

Senator Kaufman. 

Senator KAUFMAN. Thank you. 

I’d like to talk about, kind of, some of the political implications 

of this economic crisis. 

Mr. Soros, I think it’s fair to say that Russia and China have 

done everything they can to avoid an open society. And the general 

consensus is that that’s OK, kind of, because the people of Russia 

and China thought they were doing better economically, they had 

hope, they had the idea they were going to do better, their children 

were going to do better. What do you think the implications are, 

in Russia and China, of this economic crisis, in terms of politically? 

Mr. SOROS. Well, I think that China, of course, is also in a crisis. 

Exports have fallen very sharply. And China is not a democracy. 

And the rulers know that their hold on power depends on their 

ability to keep the economy growing. So, for them, the top priority 

is to assure—or to do everything possible to stimulate the economy 

and maintain the target 8-percent growth—well, it may be only 6 

percent, but something of that nature. And they are in a position 

to accomplish this, and they did respond with a very large stimulus 

package. And they’ve made it clear that if that’s not enough, 

they’re going to do more. They also have large currency reserves, 

27 

and they are liable to use those reserves also to finance their 

exports. Just as they did in the past lend us the money to buy their 

goods, they might do the same for others, as well. 

So, I think that they will, in fact, be able to recover faster than 

we will. And if they don’t, you may have political and social unrest, 

and you could even have a breakdown, which would have a very 

negative effect for the rest of the world. So, it’s not a desirable outcome in any way. 

Senator KAUFMAN. Right. 

Mr. SOROS. So, that’s as far as China is concerned. And it’s very 

important, since we have common interests with them, that we 

should find the proper way to work together to restart the world 

economy. And that’s why I think using the IMF is a very important 

foreign policy objective for us and why I think the SDR issue would 

be really a major accomplishment for the United States. 

Russia is a somewhat different situation, because there is a— 

the—there’s tremendous resentment in Russia. Putin has been popular because he has actually, through the boom in oil and gas, been 

able to provide both security and stability and economic improvement. Now you have a very severe financial crisis, a collapse of the 

Russian stock market, and a debt crisis, and a severe economic 

decline. And he is no longer so popular, and there is a real danger 

that he will become increasingly repressive and perhaps also 

aggressive to divert attention from the troubles at home. 

So, I am afraid that, from a foreign policy perspective, Russia is 

a possible source of disturbance of peace. Tensions with Georgia, 

for instance, could easily escalate again to military action. Russia 

has used gas as a geopolitical power tool, may do that again. Russia is eager to reestablish control over Ukraine. Ukraine is in a 

very serious both financial and political crisis. So, I see that as a 

major trouble spot in the world. 

Senator KAUFMAN. And how—so, if that occurs, what are the implications for the United States, in terms of—both the Russian 

leaders and the Chinese leaders in the past have used us kind of 

as a villain, someone to turn to when things are bad, to explain 

why things are bad in their country. Do you think there’s much 

chance of that happening? And how do you think it would impact 

on United States-Chinese and United States-Russian relations? 

Mr. SOROS. Well, I think it’s a very difficult task, because, on the 

one hand, Russia has become aggressive, and we must resist 

aggression, because otherwise we reinforce it. So, on the one hand, 

we have to support Georgia, Ukraine, et cetera; on the other hand, 

we do have common interests, many common interests, with Russia, so we must really have a two-pronged approach. On the one 

hand, resist potential aggression, but, at the same time, try to develop the common interests and have a change of heart, perhaps, 

in the Russia leadership, which there is some possibility of achieving. 

Senator KAUFMAN. Thank you. 

Mr. Wolf. 

Mr. WOLF. I’d just like to add a couple of comments, because I 

think it’s very important, and I think George brought this—Mr. 

Soros brought this out very clearly. These really—there are obvious 

similarities. As you pointed out, these are not democracies. They 

28 

are very different cases, and it’s really important to understand 

this, particularly in relationship to this crisis. 

China has, in some very deep sense, invested its whole future, 

to a degree that most of us would have regarded as unbelievable 

15 years ago, in opening up to the world economy. It is—astonishingly, this country—this giant country has the highest trade ratios 

of any big country in world history. They’re three—ratios of trade 

to GDP in China are three times those of the United States. It’s 

quite extraordinary how far they have bet themselves on the world 

economy. Of course, they don’t have a completely liberalized capital 

market. We know this. But, they have accepted a vast amount of 

foreign direct investment and a large number of investors, though 

by no means all are very happy with their treatment here. 

China is riding the sort of tiger of development. They see the 

future as moving in their direction. They are largely stabilityoriented, and I think they view this crisis, I suspect, not so much 

as an opportunity as something that they have to riding through. 

But, actually, let me be quite clear, China wants the United 

States to succeed. There’s no doubt in my mind that China wants 

the United States to succeed and manage this, because the alternative for them is domestically very destabilizing. And I should 

stress, by the way, I am quite convinced that the choice for us is 

not between a democratic China or an authoritarian China, but an 

open authoritarian China and a closed and hostile one. So, that’s 

a very different thing. 

Russia is genuinely revanchist. It has not truly integrated in the 

world economy, except in commodities. It is essentially a commodity exporter, as, of course, you know, and has suffered huge 

losses as a result. The Government is, in some ways, quite frightening and unstable in its—not unstable internally; that’s a different matter—but unstable in its attitudes to us, and much more 

inclined to make difficulties on principle, because it seems to me 

the Russians still view their relationship with the West in general, 

and the United States in particular, as a zero-sum one; namely, if 

the United States is doing badly, they’re doing well. I think that’s 

how they see it; pretty primitive. 

I’m absolutely certain—and I’ve spent a lot of time in China, 

talking to Chinese leaders—that they do not view their relationships in the same way. Though, while I accept the similarity, it’s 

a very important similarity, of course, I think we have to view our 

relations with these countries in very different ways, and also to 

recognize, of course, that, in the long run, China is going to be a 

great power with whom—with which we will have to form reasonably productive relations, over centuries. 

Mr. LINDSEY. I agree completely, although one caution I would 

add to this committee with regard to China. I think their perception—Martin used the word ‘‘ride through,’’ I think of it more as 

a ‘‘building a bridge’’ to the other side. And on the other side of the 

river, they expect to be able to continue or resume their large 

exports to us. And if that is not possible, then I think, you know, 

in 2011 or so, China will find that its bridge has not reached the 

other bank of the river, and then we’re going to have the problems 

that Martin was talking about. 

29 

Senator KAUFMAN. Thank you. I just want—the only thing that 

compare anything is, they’re both nonopen societies which are 

going to go through an economic crisis, and that’s the implication 

I want to make. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Corker. 

Senator CORKER. Mr. Chairman, thank you. And I know you 

hesitate to turn this into a banking meeting, but I just want to say 

that I think this is a very, very important issue, and I hope we’ll 

have more hearings on this topic. I don’t know of anything more 

important, and I thank you for having this hearing, and certainly 

appreciate these three distinguished witnesses that certainly carry 

a great deal of clout and many people in the world listen to. 

I think, at the same time, it’s actually important for us to be very 

honest about where we are financially, regardless of how we got 

here. And I hope that we’ll focus on that in an important way. 

And with that, I’ve had a lot of time with Mr. Lindsey in the 

past, and certainly appreciate his contributions, so I’m going to 

focus on Mr. Soros and Mr. Wolf. 

We had a gentleman come into our office, Mr. Soros—and I know 

that you’ve had tremendous experience as a financier around the 

world—who made a presentation, from Hayman Advisors, a man 

named Mr. Bass—looking at where we were—where Europe is 

today. OK? And I know we’ve talked about the relative differences, 

as far as how we progressed on focusing on the financial institutions. But, he laid out some pretty alarming information—if it’s 

true—would say that there’s a calamity coming in Europe, regardless of what policies occur. And it’s based on the fact that there’s 

huge amounts of sovereign debt there already. The monetary financial institution assets, as it relates to the size of the GDP of the 

countries, is very large in some cases, similar to an Iceland-like situation before, in some cases. OK? There’s huge structural deficits 

that are in place. And the interesting problem in those countries, 

as opposed to here, there are already high tax rates. So, in essence, 

while we don’t want to use the ability we have here to tax higher, 

they are already at levels that are very difficult to go above, in 

some cases. 

You add to that the fact that, in some—their financial institutions in many are leveraged, as a group, at 37 to 1, assets to tangible common equity, which is a huge amount of leverage—meaning, when you have a down side, it’s even more problematic. And 

then, many of their loans are to countries outside of their own; 

meaning, they have no control over the assets. And the picture that 

he would paint is that, in many of those countries, there is a 

calamity coming that cannot be averted. And I know that you 

invest in countries around the world, or in—I wondered if you had 

any response to that, or have looked at that in any way. 

Mr. SOROS. No, I think, Senator, you are right in saying that 

Europe faces very serious problems. Some of those problems are, 

let’s say, within the Euro group, tensions within the Euro group, 

and some of it are outside. And, of course, Eastern Europe, the new 

members—states—are in various—are at the focal point of the crisis, because they have—their banking systems, largely owned by 

the Western European banks, and the households have borrowed 

30 

in foreign currency—strangely, more in Swiss francs, for instance, 

in Hungary, than in euros, but in other countries, euros. But, most 

of the household debt is in foreign currencies. And as they come 

under—as the banks withdraw and pull money out of Eastern Europe, currencies have come under pressure. They are not part of 

the euro. And the households find themselves in a much deeper 

indebtedness than they thought they were, because most of the 

loans went to finance real estate. So, there is a very serious problem there, and it’s very important for them to hold together. They 

are, of course, guaranteeing their banking systems. But, since 

you’ve got national banking authorities, they tend to—there is this, 

what you might call, financial nationalism within Europe developing, which is a danger to the European Union. 

So, that is the situation. I think you assess it correctly. And I’m 

very hopeful that Europe will actually pull together and pull 

through. But, one should not—one should acknowledge the difficulties that they are facing. 

Senator CORKER. And so far, that hasn’t happened. I know—Mr. 

Wolf, do you have any comments? 

Mr. WOLF. Yes, I—obviously, I didn’t see this particular presentation, so I don’t know precisely the numbers involved. Some of 

them that you’ve given me, I certainly recognize, particularly the 

leverage ratio in the banking system. In my view, that looks worse 

than it is, because you have to allow for the fact that there was 

an extremely large nonbank financial system in the United States 

which performed much of the function that was in the banking system in Europe, and that was more or less completely uncapitalized. 

So, I think if you look at the leverage and the total financial system, they’re very similar, and I think the need for recapitalization, 

the numbers that Mr. Lindsey’s given, will be very similar in 

Europe. 

Is Europe unable to meet these obligations? Actually, if you look 

at it—in fact, it’s already implicit in what you said—it’s quite clear 

that the biggest fiscal challenge—again, one shared with the 

United States—is the long-term contingent liabilities associated 

with aging, very broadly defined. They’re actually not dissimilar in 

scale. The big advantage the U.S. has, as you—one you mentioned—is, it starts with a lower tax level; though whether it’ll be 

easier to raise taxes here will be interesting to see. 

Senator CORKER. Hopefully, it’ll be very difficult. [Laughter.] 

Mr. WOLF. And, of course, more important, the demography of 

the United States is more favorable, and that means underlying 

growth trends are more favorable. That should make it a bit easier 

to manage this. 

But, the point I would stress, which I think is more important 

for this purpose, is one implicit in one aspect of what you said, 

which is, this is a collection of countries, and their debt and deficit 

positions are very different. 

There are a few countries—by no means all and not the biggest, 

with the one exception, namely my own—which have extraordinarily large banking systems relative to their economies. The 

U.K. is the only big country to fall into that category. I am reliably 

informed by my friends in the U.K. Government that this is all 

under control. [Laughter.] 

31 

It is a very interesting aspect of this crisis, and central to your 

considerations, because it’s the border between financial and foreign policy that we have global financial institutions that are guaranteed by host countries which may be very reluctant or unable to 

meet all international obligations. I would like to point out the 

extreme difficulty created for the United States by the discovery 

that moneys going through AIG ended up in foreign banks. This is 

the problem for Britain multiplied almost by an order of magnitude. And it’s a political problem as much as an economic problem, quite central. 

Apart from that, which is mainly the U.K., otherwise the other 

case is Switzerland, which is not, I think, a concern at this level— 

the really big problem is, there are a number of Member States in 

the euro zone, a number of Member States in the European Union 

that are not members of the euro zone, which are quite likely to 

get into sovereign debt problems simply because of this crisis. I 

don’t believe that will include the biggest countries of the European 

Union, but there are some less-than-large ones, and even quite sizable ones, that could be seriously challenged. And ultimately, the 

question there is not whether the big countries are able to rescue 

them, because I believe they are—we could discuss that in greater 

detail if you wish to—but, whether they will be willing to. Ultimately, this is not a federal entity, it doesn’t have a federal tax 

structure, there is no federal government, and so, ultimately, if 

there were to be a very serious difficulty in the debt markets for 

particular countries’ debt, you might find that some member countries would be—big member countries, like Germany, for example, 

would be reluctant to rescue them. The rhetoric we have at the moment suggests they would help them. And, of course, George Soros 

has proposed the creation of a European bond market, partly to 

deal with these problems. 

But, we do have to recognize, in my view, the fundamental issue 

is not so much the scale of the problem, in aggregate, but its distribution across countries, and the less than perfect certainty, 

much less than perfect certainty, that strong countries would, in 

fact, rescue weak ones in a difficulty. We could well find a test of 

this within the next year or two. 

Senator CORKER. May I ask one more question, based on what 

I’m hearing? 

I’d love to, by the way, give you this information. I didn’t call out 

specific countries, because I don’t have any way of validating this 

information, but I’d love to give this to you and see if you 

wouldn’t—if you would consider responding to some of the factual 

information that’s here. You’ll do that? 

Mr. Soros, I met, yesterday, with the IMF and Mr. Lipsky. And 

I know there’s—whenever—here in America, we talk about China 

and our debt and then people raising currency issues; that obviously gets everybody, rightfully so, up in great concerns. And I realize that that—right now, that’s just talk, and we need to—what 

we really need to focus on is making sure we keep our house in 

order, short and long term. But, from your perspective, what is the 

reality of taking the SDR component, or some other component, but 

using that as a potential building block through the IMF for a reserve currency that is, in effect, the one that becomes our world 

32 

currency, and not, in essence, using the U.S. dollar? What is the 

reality of that? Is that just talk, or is that something that might 

well become a reality in the future? 

Mr. SOROS. I think it is much more than talk. It exists. In other 

words, SDRs actually exists. They are on the books of the IMF. It’s 

not a new invention. It’s very fortunate, because it would take 

quite a long time to put it in effect. It took a long time to devise 

it, and it was devised exactly for this contingency of a global shortage of liquidity; forgetting now about the solvency problem, as well, 

where it can be helpful also. So, this is the moment when using 

SDRs on a large scale could, in fact, make a major positive contribution in helping to resolve the problems of the world. 

You drew attention to the problems that confront Europe. You 

are fully aware, of course, of the problems that confront us. And 

also, the problems that are confronting Eastern Europe are even 

greater than those that confront Western Europe. And, of course, 

the developing world is the most vulnerable of all. 

And the SDR issue could help, particularly, the developing world, 

including, of course, Eastern Europe. And therefore, it would make 

a positive contribution, and I think it is an opportunity for the 

United States to exercise leadership by proposing it. 

Senator CORKER. Of course, it will be very detrimental to the 

United States in proposing that, would it not? 

Mr. SOROS. No, I don’t think it would be detrimental, frankly. 

You could view it as an alternative to the dollar, but I can—I’m 

sure that the dollar will remain the world currency, even with the 

issue of the SDRs. The SDRs are a different kettle of fish. They are 

a reserve on the books of the IMF. They have to be converted into 

a currency to be used. So, they have to be converted into dollars 

or sterling or euros—or renminbi, for that matter—in order to be 

used for actual trading. So, I don’t think they represent, in any 

way, a threat to the dominance of the dollar in the world. 

Senator CORKER. I’ve got a colleague here, I know, that wants to 

ask questions. I want to thank you all, all three of you, for being 

here and for your input. I wish we had a longer time to be with 

you, and I hope there’s a chance for you to come back, in the 

future. 

Thank you very much. 

Senator RISCH. Well, thank you, Mr. Chairman. 

Actually, I just spent 3 days in Brussels, at the Brussels Forum, 

and sat through 3 days of economists debating these issues. I’m 

going to pass. Thank you very much. 

Senator LUGAR [presiding]. Let me take advantage of that to 

raise one more question. You’ve all talked a little bit about the dangers of protectionism. Is it already the case that many countries, 

including our own, taking a look at their own problems, in terms 

of jobs, have become more protectionist? To the degree that that 

continues, this is not fatal to the scheme, but it certainly is a body 

blow. In terms of common sense, will countries come to some agreement? Domestic politics being what it is, Mexican trucks can 

hardly get across our border, we’re still trying to keep sugar out 

of the South from Latin America, all the same old things, literally. 

And so, crisis or not, people are saying, ‘‘First things first.’’ These 

are things ingrained in our policies in the past, and they’re not easVerDate Nov 24 2008 13:21 Mar 31, 2010 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 H:\DOCS\GECRISIS.TXT SENFOR1 PsN: BETTY
33 

ily expunged by summits or by other things. Other countries have 

similar difficulties. 

Now, is there something about this crisis that is likely to change 

that ethos? And how might that come about? 

Mr. WOLF. This is a subject I’ve thought about for about three 

decades and am very interested in. I’m, as it were, pretty relaxed. 

I know free traders like me aren’t supposed to say this, but I am 

pretty relaxed about the sort of protection we are seeing. We have 

experienced protectionism like this in every significant downturn in 

the last 50 years. It was very bad in the 1970s and early 1980s. 

And provided—we must—have to accept that politicians meeting 

together in international meetings say one thing and behave a little bit differently at home. This is just the reality of the world. And 

the system we have—the rules governing the system—does, in fact, 

allow measures to be taken to protect industries, in exceptional 

cases. And it will be very surprising if opportunities of that kind 

were not taken, in this case. 

So, I don’t think that anything that has happened so far is devastating, as it were, to the survival of the world—of the world trading system, nor that anything that has happened should, in itself, 

be very surprising. 

So, could it be more dangerous than that? Yes, I think it could 

be more dangerous than that. And that’s what I’ve been trying to 

stress in my recent writings. Protectionism has not been used as 

a macroeconomic policy tool—that is to say, as a tool for dealing 

with general unemployment—in any major country since the 1930s. 

It’s always been used to deal with the specific problems of specific 

industries, sometimes important, as in the case, for instance, of 

automobile production, or, in this case, the financial sector, obviously, where it’s most significant. 

There is, I think, a real danger that if this recession becomes 

very long and very deep, that the other methods we’ve talked 

about—fiscal, for example, or monetary—seem to be no longer 

effective or dangerous, that policymakers, in this situation, will 

turn to the idea of general protection as a way of achieving the 

Holy Grail, as it were, of ensuring demand remains at home. 

And it is, for this reason, so important that demand policies, 

expansionary policies, be agreed across the world, and, in my view, 

particularly so, a subject we haven’t discussed here, in surplus 

countries, which have more room for expanding demand to increase 

their absorption of tradable goods and services, and thus, relieving, 

to some significant extent, the problems of deficit countries, like 

the United States, the United Kingdom, and others. So, my concern 

is that, in that context, of course, people would even be willing to 

throw aside the rules that were agreed in the GATT and in the 

WTO, and we would then move from a series of—as it were, from 

a snowfall to an avalanche. 

We’re not there. There is no sign of it. But, if we don’t fix this 

by orthodox macroeconomic policy means—and this is very much, 

I think, the thinking of somebody—of people in the 1930s, that that 

will happen. And that seems to me the danger we really have to 

focus on. It’s not happened, there’s not much of it around, but I 

think it is where we could be, 3 or 4 years from now, if we haven’t 

fixed this. 

34 

Senator LUGAR. Mr. Wolf, though you mentioned, earlier on, as 

we discussed China, the importance of China’s willingness to open 

up, to have—not a grand bargain, but at least for us to understand 

that we need to accept exports from China, a significant part of the 

market is here in the United States. And, on the other side, not 

explicitly, but implicitly, the Chinese have been interested in buying our bonds, for safety reasons, but also because this is something that keeps the demand going. 

So, this is a very important flow. Counsel us a little bit about the 

China situation, since it’s extremely important to us and to them. 

The fact, as you say, it’s not a zero-sum game; there is a possibility, 

here, of seeing mutual advantage. 

Mr. WOLF. Well, I agree completely with your description of the 

current situation, the trade between pieces of paper and real goods 

and services. And it just seems, in many ways, rather favorable to 

the United States. But, in the longer run—and by ‘‘the longer run,’’ 

I don’t mean the next 10 years, I mean the next 3 or 4 or 5—I do 

think, particularly in the context of a general deficiency of demand 

of the kind we’re now experiencing and the associated dangers, 

that we should be expecting—and I think that’s the focus of the 

discussion, at least on macroeconomic policy—that the Chinese pursue policies which start reducing their current account surplus significantly. I think it is really hard to stabilize the world economy. 

It’s a view I’ve expressed in a recent book. If a major emerging 

country like this is running a current account surplus of $400 billion a year or so, which might conceivably in the long run rise further, I think it is desirable that we discuss with them ways in 

which this can be reduced. This will, of course, reduce their capital 

outflow, but it will also increase export opportunities from the rest 

of the world. In other words, the rebalancing of global surpluses 

and deficits, in my view—I think it’s a view that Keynes would 

have had in this context, in this sort of crisis—is a central part of 

the discussion we must be having with other countries around the 

world, and China is a particularly important one. 

Senator LUGAR. Thank you. 

The CHAIRMAN [presiding]. Mr. Soros, fill out for us on the 

SDRs—a lot of people don’t know what they are, these special 

drawing rights. They’re part of the fourth amendment to the IMF 

articles, is that what you’re limiting your comments to, or are you 

talking about the SDRs in the broader context that some people 

have talked about with respect to a full-blown currency concept 

under the IMF? Where are you on that? Just fourth amendment 

limited one-time draw, or are you taking broader? 

Mr. SOROS. Oh, no, I’m suggesting an annual issue of SDRs while 

the recession—global recession is in place. Now, there is an existing pending issue—it’s called the fourth amendment, and it’s for 

$21.6 or $23 billion SDRs. And it is actually approved by a large 

majority of the country, and is only actually pending U.S. approval 

to—— 

The CHAIRMAN. Right. 

Mr. SOROS [continuing]. Be over the 85-percent approval that is 

needed. That could be used as a sort of a trial run of how this 

would work. So, it’s a very practical proposition. 

35 

There are some special difficulties or peculiarities with regard to 

that issue, because that was conceived 10 years ago to make up for 

the relative under-representation of Russia and Eastern Europe. 

And so, it has a more-than-proportional increase for those countries. So, I’m not actually necessarily advocating that we should 

use that right away. It could be used, but I think it could be perhaps only—or it should be used perhaps only after a better understanding has been reached with Russia. 

The CHAIRMAN. Fair enough. 

Mr. Wolf and Mr. Lindsey, I want to try to resolve, in my own 

mind—and perhaps it’s good to have the public discussion—about 

the degree to which the European experience right now is the 

result of mistakes that they made on their own or the result of 

their having bought into the so-called ‘‘Washington consensus’’ 

about reforms of the last 20 years, and practices. For instance, 

many of our folks urged them, in the privatizing of banking structures and so forth, to open it up and allow the purchase of banks. 

And indeed, Western European countries have bought a significant 

component of the Eastern European banks, to such a degree that 

some of those countries are now holding assets greater than their 

own GDP, but also leaving some of those countries almost without 

a banking system, so that if they withdraw to themselves now and 

take care of business at home, those Eastern European countries 

are in triple trouble. How do you assess—Mr. Wolf, maybe you go 

first—how they wound up where they are today? Was it the credit 

default swaps, the rapid purchasing, the entry into our housing 

bubble that created their bubble? As we work our way through the 

anger that exists—and you’ve acknowledged that anger in your 

own testimony, and I mentioned it in my opening—we’ve got to 

have some sense of how we got here. 

Mr. WOLF. Can I start—— 

The CHAIRMAN. Go ahead, yes. 

Mr. WOLF. The story of Central and Eastern Europe, of course, 

is very complicated and—but, as countries concerned always 

remind us, they’re all different. Nonetheless, there is a common 

element, which is obvious enough. And I think we have to start 

with—not so much with what they were told, but with what they 

themselves wanted. After the fall of the Soviet Union—a very important and blessed event—they were encouraged and, above all, 

themselves determined to join Europe and, in the same way, join 

the West. It’s perfectly clear it was a common desire. George Soros, 

of course, knows much more about this than I did, and played a 

very large role in promoting this. This was both economic and political, and joining the European Union and the European structure 

was an important part of that. 

In the process, they committed themselves to opening and liberalizing their economies and trying to become as much like ours as 

they could, and did so to a very substantial degree. They integrated 

in trade to an incredibly high degree, foreign direct investment, 

open capital accounts and all the rest of it. 

And in general, looking back on this experience, if we leave aside 

where we are for now—and we can still get through this, I think; 

I have no doubt about it—it’s been a big success. I think it’s important that, you know, of all the things that has happened in the 

36 

world, I think the opening to Europe and the integration of Europe 

is one of the great triumphs of Western policy, in the broadest 

sense, and of American policy. 

Now, there are, however, it’s clear, a few vulnerabilities. First, 

this became the only region of the emerging world, and truly the 

emerging only region, because of their commitment to this and 

their will to this to become a very, very large net importer of capital. After the Asian financial crisis, no other region was. They— 

all the other regions accumulated reserves, and, to some extent, 

therefore, shielded themselves against this shock. These became 

very dependent on continuing inflows of borrowing capital. They 

run large current account deficits, not all enormous—Poland’s is 

relatively small, but some are gigantic—so, if all the capital is cut 

off, by definition, they immediately go into a depression, because 

the capital that supported their activity—some cases, very small 

countries, had current account deficits of 20 percent of GDP. You 

can see what happens if that’s cut off. So, they became vulnerable 

on that point. They became vulnerable, as you rightly pointed out, 

because their banking system in—because in order to introduce 

high-grade Western banks, as it was seen, banking, it became 

part—they became part of Western groups. And nobody thought 

this will be dangerous. I mean, truth. I don’t remember anybody 

ever saying, ‘‘We could get into a crisis in which the major banks 

in Italy, Austria, or Germany might start thinking we should actually have to serve our domestic interests rather than the interests 

in these countries.’’ By the way, I don’t think it’s come to that yet, 

but that was something that we didn’t think about. It is the most 

worrying aspect of this crisis, from the protectionist point of view, 

and that’s something we didn’t think about. 

The third thing they became vulnerable to, inevitably, was Western European demand. They export an enormous proportion of 

their output to Western Europe. And the Western Europeans have 

plunged into a very deep recession. These are the prices of openness. 

Now, for very small countries or countries in which with small 

economies—and Poland still has a very small economy—this integration in the world is inescapable. There’s no other way they could 

have become prosperous. But, it is clear now that there were risks 

associated with that which we didn’t fully understand, and some 

which they took to willingly, like borrowing a large amount in foreign currency, and therefore, the risk of currency mismatches. So, 

they made mistakes and we made mistakes. There’s no doubt—and 

by ‘‘we,’’ I mean, particularly, Western Europeans, in the advice 

that was given to them, but also, I think, others—the IMF, the 

Americans, and so forth. That’s how we got here. 

But, I would stress that, despite these mistakes—and they were, 

they made the region more vulnerable than it needed to be—the 

process, by and large, has been very positive. That means that, if 

we can deal with the problems they now confront—and I believe 

they’re all perfectly manageable—with suitable support, with insistence that the banks that went and bought their banks continue to 

operate effectively throughout the region, with assistance to make 

sure that currencies don’t collapse too much, from the IMF, Western Europe, and so forth, by successful policies to relaunch demand 

37 

in Western Europe, which is essential and for which Germany is 

crucial—I think we can get through this. Mistakes were made, but 

I would not—and they’re clear that they were mistakes, and I’ve 

indicated some of them, but I don’t think we should start saying, 

because of those mistakes, that something fundamentally was 

wrong with the effort. It has actually been, in many ways, one of 

the greatest successes, in both economics and foreign policy, of the 

West in the last 25 years. 

The CHAIRMAN. Thank you very much. Very good. 

Mr. LINDSEY. Yes, if I could echo the point Martin made, and not 

just with respect to Eastern Europe, but the hundreds of millions 

of people around the globe who joined the global middle class, 

thanks to these policies, this is a step back, but it is a step back 

after two steps forward. It’s not three steps back. We are still 

ahead of the game. 

Senator, I understood your question to be a little different, in 

that it was sort of a, do the Europeans have their own blame, or 

did they simply get it all from us? And there, I would—I really 

don’t think that—I think we have an excess of self-flagellation of 

this side of the Atlantic. If one goes back to the 1990s and looks 

at the creation of the ECB, the American economics profession was 

virtually unanimous in recommending that this was a dysfunction 

setup. I testified before the British Parliament to that effect. They 

put themselves in a situation where they created an optimal currency zone—excuse me, they created a currency zone that was not 

an optimal currency zone. They have no fiscal authority, they have 

limited immigration, et cetera. And so, a lot of the problems and 

the dysfunctionality that’s now in Europe was really a result of a 

political decision they made 15 years ago with which we not only 

had no involvement, but, as Americans, tended to recommend 

against. 

In addition, we Americans didn’t tell the Irish to become a financial sector and follow the policies that they did. We didn’t tell the 

Austrians and the Italians to do all the investing in Eastern 

Europe that they did. We didn’t tell the Spanish to invest in Latin 

America to the extent they did. They did that without our help or 

participation. 

It’s more that Europe and America made the same mistake than 

we exported our mistakes to Europe. The world financial system is 

global in its precepts. London is at least as creative a place as New 

York is. And the monetary policies on both sides of the Atlantic 

were very accommodative of a bubble, for reasons that, you know, 

have causes to defend. 

So, I really don’t think that we should blame ourselves. We are 

part of the problem, but they’re grownups and they made their own 

mistakes along with us. 

The CHAIRMAN. Well, thank you all very much. 

Mr. Soros, I want to ask you if you want to summarize and have 

the last word here, with respect to the foreign policy component of 

this and the challenge we face—if you just want to leave the committee with some last thoughts, pulling the afternoon together, 

that would be terrific. 

Mr. SOROS. Well, all I’d like to say, what we have been, I think, 

saying all along, that the situation is very serious, that it is a genVerDate Nov 24 2008 13:21 Mar 31, 2010 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 H:\DOCS\GECRISIS.TXT SENFOR1 PsN: BETTY
38 

uine collapse of the financial system, the likes of which we have 

not seen since the 1930s. But, we have the experience of the 1930s 

to learn from, and we—I think we are trying not to make the same 

mistakes as we did then. So, the lessons of the 1930s were summed 

up in John Maynard Keynes’ general theory which was published 

in 1936. We have the advantage that that book is now available, 

we can take it out of the drawer and dust it off and use it. 

The CHAIRMAN. There’s another interesting book, incidentally, 

which I just reread the other day, which is John Kenneth Galbraith’s ‘‘The Crash of 1929’’—— 

Mr. SOROS. Yes, very much so. 

The CHAIRMAN [continuing]. Which is well worth the wisdom in 

it, particularly with respect to some of the—— 

Mr. SOROS. And just—in summary, I just would like to, once 

again, emphasize how we do have this special drawing rights, 

which, again, is in existence, is real, and it can be used and could 

make a major contribution to alleviating the problem. 

The CHAIRMAN. Last question, Mr. Wolf. What’s the most important thing that has to come out of the G–20? 

Mr. WOLF. I think the single most important thing, given where 

we are now, there has to be a really big demand commitment from 

the surplus countries; otherwise, the United States ends up with 

this nightmare fiscal position. They are the mirror image of each 

other. I think that’s absolutely central, and there must be clear and 

credible ways forward for the fund—IMF system of which the SDRs 

are part. Those are the two absolutely central elements, in my 

view. 

The CHAIRMAN. And the ‘‘demand piece’’ means? 

Mr. WOLF. ‘‘Demand piece’’ means that—I think, that the Germans, Japanese, and Chinese have to have a target for domestic 

demand, which clearly means that they start reabsorbing their surpluses at home. 

The CHAIRMAN. Fair enough. 

This has been excellent. We really appreciate it. It scratches the 

surface of complicated issues, but it’s a terrific outline, and we’re 

very, very grateful to all three of you for being with us today. 

Thank you. 

We stand adjourned. 

[Whereupon, at 4:34 p.m., the hearing was adjourned.] 

Æ