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Document 35 of 54.

JUNE 22, 1999, TUESDAY

SECTION: CAPITOL HILL HEARING

LENGTH: 16546 words

HEADLINE: HEARING OF THE SENATE BANKING, HOUSING,
AND URBAN AFFAIRS COMMITTEE
SUBJECT: NOMINATION OF LAWRENCE H. SUMMERS
TO BE SECRETARY OF THE TREASURY
CHAIRED BY: SENATOR PHIL GRAMM (R-TX)

WITNESSES: LAWRENCE H. SUMMERS, DEPUTY SECRETARY,
U.S. DEPARTMENT OF THE TREASURY
608 DIRKSEN SENATE OFFICE BUILDING
WASHINGTON, DC

BODY:

SEN. GRAMM: Let me call the committee to order and recognize Senator Santorum, who wanted to say a few words in introducing Larry Summers.
SEN. RICK SANTORUM (R-PA): Thank you, Mr. Chairman.
I have to remark that I just came from a steel rally. And since I know the two gentlemen here -- SEN. GRAMM: Well, I just spoke against the quota bill on the floor. (Laughter.)
SEN. SANTORUM: (Laughs.) Well, I just had to get --
SEN. GRAMM: Let us hope I have undone some evil that you have done.
SEN. SANTORUM: While I enthusiastically support the nomination of Deputy Secretary Summers for the position of secretary of Treasury, I want to make this one caveat that we have a lot of discussions hopefully forthcoming, over the issue of steel and foreign imports on steel, which I know that Secretary Summers will be open-minded in his willingness to listen to the concerns of many of us. Senator Sarbanes is now speaking at that very rally. So he will no doubt come in and reinforce these remarks.
I just want to briefly introduce Secretary Summers. And he is a native Pennsylvanian, someone we are very proud of from Pennsylvania. And his resume and his accomplishments in government and in academia are renowned.
And obviously, he brings a tremendous amount of skill and intellect to the position and, I think, is very well suited to continue what I think many have seen as a successful administration in the Department of Treasury, started by Secretary Rubin. And he was a very able partner in that administration and is very well suited to hand the baton to, to continue the overseeing of, not only the areas that we are concerned of here on this committee, but obviously the other financial areas that the secretary of Treasury gets involved in.
So it is my pleasure -- I can tell you that I met Secretary Summers in Kansas City in an odd enough place, at the first Social Security Summit, and found him just as someone who has sort have become somewhat of a wonk on the issue of Social Security, found him to be incredibly knowledgeable and conversant on the issue of Social Security. And as we hopefully get -- more involved in that issue in the coming months -- that he can play, I believe, a very important role in building consensus, both here in the Congress and in the administration, for any change that might take place. And so with that hearty recommendation, I am happy to introduce Secretary Summers.
SEN. GRAMM: Well, let me thank you, Senator Santorum.
And we are very pleased to have Secretary Summers here today. If confirmed, he will become the 71st secretary of the Department of the Treasury. He is one of our nation's premier academic economists.

He was the youngest tenured professor in the history of Harvard University. He won the John Bates Clark Award (sp), which is given every two years to economists under the age of 40, for the outstanding young economist in America. And thanks to Secretary Rubin's willingness to allow Secretary Summers to provide critical leadership in many areas, he has a lot of practical experience to go with all this academic knowledge and background.
So, Larry, we're very pleased to have you here today.
Under the jurisdiction of this committee, just to give you an idea of our jurisdiction related to the Treasury, we have -- we confirm the assistant secretary for Financial Institutions. We have the Office of the Comptroller of the Currency. We have the Office of Thrift Supervision. We have the U.S. Bureau of Mines. We have the Bureau of Engraving and Printing. We have the Bureau of Public Debt. We have the United States Savings Bonds Division. We have Community Development, Financial Institutions, Government Securities, Exchange Stabilization Fund, and jurisdiction over the Export-Import Bank and all trade matters other than tariffs, so -- hence our interest in having you here today. We're very grateful that you decided to come.
And let me give you an -- well, let me first call on my colleagues. I see Senator Sarbanes is here, and let me first recognize Senator Sarbanes. And then if there are any other members of the panel who wanted to say a word before we hear from Larry, we'll be happy to recognize them.
Senator Sarbanes?
SEN. PAUL SARBANES (D-MD): Well, thank you very much, Mr. Chairman. I'll be brief, and I have an amendment on the floor which I have to address. I hope to be able to get back for this hearing, but I know some of my colleagues will be here.
First of all, I'm pleased to welcome Larry Summers before the committee as we review his nomination to be secretary of the Treasury. As you noted, we don't have jurisdiction over the nomination, but as you also enumerated, we do have jurisdiction over a number of issues and matters that fall under the responsibility of the Treasury secretary. Of course, his actual nomination is before the Finance Committee, which you are also on. I understand they held a hearing last week and are planning a markup, I guess sometime this week.

I welcome the opportunity to review the nominee's views on the many important issues for which the Treasury secretary has responsibility that fall under the Banking Committee's jurisdiction.

I think this is an unusual case because, I think, it is extensive. This committee has such broad jurisdiction that, if we choose to, I think we could sort of reach out and pull in a lot of nominees. I don't know that we want to be doing that all the time. But as you set out the list there, obviously there's an extensive amount of activity that the Treasury does which is divided in such a way in terms of congressional jurisdiction that this committee has a considerable amount of it.
But let me just simply say I very strongly support this nomination. Larry Summers is extraordinarily well-prepared to assume the responsibilities of secretary of the Treasury. His background is known to all of us here, so I won't review it at length. He's a very distinguished economist, one of our nation's leading economists. There are some who sort of put down economists, but recognizing that our chairman himself is an economist, that Larry is an economist, I certainly don't intend to be part of that pack in terms of expressing that point of view.
He was a -- he got tenure at Harvard, the youngest tenured professor in Harvard's history. He got the John Bates Clark medal (sp), which I think you referred to in your opening statement as the Outstanding American Economist under the age of 40. That was a few years back, I hasten to add. But he's had some very significant, in a sense, practical experience, and he's done exceedingly well in those jobs.
He was chief economist at the World Bank from '91 to '93, two years undersecretary of the Treasury for international affairs, then deputy secretary of the Treasury for nearly four years, and now he's been -- so he's been, in my judgment, extremely well-prepared for this position. I think most observers feel keenly that this is the right man for this job. I commend the president on his nomination. I look forward to working closely with him in the period to come, and I wish him well. And I very much hope that his nomination will move forward expeditiously in the Senate.
I just want to close with this observation. I think it's extremely important that we have a confirmed secretary of the Treasury in the position, that we not have a hiatus. Now, Secretary Rubin has indicated he intends to leave, as I understand it, at the end of the month, and I think we ought to try to make sure -- I think an argument can be made, actually, that of all the Cabinet positions, perhaps even including secretary of Defense, it's as important to have a confirmed sitting secretary of the Treasury as any other job, given the nature of the international economic challenges which we confront, the volatility that exists, potential volatility that exists in the international economic scene.

So I very much hope that we will be able to get this nominee in place quickly.
Thank you very much.
SEN. GRAMM: Thank you.
Would anyone else like to be recognized for an opening statement before we go to the --
SEN. ROBERT BENNETT (R-UT): I just would like to put one in the record.
SEN. GRAMM: Without objection, so ordered.
Well, Larry, let me --
SEN. JOHN KERRY (D-MA): Mr. Chairman, I also have a statement I'd like to have submitted to the record.
SEN. GRAMM: Without objection, that will be put in the record as well.
Well, Larry, let me give you an opportunity to give us an opening statement.
MR. SUMMERS: Thank you very much, Chairman Gramm, Ranking Member Sarbanes; Senator Santorum, grateful to you for introducing me; members of this committee. I am grateful for the opportunity to appear before you again today, in connection today with my nomination to be secretary of the Treasury. I'm greatly honored by the trust in me that the president has demonstrated by nominating me to follow in the distinguished tradition of the leadership he has put in place at Treasury with Lloyd Bentsen and Robert Rubin.
For the past 6-1/2 years, I've been privileged to serve at the Treasury Department, from 1993 until 1995, as Secretary Bentsen's undersecretary for international affairs, where my focus was on international financial issues. For the past four years, I've had the opportunity to serve as Secretary Rubin's deputy. In that capacity, I have participated in the formulation of the administration's economic and budget strategy, and worked on Treasury's many priorities, ranging from debt management to protecting the nation's borders, as well as continuing to work actively on international issues. It has been an immense privilege for me to work with President Clinton and the other members of his economic team, with the Federal Reserve, with this committee, and with others in Congress to put in place a core economic strategy for our country; a strategy that has been based on macroeconomic stability and achieving fiscal discipline; on critical public investments, especially in education. It has been based also on a recognition of America's great interest in open markets and stable growth around the world.

Mr. Chairman, while important challenges remain and while we in the United States can never afford to be complacent, I think we can all agree that the strength of the American economy in recent years stands out. Powered by the initiative and enterprise of the American people and our market system, we are enjoying the lowest rates of inflation and unemployment in a generation. We've seen the restoration of American economic leadership around the world and, most important, for the past several years we have started to see the fastest growth in real earnings of American workers in the last 25 years. I think we can all acknowledge the remarkable contribution that Secretary Rubin has made to our economy and our government over the past six and a half years. At Treasury, the right course has been set and our challenge will be to carry on.
If confirmed as secretary, I will focus on five priority objectives. First, maintaining a strong economic strategy based on continued fiscal discipline and the use of this moment of opportunity to address the long-term problems facing Social Security and Medicare. Second, ensuring that a strong economy translates into growth in the living standards of American workers and their families and that no part of this country or group of Americans is not given an opportunity to share in that prosperity.
Third, building the strong, stable and growing global economy on which American prosperity and security ultimately depend, while at the same time -- I think this is a crucial point -- working to ensure that global integration is not just an attractive abstraction but something that benefits American workers, families -- farmers, families and businesses.
Fourth, striving to ensure that the American financial system is as safe, as competitive and as efficient as possible in meeting the needs of American consumers and businesses. And fifth, supporting the tradition of excellence and integrity in the career and political staff of the Treasury Department and in the Treasury's bureaus that I have come so much to admire during my six and a half years at the Treasury Department.
Mr. Chairman, it has been my privilege, both as undersecretary and as deputy secretary, to work closely with this committee on many issues. If confirmed, Stu Eizenstat and I look forward to working even more closely with you in the future and with others in the Congress on the full range of challenges that we face.

Thank you once again, Mr. Chairman, for bringing me before this committee. I'd be pleased to respond to any questions that you or members may have.
SEN. GRAMM: Thank you, Larry, very much for your opening statement. Let me also say that there are many things I've been critical of the administration on, but I have not been critical of the people that they have nominated to be secretary of the Treasury. I think that it's really been the highlight of their administration. I think Bob Rubin has brought credibility to the administration as secretary of the Treasury at a time they critically needed it. I think he's performed great public service and I hope that you can match his achievements and I'm confident that you are capable of doing it.
I want to ask you a couple of questions. First of all, let me go back to the issue of steel quotas.

I'm always confident that you're going to have an open mind, but I'm also confident that you're not going to have an empty mind, which is why I'm supportive of your nomination. And so I want to give you an opportunity to explain to us, in the simplest terms you can, why the steel quota bill is a bad idea.
MR. SUMMERS: Mr. Chairman, let me start by saying that there is a real and serious problem in American steel towns and that there is real distress, and that it is appropriate that there be a strong public policy response to that distress. We believe that the best form that that response can take is the proper enforcement of existing U.S. trade law. And the actions that have been taken already in recent months have brought steel imports for the first four months of this year down not just below their crisis levels in the first four months of 1998, but below their levels in the first four months of 1997. In key categories where there were particularly serious problems -- hot-rolled steel, key countries, Japan -- imports have been reduced by more than 90 percent. So I believe this is a problem that should receive a strong response.
At the same time, Mr. Chairman, I do not believe that the quota legislation is the best way to respond to this problem. Because of the retaliation that it would invite, the precedent that it would set, and the implications that it would have for upstream steel markets, I believe that over time, such legislation, if passed, would not achieve the very important objective of protecting high-quality American jobs, but might -- but would be likely to have economic consequences for the United States that -- adverse economic consequences that would exceed any possible benefits.

SEN. GRAMM: Now that we have had a little bit of an opportunity to look back at the IMF actions that were taken in Russia and the -- I think one would say the partial, if not the total failure of that effort, and the potential, or at least the accusations that much of that money ended up abroad, I'd like to ask you, in light of your experience at the World Bank, to tell us what you think happened. Now that we can look back after the fact, what happened, and what do you think we've learned from it?
MR. SUMMERS: Mr. Chairman, we'll be learning and studying and understanding these developments for many, many years. The Russian reform effort, as it moved forward through the decade of the 1990s, was always facing two large pressures; a pressure from many elements within Russian society who wanted to turn backwards and put -- return communism, or something very close to it; and an effort on the other side from the oligarchs, who were trying to create a kind of lawless capitalism to their own benefit. And the efforts to create a stable, functioning, market economy faced those two pressures. In the event a combination of low oil prices, the Asian financial crisis, and the reassessment of emerging markets, political weakness of reformers at key moments, led to a situation where the reform effort, in a sense, collapsed, the efforts to keep those reform efforts moving proved to be unsuccessful.
I think the most important lesson that I've learned from all of this is that while macroeconomic stability is important, while there are many important things, a market economy cannot function without basic capacity to enforce property rights, to enforce contracts, and to have relatively non-corrupt and efficient enforcement of the basic law of commerce.

And that without those things, no amount of money that goes into a country will stay in the country, and there is not the prospect for the establishment of stability.
And so I believe that going forward in Russia, there will need to be a variety of protections with respect to any future financial support, but that the priority has to be on establishing that basic framework for legal exchange, for protection of property rights if Russia is to realize what it is capable of economically. And with the technological capacity of the Russian workforce, the natural resources at Russia's disposal, if the right system that unleashes that economic energy can be found, I think there is, indeed, potential.
SEN. GRAMM: Let me ask one final question. As you are aware, the House will probably adopt the financial services modernization bill by the end of this week; if not, certainly the beginning of next week. We would then go into conference, I assume, right after the July 4th recess. I'd like to get your views on financial services modernization. Are you for the bill, or at least for financial services modernization? Do you believe it is important and timely to repeal Glass-Steagall and knock down these barriers that separate banking and insurance and banking and securities?
And I'd like to at least give you an opportunity to sort of give us your thinking on the three issues that obviously represent our challenge in trying to get a bill. One is the question of whether banks should provide these services inside the bank in what are called "operating subsidiaries," or outside the bank in affiliates of holding companies. And then the question about -- which was not really dealt with very much in the Senate; in fact, we adopted the minority position on privacy, so that this was a non-controversial issue in the Senate.

It's become very controversial in the House. I'd like your views on that.
And if you wanted to say something about the whole CRA issue, I'd like to give you an opportunity to comment on this issue, because my guess is that of all the legislation that might become law during your tenure as secretary of the Treasury, this is going to be the most important and the most remembered bill.
MR. SUMMERS: Mr. Chairman, thank you very much for giving me that opportunity.
I believe financial modernization is a very important issue. The regulatory structure that was a perhaps proper response to the events of the Depression is not the right financial system for America on the brink of the 21st century. So there is a strong case for appropriate financial modernization that benefits consumers and makes our financial system not just more efficient but also more competitive globally.
But to be effective, in my judgment, and all of our judgment at Treasury and in the administration, financial modernization has to be done in the right way. That embraces a number of the issues that you touched on in your question.
We believe very strongly in the principle of business choice, that banks ought to have the opportunity to configure their financial activities in the way they see fit, between the operating subsidiary and the holding company affiliate, unless there's a very strong countervailing consideration. And while various arguments have been adduced about subsidy, we believe that the balance of evidence suggests that the operating subsidiary can make a very substantial contribution to reducing subsidy and to preserving systemic stability.
The people whose responsibility it is to minimize taxpayer contributions to financial distress situations at the FDIC -- chairmen of both parties have concluded that the operating subsidiary is something that they quite strongly favor, because of the benefits that it provides to taxpayers.

Privacy, as the president has said, is an important issue. And the president has made it clear that he supports a notice and choice approach to the privacy issue as the best way of balancing consumers' very important interests in privacy with the very real efficiency benefits that can take place on occasion through the sharing of information. We will all, as we move forward, have to work together in consultation with each other, in consultation with all the affected groups, to find the best way forward on privacy and to find the best legislative vehicles with respect to the privacy question.
Let me just say on CRA, Mr. Chairman, that CRA, in our judgment, is a program that has made a very substantial contribution to many, many American communities that, on their own testimony, because of the opportunities that they pursued that they might otherwise not have pursued, CRA has also made a contribution to the bottom line of many institutions. We believe that it is very important to maintain the relevance of CRA as we go forward, and would have great difficulty with any approach to financial modernization which would not maintain the relevance of CRA as we go forward. But we look forward very much to working with the Congress, working in particular with you and the members of this committee, along with many other legislators who've been concerned about this issue to try to find the best approaches going forward.
SEN. GRAMM: Thank you.
Tim Johnson
SEN. TIM JOHNSON (D-SD): Thank you, Mr. Chairman.
Welcome, Mr. Summers.
The Department of Agriculture has projected that total U.S. ag exports will plummet to $49 billion by the end of 1999, down from almost $60 billion in 1996. The world financial situation, particularly in Asia, which had been the fastest-growing American agricultural market, remains, frankly, tenuous.

Overall, the world economic situation does not seem to suggest a rapid expansion of overseas markets for most U.S. ag products. And moreover, the high value of the U.S. dollar, relative to other exporting countries' currencies, makes it difficult for U.S. products to be competitive in the world market.
What specific remedies would you recommend to help bring the U.S. agricultural economy in line with the prosperity being enjoyed by most other sectors of the overall economy in the United States?
MR. SUMMERS: Senator Johnson, let me just first say that I know less about the agricultural economies than I should. But I am certainly very much aware of the seriousness of the problems in many of America's rural areas. Let me highlight, if I could, three crucial aspects with respect to the agricultural economy, and I'll emphasize more things that Treasury touches.
First is a strong global economy. Ultimately, agricultural prices are set by supply and demand, and demand depends upon the strength of the global economy. And that is one of the reasons why the agricultural community was so concerned with supporting a vigorous U.S. response to the problem of the Asian financial crisis, through the IMF funding and in other ways. And I think it is incumbent on all of us to take what steps we can to restore growth in the world's emerging market.
Second, it is important that, as we think about our national economic strategy and our strategy towards communities, that we recognize that it is important to assure that capital access is adequate, not just in depressed urban areas, but also in rural areas; that as we move ahead with respect to questions of banking that we just discussed, as we look at programs like the Treasury Department's CDFI Program, we make sure that we are taking steps to promote access to capital and economic development in rural, as well as urban areas.
And third, Senator, in my judgment -- and I don't enough to go into detail in this area at all -- it is appropriate that we maintain the right sorts of well-thought-out agricultural programs that concentrate benefits on those where distress is greatest and to the extent that we can, seek to harness rather than work against, market forces.

I might also just add as a general statement, that while clearly at a time when the national economy is doing well, there is distress in the farm areas. I think one will find over long periods of time that farm states have a very great interest in what is happening nationally, and that everything we do that's right, whether it's the budget surplus, whether it's working to open foreign markets that can make our national economy strong, it also doing something for American farmers.
SEN. JOHNSON: We have discussed this earlier, and I am pleased and confident that under your oversight, that you will see to it that the CDFI does take an appropriately balanced view with regard to investment in rural America. And I'm pleased to know that and to see that as a component of your overall view on this issue.
I yield back.
SEN. GRAMM: Rick Santorum.
SEN. SANTORUM: Thank you, Mr. Chairman.
Return to our favorite topic, but more of a general question first. Your predecessor has made comments, both publicly and privately, about his perception that the future of America is in providing services and in service industries, and that the manufacturing component is less important and one that we don't necessarily need to support. Do you share that viewpoint, or do you believe that manufacturing is still a vital and important part of our economy and one that we need to nurture and support?
MR. SUMMERS: I'm not sure I would accept your characterization of Secretary Rubin's views as exactly accurate. But let me speak about my -- let me speak, if I could, about my views.
I think we have a very strong interest in this country in the maintenance of a strong manufacturing sector. I think those who say that manufacturing is only 20 percent of the economy and, therefore, should not be a priority going forward, are making a serious mistake.

There are a number of critical reasons why we need, as policymakers, to focus on the health of American manufacturing.
One is that a very large fraction of all the research and development that American businesses do is done in the manufacturing sector.
A second is that in many cases manufacturing firms provide particularly high quality jobs that form the basis for people's capacity to support a family.
And a third is that while manufacturing accounts for a portion of the nation's value added in the statistics, it accounts for a much larger fraction of what is sold. And a substantial part of what the service sector and what other sectors produce is sold to the manufacturing sector, and that can only be done if the manufacturing sector is healthy.
So certainly we do have a real concern in this country -- and proper concern, in my view -- with a healthy manufacturing sector.
SEN. SANTORUM: A question related here to the committee and tying the issue of steel, and that is that I'm talking to many people in the steel industry who feel that the steel industry has paid twice for the Asian crisis: one, through the IMF rescue package, and then having that package in some senses used to subsidize the very industries that then have come and dumped steel into our markets. My question is: What can you do about that, in future cases, to make sure that our own money isn't used to hurt our own industries through these bailouts?
MR. SUMMERS: Senator, let me say that as one manifestation of the legislation on the IMF last year that many of the members of this committee were very instrumental in crafting -- Korea, in particular -- the secretary of the Treasury is asked to certify that no IMF dollars are going into direct subsidies to Korean industries that compete with American industries, and we have been able to make that certification on the basis of quite extensive review of practices.
We have also been successful in the IMF, as a consequences of the legislation, in obtaining a G-7 policy statement pointing towards the desirability, not just with respect to IMF funding but also with respect to the policies of countries to which the IMF provides funds, that conditionality would address questions of directed lending or other kinds of industrial subsidies.

So I believe a very vigorous response is called for.
I might just say, though, Senator Santorum, that I think the IMF response to the problems of the last year has had some very positive benefits compared to what could have been for the steel -- for the U.S. steel industry, in at least two senses. One is that a major source of competition is the result of prices that are sold at very low cost because of extreme devaluations in other countries. The restoration of confidence through a flow of capital leads to the reversal of those devaluations, as we've seen, for example, in Korea. And also that a stronger global economy means more global demand for steel, which means higher prices.
SEN. SANTORUM: If I can switch gears to one of my favorite topics, and that's Social Security -- and I see my time is running out, so I'll ask a quick question on that, and that is, we have had many conversations about the issue of Social Security, and I just wanted to get a sense of -- as I get the question asked of me -- Is this administration serious about doing something about Social Security? I think that the plan that was submitted, the president's budget has been panned pretty well bipartisanly as not really getting at the real issue of making some of the structural reforms that are necessary to make this system sustainable over the long haul. That's one question.
The second question is, do you see investment -- whatever scenario goes forward, whether it's a government investment or individual investment -- do you believe investment is a key component of any restructuring of Social Security?
MR. SUMMERS: Yes, the administration is serious, and we believe it's very important to use this moment of opportunity to address Social Security. And yes, I believe that there is a strong case that Social Security beneficiaries, like almost all other pension beneficiaries in the United States, should receive some of the benefits that the higher return associated with being -- associated with stock market investment -- can generate.

SEN. SANTORUM: I just want to make one follow-up because someone presented this to me that makes a lot of sense. It is my perception that from an economic policy perspective globally, as far as -- well, with respect to this country, not globally -- it is the economic policy of this country to make sure that we do not have inflation or a rapid increase in wages, which would be inflationary. At the same time, it is generally conceded the policy of this country to make sure that the market does well, and the better sustainable growth in the market, the better.
The reason I posit that is that we have a Social Security system based on an index, wage growth, where it is the policy of the country to suppress, instead of basing it on an index which is the stock market, which it is the economic policy of this country to increase. So would it not make sense to rely more on an index which we're encouraging to grow as opposed to an index that we are artificially, as some would suggest, trying to suppress?
MR. SUMMERS: Let me respond briefly to that in just two ways. One, I think it's very important as we think about national economic policy that our objective be to grow and increase the real wages, wages after adjusting for inflation, of all American workers as rapidly as possible. I think that's something we can all share on a bipartisan basis. And I think ideas that it's desirable to hold wage growth down in the sense of real wages would be very substantially misguided.
I did respond on stock markets, Senator Santorum. I would just say that I think we do have to be very mindful of finding ways of taking advantage of investments that preserve the tremendous efficiencies that Social Security has achieved, nearly 99 cents out of every dollar paid out in benefits, and that avoid exposing workers who retire in a particular year to very substantial uncertainties associated with stock market fluctuation.
SEN. SANTORUM: I agree with you.
Thank you, Mr. Chairman.
SEN. GRAMM: Thank you.
SEN. EVEN BAYH (D-IN): Thank you, Mr. Chairman.

Mr. Undersecretary, welcome. You have testified before us before, but never under these circumstances, so we are very grateful for your courtesy in appearing before us today.
I would at the beginning of my remarks like to observe to our colleagues in the Fourth Estate who have joined us today that in light of the swift and substantial adverse reaction on the part of foreign currency markets to even the slightest hint that the nominee will not be promptly confirmed, I would like to add my enthusiastic support, echoing the chairman's remarks, and believe that that support is well deserved, not only because of the markets' reactions, but because of all the data you mentioned in your prepared comments.

It really has been a remarkable period of years under the guidance of this Treasury and this administration. And the acid test of any economic recovery is of course the growth in real wages for working Americans, which you indicated have accelerated at the most rapid rate in a generation. And so I commend you for your performance and hope that your confirmation will be swift on the floor of the United States Senate.
I have just three very brief questions, Mr. Summers.
First, I'd like to ask about the issue of savings. I have become increasingly concerned that our national savings rate is not all that it should be. And correct me if I am in error, I believe that at least for the last two quarters, American consumers have actually been experiencing a negative savings rate for the first time since the 1930s.
My question is this: You indicated the opportunity we have at this juncture to take some long-term steps to perhaps increase the national savings through the use of the budget surplus. I'd just like you to address briefly the importance of savings and what potentially we can do, through paying down the debt, to increase national savings and thereby benefit the economy in the long run.
MR. SUMMERS: Senator Bayh, thank you for asking that question. When I used to teach economics, the economics of savings was something that I used to give long lectures about. I will try to be brief right now.
More savings in America is important macroeconomically for us because it is the only way to have more investment in America without having more foreign borrowing and trade dislocation. It is important for American families because of the uncertainties of the new economy and because we are getting to a situation where many people have a retirement period that is more than half as long, or almost as long, as the period of time during which they were working.
And we can take satisfaction from the fact that the national savings rate, including what the federal government does, has actually doubled over the last six years. But it is still in the 7 percent range, much too low and lower than it used to be. And the personal savings rate has, as you suggested, actually turned negative. And that has to be an area of serious concern.

In terms of what we can do about all of this; the most potent and reliable way to increase national savings is to preserve the budget surpluses and use them to pay down debt on a substantial scale. And whatever else we do, I hope we find a way -- hope and trust we'll find a way to do that this year.
Second, I think we need to work in a variety of ways to encourage people to save. Savings in many ways is sold, not bought. We need to provide the inducements to people to do that.

I think the USAs proposal that the president has put forward that would provide a universal account to which all Americans -- almost all Americans would have a contribution, would be a significant step in this regard. I think we took a constructive step some time ago in the Treasury Department by offering the indexed bond and the indexed savings bond, which provides guaranteed purchasing power insurance and returns.
I think more generally -- and this is something I hope to follow closely during my time, if confirmed as secretary of the Treasury -- we need to think about ways of promoting the idea of saving because I think, as I say, it's one of the few things that's important both for individual American families and for the health of our overall economy.
SEN. BAYH: Just a brief related question regarding the potential vulnerability of the real economy to a downturn in the financial markets, and perhaps the argument for additional prudence and caution in how we utilize the surpluses you were suggesting. As I understand it, the American consumer has been one of the real heroes here over the last year or two, consuming at a rate that has sustained not only our economy, but absorbed some of the excess capacity from abroad, even to the extent of dipping into savings or taking into account, I think it's called the "wealth effect" because of increased value of assets, they're spending a little bit more. What does this suggest about our vulnerability or the world economy's vulnerability to a potential downturn in our financial markets, and perhaps, then, the argument for additional caution in how we proceed from a policy standpoint?
MR. SUMMERS: I think it's appropriate for us to be cautious as we think about questions of national fiscal policy and the use of the surplus. I think it's important to remember that we're in a phase where the economy is already very, very strong, and that has to influence fiscal policy decisions.
I think it's important, as I suggested in my opening statement, that we all avoid complacency and that people remember that, as Chairman Greenspan likes to say, many more bad lending decisions are made at the peak of booms than are made at the trough of periods with problems. I think that is something that needs to be recognized as spending plans are made or borrowing decisions are entered into.
And certainly I think prudence at the national level in recognizing that we've been enormously fortunate to see our forecasts proved to understate the budget surplus each year for the last number of years, but it will not always be that way.

And I think it behooves all of us in making policy to think about the proverbial rainy day and to design policies that will be robust and proper policies, even if not everything works out in the way that we hope it would.
SEN. BAYH: We had a theory in state budget forecasting called "the law of countervailing error," which meant that if we'd had a few years we'd estimated revenue, certainly the time would come when it would be on the other side. Perhaps that applies at the national level and argues for caution as well.
Mr. Chairman, my time has expired. Could I just be permitted one additional brief question I thought the candidate should be allowed to address?
SEN. GRAMM: Yes, sure.
SEN. BAYH: I was reading in some of the popular press, Mr. Summers, glowing reviews, almost completely laudatory. There were a couple of suggestions, however, that crept in there with regard to the Mexican situation and the possibility of some moral hazard having been created that in some way precipitated some of the Asian problems thereafter, which I was frankly a little surprised to read. I was under the impression that there were some systemic problems in some of these countries dealing with their financial institutions or macroeconomic policies that had in fact really been the root cause of some of these troubles. And if you could just very briefly discuss what you believe did lead to that situation, and also perhaps just very briefly discuss, if we had done nothing, what the consequences for the citizens of some of these countries might have been.
MR. SUMMERS: I think the root causes, as you suggested, Senator Bayh, lay in the policies of these countries. Moral hazard was an element, but not, I think, moral hazard having anything to do with international lending. The moral hazard that was really the problem had to do with what's come to be called crony capitalism: the sense that if you lent for -- if you lent to build a skyscraper, you lent to build whatever, and the loan went bad, somebody would come along and bail you out, which was a domestic problem in these countries. I think it is difficult to make the case that it was international moral hazard that was a substantial contributor to what happened in Asia.
At the same time, it is a crucial part of a healthy international financial system that lenders are prepared to take responsibility for their loans and that they make decisions based on underlying fundamentals, not on relying on some kind of bailout. And some of the steps that Secretary Rubin was able to announce in Frankfurt as agreements of the G-7 go importantly in that direction.

I believe if we had stayed out of the financial crisis, if there had not been an international response, you would have seen all of the kinds of distress and dislocation you've seen in emerging markets impact on American farmers and other American workers very, very greatly magnified. And while I don't want to be melodramatic -- the comparison is not right -- I think we got a taste of what complete laissez-faire policies could do when they were tried in the late 1920s with respect to global financial problems.
SEN. BAYH: Thank you.
SEN. GRAMM: Jim Bunning.
SEN. JIM BUNNING (R-KY): Thank you, Mr. Chairman. I met with Secretary Summers yesterday and I have just a couple of things to question him on. You mentioned two of your five key building blocks that you would like to do as secretary of the Treasury were living standards and global economy were mentioned strongly.
Some critics have accused you of urging currency devaluations and austere fiscal policies on struggling nations that hurt the poor and middle class while, subsequently, international bailouts have enriched the more wealthy and savvy investors in those countries. How do you respond to that?
MR. SUMMERS: Senator Bunning, let me first say that on the whole question of devaluations, they are never good things. As I have said often, in my judgment, no nation can devalue its way to prosperity. There have been occasions when countries devalued; typically it has been situations where there was no alternative, because they had run out of the reserves to defend the currency level that they were seeking to attain. As you and I had a chance to discuss yesterday, there is no warrant for providing bailouts to large investors for the sake of providing bailouts.
There is, I believe, a need to contain contagion and respond to global financial crisis. From time to time, it will be the case that those who've made loans will be better off in a global economy that's recovering than they would be in a global economy that was not recovering.

But the standard and the approach has to be based on what will raise living -- has to be based on what will raise living standards and what will best contribute to the health of the global economy, not any desire for bailouts per se.
You touched also in your question on the concerns about austerity. Let me just say there that while battlefield medicine is never perfect, and I think certainly the IMF and others would recognize that they have a great deal to learn, I think to a degree that is greater than many people appreciate, the policies in these countries evolved with changing situations in favor of much looser fiscal positions. And I think it does bear some emphasis that those countries, like Mexico, Thailand, Korea, the Philippines, that were able to carry through on their commitments to the IMF have seen much better economic results than those countries that did not carry through on their commitments to the IMF, like Russia and Indonesia.
SEN. BUNNING: Just a question on tax reform, or the possibility of tax reform. If we do get some tax reform, what sort of tax reform would you like to see? In other words, basic reform. I'm not just talking about cutting across the board or capital gains tax reduction or estate tax reduction; I'm talking about a policy on taxes that include a total revamping of our code, because sitting on Ways and Means and listening to you testify over there many times, it seemed to me that the administration liked the current tax code, and I'm not sure that I do. And so if you have any suggestions, we'd like to hear them.
MR. SUMMERS: Let me just say this, Senator Bunning.

None of us are ever satisfied with the current tax code. And broad global reforms have their attractions, and certainly it is something we are very open to looking at -- proposals. But to be right, any reform proposal has to meet four tests: It has to be consistent with, solvent with, fiscal discipline and the progress we have made with promoting economic growth, with maintaining fairness in the tax system, and with making the code simpler.
It is easy to achieve any two or three of those objectives, if you are willing to sacrifice one or the others. Many of the proposals do that in one way or another. What is much more difficult is to achieve all four simultaneously.
But my hope would be that, as we look at the tax system, we could think about the interests of middle-income families and that we could think in particular about questions relating to savings, which as Senator Bayh and I had a chance to discuss, seems to me to be a particularly important national economic issue. And USAs the president has proposed are one idea in that direction.
SEN. BUNNING: Last by not least, I know that the Department of Treasury has taken steps to ensure that regulators do not attend political fund-raisers with representatives of industry they regulate. What assurances can you give the committee that you -- that this situation that occurred with the recent Comptroller of the Currency attending a fund-raiser with banking industry officials, never happens again?
MR. SUMMERS: What happened was wrong. There are clear guidelines and policies to make sure that it doesn't happen again. And certainly, I will do my best as secretary of the Treasury, to ensure that in everything that the department offices do and the department's bureaus do, the highest standards of integrity are maintained.
SEN. BUNNING: Thank you.
SEN. GRAMM: Thank you, Senator Bunning.
Wayne Allard.
SEN. WAYNE ALLARD (R-CO): Thank you, Mr. Chairman.
I'd like to welcome Mr. Summers to the committee. I listened very closely to your opening comments. And frankly -- I mean, they were rather bland. You want to talk about economic growth both in this country and internationally. I don't think anybody here really agrees with that. The question is, "How are you going to get us there or help get us there?"
You talked about safe financial systems. I don't think any of us agree with that type of a goal. But again, the question is, "How are you going to get us there?"
And in your final comment, you said a tradition of excellence at the department. And I may not agree with that comment after a little bit of reflection. My questions -- I hope to bring out some of those points.

But let me talk a little bit about gold. In your testimony before the Finance Committee hearing, you said that you intended to seek congressional authorization to approve the sale of a portion of the IMF gold reserves. Now, in reviewing the law, I think the law is very clear that you have to come to Congress for authorization to do that. Do you agree with that?
MR. SUMMERS: Yes, I do.
SEN. ALLARD: Okay, let me pursue this just a little bit further, and I want to close the door even tighter, if I may, on your comment. Let's suppose that Congress does not approve the sale of the gold reserves of the IMF, then will you be participating in any way in providing U.S. support or otherwise facilitate IMF gold sale for debt relief?
MR. SUMMERS: Not --
SEN. ALLARD: Let me repeat --
MR. SUMMERS: No, I understand the question, Senator. I'm just trying to give you a very careful -- I'm trying to give you a very careful answer. As I understand it, the law requires congressional authorization --
SEN. ALLARD: Right.
MR. SUMMERS: -- for IMF gold sales or for U.S. support or facilitation of IMF gold sales. So if that approval and authorization is not forthcoming, the United States will not be able to support in any way IMF gold sales.
SEN. ALLARD: As head of the Department of Treasury, you'll not be working with the administration to go around the Congress, if they decide that's not a good thing to do?
MR. SUMMERS: We would certainly -- we would not -- with respect to IMF gold sales, absolutely not.
SEN. ALLARD: Okay. I'd like to follow up a little bit about your comment on the excellence of the Department of Treasury. I ran a few things through my mind as to what's been going on in the last couple of years as far as that department is concerned. You have some agencies in it that I think that -- and some policies that have come out of the department that I think's concerned many members of the Senate, at least, and I think the full Congress.
First of all, you know, the Internal Revenue Service itself has not been very friendly to taxpayers. In fact, in the last Congress, you know, there was a concern; we passed legislation here. This administration has failed to put forward some nominees for a commission for oversight, and right now that's rather stalled. And I'm disappointed that we don't have that oversight on the IRS. What is it that, as head of the Treasury, are you going to do to make sure that we get those positions filled and can move forward?

MR. SUMMERS: Senator, let me just say with regard to the IRS, there were and are real issues at the IRS. I first testified using the term "off track" almost four years ago. I think the new commissioner of the IRS, Charles Rossotti, who is the first commissioner of the IRS in many, many years not to be a tax lawyer, but to be a proven manager with experience in information technology, is really making a difference in terms of the way the phones are getting answered, walk-in centers, many, many other things. It's a process that will take time, but I think we are already starting to see results.
As far as the IRS board that you referenced is concerned, the president has sent five nominees to the Senate. There will be two more nominees whose names will be coming very soon. As you and I had a chance, I think, to discuss, there have been some concerns that have arisen with respect to one of the nominees who has decided to withdraw, and the president will be providing --
SEN. ALLARD: Will you be working --
MR. SUMMERS: -- nominating someone else as soon as possible. And certainly my goal is to have this board up and running as rapidly as possible because of the support that it can provide and the input that it can provide.
SEN. ALLARD: Well, I would hope that you could expedite that process, and I'd like to get a firm commitment from you that you'll be expediting, because I think that's important that we have that oversight, particularly in that field. And I know that most of us thought well, maybe we'd taken a step towards making the Internal Revenue Service a little bit more friendly, but from what I've been hearing lately, I begin to wonder how much we really accomplished. So I think it's very important that we get that board in place and move forward.
Another issue that comes to mind when you talk about the excellence of the department is "know your customer" regulations. I mean, here's some regulations that were -- and you made comments in your -- about how the administration is going to protect privacy. But with the "know your customer" regulations, was a very significant impact on customers' privacy who did business with banks.

And so I just raise that as sort of contradiction between your statements and what's been going on in the department. I hope that you'll be looking at rules and regulations and following through with that.
And then the third area that I want to get to, which is important to me and perhaps maybe even raises a little greater flag, is your statement on the death tax or the inheritance tax. And you said that -- in one of your statements that it was selfish to even think about reducing the death tax.
Now I happen to look at it as something that is -- it's a good first step in simplifying the tax code. Those who advocate flat tax -- we're really beginning to simplify the tax code. And I think in many cases on the inheritance tax, people have been taxed before on that money, and in many cases, if they were young people working on a farm or ranch, they probably already earned some sort of a legacy towards the income of that total family. I think that's reflected in the inheritance tax.
And you had made a statement -- and I'll bring this up here -- "'In terms of substantive arguments, the evidence put forth by lawmakers advocating repeal of estate tax is about as bad as it gets,' Deputy Treasury Secretary Lawrence H. Summers said in a meeting with a small group of reporters yesterday. 'When it comes to the estate tax, there is no case other than selfishness.'"
And then in the committee you followed it up -- the Finance Committee -- "yesterday Summers said that he regretted his earlier choice of words. He stressed, however, that he was not changing his position on the estate tax." So you still think the estate tax is selfish (sic)?
MR. SUMMERS: Let me take the three questions you've raised very quickly, if I could, Senator Allard.
On the question of the board, I'm absolutely committed to expediting it as much as possible.
On the question of "know your customer" regulations, they were issued for public comment. The public commented that they were a very bad idea because of the privacy implications, and we withdrew the regulations, which I think is the right way to -- which is, I think, the right way for us to operate. And those regulations will not be coming out again. With respect to the estate tax comments, what I said at the Senate Finance Committee was that what I had said was wrong because it's always wrong to impugn motives in these kinds of discussions.

I went on to say that there were legitimate concerns about the estate tax, particularly as it affected small businesses and farmers, and that I had been pleased to have a chance to be part of the process when the Congress took significant steps in 1997 to reduce estate tax burdens. That was my attitude. And I think the reference to "maintains his position with respect to the estate tax" in that article was probably a reflection of my saying that, as for current policy, what I supported was the president's budget, which does not contain as one of its policies an estate tax repeal or other major change. But all I said was that I favored the president's budget.
SEN. ALLARD: So as part of the administration, you oppose eliminating the death tax.
MR. SUMMERS: At this point -- at this point we believe the best set of policies are those that are contained in -- are contained in the president's budget; which doesn't mean that there aren't legitimate concerns about the estate tax; but we do not support the repeal of the -- repeal of the estate tax, although we obviously respect the fact that it's something where different people have different views.
SEN. ALLARD: Mr. Chairman, I see my time has expired, and I'll -- thank you for giving me the time, and I might have some questions later. Thank you.
SEN. GRAMM: Thank you, Senator Allard.
Senator Hagel.
SEN. CHARLES HAGEL (R-NE): Mr. Chairman, thank you.
Mr. Secretary, welcome.
Mr. Secretary, I wish to go back to your testimony this morning and your first priority objective. You say first maintaining a strong economic strategy based on continued fiscal discipline and the use of this moment of opportunity to address the long-term problems facing Social Security and Medicare. And I know my friend and colleague, Senator Santorum, has talked a little bit about Social Security this morning. But would you enlighten the committee, Mr. Secretary, on how do you intend to seize the moment, as you put in your first comment here, your first priority, as to how would you advise the president on Medicare, Social Security? And what can we expect, in your words, for the next year and a half seizing the moment to address Social Security and Medicare?

MR. SUMMERS: Senator Hagel, we will all be working through the budget process this year. I expect that the president will, before long, lay out a quite detailed blueprint with respect to a number of crucial changes that he believes would strengthen the Medicare system by promoting debt reduction, through augmenting the Medicare trust fund, to modernize the Medicare benefit, and to provide for structural changes -- certain changes in the structure -- of the Medicare program.
I think, more generally, we will all have to come together on finding a framework for surpluses before we commit any of the large surpluses that, at least according to current forecasts, lie in prospect. And I don't think that's something that can be done by one party or the other. I don't think it's something that can be done by one branch of government or the other, but it's something that we'll all have to find the best ways to work together on so that we can accomplish this in a bipartisan way and accomplish this in a way that involves cooperation between the president and members of the House and Senate.
SEN. HAGEL: But what specifically will you recommend to the president, going back to your statement that you intend to seize the moment of opportunity?
MR. SUMMERS: I have recommended to the president, and will continue to recommend, what I think has been the policy of the administration -- that there be a commitment to not utilize these surpluses until a satisfactory framework is found with respect to Social Security and Medicare; that we work to maximize the amount of debt reduction that we achieve, both because it helps our economy in the short run and makes room in the budget in the long run; and that we make important changes in the Medicare program in particular, to make it a maximally effective and fiscally prudent program.

I also believe, as I had a chance to discuss briefly with Senator Santorum, that certain changes with respect to investment for the benefit of Social Security beneficiaries, could make an important contribution, both to their well-being and to the long-term solvency of the program.
SEN. HAGEL: So are you saying we can anticipate structural changes being suggested or recommended from the president, as you I think said -- lay out details over the next few months both to Social Security and Medicare?
MR. SUMMERS: With respect to the Medicare Program, I anticipate that the president will lay out a series of suggested changes in the program.
With respect to the Social Security Program, the president has laid out a framework for augmenting Social Security solvency; has noted the investment issue, has noted several other structural changes that he sees as desirable in terms of the earnings test, in terms of greater protections for widows or survivors under Social Security; and believes that what is best is to find a satisfactory-as-possible, a bipartisan process for building on that.
SEN. HAGEL: But will those be presented in some kind of a form, legislation? How will that be presented to the Congress?
MR. SUMMERS: With respect to Social Security, we will continue to be consulting with members of Congress in both parties on what the best vehicle is for taking the issue forward.
SEN. HAGEL: Let me ask an international question: Did the president consult with you, when the Chinese premier was here, Zhu Rongji, regarding China and WTO and the trade package?
MR. SUMMERS: The president -- of course consulted with his whole economic team.
SEN. HAGEL: What advice did you give him about that issue?
MR. SUMMERS: I don't think it would be appropriate, Senator Hagel --
SEN. HAGEL: Well, let me rephrase it then.

MR. SUMMERS: -- for me to get into my particular --
SEN. HAGEL: Let me ask you your position on it. Do you think the Chinese should be admitted to the WTO?
MR. SUMMERS: I think it is very much in the interests of China, the United States and the global economy for China to be admitted to the WTO, on a sound and appropriate commercial basis, if such an agreement can be obtained. I think it is very important that any agreement that's obtained be a strong one because admission of a country that's got a fifth of humanity into the WTO, which in a sense legitimates its trade policies as of that moment, is a very important juncture in the global trading system.

And it's appropriate that we negotiate for a strong agreement at that important juncture, but much better that those efforts succeed and that, on a strong basis, China be able to enter the WTO than that somehow that does not take place.
SEN. HAGEL: Obviously, the president didn't feel that moment was right when the premier was here a few weeks ago.
MR. SUMMERS: I think the judgment of -- I think many shared the judgment that, while great progress had been made to that point, there were some important remaining issues, particularly as regards the so- called "protocols" that would have affected surges of imports into the United States from China that needed to be -- needed to be addressed before the negotiation could be said to be complete.
SEN. HAGEL: My time's up. Thank you, Mr. Chairman.
Mr. Secretary, thank you.
SEN. GRAMM: Mike Crapo.
SEN. MIKE CRAPO (R-ID): Thank you, Mr. Chairman.
And Mr. Summers, I appreciate the opportunity that you and I had a few days ago to talk about some of the critical issues that I am concerned about. And in that context, I'd like to talk with you a little bit about another aspect of our international trade policy, and that is the International Monetary Fund, and focus it specifically on South Korea and the issue of subsidization of various industries, in particular the semiconductor industry.
As you and I discussed then, I think it's very critical that the United States pursue proper policies through all of its interests, not the least of which is the International Monetary Fund, and the question of whether the IMF is being utilized to subsidize anti- competitive actions by other nations with regard to the United States and our producers.
I guess the first question I have with regard to that is, I'd like to ask you publicly to discuss your willingness to be very aggressive in making certain that the protections that we require of our producers in all of our trade arrangements, and in particular the implementation of the IMF, will be pursued and monitored by Treasury.

MR. SUMMERS: Yes, indeed, Senator. These are a set of commitments that we in the administration as a whole take very seriously.

Since you and I discussed this, I've had a chance to talk with Secretary Daley about this and as far as the areas where there is overlap in the trade policies, this is something we intend to pursue vigorously.
With respect to the IMF certification, specifically this is something that we ask the IMF to intensively monitor and separately we monitor ourselves, particularly through the work of the U.S. embassy. And that is something we will also continue and it is obviously a very important priority for us that no IMF money go to subsidize a competitor with U.S. firms, and it is also a priority for us that the opportunity that the IMF program provides to promote reform in countries be used to reduce directed lending and other subsidies.
I might just note in that regard that over the first six months of this year the IMF has been a net recipient of funds from Korea and Korea has paid back, over the last six months, approximately $6 billion to -- on a net basis -- to the IMF, and that we're no longer in a situation where the net flow of money is from the IMF to Korea, but very much in the reverse.
SEN. CRAPO: I appreciate that commitment on your part and, as you know, I'm very concerned about these certifications that the Treasury has already given with regard to the release of IMF funds in South Korea. And in my review of the documentation that's been provided to me justifying that certification, although I'm not finished with that review yet, my initial thoughts about it as I have reviewed it are that the -- I have serious questions as to whether there is sufficient information and whether there is a sufficient ability, or at least a sufficient resource being put to bear -- brought to bear -- to make those certifications, both on the part of the IMF and on the part of the Treasury. The question I have is, Do you feel that the Treasury and the IMF have the necessary resources and are committing the necessary resources to assure that the conditions Congress has put on the utilization of this money are being met?
MR. SUMMERS: Senator, I do, but we are always very open for advice and suggestions and ways in which we could do our jobs better. So my colleagues and I would be delighted to meet with you and your colleagues to discuss how best to take this very common objective forward.

SEN. CRAPO: All right, I'd like to move a little more broadly into general IMF policy right now. I noted when we had some of our previous hearings with regard to the approach that the IMF has taken with regard to helping out countries work out some of the difficult situations they're facing, that in almost every case, if not every case, one of the requirements or one of the conditions that the IMF was working on was an increase of taxes in the relevant countries as an effort to work out their financial problems. That seemed a little bit disturbing to me because it seemed more of a short-term solution and not a long-term institutional fix. Would you agree? Or do you believe that encouraging program countries to increase taxes rather than to decrease and control spending is the right policy?
MR. SUMMERS: Senator, I think that's something that has to be judged on a case-by-case basis. There are certainly many instances where the appropriate top priority has to be reductions in spending; has to be civil service reforms with respect to padded civil service; has to be privatization, and those are in many cases important elements in IMF programs. There are also cases where countries are collecting only a very small fraction of GNP in taxes, where half or more of legally required tax payments are not actually collected, and where an improvement in tax enforcement is a priority.
I think this is an issue that will need to be -- continue to need to be looked at going forward. But certainly I would be able to agree with what I think is the impulse behind your question, which is that markets and free enterprise are the best way forward for growth, not government-driven growth, and that it's appropriate that the IMF be pursuing and promoting pro-market rather than pro-government policies.
SEN. CRAPO: Thank you.
Mr. Chairman, could I have one last question, if it's all right?
SEN. GRAMM: Sure. Go ahead.
SEN. CRAPO: I assume you're familiar with the G-7 proposals that would provide for massive debt write-off to about 30 of the countries across the world that have received significant support in the past.

Do you believe that that debt write-off is sound economic policy?
MR. SUMMERS: Yes, I do.
SEN. CRAPO: Could you tell me why?
MR. SUMMERS: Because the debts in question are debts that are very unlikely ever to be collected and that represent a shackle, an overhang that discourages subsequent investment. And just as bankers know that it is good banking to do workouts with loans that have gotten in sufficient trouble, rather than to pretend to carry them as a fiction at their full book value --
SEN. CRAPO: But doesn't it just extend the moral hazard that we talk about trying to avoid and once again show that those who can engage in unjustified debt practices can get bailed out?
MR. SUMMERS: The debts in question in the G-7 statement are public-sector debts or debts from the international financial institutions. And I think it is good practice for any lender who has made a loan that has gone under water to acknowledge that fact and to create the best possible workout, rather than engage in cynical defensive lending, where you loan the money in order to be repaid. And frankly, a large part of what this does is create a situation where we acknowledge the loans that have gone bad to many of the poorest countries.
I do think -- and this is one of the things -- one of the very important considerations that went into shaping this program -- that it is important to find a balance and that you can't be in a situation where you acknowledge or allow the non-payment of debt because it's inconvenient or simply because it's burdensome. A financial system has to be based on the idea that obligations are met. At the same time, a financial system also has to accommodate the possibility that sometimes obligations cannot be met. And I think if you -- at least as we have looked at the detailed financial situation of these countries, the debts in question really represent a kind of burden that's become unsustainable.

SEN. CRAPO: Thank you, Mr. Chairman.
I think this shows there have been some bad lending decisions made, at least. I see my time is up.
SEN. GRAMM: Jack Reed.
SEN. JACK REED (D-RI): Thank you, Mr. Chairman.
Mr. Secretary, over the last several months with increasing emphasis we've been looking at the issue of Y2K and possible contingencies. And one, I think, has to reasonably assume there will be some problems, and maybe more perceptual than substantive. But I wonder what the Treasury is doing to ensure that there is adequate liquidity in the banking system and also that businesses have access to liquidity in the context of Y2K.
MR. SUMMERS: This is, as you suggest, an important issue for us. And I'm sure there will be -- there will be problems. Our first step at Treasury was to get our own house in order, and I think we've made some very substantial progress with respect to the IRS. With respect to the banking system, my understanding is that there were some simulation exercises, if you like, done within the last several weeks where the clocks were turned forward to January 1st of the year 2000, and the banking system actually came through those exercises quite well. But we continue to consult closely. It's something that's emphasized in the OCC's examination of its banks, the OTS's examination of its banks, and something we have discussion with the Federal Reserve about regarding the provision of -- regarding the provision of liquidity if that were to become necessary.
SEN. REED: Let me just follow up, Mr. Secretary, with a more specific question. Earlier this year, Congress authorized the National Credit Union Central Liquidity Facility to fully access its statutorily authorized borrowing authority of 12 times capital with regard to these Y2K potential contingencies. I understand, though, that Treasury has not yet worked out the details of this borrowing, or potential borrowing. Is that something that you can move on aggressively as you assume your responsibilities?
MR. SUMMERS: Yes, it is. There are many technical issues involved in the documentation, and obviously we want to be very careful to ensure the taxpayers' money is safeguarded in anything that takes place, and we want to provide the maximum incentive for remediation of the Y2K. But we are absolute committed.
I hesitate to be talking, frankly, about the Y2K in Senator Bennett's presence, given my comparative disadvantage in knowledge. But we are very much committed to carrying through our role with respect to that statute.
SEN. REED: Just as a final point, and I am glad Senator Bennett's here because he has been the leader, along with Senator Dodd, on this issue, is that -- one concern I have -- and it might be just as a perceptual reaction to -- and not a real problem, but a perceptual problem -- is liquidity shortages in certain institutions. And I would hope that we would have a mechanism either on the books, or shortly put on the books, that would give the Treasury or some agency the flexibility to get cash out where cash is necessary.
Having concluded this line of question, let me quickly turn to something else, and that is --
SEN. BENNETT: Let me quickly say that the Federal Reserve is planning to have an additional $50 billion in cash just for that reason.
SEN. REED: Well, I think that is encouraging. The only question is will they actually give it out? (Laughs.) They are noticeably stingy when it comes to problems.
But another issue, Mr. Secretary, and that is we are enjoying remarkable prosperity and measured in our unemployment rates, measured in the success of Wall Street and many other different parameters. But there is one nagging issue, and that is a record trade deficit.
And I wonder, as an economist who has thought about these issues for a very long time, essentially how long can we keep running huge deficits without impacting on our overall economic performance in the country? And the corollary to that question is: What do we do about it?
MR. SUMMERS: I think the trade deficit is a serious problem because of the dislocations that it engenders, because of the questions that arise of how long one can borrow, because of the protectionist pressures that it generates, Senator Reed.
I think the best thing to do about it is really along three lines: first and probably most important, promoting growth abroad so that all countries are carrying their weight and the global economy isn't trying to fly on a single engine; second, working as we have worked very hard to open markets abroad to U.S. exports and to the flow of products from the United States so that we can export more.

And third, increasing our national savings so that we do not find ourselves in a situation where we have to borrow from abroad and accept a concomitant of high imports relative to exports.
SEN. REED: Thank you, Mr. Secretary.
Thank you, Mr. Chairman.
SEN. GRAMM: Bob Bennett.
SEN. BENNETT: Thank you, Mr. Chairman.
I apologize, Mr. Secretary, for not being able to be here through your whole hearing. It's not in any way a demonstration of my lack of interest or my lack of support for your nomination.
I understand you've already been asked about the death tax. Let me ask specifically about the Kyl bill, of which I am a cosponsor, which says there will still be a tax on assets that are passed on from one generation to the other, but that the tax will occur at what we normally think of as a taxable event, which is the sale of the asset. In other words, death is not a taxable event; the sale of an asset is a taxable event. And it would be taxed on its original base in the normal tax structure, that it is at a capital gains rate. So that if a family business, for example, passes to the members of the family, there is no taxable event until some member of the family decides to exercise his or her right to sell that.
It would seem to me that this would take care of the ideological concern, many people saying you should not have a huge fortune accumulated and then held generation after generation without any redistribution, and at the same time, maintain sound tax policy that says the taxable event is the sale of the asset, and as long as the asset is not sold, it should not be taxed.
Do you have a comment on the Kyl bill?
MR. SUMMERS: I'm not able to make a -- I have not studied it sufficiently to really provide you with any kind of detailed set of views --
SEN. BENNETT: Okay.

Would you do that and respond? I don't --
MR. SUMMERS: I will respond. Clearly, I don't want to mislead you. The tax policies we support are the tax policies that are embodied in the president's budget. But as I have said, there are legitimate concerns in this area, and there's questions -- the questions of cost, there are questions of lock-in effects, and so forth. But I will -- we will come back to you on that.
SEN. BENNETT: All right. Picking up on Senator Crapo, the debt forgiveness, I tend to agree with you on debt forgiveness on loans that are clearly uncollectible. My concern is do we have the possibility on the part of international monetary institutions of doing what unfortunately sometimes happens in the private sector with respect to bankruptcies: "Gee, the slate is wiped clean; let us now loan you a whole lot more money" -- (laughs) -- "because you're now available for it." And I would hope the IMF and the World Bank, if there is debt forgiveness, takes a very, very hard look at additional debt. I'm afraid there are some of them that would say, "Oh, this country is poverty-stricken and we must once again show our great compassion and give them a whole lot of new loans, and they can now handle it because, look, they don't have any interest payments to make on any of the old ones." I think that is not good for the country, and it's certainly not good for the IMF or the World Bank. But there are those there who have that tendency, and I would hope you as secretary would do what you could to help them control that tendency.
Let me go to one other issue -- you and I have had a number of these discussions in the past -- (laughs) -- having to do with the stability of money.
For an individual in a country that is in some trouble economically, most often that individual's only economic asset is cash. And when the IMF comes in and says "Well, the thing we need to do to kick-start this economy is devalue your currency," you have just destroyed the capital base of all of the individuals in that country. We've had this conversation before. You recognize it, clearly.

But this is my biggest concern with the IMF, and with some of the things the IMF has been doing around the world, where they will say, "Well, to make your exports more competitive" -- or whatever -- "you know, we are going to devalue your currency." And then you have just wiped out whatever individual capital base people have.
I sit on the Appropriations Committee. And we are involved with microcredit, a program that everybody loves, where we make loans to people, of $50 to a woman -- for $100, so she can buy a sewing machine and become a capitalist, become an entrepreneur. All of a sudden, she has some accumulated capital. And yet we are destroying the accumulated capital of individuals around the world. I say "we," the IMF and others, when they encourage these kinds of devaluations.
Would you comment on that and give us what advice you would give the IMF with respect to devaluations?
MR. SUMMERS: Senator, my belief is that -- I have said many times -- no nation can devalue its way to prosperity. Devaluations are never a good or happy or desirable things.
Many of the devaluations that have happened have happened, not as a reflection of economic strategy, but as a matter of economic inevitability when a country's reserves had become fully depleted or largely depleted in defense of a given fixed exchange rate that didn't prove to be tenable, given the policy framework that the country was pursuing.
I think increasingly, we will need to encourage countries to put in place economic policies that, if you like, are guided by one of two philosophies: either the philosophy that the United States and many other countries operate with, that the exchange rate should be a flexible or floating exchange-rate regime; or the approach that says that the exchange rate should be fixed, that it should be a promise. And if it is fixed and if it is a promise, it is fixed and a promise that should not be broken. And we need to make sure that, when those commitments are entered into, those commitments are kept.
But I would caution that any exchange-rate regime, whether it is flexible, whether it is fixed -- whatever it is -- cannot be more viable or more contributing to a national economy than the underlying policy framework. And if the country spends more than it can collect and more than it can borrow, a country's banking system is not regulated and not healthy, there will be no healthy path through whatever exchange rate if pursued.

And so it's important to focus on the underlying fundamentals, which in turn provide the basis for sound money, whatever kind of exchange rate regime is pursued.
SEN. BENNETT: Well, my time is gone.
Just a quick observation: Maintaining the soundness of money seems to have been at the very end of the list of priorities that many of our international monetary institutions have followed. And I would like to see the American administration move it up, so that whether it's the IMF or the World Bank or whatever it is, one of the first things they do is to say, "We've got to do everything possible to keep the money, the value of the money stable." There can be no more significant contribution that an international monetary institution can make to the citizens of another country than to see to it that their meager store of capital, whatever it is, is not rendered worthless overnight by fiat. And we have seen that again and again. And I would hope the U.S. Treasury Department would be a leader in trying to repair that.
MR. SUMMERS: I share your sense. Inflation is often called "the cruelest tax," and I think that's exactly right.
SEN. GRAMM: John Edwards?
SEN. JOHN EDWARDS (D-NC): Thank you, Mr. Chairman.
Good morning, Mr. Secretary. How are you today?
MR. SUMMERS: Very well, thank you.
SEN. EDWARDS: Welcome.
I've got two areas that I'd like to ask you some questions about. And I apologize -- I've not been here the entire time, like Secretary Bennett (sic) -- if you've already talked about this.
Oh, I'd like to start with financial services modernization. And you know that this committee and the Senate in general has spent a tremendous amount of time on that issue and on that bill. And there are many of us -- myself included -- that believe that we desperately need to pass a financial services modernization bill. There's a difference in approach between Senator Gramm and myself and some of the Democrats on issues such as CRA. I'm interested in two things from you. First is just your general comments on financial services modernization and the appropriate structure for financial services modernization, and second, what role you intend to play in the House effort to pass the financial services modernization bill.

MR. SUMMERS: Senator Edwards, I had a chance earlier to make a long statement about financial modernization in the record. Let me just say now that I strongly support the right financial modernization bill. The policies that were right during the Depression period are not right for America in the 21st century. But it has to be the right financial modernization bill, and that means it has to protect and maintain the relevance of CRA, has to provide for business choice, through the operating subsidiary option, which can contribute to financial stability, and it has to provide appropriate protections for consumers.
As you know, there are different formulations of the bill working their way through the House. And if confirmed as secretary, I intend to continue the department's efforts to encourage this process to take as strong and appropriate a form as close as possible to our priorities, in the hope of producing legislation that can enter into law this year.
SEN. EDWARDS: Let me follow up with that. I've spent a lot of time down in North Carolina talking to the banks in North Carolina and also talking to consumers in North Carolina who are concerned about privacy issues. And what I'd like to have you comment about is, first of all, the banks' concern that I hear expressed regularly when I visit the banks in North Carolina, that some of the privacy provisions in the Commerce Committee-passed version in the House are unduly burdensome and will really make their job very difficult, make it difficult for them to provide services that they think are badly needed.
What, in your mind, is the bottom line on privacy? How do you strike the proper balance between what I think is a legitimate interest of financial institutions in doing some of these things against the interest of consumers in protecting their financial information? What's your perspective on that?
MR. SUMMERS: Senator Edwards, I think you stated what are the trade-offs involved here, considerations that have to be balanced, very, very accurately. On the one hand, I think many people feel, and feel very legitimately, that the records of one transaction with one entity should not become something that's freely available to others.

On the other hand, I think many of us appreciate the ability to get loan approvals quickly, appreciate the ability to have opportunities that will be attractive to us brought to our attention, and that some form of appropriate balance needs to be found.
I think the president has laid out -- the president has laid out the principle of notice and choice, which is to say that people should have an -- should be told what kind of information about them is being shared and should have some choice regarding it. Now, how best that general principle should be implemented, both in terms of various details and the definitions of what types of information are involved, how notice is to be given, how choice is to be provided and the question of what legislative vehicles are best to pursue this, I think are things we're all going to have to work and consult on as the year moves forward. But it does indeed involve a balancing of exactly the considerations that you described.
SEN. EDWARDS: Let me ask you about a very specific situation we have in North Carolina where Blue Cross Blue Shield of North Carolina, which had operated as a non-profit business for many years, decided to convert to for-profit status. And basically, the state of North Carolina required, as part of that conversion, that they set up a charitable foundation to help provide insurance to people who otherwise wouldn't have health insurance available.
Now, I've looked at the issue myself in terms of the Senate bill, and I'm satisfied that in terms of the Senate bill, North Carolina is right to make that -- to require exactly what they've required in that situation is intact. I am concerned about whether that right remains intact under whatever comes through the House.
Can I first have your perspective on the substantive issue of whether you believe North Carolina, under those kind of circumstances, ought to have the right to impose that kind of requirement?

MR. SUMMERS: Senator, I think it's -- I'm sufficiently unfamiliar with the issue that I am hesitant to make a firm statement on that and am not really knowledgeable enough to parse the language of the Senate bills and the House bills in this area. In general, it seems to me that it's appropriate for states to be able to protect their consumers in the way that you suggest.
SEN. EDWARDS: Would you be willing to give me an answer to that question --
MR. SUMMERS: Sure.
SEN. EDWARDS: -- after you've had a chance to look at it?
Let me say that I think it's terrific that the president nominated you. I think you're going to do a spectacular job. And we're all proud to have you serving in that capacity.
MR. SUMMERS: Thank you very much.
SEN. GRAMM: Chuck Schumer.
SEN. CHARLES SCHUMER (D-NY): Thank you, Mr. Chairman. And I, too, want to join my colleagues in welcoming you here in, at least speaking for myself, saying that I think you're going to be a great Treasury secretary and I'm enthusiastically in support of your nomination.
You couldn't have had better training: Bob Rubin, a New Yorker -- the one thing I would hold against you, but not by much, compared to Rubin. Been a friend of mine for 30 years and just done a fabulous job. And you've been an integral part of that team. And given your experience in the academic world and elsewhere as well as your tenure as deputy secretary, I think you're going to do a great job. I just had a couple of questions that I might ask of you.
One deals with the changes in the capital markets because of the Internet. And if you've been asked this question before, I apologize -- we had another hearing -- please let me know, because I don't want to take the committee's time. Four years ago or five years ago no stocks were traded on the Internet; now 30 percent are. We're seeing potential fracturization of the markets with the moves into night trading, the moves into ECNs and things like that. Could you just comment on how you think these changes will affect the depth, the stability, the openness of what are the greatest capital markets in recorded history, which are our own?
MR. SUMMERS: Senator, I think they've got the potential to do enormous amounts of good in terms of reducing transactions costs, increasing liquidity, causing our markets to function more efficiently. At the same time, I think as with any set of innovations or any set of changes, it's important for us all to be attentive to any risks that are attendant.

And I suspect that the very speed with which it will be possible to trade, the very decentralization that has strengthened the Internet, will also pose new challenges in terms of assuring an adequate level of market integrity. And it seems to me that it's appropriate for all of those who are involved in regulation to be mindful of what are very great changes that the Internet is bringing.
But I think it's important that we do so with the right kind of balanced philosophy that I think the president's electronic commerce strategy tried to lay out, which is that it will rarely be possible or appropriate to regulate the Internet -- regulate or tax the Internet -- as the Internet, but at the same time that it is important that the new opportunities it prevents (sic) not become a basis for circumventing very important kinds of protections that we as a society have tried to provide. And those will be some of the questions that, in the financial regulation area, we will all be grappling with.
SEN. GRAMM: Chuck, would you yield for just a second?
SEN. SCHUMER: I'd be happy to yield to the chairman.
SEN. GRAMM: I'm going to run over to the floor to help close out the debate on the steel quota vote. We're going to vote about 12:15. I want to thank you for coming today, Larry. As you are probably aware, the Finance Committee voted your nomination out a few moments ago, 20 to zero. I think you will get very strong support and votes from this committee. We're very grateful that you came over for the hearing; we look forward to working with you. I'm going to take you up on the commitment that you made about getting together and meeting to be sure we agree on the facts so that we're always arguing about programs and philosophy and values rather than different perspectives on the facts. And I wanted to, again, thank you for coming before the committee. Let me thank you --
MR. SUMMERS: Thank you for providing me the opportunity.
SEN. SCHUMER: Thank you. Another question I had is somewhat related to that, but not really directly, although it may be a cause. The chairman of the Fed, Alan Greenspan, I guess is a little less enthusiastic about his comments about irrational exuberance, but still maintains them. In my talks with him as well as what he said publicly, he believes our markets are going to be in good shape, our equity markets, over the next few years because of the changes, greater productivity, that the information revolution is bringing our country, the concomitant resistance to inflation that those productivity changes bring.

But the one danger spot he thought, was, with so many new entrants into the markets, the day trading and all ths other stuff, which is not taking away from the old but adding to it -- does create some instabilities in the markets that may be dealt with over time by the markets themselves, or whatever.
Tell me your views on that little universe of facts.
MR. SUMMERS: Senator, I would, as you will understand, not want to make any comment with respect to levels of the market --
SEN. SCHUMER: No, I am not asking that.
MR. SUMMERS: -- past, present or future.
I think, in general, those of us involved in economic policy- making can best serve the economy by concentrating on the fundamentals and not trying to manage the markets and not trying to use markets as a benchmark.
I do think -- and this is not an area where I have expertise, detailed expertise -- that there clearly are concerns with respect to ensuring adequate protection of, and adequate prudence by, retail investors, and that it is important for everyone to be mindful of the fact that markets fluctuate and that we have lived through a period of extraordinarily good times in the economy and really now for quite a long time, in markets, and that that is not a basis on which one can absolutely rely, going forward.
One of the things Chairman Greenspan has said often that I would very strongly agree with, is that bad lending decisions tend to be made in good times and good lending decisions tend to be made in bad times. And I think that is something that we all need to be mindful of. And I think that at a time like this, a kind of complacency has to be one of the risks that we consider.

SEN. SCHUMER: I thank you.
And thank, Mr. Chairman. An answer worthy of Chairman Greenspan himself.
SEN. SARBANES: Bob, I have a --
SEN. BENNETT: Senator Sarbanes has a further question.
SEN. SARBANES: I had to leave and go to the floor. I had just one question I'll put. Under Section 3005 of the Trade Act of 1988, the Department of the Treasury is required to submit to the Congress an annual report, with semi-annual updates, on the conduct of international economic and exchange rate policy. In January, the Treasury submitted its latest report under the act to the Congress, which, unfortunately, had been quite delayed.
You and I have discussed this matter, and you've given assurances that the Treasury in the future will submit these reports in a timely manner, and I appreciate those assurances; I think they're important.
I did want to touch on one of the matters that's required to be included in the report, and that's the Treasury's determination, which is required by Section 3004 of the act, as to whether countries are manipulating the value of their currencies relative to the dollar in order to gain a competitive advantage in international trade.
We have received reports from various U.S. industries trying to compete in Asia that several countries appear to be engaging in currency manipulation for competitive trade advantage.
Now, my first question is, have any of these reports come to your attention?
MR. SUMMERS: I've not, myself, received such reports. In general in Asia the priority in the last two years on the part of countries has been avoiding excessive depreciation and generating appreciation. But clearly, as we move to the next report, and I know these reports are to come twice a year, we will certainly be prepared to investigate all such allegations.
SEN. SARBANES: Yeah. So I assume that Treasury hasn't, to your knowledge, identified any U.S. trading partners engaging in currency manipulation? MR. SUMMERS: That's correct.
SEN. SARBANES: Given these reports that we're hearing from our private industry, though, I -- we'd like you to undertake a particularly close analysis of this particular issue as you moves towards -- well, preparing the next report, or if the situation is pressing enough, need to bring it to our attention before that.

MR. SUMMERS: We will do that.
SEN. SARBANES: And the other observation I just want to make, Mr. Chairman, is as one who's been around here a fair amount of time I don't want you to get -- I congratulate you on the vote in the Finance Committee, but you should be very careful not to get carried away by this 20 to nothing vote because things can change around here in a hurry from time to time. So it's a good sign now, and I think it'll last through your confirmation, but it doesn't guarantee that there won't be storm clouds down the road. That's just a kind of a word of friendly counsel. (Laughs.)
MR. SUMMERS: Thank you very much for that very -- what strikes me as very valuable caution.
SEN. BENNETT: You remind me, senator, of a comment made by Bryce Harlow (sp), whom I regard as one of the most knowledgeable Washington practitioners ever to walk these halls. He said every president enjoys a honeymoon until he submits his first budget. (Laughter.) And I do have one additional question.
This morning the World Bank is voting on whether or not to assist the Chinese government's program of moving Chinese into areas that have been historically Tibetan. Do you have an opinion of this proposal? Maybe it's too late. Maybe the vote has already been taken. But you know the matter, I'm sure.
MR. SUMMERS: The United States will be voting to oppose the project because of concerns in the environmental areas and concerns in the resettlement areas.
SEN. BENNETT: Thank you. I appreciate that, and I agree with that position. Thank you.
The committee stands adjourned. (Gavels).
END

LOAD-DATE: June 23, 1999

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