Remarks Of
Representative James A. Leach
Chairman, Committee on Banking and Financial Services
Before the World Food Prize Symposium
Des Moines, Iowa
October 16, 1998

I would like to speak tonight about the interplay of three issues -- international economics, foreign policy, and finance -- with the health of American agriculture.

As most Americans are coming to understand, the global economy is in serious disarray. The issue now is the magnitude of the crisis, its potential effects on the U.S. economy and American national interests, as well as the response of policymakers in Washington and elsewhere around the globe.

This is a defining moment for the United States. The current economic problems are as menacing as any in the last 50 years. Until recently the consensus view was that the U.S. economy was sufficiently robust to weather the storm. But in recent weeks the risk of a substantial slowdown has risen substantially. The effects of the global crisis are increasingly evident in three different channels: exports, corporate profits, and finance.

The initial and most important impact of the global crisis on the United States involves a deterioration in the terms of trade. The agricultural economy in particular has experienced tremors as the upheaval abroad has choked off the capacity of foreigners to pay for U.S. goods and services. According to the Department of Agriculture, market prices and net cash farm income in 1998 will be at least $2 billion less than forecast as a result of lost markets. A 12 percent decline in demand for U.S. agricultural products has led to a 30-to-40 percent reduction in prices for many agricultural commodities.

With the general erosion of corporate earnings the seeds of an abrupt credit crunch have begun to take root. Money-center commercial and investment bank exposure to hedge funds has shaken confidence levels on Wall Street. The fear of tightening liquidity conditions and a possible confidence-shaking response of Middle American consumers caused the Federal Reserve's surprise move yesterday to lower interest rates for the second time in three weeks.

Because disruptions in the nation's supply of credit typically lead to economic downturns, the Federal Reserve has no choice but to continue to err on the side of lower interest rates. The scramble of financial institutions to quality lowers prospects for further economic growth this year and betokens concern for almost any kind of leveraged investment decisions. Indeed, as Chairman Greenspan remarked last week, "It's pretty obvious that the outlook for 1999 and the US economy has weakened measurably in the aftermath of the Russian devaluation and debt moratorium. We are clearly facing a set of forces that should be dampening demand going forward to an unknown extent… This is a time for monetary policy to be especially alert."

Maintaining global financial stability and economic growth is self-evidently a vital U.S. national interest.

Financial crises, economic recessions or depressions, and collapsing currencies all have a direct impact on the competitiveness of American goods and services in global markets, the continued growth of our economy, the well-being of American farmers and workers and, not incidentally, conditions that make a more civil, peaceful world possible.

There are no assured stabilization answers, but a crticial ingredient of a U.S. approach should include leadership through the international financial institutions and cooperation with our friends and allies on strategies to advance sustainable economic growth. In this context, new prudential approaches to international economic problem-solving need to be developed before the global trend toward democracy and open markets is placed at even more serious risk.

While the U.S. has the option to ignore global economic issues – to go it alone in protecting our national interests, as some in Congress suggest – such a myopic approach would place a greater risk on the American taxpayer than does reliance on international institutions like the IMF. The reality, whether we like it or not, is that if there was no IMF, the global pressure would be for the U.S. Treasury to take direct responsibility. But, few in America or abroad would want the U.S. government to bear the burden of becoming, by default, the lender of last resort to the world. Reliance on the IMF, on the other hand, implies not only shared global responsibility (five-sixths of the fund's money comes from other countries), but greater likelihood of repayment and reform.

Accordingly, despite the unprecedented bitterness that has developed in American politics, I've gone out of my way to insist that the Banking Committee, which I chair, work cooperatively with the Administration on national interest issues which are increasingly in the economic, rather than the political, arena. In this regard, I am pleased that the recent budget accord includes a full replenishment of the financial resources of the International Monetary Fund, with conditionality that follows the basic model of the legislation I drafted and moved through the Committee in March. It is self-evidently in the U.S. national interest to replenish the IMF's coffers without further delay. At issue is not only the stability of the international financial system and the ability of the IMF to respond to future crises, but the broader question of whether the U.S. intends to be an engaged leader in global economic policy and multilateral diplomacy in general.

By the same token, the IMF is an imperfect institution. Recognizing this fact, the Congress is insisting on credible, realistic IMF reforms. These reforms are designed to ensure that the IMF becomes less secretive and more accountable. In addition to requiring greater transparency, we are requiring that the U.S. lead efforts to ensure that IMF borrowers follow market-oriented reforms, adopt sound banking practices, reduce opportunities for corruption and bribery, support workers' rights, reduce ethnic strife and promote environmental protection.

Yet funding and reforming the IMF alone will not promote international financial stability. If the world is to avoid ever more expensive IMF programs and their attendant moral hazard problems, a new consensus on reforming the international economy, particularly financial standards, must be developed. The world community needs to examine anew issues related to appropriate exchange rate regimes, strategies for resolving public and private debt problems, and the roles of the IMF and World Bank in the 21st Century.

Similarly, Americans need to be responsive to the humanitarian needs of peoples who have been devastated by events beyond their control. Indonesia, the world's fourth most populous country, has not only experienced an economic collapse, but been beset by an El Nino-related drought that has brought it to the edge of famine. In Eurasia, Russia has sunk into an economic and political abyss that brings the revolutionary conditions of 1917 to mind. The ruble has lost virtually all value, banks have closed and store shelves are empty. Indeed, Russia is struggling to prevent potentially catastrophic food shortages as economic chaos has all but shut down imports ahead of its always bitter winter. The prospect of a Russian food crisis can only amplify voices from the left and right --- the Communist past and an intolerant and militant nationalism with possibly Fascist dimensions – each of which clamors for return to a more politically repressive, state-directed economy, however growth-stifling it may be.

How could the bursting of the financial bubble in Thailand last year have precipitated a global crisis?

A review of origins of the Asian crisis suggests that those countries with modern, well-regulated financial systems have done well, while those without have found public treasuries jeopardized and economies in peril.

But even if the world were suddenly to adopt the market policies and practices along the American model, that would not prevent financial crises from occurring. As former Federal Reserve Chairman Paul Volcker recently wrote in the Financial Times, "Consider the latest bit of evidence from the U.S. itself: one unsupervised and unregulated financial institution -- an institution boasting the most elaborate models of market behavior and sophisticated advisors -- carried the possibility, by testimony of the U.S. Federal Reserve, of pulling down the financial tent."

The failure and government-led rescue of America's most heavily-leveraged hedge fund, Long-Term Capital Management represents one of the most serious and symbolic financial events of the decade.

Dubiously enshrined in establishment economic thinking is the "too-big-to-fail" doctrine – the notion that government will intervene to save a bank in trouble if its collapse would cause major harm to the economy. Last month, with the rescue of Long-Term Capital Management a corollary appears to be in the making: "some financial firms are too big to liquidate too quickly."

The application of the "too big" doctrine for the first time beyond a depository institution raises troubling public policy questions.

From a social perspective, it is not clear that Long-Term Capital, or any other hedge fund, serves a sufficient social purpose to warrant government-directed protection. In one view, hedge funds provide liquidity and stability in financial markets, allowing economies to finance the infrastructure and enterprises necessary to modernize. In another view, hedge funds have a narrower rationale: they're seen to be run-amok, casino-like enterprises, driven by greed with leveraged bets of such huge proportions they can influence global capital markets and even jeopardize the economic viability of individual sovereign states.

In the past decade, the American public's attention has been focused on institutions of finance and the development of sophisticated trading instruments such as derivatives. New fangled products can, in many instance, be helpful as hedges against risk, but as demonstrated by Long Term Capital's failure, over-leveraging can produce destabilizing conditions for companies, as well as the general economy. While recognizing that there can be merit to utilizing modern financial instruments, what is needed is a return to the basics and an emphasis on the efforts and needs of ordinary people, as contrasted with a disproportionate emphasis on nihilistic insider games.

The founder of the Grameen Bank in Bangladesh, Dr. Muhammad Yunis, was awarded the World Food Prize in 1994 for developing small loan programs for the poor. With the Grameen model in mind, I have been pushing legislation in the Banking Committee emphasizing micro-enterprise lending in the United States. American society is becoming more sociologically splintered with an increasing chasm between haves and have nots for which the experience of the developing world has direct relevance. But, as much as there is a place for small business and micro-enterprise lending in America, the country in most desperate need of the development of smaller financial institutions – such as community banks and credit unions with the capacity to administer micro-enterprise programs – is Russia, which has attempted to build big banks tied to the government, instead of smaller lending institutions springing from the people. It is smaller institutions of finance which are most critical in rural areas around the world. It is, after all, no accident that one of the strengths of Iowa agriculture is that farmers have access to competitive credit terms offered by community-controlled banking institutions.

With regard to the agricultural dilemma, the issue is prices at home and, more significantly, availability of nutrition abroad. Food production at any time and place is always a function of weather, but famine in the modern world is more man-made than nature-caused. There is sufficient food to go around; the problem is distributional equity, infrastructure such as transportation and storage, and capacity to pay.

At this time, compassion demands the attention of the world community to problems of potential famine in such diverse parts of the globe as Russia, North Korea, Indonesia, and sub-Saharan Africa.

The children of the world are increasingly threatened. The issue isn't Malthusian -- population growth outstripping capacity to produce -- but the social and political will to insure that forgotten continents, unknown island states and former enemies are compassionately unattended to.

As a country, we are obligated to act promptly and non-ideologically. It is simply frail judgment to deny, for instance, the Cuban people humanitarian commerce in food and medicine. This is not the American way.

While isolationism is always at issue in our democracy, the American heritage involves a heavy dose of compassionate internationalism. Consistent with the most caring dimension of the American foreign policy tradition we should support efforts through the World Bank and other development institutions to bolster already fragile safety nets for education, health and social protection in crisis-affected countries. Such initiatives should be designed to send a practical message about America's concern for the plight of average citizens around the globe -- not just government officials, captains of industry and problems of corrupted capital flows.

There is a worldwide crisis of finance that has, as a ramification, a looming famine emergency. Given this circumstance the Administration is obliged to creatively use its authority under the charter of the Commodity Credit Corporation to purchase food stocks for transfer under a dramatically upgraded P.L.-480 Food for Peace program. Clearly, transferring monetary resources -- that is, the equivalent of gold -- to financial plutocracies is failing. What should be emphasized instead is the transfer of food stocks -- the gold of our harvests -- bartered, where possible, for natural resources, such as oil and gas, from countries like Russia and Indonesia. In North Korea, the quid pro quos, to the extent they can be developed, should relate more to greater political restraint from this modern-day Sparta.

There are points where politics and economics intersect, and when political institutions implode, as they have in Russia, economic consequences follow. The best and the brightest on Wall Street lost billions betting that Russia was "too nuclear" to fail. They didn't grasp that it was too corrupt to succeed and that it did little good for the West to transfer resources to Russia's Central Bank if it simply recycled them to a private banking system which served as a money-laundering network for insiders.

No nation-state can prosper if it lacks a place where people can save their money with confidence and seek lending assistance with security. Russia, which is the land mass most similar to our own, has been kept back for most of this century because of the Big "C" – Communism – and is now being kept back because of the little "c" – corruption – which is likely to be more difficult to root out than Communism was in the first instance.

It is bewildering how, with all the attention in recent months being given to reforming the "architecture" of the global financial system, no one is paying attention to universal values. But, honesty must prevail over corruption or no financial system will work. In fact, unless the point is made with regard to countries such as Russia that the problem isn't that market economics are wanting, but that corrupt market mechanisms are pervasive, the Russian people will never understand the lessons of the century. The old battleground in world affairs was Communism vs. Capitalism; the new one contrasts corrupted quasi-capitalist economies with non-corrupted ones; corruptocracies vs. free-market democracies.

What the Russian people – and those of so many developing countries – deserve is a chance to practice free market economics under, not above the rule of law. If attention is paid, above all, to establishing honest, competitive institutions of governance and finance, virtually everything else will fall into place.

With regard to the issue of corruption, the lessons are writ large: the best antidote to cultural corruption is a legal system where economic enterprise is decentralized and subject to as little financial control by the government as possible. The general level of corruption decreases as the degree of market competition increases. Free market systems are not only more efficient than statist models, but more honest.

From the public's perspective it must be understood that politicians are dangerous and that, kleptocracy aside, their most counterproductive weapon is protectionism. This is particularly true in finance. Any country that protects itself from foreign competition in finance injures itself and, in effect, emboldens corruption. Unilateral actions or international agreements to open those markets that are closed to Western-system financial institutions provide the best chance for corrupt systems to reform themselves. Their publics will, if given a chance, lead their leaders by saving where they are best protected and borrowing where they get the most competitive terms.

In this context, the Long-Term Capital Management saga is fraught with ironies related to moral authority as well as moral hazard. The Fed's intervention comes at a time when our government has been preaching to foreign governments, particularly Asian ones, that the way to modernize is to let weak institutions fail and rely on market mechanisms, rather than insider bailouts.

We have also encouraged developing countries to establish bankruptcy arrangements to cushion the shock of failures and, where possible, fairly distribute the assets of bankrupt institutions. Now as the country with the most sophisticated markets, bankruptcy laws and legal precedents, we appear to have abandoned the model we urge others to follow.

It will be months before full perspective can be applied to the Long-Term Capital issue, but the principal lesson would appear to be that our government, above all others, should not subsidize insider bailouts or protect those who make investment errors.

The "too big" doctrine is simply too prone to fail.

Analogously, the lesson for Congress of recent events abroad is that we cannot isolate ourselves from global problems. Just as this crisis has produced a leadership test for governments in developing as well as industrialized economies, with the question of whether they have the will to address controversial problems in their societies, it has provided a leadership test for the United States, with the question of whether we can remain a global leader.

It is far easier to identify the vexing economic problems facing the world than fashioning credible and sustainable pro-growth solutions that will alleviate deteriorating standards of living. Nonetheless, if global confidence is to be restored, and the wrenching experience of our parents' generation not repeated, the United States clearly must lead and emphasize the basics – democracy, free markets, the rule of law.

If America offers leadership, our ties and influence in the world could be strengthened for decades to come. On the other hand, if we turn a cold shoulder on problems in the developing world during this time of crisis, the consequences for American political leadership and commercial activities will be profoundly damaged for a long time to come.

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