Chairman Leach, members of the Committee, thank you very much for inviting me here this morning to testify on recent economic developments in Asia, and the roles that the International Monetary Fund and the United States should play in the developing crisis.

Let me begin with a basic statement about what I believe the objectives of American policy should be. I believe that it is the role of the Congress to minimize the adverse impact of events in Asia, and possible similar events elsewhere, on the living standards of the American people. This has three dimensions to it. First, we must minimize any downside risk in the current crisis and be prepared to take actions to prevent a widespread collapse of global trading and banking relationships. Second, we must pursue policies which quickly get Asian economies into working order as parts of a free and open international market for goods and capital. Third, we must establish new institutional arrangements which minimize the chances that events of this magnitude happen again, and that if they do recur, they are resolved in a more expeditious manner than the current crisis has been.

Let me take these objectives in order and begin with some good news. Thanks to actions taken over the past decade, the United States economy and its financial system are in great shape. Our financial system is far better able to weather the current difficulties than it was 10 years ago and is far better positioned than any of our competitors'.

This is not the result of luck, but of a lot of hard work by our nation's regulators and its banks. And we have paid a price. The economic headwinds which afflicted the United States economy in the early years of this decade were, in large part, a result of the actions taken to strengthen the banking system so that it could be healthy today. Let me stress two particular changes. First, our banks built substantial capital and loan loss reserves as the result of legislative and regulatory requirements to make sure that any bank losses would be carried by the stockholders of the institution and not by the taxpayers. This capital building process was a major cause of the economic slowdown in the early 1990s, but it laid the groundwork for the current economic expansion.

Second, the Federal Reserve, under the leadership of Governor Susan Phillips, worked closely with the major global U.S. banks to develop highly sophisticated computer models of banks' balance sheets. They carefully modeled the complex interrelationships between various components of bank portfolios. This all sounds very technical, but it has had a big practical payoff. Bank managements and the Fed have a much better understanding of the actual risks in the lending portfolios of the banking system than exist in other countries. This has really paid off. Our banks are far less exposed to the Asian crisis than those of Europe or Japan who did not do this hard work.

Third, our monetary authority has spent the last 17 years building credibility. This credibility, and the Fed's ability and willingness to use it in a crisis is the real defense America has to prevent systemic problems in Asia from spreading to our banking system and our economy. Again, this has not been a costless process. The process of building credibility was a major factor in the recessions of 1982 and 1990. It is important to recall that, back in the Carter Administration, the monetary and financial credibility of the United States was so low that we were actually forced to issue bonds denominated in foreign currency. Today, the dollar is the undisputed king of the world financial community. As a result, it would take an unlikely series of catastrophic policy errors to produce the kind of banking crisis in American banks that exists elsewhere.

I stress this good news because understanding it is key to pursuing the objectives I mentioned earlier. The United States had the foresight to take the precautionary measures needed to prudently protect its economy and citizens from events now unfolding in Asia. Given their public statements, I believe that our banks could now absorb the losses they face in Asia without seriously impairing their capital position or ability to function or having a large impact on the U.S. economy. While taking such losses would not be a happy outcome, a quick resolution of this crisis would not be catastrophic for our economy or our citizens.

The most important ramification of this fact is that it should have strengthened the bargaining position of our government in international negotiations. I find it amazingly frustrating that rather than pressing home the advantages that the U.S. economy now possesses, we have timidly been seeking cover in multilateralism. Perversely, this has meant maximizing the risks to U.S. taxpayers while minimizing the negotiating power inherent in the U.S. position.

For example, throughout 1997, the Japanese government was pressing for an Asian-financed solution to Asian problems. The United States spent its time blocking such an effort, insisting in effect that U.S. taxpayers, and not just Japanese taxpayers, be on the hook for the Asian bailout. We blundered in this regard in part out of ignorance. While Japanese authorities understood the overexposure of their institutions to Asia, our government was seemingly unaware of the magnitude of the crisis. In November at the APEC summit, the President even declared this to be a mere "glitch" in the road, producing widespread incredulity of the U.S. grasp of economic reality. Our efforts to block the Japanese proposal also delayed the kind of prompt action that could have minimized the collateral damage to Southeast Asian economies.

I believe we should use our negotiating leverage -- the United States effectively has all the cards in the current crisis -- to advance our principles about the working of the global economy. We should do so not out of nationalistic breast-beating, but because we have made the sacrifices to do the right things and others have not. The taxpayers of Europe and Japan, and the working people of Asia would be much better off today if their governments had imitated the actions taken by the United States with regard to reforming its financial system and deregulating its economy. We should be using the present crisis to insist that other nations take those actions now, and make those actions a precondition for our assistance.

The actions I speak of address the second and third objectives I referred to in my introduction. To get the Asian economies functioning again in a way which is helpful to America and the global economy, we must make sure that the existing crony-based systems in those countries come to an end. Under present arrangements, firms are never allowed to fail. They take advantage of a protected domestic capital market to finance huge projects at artificially low cost, and then face no adverse consequences when they have problems. Firms are protected against international competition by limits on foreign investment and ownership.

In spite of talk about "conditions," the IMF has simply not been aggressive enough in advancing our long run interests in this regard. I would note that it has been the growing opposition to the IMF bailout money by the U.S. Congress that has strengthened the negotiating stand of the IMF in Korea with regard to foreign ownership. By its nature, the IMF does not represent the successful American model of the past two decades, but a conglomeration of interests which includes the less successful models of Japan and Europe. Because of our inherent negotiating strengths in the current crisis, we gain very little by relying on such a multilateral agency to represent our interests.

Furthermore, it is far from clear that the IMF is successful even in advancing the collective interests of the people of this planet. For example, it was reported in the New York Times, that the IMF has admitted to making matters worse in Indonesia. All too often, the IMF simply strengthens existing power elites. It buys them time. Since the elites, and not the people of the country, are on the other side of the negotiating table, the end negotiations often require excessive sacrifice by the middle classes of the country, and too little sacrifice by those who actually caused the financial crisis in the first place. I would note that this is certainly true in Mexico, which has often been touted as a "success" for the IMF. The U.S. Treasury may have made a "profit" on the Mexican loans, but the Mexican workers and not the Mexican establishment paid the price.

There is a final important point to be made about whether the IMF is hastening an economic recovery in Asia. It is simply not the case, as some claim, that creditors and debtors are incapable of resolving their own problems without the IMF. I would note that the stated reluctance of the Congressional leadership to approving more funds for the IMF has actually helped force the banks and the debtor nations to sit down and negotiate. Had there been no IMF, this would have happened much sooner. Sadly, the efforts of the IMF and the Administration to create an early role for the IMF in this crisis had the effect of delaying negotiations between the parties directly involved.

This is a matter of straightforward self-interest. Both parties involved in the dispute--the banks and the borrowers--stood to lose money. Both are also aware that a protracted dispute simply increases the economic damage and increases the total losses which must be covered. But, both also saw the injection of IMF funds as a way of minimizing this loss. Thus, as long as it seemed as though the IMF was going to keep injecting funds, neither party had any incentive to resolve the dispute. It was only late in December, when it became clear that the IMF was running out of money and would not be replenished in a timely manner, that an effective rollover of Korean debt occurred.

I am not one who believes that there is no role for the IMF in the world. But the proper role does not include acting as lender of first resort. Instead, the IMF should be a facilitator. It should candidly and objectively assess the risks inherent in various economies--a function it failed to do in the current crisis. It should offer its good offices for resolving disputes and providing technical assistance and monitoring services to make sure that negotiated agreements are carried out. It is even conceivable that it should be able to pull together the resources needed to clinch a deal between creditors and debtors that is largely resolved, but needs a small amount of funds to finalize.

Thus, confronting the problem now before the Congress, I believe that an immediate increase in the IMF quota would not be helpful to meeting the objective of a speedy recovery of Asian economies. Approval of the IMF quota increase would simply signal to those parties most directly involved that the world's taxpayers will cover a substantial portion of the losses brought about by their imprudent behavior. On the other hand, an actual rejection of a quota increase might destabilize Asian markets at a very delicate moment. Thus, the best course for the Congress is to defer consideration of the issue while studying the issue carefully and monitoring how events in Asia unfold.

I also believe that such an action, or should I say deliberate inaction, would facilitate the third objective of which I spoke--minimizing the likelihood that a similar event will recur. I believe it will prompt the Administration to more aggressively represent America's long-term interests and strengthen its bargaining hand in any such negotiations. America has the most to gain from a global economic order in which capital investment--including equity investments--can be made anywhere on the planet. It also has the most to gain from a world in which financial disputes, including bankruptcies and insolvencies, can be resolved before a fair and impartial arbiter.

With regard to direct investment, our long term objective should be that a company headquartered anywhere on the planet should be able to invest in a factory anywhere else on the planet and receive the same legal protections as any other company located there. I find it amazing that America has tolerated a situation in which any Korean firm can make any investment it wishes in the United States, but no American firm was allowed to own a majority stake in a Korean enterprise. We should aggressively use our leverage in the current dispute to end such inequities.

With regard to lending, our long-term objective should be that bankruptcy mechanisms are in place which allow lenders to repossess the collateral which underpin their loans. We need an international bankruptcy "best practices" standard and are now in a sufficiently strong negotiating position to bring one about. However, we must act now and use the advantages the current crisis brings us. At the same time, it should also be made clear that those who make investments or loans which are not profitable must bear the consequences of their decision. As long as it is perceived that international institutions and the United States taxpayer will bail out imprudent lenders, crises of the kind we are now experiencing are sure to recur and perhaps escalate.

We have also made a serious mistake in effectively converting loans from various international banks to various Asian companies into loans from American and other taxpayers to the Korean and other governments. A lender should be able to foreclose on a borrower without it becoming an international issue. By effectively nationalizing these economic arrangements we expand the moral authority and security commitment of the United States in the interests of private parties which may not even be American.

Much has been made of the supposed foreign policy interest of the United States in these matters. While I do not pretend to be a defense expert, I believe that most of this foreign policy concern has to do with the perceived reputation of the United States in the countries involved. I believe our present policies represent the worst of all worlds. The United States is identified as the effective "puppet master" which dictates IMF policy. America, therefore, gets the blame for the harsh macroeconomic conditions which the IMF demands as conditions for its loans. At the same time, as we all know well, the IMF does not represent American interests, but the interests of its many member states. So, the United States bears a disproportionate share of the foreign policy costs without achieving its share of the foreign policy benefits.

From a foreign policy perspective, a world in which an international bank, even an American owned one, can foreclose on a Korean company in default, must be infinitely preferable to one in which the American government, with or without the IMF, imposes macroeconomic policies borne by the entire Korean nation. The Korean chaebol now in default aren't particularly popular with the Korean people. The Indonesian companies owned by the Suharto children aren't particularly popular with the Indonesian people. And the Thai companies owned by military officers in the Thai army aren't particularly popular with the Thai people. By converting the problems of those failing companies into national problems and by converting the cause of the banks into an American cause, we are actively weakening our world standing.

We are at a critical juncture where the global economic and security policy interests of the United States happen to coincide with the interests of the great majority of the population of the planet. A free international economic order, in which one doesn't need connections with the government to be able to run a business, is as much in the interests of individual citizens of Asian countries as it is in the interest of American citizens and firms. The sooner we make clear that we are not interested in bailing out crony capitalists and the banks which lend to them, the less likely it is that we will ever face an economic crisis like the present one again.

Lawrence B. Lindsey is a resident scholar at AEI.