Mar.Geithner Testifies on the State of the International Financial System
At a House Financial Services Committee hearing on March 20, Treasury Secretary Tim Geithner discussed the U.S. policy responses to the European debt crisis and the use of the International Monetary Fund (IMF) to assist struggling European states.
In his opening remarks Vice Chairman Jeb Hensarling (R-Texas) said because of recent developments, Europe’s debt problems are not as “threatening” as they once were. Instead, Hensarling said the greater threat is “Europe successfully confronting their debt problems now, while we [U.S.] do not,” warning that “there is no greater threat to our economy than our fiscal trajectory.” Additionally, he criticized U.S. fiscal policy and the administration’s lack of a jobs plan, indicating that improving jobs numbers are a result of Americans leaving the workforce. In closing, Hensarling expressed concern with the IMF’s stated intentions to increase lending to struggling European countries and the impact of those loans on American taxpayers.
Ranking Member Barney Frank (D-Mass.) said the debt crisis in Europe is a major threat to the U.S. recovery and the IMF has, and continues to, play an important role in containing the crisis and ensuring its resolution. Frank added that impeding IMF support to Europe would be “economic self destruction.”
In his opening statement, Geithner said the European debt crisis has caused “significant damage” to global economic growth and has buffeted the U.S. recovery from the 2008 financial crisis. He said the U.S. and the IMF are working together with European leaders to put in place a comprehensive strategy to address the crisis, including: 1) Economic reforms in the member states to restore fiscal sustainability, restructure the banking systems, and improve competitiveness and growth prospects; 2) Institutional reforms, including the “Fiscal Compact,” that establish stronger disciplines on the fiscal policies of the member states to limit future deficits and debt as a share of GDP; 3) A coordinated strategy to recapitalize the European financial system, with government guarantees of funding; and 4) A “firewall” of funds to provide financial support to governments that are undertaking reforms to help assure access to financing on sustainable terms.
Geithner said he is “encouraged” by the steps European leaders have taken to address their sovereign debt crisis, and urged them to build on their progress, but warned against performing “hasty” or dramatic” budget cuts or tax increases to address deficits during recovery. He also reminded members that it will take time for the European Union to fully institute its strategies to stem the crisis, adding that the reforms will need to “carefully calibrate the mix of financial support and the pace of fiscal consolidation.” Additionally, Geithner expressed concern over rising oil prices’ downward pressure on growth. In closing, Geithner defended the IMF’s role in Europe, highlighting the importance of their advice and their ability to mobilize temporary funding, but said he has “no intention to seek additional resources for the IMF.”
Question and Answer
Geithner was asked about U.S. commitments to the IMF by several members. Responding to questions from Rep. Maxine Waters (D-Calif.), Rep. Steve Pearce (R-N.M.) and Rep. Randy Neugebauer (R-Texas), Geithner defended the IMF’s work and stressed its importance in containing the European debt crisis. He also told Neugebauer and Pearce, that although no investment is risk free, after six decades of participation in the IMF program, the U.S taxpayer has never lost money on a loan to the IMF.
Hensarling asked Geithner if Treasury has a timetable for requesting more funds for the IMF and if Treasury, or the Obama administration, has the legal authority to loan funds to the IMF without Congressional approval. Geithner said the IMF currently has $400 billion in uncommitted funds at its disposal and “can’t see the case” for increasing the United State’s contribution to the IMF. He added that it is his belief that any additional monetary support for the IMF would require Congressional approval.
Frank asked Geithner what would happen to the U.S. economy if Congress decided to impede the IMF’s work in Europe. Geithner said impeding the IMF’s work in Europe would hurt the recovery, slow growth and hurt U.S. businesses.
Rep. Gary Miller (R-Calif.) asked Geithner to comment on a recent Wall Street Journal article that said the Volcker rule could prevent European countries from selling their bonds at a time when their ability to borrow is critical. Geithner acknowledged that several European countries have shared that concern with the administration, and promised members that the Federal Reserve was looking into the matter. He added that although Treasury does not have direct authority over the rule, it does have a coordinating role concerning the “broader design of the rule,” and will take a “very close look” at how to mitigate these concerns.
Rep. Judy Biggert (R-Ill.) asked Geithner to comment on the concerns that the financial services industry have expressed with the Volcker rule, referring specifically to SIFMA’s comment letter on the proposed rule. Geithner said after Dodd-Frank was passed, Congress asked Treasury to create guidance on how the rule should be designed. The guidance received “broad support” from Congress and the financial services industry, but both sides of the aisle and the financial services industry have expressed a range of concerns since the rule was drafted by the regulators. He said the stakes on getting this rule right are “very high,” but he assured Biggert that the regulators will take the necessary time to carefully review all of the comment letters they have received to make sure the rule is right.
Biggert also asked Geithner to comment on China’s barriers to entry for American business, including financial services firms. She said: “Though you [Geithner] have stated publicly that the U.S. needs to the level playing field with China, they continue to have the most restrictive market for financial services in the G20.” Geithner said it is very important for China to further expand the opportunities for U.S. firms competing in China. He said Treasury and the administration will continue to work with the Chinese to level the playing field, but noted the progress they have made so far, including rising exchange rates and significant currency appreciation.
Rep. Carolyn McCarthy (D-N.Y.) asked Geithner to elaborate on the effect of U.S. sanctions on Iranian banks. Geithner said U.S. sanctions, coupled with similar sanctions by Europe, are having a “very substantial effect” on Iran, forcing countries to cut back on their usage of Iranian oil by making it extremely difficult to pay for it.
Neugebauer and Rep. Patrick McHenry (R-N.C.) asked Geithner to comment on the Financial Stability Oversight Council’s (FSOC) coordination efforts with foreign regulators. Geithner said some foreign regulators have been less than forthcoming with their rulemaking processes, especially in the derivatives space. He noted that the U.S. is “a long way ahead” in its development of oversight and transparency frameworks for derivatives markets and acknowledged that other foreign regulator’s inability to keep pace has presented some problems, including U.S. regulators missing rulemaking deadlines to maximize alignment with foreign derivatives regulations. Additionally, Geithner said regulators will not weaken their regulation to better align with some foreign reforms.
Rep. Carolyn Maloney (D-N.Y.) asked what Treasury is doing to ensure that Americans can access foreign bank accounts. Geithner acknowledged that several concerns have been expressed in regards to the Foreign Account Tax Compliance Act (FATCA), but said Treasury is working to satisfy Congressional intent of the rule and has given foreign banks considerable time to comply. However, he said more work still needs to be done to refine FATCA.
Following up on Maloney’s line of questioning, Rep. Blaine Luetkemeyer (R-Mo.) asked Geithner whether he believes FATCA will restrict foreign investment. Geithner said Treasury has acted twice to give foreign institutions more time to adjust and lessen the compliance burden, but he acknowledged that there is still work to be done.
Luetkemeyer also asked about the effect of U.S. banks’ credit default swaps against Greek debt on the economy. Geithner said banks have dramatically reduced their exposure to European sovereign debt over the last 18 months and the execution of credit default swaps will have “no material effect” on the U.S. economy.
Rep. Scott Garrett (R-N.J.) asked Geithner what will happen to Edward DeMarco, Acting Director of the Federal Housing Finance Agency, if he “refuses to carry out certain provisions of the Home Affordable Modification Program 2.0 (HAMP 2.0).” Geithner said the administration and Treasury have been working “very closely” with DeMarco, noting that he has been very supportive of the “bulk of programs aimed at repairing the damage to the housing market.” However, he noted there are some obvious disagreements between the FHFA, the Treasury and the administration, especially on principle reduction.
Garrett also asked why investors were not “at the table” during the negotiations leading up to the Servicer Settlement. Geithner said Treasury was not an architect of the agreement, but said the architects did consider the proposal.
Rep. David Scott (D-Ga.) asked Geithner if HAMP is succeeding. Geithner said the HAMP program has helped “about one million” homeowners, which is “less than we [the administration] wanted.” However, he said the modification standards established in the HAMP program has spurred broader refinancing efforts across the country, helping over two million homeowners refinance their mortgage.
Rep. Keith Ellison (D-Minn.) asked why the government sponsored enterprises (GSE) refuse to add principle reduction to their modification ‘toolbox’. Geithner said Treasury and the administration are encouraging the GSEs to use principle reduction modifications, but acknowledged that a GSE principle reduction program must be “carefully” implemented because of the laws governing Fannie and Freddie. Geithner also said that a GSE principle reduction program will be targeted.
Ellison also asked Geithner to explain why the Volcker rule is good for the economy. Geithner said the 2008 crisis was caused by the excessive risk-taking of financial institutions and manipulation of the government safety net. He said the Volcker rule is part of a “broad set of reforms” to make sure that firms cannot manipulate the system like they did in 2008. Geithner noted however, that the rule did protect market making, but might be out of balance, assuring Ellison that regulators are making the necessary adjustments.
Rep. Gregory Meeks (D-N.Y) asked what reforms Greece will undertake to make it more economically competitive. Geithner said there are three basic issues that contributed to Greece’s debt troubles: 1) their government grew too large; 2) regulatory and bureaucratic impediments made it very hard to start a business and effectively utilize its labor force; and 3) their financial system was too leveraged to be sustainable over the long run. He said Greece is undertaking a combination of fiscal and political reforms, but it will take a while for the system to change, which will negatively affect growth in the near term. Meeks followed up by asking what would happen if Greece defaulted and left the Euro. Geithner said a Greek default, on its own, would not cause much harm to the U.S. economy, but it would cause a recession in the rest of Europe, which would greatly affect us.
Rep. John Carney (D-Del.) asked Geithner to comment on the sustainability of solutions for Greece’s debt problems. Geithner said EU countries face two fiscal disadvantages when combating downturns. First, member states do not have their own monetary policies and their currency exchange rates cannot adjust to downward pressure. Second, the EU has no mechanism for “fiscal transfers to cushion economic shocks.” He said the reforms Greece is currently implementing are helping and Greece is making progress towards becoming fiscally sound, but a successful solution to Greece’s problems ultimately depend on continued support from their political leaders.
For testimony and a webcast of the hearing, please click here.
At a House Financial Services Committee hearing on March 20, Treasury Secretary Tim Geithner discussed the U.S. policy responses to the European debt crisis and the use of the International Monetary Fund (IMF) to assist struggling European states.
In his opening remarks Vice Chairman Jeb Hensarling (R-Texas) said because of recent developments, Europe’s debt problems are not as “threatening” as they once were. Instead, Hensarling said the greater threat is “Europe successfully confronting their debt problems now, while we [U.S.] do not,” warning that “there is no greater threat to our economy than our fiscal trajectory.” Additionally, he criticized U.S. fiscal policy and the administration’s lack of a jobs plan, indicating that improving jobs numbers are a result of Americans leaving the workforce. In closing, Hensarling expressed concern with the IMF’s stated intentions to increase lending to struggling European countries and the impact of those loans on American taxpayers.
Ranking Member Barney Frank (D-Mass.) said the debt crisis in Europe is a major threat to the U.S. recovery and the IMF has, and continues to, play an important role in containing the crisis and ensuring its resolution. Frank added that impeding IMF support to Europe would be “economic self destruction.”
In his opening statement, Geithner said the European debt crisis has caused “significant damage” to global economic growth and has buffeted the U.S. recovery from the 2008 financial crisis. He said the U.S. and the IMF are working together with European leaders to put in place a comprehensive strategy to address the crisis, including: 1) Economic reforms in the member states to restore fiscal sustainability, restructure the banking systems, and improve competitiveness and growth prospects; 2) Institutional reforms, including the “Fiscal Compact,” that establish stronger disciplines on the fiscal policies of the member states to limit future deficits and debt as a share of GDP; 3) A coordinated strategy to recapitalize the European financial system, with government guarantees of funding; and 4) A “firewall” of funds to provide financial support to governments that are undertaking reforms to help assure access to financing on sustainable terms.
Geithner said he is “encouraged” by the steps European leaders have taken to address their sovereign debt crisis, and urged them to build on their progress, but warned against performing “hasty” or dramatic” budget cuts or tax increases to address deficits during recovery. He also reminded members that it will take time for the European Union to fully institute its strategies to stem the crisis, adding that the reforms will need to “carefully calibrate the mix of financial support and the pace of fiscal consolidation.” Additionally, Geithner expressed concern over rising oil prices’ downward pressure on growth. In closing, Geithner defended the IMF’s role in Europe, highlighting the importance of their advice and their ability to mobilize temporary funding, but said he has “no intention to seek additional resources for the IMF.”
Question and Answer
Geithner was asked about U.S. commitments to the IMF by several members. Responding to questions from Rep. Maxine Waters (D-Calif.), Rep. Steve Pearce (R-N.M.) and Rep. Randy Neugebauer (R-Texas), Geithner defended the IMF’s work and stressed its importance in containing the European debt crisis. He also told Neugebauer and Pearce, that although no investment is risk free, after six decades of participation in the IMF program, the U.S taxpayer has never lost money on a loan to the IMF.
Hensarling asked Geithner if Treasury has a timetable for requesting more funds for the IMF and if Treasury, or the Obama administration, has the legal authority to loan funds to the IMF without Congressional approval. Geithner said the IMF currently has $400 billion in uncommitted funds at its disposal and “can’t see the case” for increasing the United State’s contribution to the IMF. He added that it is his belief that any additional monetary support for the IMF would require Congressional approval.
Frank asked Geithner what would happen to the U.S. economy if Congress decided to impede the IMF’s work in Europe. Geithner said impeding the IMF’s work in Europe would hurt the recovery, slow growth and hurt U.S. businesses.
Rep. Gary Miller (R-Calif.) asked Geithner to comment on a recent Wall Street Journal article that said the Volcker rule could prevent European countries from selling their bonds at a time when their ability to borrow is critical. Geithner acknowledged that several European countries have shared that concern with the administration, and promised members that the Federal Reserve was looking into the matter. He added that although Treasury does not have direct authority over the rule, it does have a coordinating role concerning the “broader design of the rule,” and will take a “very close look” at how to mitigate these concerns.
Rep. Judy Biggert (R-Ill.) asked Geithner to comment on the concerns that the financial services industry have expressed with the Volcker rule, referring specifically to SIFMA’s comment letter on the proposed rule. Geithner said after Dodd-Frank was passed, Congress asked Treasury to create guidance on how the rule should be designed. The guidance received “broad support” from Congress and the financial services industry, but both sides of the aisle and the financial services industry have expressed a range of concerns since the rule was drafted by the regulators. He said the stakes on getting this rule right are “very high,” but he assured Biggert that the regulators will take the necessary time to carefully review all of the comment letters they have received to make sure the rule is right.
Biggert also asked Geithner to comment on China’s barriers to entry for American business, including financial services firms. She said: “Though you [Geithner] have stated publicly that the U.S. needs to the level playing field with China, they continue to have the most restrictive market for financial services in the G20.” Geithner said it is very important for China to further expand the opportunities for U.S. firms competing in China. He said Treasury and the administration will continue to work with the Chinese to level the playing field, but noted the progress they have made so far, including rising exchange rates and significant currency appreciation.
Rep. Carolyn McCarthy (D-N.Y.) asked Geithner to elaborate on the effect of U.S. sanctions on Iranian banks. Geithner said U.S. sanctions, coupled with similar sanctions by Europe, are having a “very substantial effect” on Iran, forcing countries to cut back on their usage of Iranian oil by making it extremely difficult to pay for it.
Neugebauer and Rep. Patrick McHenry (R-N.C.) asked Geithner to comment on the Financial Stability Oversight Council’s (FSOC) coordination efforts with foreign regulators. Geithner said some foreign regulators have been less than forthcoming with their rulemaking processes, especially in the derivatives space. He noted that the U.S. is “a long way ahead” in its development of oversight and transparency frameworks for derivatives markets and acknowledged that other foreign regulator’s inability to keep pace has presented some problems, including U.S. regulators missing rulemaking deadlines to maximize alignment with foreign derivatives regulations. Additionally, Geithner said regulators will not weaken their regulation to better align with some foreign reforms.
Rep. Carolyn Maloney (D-N.Y.) asked what Treasury is doing to ensure that Americans can access foreign bank accounts. Geithner acknowledged that several concerns have been expressed in regards to the Foreign Account Tax Compliance Act (FATCA), but said Treasury is working to satisfy Congressional intent of the rule and has given foreign banks considerable time to comply. However, he said more work still needs to be done to refine FATCA.
Following up on Maloney’s line of questioning, Rep. Blaine Luetkemeyer (R-Mo.) asked Geithner whether he believes FATCA will restrict foreign investment. Geithner said Treasury has acted twice to give foreign institutions more time to adjust and lessen the compliance burden, but he acknowledged that there is still work to be done.
Luetkemeyer also asked about the effect of U.S. banks’ credit default swaps against Greek debt on the economy. Geithner said banks have dramatically reduced their exposure to European sovereign debt over the last 18 months and the execution of credit default swaps will have “no material effect” on the U.S. economy.
Rep. Scott Garrett (R-N.J.) asked Geithner what will happen to Edward DeMarco, Acting Director of the Federal Housing Finance Agency, if he “refuses to carry out certain provisions of the Home Affordable Modification Program 2.0 (HAMP 2.0).” Geithner said the administration and Treasury have been working “very closely” with DeMarco, noting that he has been very supportive of the “bulk of programs aimed at repairing the damage to the housing market.” However, he noted there are some obvious disagreements between the FHFA, the Treasury and the administration, especially on principle reduction.
Garrett also asked why investors were not “at the table” during the negotiations leading up to the Servicer Settlement. Geithner said Treasury was not an architect of the agreement, but said the architects did consider the proposal.
Rep. David Scott (D-Ga.) asked Geithner if HAMP is succeeding. Geithner said the HAMP program has helped “about one million” homeowners, which is “less than we [the administration] wanted.” However, he said the modification standards established in the HAMP program has spurred broader refinancing efforts across the country, helping over two million homeowners refinance their mortgage.
Rep. Keith Ellison (D-Minn.) asked why the government sponsored enterprises (GSE) refuse to add principle reduction to their modification ‘toolbox’. Geithner said Treasury and the administration are encouraging the GSEs to use principle reduction modifications, but acknowledged that a GSE principle reduction program must be “carefully” implemented because of the laws governing Fannie and Freddie. Geithner also said that a GSE principle reduction program will be targeted.
Ellison also asked Geithner to explain why the Volcker rule is good for the economy. Geithner said the 2008 crisis was caused by the excessive risk-taking of financial institutions and manipulation of the government safety net. He said the Volcker rule is part of a “broad set of reforms” to make sure that firms cannot manipulate the system like they did in 2008. Geithner noted however, that the rule did protect market making, but might be out of balance, assuring Ellison that regulators are making the necessary adjustments.
Rep. Gregory Meeks (D-N.Y) asked what reforms Greece will undertake to make it more economically competitive. Geithner said there are three basic issues that contributed to Greece’s debt troubles: 1) their government grew too large; 2) regulatory and bureaucratic impediments made it very hard to start a business and effectively utilize its labor force; and 3) their financial system was too leveraged to be sustainable over the long run. He said Greece is undertaking a combination of fiscal and political reforms, but it will take a while for the system to change, which will negatively affect growth in the near term. Meeks followed up by asking what would happen if Greece defaulted and left the Euro. Geithner said a Greek default, on its own, would not cause much harm to the U.S. economy, but it would cause a recession in the rest of Europe, which would greatly affect us.
Rep. John Carney (D-Del.) asked Geithner to comment on the sustainability of solutions for Greece’s debt problems. Geithner said EU countries face two fiscal disadvantages when combating downturns. First, member states do not have their own monetary policies and their currency exchange rates cannot adjust to downward pressure. Second, the EU has no mechanism for “fiscal transfers to cushion economic shocks.” He said the reforms Greece is currently implementing are helping and Greece is making progress towards becoming fiscally sound, but a successful solution to Greece’s problems ultimately depend on continued support from their political leaders.
For testimony and a webcast of the hearing, please click here.