Summary of the William J. Casey Institute of the Center for Security Policy on ‘The Asian Financial Crisis: The Exception or the Rule?’

4 May 1998
New York, NY

Over the past few weeks, growing concern has been expressed in capitals and markets around
the
world that Asia’s financial crisis is intensifying and spreading, with potentially global
repercussions. Such a prospect is prompting policy-makers and interest groups in the United
States (among other places) to urge Congress to approve major new infusions of taxpayer
resources for bail-outs run by the International Monetary Fund (IMF). Others are arguing that the
private sector is the only mechanism capable of effecting necessary structural changes. If
Washington and other industrialized nations are to avoid making what may prove to be
multi-billion dollar mistakes, the character and causes of this crisis must be properly understood.

Toward this end, the William J. Casey Institute of the Center for Security Policy convened on
4
May 1998 an impressive Symposium in New York City to consider the present and long-term
policy and economic implications of the Asian financial crisis. In attendance were nearly two
hundred past and present business leaders, senior government officials, diplomats and journalists.
(See the attached List of Participants.) The program began with
a reception and luncheon
featuring a forceful address on the issue of American global leadership by a former — and perhaps
future — presidential candidate Steve Forbes. (For an edited rendering of Mr.
Forbes’
extraordinary speech, see the Casey Institute’s Press Release entitled
Casey Symposium Shows
Need for Security-Minded Approach to Asian Financial Crisis and Other Global
Challenges
[No. 98-R 77, 5 May 1998].) The symposium on the crisis
confronting the emerging market
economies, particularly those in Asia, was held in the afternoon after Mr. Forbes spoke.

The following pages summarize many of the important insights gleaned from the discussions
regarding the causes of the present financial crisis; the IMF’s and other multilateral organization’s
ability to address those ills; and the impact of the crisis on the security landscape. With regard to
the latter, a particularly interesting discussion took place concerning the use increasingly being
made by potentially unfriendly national military establishments or other foreign government
entities of financial instruments issued in Western capital markets to underwrite their activities.

The points itemized below are direct, albeit unattributed, quotes from participants. No effort
was
made to formalize a consensus among the symposium participants, but certain views appeared to
be broadly shared.

Highlights of the Casey Symposium’s
Proceedings

The stage was set for the afternoon’s discussion by illuminating remarks by former
Deputy
Treasury Secretary R. T. “Tim” McNamar and former Associate Director of
the Office of
Management and Budget Lawrence Kudlow. Subsequent to their distinguished service
in
government, both men have gone on to become major players on Wall Street. At present,
Secretary McNamar is Vice Chairman of AmTec, Inc. and Mr. Kudlow is Chief Economist and
Director of Research at America Skandia Investment Services. They offered views that
contrasted sharply in several areas concerning the underlying causes of the Asian financial crisis
and, accordingly, the efficacy of various methods of addressing the problems.

The Casey Institute Symposium’s second panel focused on the policy aspects of the Asia
financial
crisis. This segment featured valuable contributions by lead discussants John
Fund, a member of
the Wall Street Journal’s Editorial Board, and Roger W. Robinson,
Jr., former Senior Director
of International Economic Affairs at the National Security Council. Mr. Robinson is
the
first occupant of the Institute’s William J. Casey Chair.

In order to capture most efficiently the main points of these highly complementary panels, this
summary of the highlights of the Symposium’s proceedings is divided into seven sections.

Trends in the International System

• “The introduction of technology has resulted in a loss of sovereignty by
  governments and
  an empowerment of both individuals throughout the world and the private markets that
  they
  determine with the click of their computer mouse.

“I think this is as fundamental a paradigm shift as the introduction of steam power at
the beginning of the industrial revolution. The industrial revolution was mostly in
Western Europe and North America. Mostly white men benefitted. The technology
revolution is already throughout the world today, and all mankind will be the
beneficiary.”

• “Almost all countries are attempting to privatize previously state-owned
  enterprises, with
  varying degrees of success. Even Brazil has made excellent headway. China is filled with
  privatization schemes of various types, some of which will work. Most of the world’s
  policy-makers have become monitors to varying degrees. Sterling examples of reform from
  centrally
  planned economies to capitalist economies are multiplying, Chile, Poland, Argentina,
  Singapore, and, yes, the Netherlands.”

• “There is a consensus that free domestic markets allocate goods and services better
  than
  government decisions. Free trade benefits many more people than it hurts, and it is to
  be pursued. Minimum regulation of domestic capital allocation most efficiently serves a
  growing private economy. Free flows of international capital will seek the highest return
  consistent with portfolio risks sought by investors. Floating currency rates will, over time,
  reflect the quality of the country’s economic management and economic policies.”

• “Volatility in markets is to be expected, and it reflects market discipline.
  Entrepreneurship is a positive goal, and small business can produce wealth and jobs as well as
  larger companies.”

• “There is lack of agreement on transparency of decision-making by governments
  and
  corporations. There is a lack of satisfactory financial disclosure and conformity of
  auditing standards worldwide. Disclosure standards for banks, corporations, and
  governments are not agreed upon.”

• “Today, what do you do when Goldman Sachs does a $200-million underwriting for Korea
  and
  puts the bonds in 100 or 200 insurance companies, the pensions funds around the world?
  Goldman Sachs doesn’t have any ongoing responsibility. They made their fees and went their
  way. Those bonds, you may not be able to find. They are probably freely tradeable. They do
  get mark-to-market. Some losses do occur, but something is wrong.

“We saw in the recent situations, for example,…the blatant conflict of interest when
Goldman Sachs was advising Korea on how to restructure and bidding for the
underwriting at the same time. That is simply morally wrong, and that should be
prohibited, in my view.”

Causes of the Asian Financial Crisis

• “The Asian financial problems result from banking systems’ inability to cope with
  adverse macro-economic conditions, coupled with an over-leveraged private sector and
  corporate reliance on bank borrowing.

“How did this happen? Well, loans are directed by the government, not the
market. There was inexperience or unskilled domestic lending. There was
inadequate, inaccurate, or late financial reporting by the borrowers, and,
clearly,
there was the moral hazard of the likelihood of a government or international
bailout. Again, this applies to…bonds…as well as the bank loans.”

• “You have concentrations of credit exposure, too much to one borrower.
  You have
  connected lending where you have any type of a group of companies in Korea or Japan or
  elsewhere, where they are altogether.

“You have got to remember, 60 percent of the shares on the Tokyo Stock Exchange
are all cross-held, 60 percent. That is too high. Corporate governance in these
countries is virtually nonexistence. You lack an outside board of directors. You
certainly lack audit committees, independent auditors with international standards.

“Well, it raises a question. If a private sector corporation or bank in any
country is going to access international capital markets, why shouldn’t they
be forced to adhere to some minimal standards of corporate governance and
supervision? If you want to list on the New York Stock Exchange, you have to
meet certain standards.”

• “…[The affected] countries have increasingly employed — they didn’t really start out that way
  — but they have lapsed into this kind of state-directed crony capitalism command and
  control. And world credit markets, which really run the show, not
  the IMF, world free
  credit markets basically just pulled the plug and forced them to rethink their
  policies.“

• “Capital goes where the rate of return is highest. It is real simple. And as soon as the
  capital
  returns from many of the Asian tigers began to deteriorate because of bad monetary and fiscal
  decisions and insider lending and propping up failed banks and corporations, then the money
  moved out and suddenly we had a crisis.

“The IMF contributed to it because it is a devaluationist agency, but, by and large, the
countries have to take most of the blame.”

• “Central banks are, by definition, central planners, and if there is anything we have
  learned from the demise of the evil empire, it is that central planning doesn’t work.“

• “The Asian crisis is like the Berlin Wall coming down. I think a lot of good is going to come
  out of this pain and suffering because they’re smart people and they’re going to figure it out.

“The ills of crony capitalism exposed by the Asian financial crisis, including inadequate
disclosure and politicized banking systems, are, in turn surfacing the whole moral
hazard question. The matter of foreign government-sponsored conglomerates and the
undue coziness between governments and private sectors in Asia need to be
fundamentally restructured. This is very cathartic from an economic and financial
perspective. The Asian financial crisis, likewise, slowed China down, allowing us to
take a hard look at where this huge train is going.”

• “I think the largest factor about the Asian crisis was [that] it was a financial bubble. It was
  built on low interest rates, and the currency relationships between all those Asian currencies
  and the U.S. dollar were unrealistic.

“The bubble in Asia came from artificially low credit conditions in the U.S. transmitted
through currency links. So, when it blew up, you know, everything that was predicated
on artificially easy credit conditions and phoney currency links evaporated.”

The International Monetary Fund: Solution or Part of the
Problem?

‘The IMF as the Solution’

• “So, in this Asian financial crisis, what is the role of the World Bank and the IMF? Should
  they be abolished? No, I don’t think so. I think we have to reinvent them.

“Absent the IMF, nations with severe balance-of-payments problems, regardless of the
cost, have, I think, only two options. Either they default or continue devaluation. …If
those are the only two options that people have, is that going to promote security in the
world and economic growth that will raise the standard of living of the largest number
of people in those countries?”

• “The role of the IMF should be to work with the World Bank to develop and
  enforce
  standards throughout the world. Joint structural adjustment loans to countries to
  strengthen
  their accounting, bank supervision, central bank and corporate governance policies, these
  issues were on the agenda for the first time at the Interim Committee meeting in
  Washington
  last month, and that is a pretty appalling indictment that we have the international capital flows
  that we have, and this is the first time they were on the agenda of the IMF, after the Asian
  financial crisis.

“It is really the first time that the soundness of the domestic financial system and
operations of world capital markets were at the center of discussion. That was
driven by the recognition of the fact that the problems in Asia were caused principally
by financial fragility and lack of transparency.

“This caused the chairman of the Interim Committee to call for amending the
articles. This is not just a policy, but amend the articles that emerge. If you are
going to be in the IMF, you have to do this, to require member companies to
commit to strengthen their domestic financial system as a condition for
membership. In effect, the IMF would develop international standards of
soundness, and they would disclose how countries measure up to these
standards, a little bit similar to what Moody’s and Standard & Poor’s do.

“Presumably, market pricing would then reflect these differences in ratings. Well,
this is a pretty radical change. It is what Secretary Rubin calls the new
international architecture. I just call it a framework. It is really to prevent these
problems.”

• “Now, the underlying hypothesis…is that the more interconnected the world’s financial
  systems
  are, the less independent are domestic financial systems. In effect, the price of admission
  to
  international private capital should be a domestic financial system that includes
  minimum standards for prudential domestic banking, corporate governance, and
  accounting transparency. In my view, this is what the IMF should be focusing its efforts
  on,
  to provide a framework for improved private capital decisions.”

• “If difficult IMF reforms are not adopted, then the Asian financial crisis is likely to
  repeat itself again and again, as Mexico did in the ’80s and ’90s. If the U.S. is diluted in
  its quota share, that is, does not keep its voting percentage, it will not be able to provide
  leadership or force these reforms. However, with American participation and leadership, the
  IMF can be reformed so it is doing the right thing proactively to prevent recurrence of the
  current situation in Asia.”

• “The timing of today’s discussion is very appropriate. At a time when many people believe
  that last Friday’s vote for NATO expansion adds to the world’s military security, abdicating a
  United States-IMF leadership, and diminishing our international economic security, could
  cause the Asian experience to become the rule and not the exception, as the title of today’s
  seminar suggests.”

• “I think there is going to be an IMF, [but] I think that it has lost its way. It does have a
  mandate, and it can do constructive, legitimate things within established parameters.
  Nevertheless, I think that the institution — and the system of which it is a part — needs
  some urgent reform.”

• “On the other hand, one of my greatest fears is that we [will] not exercise our quota share,
  maintain our voting [and] decrease in voting power down to probably 12 or 10%. We lose
  [the] effective veto [we enjoy]…at 20%. We are close enough to it, we can always get
  somebody to go along. We simply become a marginal player, and the IMF and the rest of the
  world does whatever the hell they want to without U.S. leadership. I regard that as the worst
  possible outcome.”

‘The IMF as Part of the Problem’

• “I have a somewhat different point of view. I don’t think we need the IMF at all.
  And, in
  fact, my basic take is you give a bunch of Ivy League economics professors a couple hundred
  billion dollars to dispense around the world, you’ve got yourself a big global problem.”

• “The IMF doesn’t do what it was supposed to do, and that was to stabilize currency and
  monetary policies. The view coming out of Bretton Woods in 1945 was we need to avoid the
  isolationism and protectionism and beggar-thy-neighborism that was such an important cause
  of the global depression in the ’30s.

“So some smart people, including John Maynard Keynes, in probably his best moment,
set up…what became GATT and the IMF and also the World Bank and said in order to
have a free world trading system which is vital to wealth creation and peaceful harmony
among the nations, we need stable currencies. You can cause protectionism by
constant devaluations, just as much as you can by legislating tariffs, and that
system worked brilliantly in the post-World War II recovery period of the late ’40s, the
’50s, and the ’60s, and it didn’t break down until first Johnson and then most
particularly Richard Nixon broke the Bretton Woods system.”

• “[The Wall Street Journal‘s] Claudia Rosette wrote an editorial recently in which
  she pointed
  out that IMF employees all around the world have housing allowances, school allowances for
  private education of their children, transportation allowances. It is an incredibly
  cosseted
  welfare state. And in addition, it’s all tax-free. If you get a $125,000 annual salary
  from
  the IMF, which is the average of a country director, it is tax-free in addition to all of these
  bonuses.

“We do not just have to critique the record of the IMF…but also the
culture of the
IMF. I mean, these people are so insulated from reality that they make…the European
Commission headquarters look positively connected with the grass roots. … These
people are not interested in the kind of practical down-to-earth performance-based
result economies and decisions that you all make in this room. They live in a separate
world.”

The IMF’s Record

• “The IMF has undergone ‘mission creep,’ to use a phrase that Congressman Dick Armey has
  successfully used, in slowing down the IMF money in Washington. The IMF has
  become a
  sort of self-appointed world lender of last resort, a sort of global welfarist financial safety
  net agency.”

• “This is an agency of academics. None of them ever made a loan in their lives. They have
  never had to do real-world market analysis or credit risk analysis. They are simply not staffed
  up for this kind of operation, and as I said, no one has really said this is what you should do.
  So we need to stop the mission creep. That may or may not be doable.”

• “The IMF has been sort of gradually growing into this world welfare lender, safety net
  lender.
  So, from the mid-’60s to the mid-’90s, basically as we counted them up…they have had
  89 cases of IMF dole. Of that 89, 48 of those countries, roughly 54
  percent, are no better
  off economically today than they were before receiving the loans.

“Now, of the group that is no better off, 32 of them, or 67% are actually
poorer
today, and, finally, of those economies that have become poorer; 14 — or 44% —
have actually shrunk. Their GDPs are today lower than when they first went on
the
IMF dole.

“So this is an outfit that not only can’t shoot straight, but it is actually doing more
harm than good, which is not a good thing politically. Of course, they don’t have
any political roots. So that’s the problem. No one can vote on it.”

• “Here is the brilliant job the IMF policy advice has done: So far, the latest data in Indonesia
  show a 28-percent increase of inflation, wholesale prices. CPI is up 39 percent. Industrial
  production in Indonesia is falling 25 percent. Well, that is pretty good. Inflationary
  depression, I guess.

“In Thailand, the wholesale price index is up 26 percent. CPI is up 10 percent.
Industrial production is falling 15 percent, more inflationary recession. In South
Korea, wholesale prices are rising 18 percent, consumer prices 10 percent. Industrial
production is falling 11 percent, and in Malaysia, wholesale prices are up 16 percent,
and industrial production is falling at 5 percent.

“In other words, in those countries who are the beneficiaries of IMF money
and who are now signed up as part and parcel IMF policy conditionality
reform program, they are experiencing hyper-inflation and deep recession.
This is not what you call a policy success, and we have had nine months.”

• “Nine months…after the crisis, the IMF still has not recommended either, a) a central bank-
  independence plan or, b) a monetary restraint/currency stabilization plan. We are
  throwing
  money left and right with a lot of goofy ideas about deregulation and raising taxes and
  things of that sort, which these countries shouldn’t and can’t possibly do right now,
  creating more austerity, but we still haven’t fixed the monetary problem.“

• “The IMF had nothing to do with Europe’s monetary recovery. The IMF had nothing to do
  with Latin America’s monetary recovery, and the IMF is a force for evil with respect to East
  Asia’s monetary recovery. They still haven’t figured it out. Money supply is soaring in East
  Asia. This is money they print that no one — literally no one — wants to hold. The people on
  the streets want dollars. A few of them want yen.”

The IMF and ‘Moral Hazard’

• “The IMF loans $55 billion to Mexico. Do you think lenders in Asia started salivating in
  1995
  and say, ‘Hey, they did it there. They’ll do it for us. So let’s stretch the limits’? You know,
  the big American banks, to a lesser extent the big German banks, certainly the big
  Japanese banks. They stretched all manner of loan analysis and credit risk analysis
  because they figured, you know, after Mexico, we’re going to get some. And guess
  what? They are going to get some.

“Even Treasury Secretary Rubin has admitted — he says, ‘Unfortunately, part of this
package is some concessions to the banks.’ Well, I don’t think the banks who made
the bad loans should get any concessions. That’s the beauty of free-market
democratic capitalism. You have a God-given right to make a fortune, and you have
an equally God-given right to lose your shirt. … And the IMF and the World Bank
and the Asian Development Bank and the Latin development banks and all these
development banks simply get in the way of the marketplace’s pricing of risk,
and that, in effect, stomps out the disciplinary competitive free market forces,
and it is more than a moral hazard. It is actually an obstruction to reform. So I
think that has to be changed.”

What Should the United States’ Role Be?

Engage Via the IMF

• “…Whether we talk about the Asian financial crisis, whether you bring in Russia, all these
  needs, are very similar, and I am pleased to say I hear some good preliminary noises, but
  without United States leadership, forceful leadership, this won’t happen.”

• “I think that as long as the U.S. gets the story right in economic terms and as long as we are
  non-isolationists, as long as we are still spreading our wings through the private sector around
  the world, we are going to influence countries to follow appropriate pro-growth, pro-wealth,
  creating pro-entrepreneurial policies.”

Engage Via the Markets

• “I don’t want to make the case that it’s all good, but I think in the great historical continuum,
  the United States is the greatest example of free market capitalism. Here at
  home, 125
  million Americans own stocks. That number has doubled, once in the ’80s and once in the
  ’90s. Everybody owns a piece of the rock.”

• “Our growth, our low unemployment, our zero inflation, our strong currency, our
  effective central bank system, these are examples for the rest of the world.

“My point is the U.S. Treasury must never be the cat’s paw of the IMF, which is where
it is now, but, in effect, we don’t even need the IMF to be the U.S. Treasury’s cat’s
paw. All we need to do is to peaceably go about our profit-making free market
business and financial practices, and the rest of the world will take notice and
they will change.

“That is what turned around Latin America. That is what is starting to turn
around Europe. That is what is turning around Russia and some of the East
European countries. That has turned around New Zealand, turning around
Australia, improving Canada, and so forth, and the Asians are real smart. They
work hard, and they are thrifty, and they are going to get it right, but we don’t
need the IMF and the World Bank and a whole bunch of multilateral
international organizations to tell them what to do. Just let the United
States roam the world peacefully and profitably, and this story is going to
have one great free, happy, wealth-creating, prosperous ending as we roll
into the next century.“

• “You know, as far as Asia goes and really all the less-developed countries or whatever we
  are
  going to call them now, I think they should be on a currency board system, and I think the
  currency board should be linked to a commodity standard.”

China’s Looming Banking Crisis

• “Obviously, there is a major problem facing China today. I think we are all worried
  about
  what is going to happen in China down the road when the banking system there
  collapses.

“The Chinese are doing an awful lot of things right. They, in fact, have asked [former
Resolution Trust Corporation and Federal Deposit Insurance Corporation Chairman]
Bill Seidman to come over, and he has been counseling them on how to set up an
RTC-type program for their banks. That can be done with IMF help. That would be a
very positive thing for them to do because their banks are saddled with these politically
motivated loans that were made previously under the Communists.”

• “…All the deposits from the small little villages all the way across China, all those little
  savings
  and pension plans have been put into the banks in the form of a deposit, and the loans that have
  been made…I doubt if there is an inch of value in any of those loans. Wouldn’t that
  coming
  Chinese banking collapse make the Japanese banking collapse look like amateur night,
  and isn’t, therefore, our taking a stand on the IMF now in this $18-billion replenishment
  probably going to have a blessing in disguise when you look at the bottomless pit that
  we
  have to be putting up down the road for China?”

• “The Chinese have been trying to pursue a strategy of growing their way out of it,
  and it
  is simply not going to work. They have a growing recognition of that. I would submit
  that
  some type of an RTC-type approach in China, which they had been studying now for 18
  months or so, using some credit enhancements that might come from either the World Bank or
  IMF could produce some bonds that would have some value.

“The truth of the matter is, a lot of the underlying assets are quite mixed. There are
good, efficient plants in China, and there are old plants in China that are absolutely
worth nothing in terms of brick, mortar, and equipment, and the staff is redundant by a
factor of 10. Unfortunately, the latter would be the predominant view rather than the
former, but there are some good assets in there, and you would obviously package the
bad assets with the good. And I think the Chinese are going to pursue that very, very
aggressively.”

• “I think the expansion and subsequent appropriation that will cover the growing
  moral
  hazard is a huge issue. … We started with $55 billion in Mexico. We’ve gone three times
  as much in East Asia, and we’re not over yet. And if it spreads to China for the reasons
  that [that have been] articulated, we are going to have a problem. The
  same arguments
  about world economic collapse and American economic collapse are going to be
  used. We
  are going to have a problem.”

Japan’s Present Crisis

• “What else is next? Well, Japan is unlikely to do an IMF program through performance of
  financial services sector, but, in fact, it needs one.”

• “There is a vital political dimension to all these economic fixes, and that political dimension
  is
  the degree to which the major players in these countries will not let go of their commands and
  their controls and their powers. This is really the invisible hand in Japan and Korea and, on a
  smaller scale, Indonesia. [Indonesia] is the most rapacious and easy one to understand because
  it is just Suharto and his family, but Korea and Japan are more diffuse. Japan, in particular, is
  the one that interests me. They’ve [had] eight prime ministers since 1987. What does that tell
  you? Eight — about to have the ninth.

“Look at the newspaper accounts of the last 10 years of Japanese political corruption.
Their political corruption campaign spending abuse makes us look like pikers —
pikers. Now, there is a reason for that. You know, follow the money to the big
corporations and the big banks. They are getting special privileges and
advantages and concessions for MITI, from the Ministry of Finance, and…the
general government. The Liberal Democratic Party is a corrupt political organ.”

• “This is why…in many respects, I don’t want these countries aided and abetted and
  assisted because I think they have got to hit bottom, until the people
  become so enraged that
  they will change the nature of the political system and move towards a true democracy with
  the…private property restraints and regulations that democracies have. They are going to have
  to evolve here. There is no magic quick fix.”

• “So, if you take that corruption point and the blockages and then you take your
  moral
  hazard expenditure point, you know, you have got a potential for another big problem
  out there, and that is why I don’t want to reform, I want to defund, the
  IMF. I want to
  take them down three notches. I want IMF deflation because I know that taxpayers in
  this
  country are going to be called upon to bail out again, and it’s not going to work until the
  fundamental political democratic problems are worked out.”

The National Security Dimension

• “You will find that there is a new form of national security emerging which will
  gain
  increasing prominence for the balance of this decade and the 21st century. It is in the
  very portfolio that we are talking about today, which is the national security dimensions —
  often overlooked — of the international economic and financial portfolio.”

• “On the issue of the flow of militarily-relevant Western technology, in the past, there was
  real
  discipline. There was forced transparency and inspection regimes. Contrast that to the way it
  is done today, where some of these same prospective adversaries are entering the U.S. bond
  market. It is not just the ability to attract big money at cheap rates relative to the risk, but
  almost no questions asked concerning where the money is going and how it is being used. This
  is, for the most part, general purpose or so-called balance-of-payments money.”

China’s Campaign to Penetrate the U.S. Capital Markets/Political
System

• “I do not believe that the Chinese threat is so much military as it is [potentially] subversive of
  our political system. … Let me explain why: In addition to all of the Chinese fund-raising
  scandals that you have heard about, in addition to the Chinese missile technology transfer
  issue, which Steve Forbes mentioned, we now have clear evidence that the Chinese had a
  long-run strategy for subverting our political system.“

• “We often have no clue as to how the Chinese or the Russians are using investor funds —
  especially when talking about sovereign bond offerings. … These (and other)
  governments
  are also mindful of the fact that they can create politically-powerful new constituencies
  in this country and elsewhere in the West. That is to say, they are not just dealing with
  banks
  and governments as lenders anymore. For example, the only two institutions that the Soviet
  Union ever borrowed from, for the most part, were Western governments and commercial
  banks. Today, it is U.S. securities firms, pension funds, insurance companies, leasing firms,
  corporations, and high-net-worth individuals.

“So, over time, you could well have millions of Americans, wittingly or
unwittingly, holding Chinese (or Russian) government paper in their investment
portfolios. You already have the Chinese in our bond market to the tune of over
$7
billion.

“These foreign governments are creating vested financial interests on the
part of politically powerful constituencies in this country, millions of our
citizens, to ensure that U.S. economic sanctions are not imposed on these
governments. In short, U.S. investors will probably not want China penalized
when it sells missile parts to Pakistan or Iran, or otherwise violate the missile
technology control regime. Even in the cases of nuclear materials for the
production of weapons, nuclear reactors to Iran or whatever it may be, U.S.
investors could be sufficiently exposed to say, ‘Look, if there are economic
sanctions and if you are going to impose financial penalties or restrict the access
of these foreign governments to our markets, what do we do when it comes time
to redeem our bonds and pension funds?'”

• “…There is not a happy answer at this time because of the lack of vigilance on our part and
  the
  lack of understanding that the very financial vested interests [involved in the] construction of
  powerful new constituencies in a sense in every cell of this country — not just banks
  and
  governments — is of a very profound national security consequence.”

“For example, take Great Wall Enterprises. They want to come to the
U.S. bond
market in the next 12 months — and they’ll probably get here, barring action on the part
of some folks around here. Who are they? Well, they’re the ones that cut the
[controversial] deals with Loral and Hughes. What is their business? They build
strategic intercontinental ballistic missiles targeted at the United States. That’s what.
So buy bonds, but think hard about who is in the cross-hairs of your capital flows.”

• “[The good news is that] China is not looking so invincible anymore. How would we have
  known that they had as much as $650-billion in non-performing loans in that country? How
  would we have known that their reserves were, in part, encumbered in that banking crisis?
  How would we have known that they were really nervous about their financial condition and
  were having difficulty maintaining the Hong Kong dollar peg, property values, and other
  things?

“Beijing may have learned that its dependency on U.S. stability and markets is greater
than anticipated. Maybe they [can be made to] understand the potential costs of
continued proliferation and mischief making in the Persian Gulf, Indian sub-continent,
and elsewhere of the nuclear variety. And maybe they will resist funding those kinds of
activities, not to mention the abuse of human rights.”

What Should Be Done?

• “We need full disclosure and a screening mechanism for our markets because the
  U.S.
  now controls some 60 to 70 percent of global capital capacity. Think about it. You
  want
  to talk about a place where it is still Pax Americana? Try the capital markets. These
  markets
  are today what our oil and gas equipment and technology near-monopoly was in the early
  ’80s.

“There is a bill pending right now, sponsored in the Senate by Senator Lauch
Faircloth (R-NC) and Rep. Gerry Solomon (R-NY), chairman of the
House Rules
Committee, called The U.S. Markets Security Act of 1997 (S. 1315). The bill
is the
beginning of an effort of the type that I [believe is in order now]. That is to say, it
would create for the first time an Office of National Security at the Securities and
Exchange Commission.

“The legislation is not designed to create a gatekeeper role or to help decide
which foreign government-controlled entities can issue bonds or equities in our
markets, and which can’t. It is not supporting any form of capital controls.
Indeed, it eschews capital controls, because that’s the wrong
remedy,
particularly when you don’t yet know the scope and the nuances of what you’re
dealing with. There has to be an educational effort before further protective
measures are taken.

“It does provide a set of disclosure and reporting requirements on any foreign
government-controlled entities seeking entry into the U.S. debt and equity
markets. It merely requires that a list be provided every 90 days to Senate
Banking, Senate Intelligence, and Senate Foreign Relations [Committees] as to
the identity of these foreign entities.

“The sending of such a computerized list to Capitol Hill from the SEC every 90
days would give us a sense of who is coming to our markets, so that the relevant
members and committees could take a look and see if China Aerospace, China
International Trust and Investment Corporation (CITIC), Bank of China or other
questionable borrowers are expanding their presence in this country. In general,
we need to know who these borrowers are and what their agendas are, so that we
can begin the process of building a database. Ultimately, this would allow us to
preempt some of the nefarious and malevolent activities which U.S. investors
might otherwise unwittingly end up helping to fund.”

• “I think that there can be a meeting of the minds that there has to be a new form of due
  diligence in the capital markets for the 21st century. It is not just about the numbers and
  normal financial criteria anymore. This is a different game now. Bad actors are now
  funding
  themselves in the U.S. capital markets and using the legitimate international trading and
  financial systems for increasingly dangerous purposes.“

• “We have to recognize that the issue here is not free trade. The issue is one of
  greater
  transparency, accountability, and if necessary, the use of intelligence sources and
  methods to ensure that U.S. capital markets are not being abused.

“The policy implications of that come later. We need a responsible policy, which
means we don’t give away the store and we monitor our security and intelligence
concerns closely. Trade can still move ahead with China and Russia, but our eyes
would be open.”

Conclusion

The Asian financial crisis is a symptom of systemic problems within the
affected economies.
Importantly, other Pacific Rim countries — notably, China and Russia — are also rife with crony
capitalism, corruption, undue centralized planning and control and a lack of transparency and
accountability. The Casey Institute’s Symposium on this crisis makes clear that unless and until
structural reforms are made, it is unlikely that there will be an appreciable amelioration of
economic conditions in those nations already reeling from its effects. Without such reforms,
moreover, China and Russia are well on the road to meeting a similar fate.

It is against this backdrop that the wisdom of further international interventions conducted by
the
IMF or other multilateral financial institutions must be weighed. Will such interventions
facilitate reform or will they actually serve to relieve the pressure for the
needed structural
changes? Will they reward irresponsible investors and lenders and, thereby, encourage
them to
engage in such practices elsewhere — and create demands for further bailouts down the road?
And will further allocations of U.S. tax dollars to the IMF under present circumstances catalyze
needed changes in the operations and accountability of that institution, or stave them off?

While there were clearly divergent views on these questions expressed in the course of the
Symposium, it is noteworthy that none of the Seminar’s highly experienced and
knowledgeable
participants was prepared to argue that the IMF could be relied upon in its present form to
prevent the further financial crises now in prospect. Congress must, therefore, take no action that
will have the effect of perpetuating either the IMF’s present way of doing business or encourage
nations in financial difficulty to defer action on the structural political and economic sources of
their problems.

The Casey Institute Symposium indicates that Congress — and the Clinton Administration —
must
also come to grips with the potentially grave national security implications of the non-transparent
access of potentially hostile foreign governments and their entities to U.S. capital markets.
Participants appeared to agree that the public as well as their elected representatives need to
become more aware of the down-sides of such access and to adopt the means available for
promoting greater transparency and discipline with respect to the use of funds from the American
equity and bond markets.

— End of Summary —