MALLABY: Thank you all for being here this
morning.
My name is Sebastian Mallaby.
I work here at the Council.
So I want to welcome you all to today's CFR
meeting.
This is part of the Peter McColough Series
on International Economics.
I want to welcome also CFR members around
the nation and the world participating in
this meeting through livestream.
I think you know this is going to be on the
record.
There is an introduction and description of
Mr.-of Secretary Lew's bio, I think, in your
packs.
But just to say that he was sworn in as the
76th treasury secretary in 2013.
Before that, he ran the OMB.
And one thing I remember as being kind of
relevant to what he's going to be discussing
today is, before that, in the early Obama
administration when he was deputy secretary
of state and running the first-ever sort of
deep look at all the tools of development
assistance across the U.S. government, the
Quadrennial Development Review, shows that
his involvement in these questions of the
interaction between economics and statecraft
is rather extensive.
So I'm going to welcome Secretary Lew up to
the podium.
And he's going to speak for a bit, and then
we're going to have a conversation.
Thank you.
LEW: Thanks very much, Sebastian, for that
introduction, and for your leadership at the
Council.
This is a remarkable institution with a long
history of intellectual influence on America's
foreign policy.
And, as always, it's an honor to be here today.
America's leadership in the global economy
is something we all care deeply about.
And I want to thank Gideon and his Foreign
Affairs team for publishing my essay on this
topic.
The piece opens with a story about the difficulty
of getting IMF quota reform through Congress.
And it asks, why was it so hard?
Why was it so hard, and did it take five years
to win approval at the end of last year?
After all, the IMF has been a symbol of U.S.
leadership since its birth at the end of World
War II.
And, along with the World Bank and the World
Trade Organization, it's provided the underlying
architecture of a global economic system that's
helped produce remarkable gains over the past
70-plus years.
American leadership was essential to the creation
of that system and the progress that it's
yielded.
Yet, even though it's supported the well-being
of our citizens and has helped the United
States advance our values and our foreign
policy objectives, America's global economic
leadership has not always been popular here
at home.
In the case of IMF quota reform, it took five
years to convince Congress, to act, a delay
that led many in the international community
to question America's leadership position
in the global economy.
The ultimate passage of IMF reform was pivotal,
but it was just one of many important steps
needed to sustain our economic leadership
and adapt it to the challenges of our time.
We know that the global landscape of the next
century will be very different than that of
the postwar era.
And if we want it to work for the American
people, we need to embrace new players on
the global economic stage and make sure that
they meet the standards of the system we created,
and that we have a strong say in any new standards.
The worst possible outcome would be to step
away from our leadership role and let others
fill in behind us.
Making the case for global engagement is a
responsibility we all share.
And we must make the choices necessary to
ensure both the future of the international
architecture we built and America's position
in it.
Over the last year, the Obama administration
has made significant progress advancing U.S.
leadership in the global economy.
We worked with Congress to secure IMF reform,
Trade Promotion Authority, and the reauthorization
of the Export-Import Bank.
We reached agreement with our international
partners on the Trans-Pacific Partnership,
a landmark climate agreement, the Iran nuclear
deal, and a stepped-up strategy to confront
terrorist financing.
But to ensure the benefits of our global role,
that those benefits remain available in future
generations, we have more work ahead of us.
Since its establishment in 1944, the Bretton
Woods system of cooperation has evolved and
endured by providing a foundation for mutual
economic gain that could not be achieved by
individual countries alone.
Since 1950, real per-capita income worldwide
has quadrupled, raising living standards for
billions of people, extending life expectancies,
and expanding access to education.
Clear rules for global economic relations
create opportunities and incentives to innovate,
invest, and work-the critical drivers of economic
progress.
But a system of mutual responsibility does
not automatically enforce itself.
It requires responsible American leadership.
It also requires constant improvement to raise
standards and create better mechanisms to
ensure that countries keep their commitments,
refrain from unfair competitive behavior,
and cooperate to confront new challenges.
The rules-based system was a major reason
that the global financial crisis never turned
into a second Great Depression.
The United States and other nations were able
to coordinate efforts through the G-20 and
the IMF to avoid the downward spiral of protectionism
and predatory macroeconomic policies that
characterized previous eras.
The world's major economies-the United States,
the eurozone, Japan, and China-launched simultaneous
economic stimulus programs and mobilized financial
assistance to vulnerable parts of the global
system.
We've build on that cooperation in recent
years to advance important U.S. goals, including
the IMF's response to fiscal stress caused
by the Ebola epidemic in 2014 and its support
for Ukraine following Russia's aggression
in Crimea.
The scale and speed of assistance in both
instances would not have been possible if
the United States had to act alone or to stitch
together donor contributions.
The simple fact is that international financial
institutions amplify U.S. influence on the
global stage.
We have also worked closely with partners
to implement financial sanctions that show
how this same global financial architecture
can be used to persuade malign actors to abandon
behavior that threatens peace and security.
The Iran agreement is a direct result of the
financial pressure imposed by an unprecedented
global coalition.
And we have and continue to work closely with
our allies to impose costs on Russia for its
actions in Ukraine, and on entities that are
abetting North Korea's nuclear violations.
But the benefits of international coordination
and our international standing cannot be taken
for granted, and we must take the necessary
steps to preserve and strengthen our position.
Responsible and sustainable U.S. leadership
in the global economic system begins at home.
And we have to lead by example, as we did
by bouncing back from the financial crisis
that threatened America's place in the global
economy.
The U.S. economy has now produced the longest
streak of uninterrupted private-sector job
growth in American history.
Between 2009 and 2015, the budget deficit
has declined from nearly 10 percent of GDP
to 2 1/2 percent.
And improved financial regulation has helped
to address the causes of the crisis, producing
a better-capitalized and more stable financial
system.
Yet, along the way, political brinksmanship
led some to question America's capacity to
meet this moment of leadership.
The threat of government shutdowns and default
heightened global anxieties.
And Washington's inability to reach a consensus
on domestic priorities such as rebuilding
aging infrastructure and reforming the broken
business tax code-priorities with bipartisan
support-creates unnecessary risks to America's
future economic strength.
Recent advances-including multiyear budget
targets, the passage of Trade Promotion Authority,
and the reauthorization of the Export-Import
Bank-have demonstrated that we have the capacity
to work together to make important progress.
But much more work remains.
Beyond our borders, the world's economic challenges
will not end with the current administration,
nor will the ongoing agenda for U.S. leadership.
And there are a number of priorities that
we must continue to press.
First, we must work with our partners to further
modernize the IMF, allowing it to intensify
its scrutiny of critical issues like exchange
rates, current account imbalances, and shortfalls
in global aggregate demand.
Because more information means better policy
cooperation and more efficient financial markets,
the IMF should continue to promote greater
transparency among its members when it comes
to economic data, especially as it relates
to foreign reserves.
Second, we must work with our partners to
make the World Bank and the regional development
banks more efficient and effective.
These institutions need to have the resources
and policy expertise to help countries promote
sustainable development and address challenges
like state fragility, forced migration, natural
disasters, and disease epidemics.
They must also be able to mobilize resources
that cut carbon emissions and build societies
resilient to climate change.
Third, we must help modernize the global trading
system by pushing for innovative features
in new trade agreements.
TPP, for example, includes strengthened labor
and environmental provisions, robust protections
for trade in services, and controls on the
behavior of state-owned enterprises to ensure
fair competition.
Under the agreement, members have also pledged
to avoid manipulating exchange rates.
These high standards need to be the model
for future agreements.
Fourth, to prevent a repeat of the financial
crisis, we must continue to lead efforts to
reform the international financial regulatory
system.
U.S. leadership in this area has already resulted
in more rigorous capital standards for banks,
greater transparency in the derivatives market,
and stronger tools for managing the failure
of financial institutions.
With many of the critical standard-setting
reforms in place, the focus must shift to
comprehensive and consistent implementation
and close attention to emerging threats.
Fifth, we must continue to combat terrorist
financing, corruption, money laundering, and
other financial crimes.
The Treasury is strengthening its anti-money-laundering
and counterterrorist financing rules at home,
working through the Financial Action Task
Force to improve enforcement globally and
partnering with countries to combat terrorist
financing specifically against ISIL.
Because we must keep up with innovation in
the private sector and by our adversaries,
regulators must update their regimes while
ensuring regulations do not impede legitimate
provision of financial services, especially
to the underserved.
Finally, we're committed to building on the
progress that we've made in cooperating with
emerging-market partners, including Brazil,
Argentina, India, and Mexico on key priorities,
such as facilitating investment, improving
the implementation of tax policies, promoting
financial inclusion, and combating money laundering
and terrorist financing.
As the two largest economies, the United States
and China also have a unique responsibility
to work together to advance shared prosperity,
maintain a constructive global economic order,
and make progress on critical challenges like
climate change.
This year we'll hold the seventh U.S.-China
Strategic and Economic Dialogue, which is
a platform that has strengthened relations
between our two countries and provided a forum
for discussing important priorities, like
China's shift toward consumption-led growth
and greater transparency and predictability
in its policymaking.
While the progress of the last year has helped
to advance this important agenda, we cannot
take our global role for granted, and we must
always think about how our choices will affect
our leadership in the future.
With vision and foresight, previous generations
of Americans have provided a foundation on
which to advance our values and build a prosperous
future for the United States and other countries.
Our task now is to strengthen that architecture
and adapt it to new challenges.
If we come together and accomplish this, we'll
not only support today's prosperity.
We'll also ensure that the next generation
of Americans inherits an even stronger platform
for navigating tomorrow's economic landscape.
Thank you very much.
(Applause.)
MALLABY: Great.
So we have a bit more than 45 minutes.
And we're going to divide that between a conversation
up here, and then we're going to go to the
members.
There's a lot of talent I can see in the room,
so I do want to hear from people.
But I thought I'd start by just, you know,
in a slightly cheeky way, questioning the
premise.
You lay out this view that the Bretton Woods
institutions embed U.S. values, expand Western
influence.
And I think this is the Council, and most
people are going to agree with that for the
most part.
But you could also observe that the central
feature of the Bretton Woods architecture,
when it was adopted in 1944, was actually
fixed exchange-rate regime.
And that was probably the most important single
part of it.
And it was dumped by Richard Nixon unceremoniously
in 1971.
And then the world moved on and we found that
actually floating exchange rates for large
parts of the global economy were good.
And so I want to ask you to look forward and
ask a question about the sort of central theme
of your essay, which is to say maybe there
are bits of the international financial architecture
that we shouldn't necessarily support, that
might be dispensable, that might not be around
in 10 years.
Can you think of any that you do not think
of as indispensable?
LEW: Sebastian, I think that the key is to
think of the international architecture as
an evolving, adapting set of institutions.
The world, at the end of World War II, looked
so different than it does today.
The role of the United States was so different
than it is today.
And it wasn't good.
It wasn't good that the rest of the world
had lost its manufacturing capacity, that
there was no other hard currency that had
any promise of being an alternative to the
dollar.
And the system that evolved provided a foundation
between the 1940s and the 1970s to see a period
of growth that has led to not just economic
growth but geopolitical stability.
Some of the political developments in the
'70s, '80s, and '90s show that when you move
towards a more market-oriented system, when
you're sharing a set of values, political
reforms tend to follow.
I think as we go forward, the thing that we
have to keep in mind is that the world isn't
going to look, in 10, 20, or 30 years, exactly
the way it looks today.
The thing that we need to make sure, from
a U.S. perspective, is a constant is that
we have a role in those institutions to help
govern how they change as they go along.
We can't look at it as being completely frozen
in time, or others will just decide that they're
going to group together in a different set
of organizations where they make different
rules.
I think the thing about the IMF, the World
Bank, are that they're institutions that are
very inclusive.
There's a very strong U.S. role that we have
earned.
And going forward, I think these institutions
have to be looking at the challenges of the
future.
You asked about the IMF, but let me kind of
shift and give an answer perhaps a little
bit more about the World Bank.
You know, we have, over the last year, since
the World Bank play a very important role
in the discussions on climate change, we've
seen the development of lending facilities
that are designed to deal with challenges
of the future, which is governmental and public-private
partnerships to invest in the kinds of things
that will lead to a cleaner environment.
At the IMF, you know, if you look at the period
between 2008 and now, it has played an enormously
significant role, both in stabilizing the
post-financial-crisis environment and also
in responding to the crisis.
I mentioned two in my remarks, Ebola and Ukraine.
We don't know what those challenges in the
future will be.
I don't think anyone predicted Ebola, you
know, even a month before it became an international
crisis.
What we know is we need to have flexible international
bodies to go to Congress to get funding.
To deal with something in short term like
Ebola is a challenge.
MALLABY: Let me ask-let's take both of those,
the World Bank and the IMF, since you've raised
both of them, as the key institutions of the
order created in 1944.
So in terms of the World Bank, I think it's
certainly true that the governance system
on the board has neither the disadvantages
of the U.N. Security Council, which is way
too narrow for a world in which other powers
have risen, nor the disadvantage of the U.N.
General Assembly, which is way too democratic,
frankly.
So that strikes me as an incontestable point.
But the tools of the World Bank's lending
feel to me as if this evolution that you're
mentioning might be accelerated somewhat.
So, for example, the IBRD, the main lending
window, which lends at, you know, interest
rates that cover the World Bank's costs so
they're sub-market, but they're not a giveaway.
You know, the premise was a world in which
the clients did not have access to global
capital markets.
That premise is out of the window.
They all do have access to commercial private
capital.
So what's the residual rationale?
The classic answer would be there are some
things, like global public goods-climate being
a good example-where you want more lending
than the market would deliver for those things,
because they're global public goods, and single
countries don't have an interest in creating
enough of them.
But as I understand it, the IBRD's lending
interest rates do not differentiate.
They don't give you a break, a cheaper interest
rate, if you're borrowing to create a (political
?) or public good.
Shouldn't that-isn't that a clear case where-
LEW: I think if you look at the discussions
that we had just last year at Addis Ababa,
at the Funding for Development conference,
it kind of illustrates your point of being
kind of in between the Security Council and
General Assembly.
There were very significant debates about
how much a World Bank resource should be put
into climate.
You know, there was a debate about whether
it was competing with more traditional forms
of lending or whether it should be all additive.
And I think it was resolved in a way that
was really quite construction, where the World
Bank became a major partner in making resources
available to deal with what is one of the
most pressing public goods of our generation
dealing with investing in a-in a more energy-efficient,
less carbon-intensive future.
MALLABY: But just to press you, right now
there is a surge just reported in IBRD lending,
which is driven by the budget gaps in countries
like Nigeria, which have had resource crashes
and where the private markets are being less
accommodative in lending for general budget
expenditures.
So a large portion of what the bank does is
kind of substituting, complementing, competing-however
you want to see it-with private capital markets.
It's not creating global public good.
LEW: I think it's a mistake to think of any
of these institutions as dealing with one
challenge.
Dealing with maintaining basic financial stability
in a country is certainly core to what the
IMF is, even though the IMF does many things
beyond that.
The World Bank has traditionally helped to
shore up systems which meet the standards
that are set by entities like the IMF to be
on a sustainable path.
I think having multiple points of access,
to make sure that you avoid the destabilizing
consequences of having either cyclical or
price-shock effects that lead to economic
and political destabilization, is very important.
It's not that you choose between doing climate
change or the other.
The question is, how do you strike the right
balance?
I think that one of the things that the World
Bank has done over the last few years is looked
at how to manage its resources creatively
to gain a bit of reach through better management
of its financial capabilities to be in more
places.
That's a good thing.
If you look at the countries that are on the
cusp of kind of shifting from developing to
developed countries, they tend to still be
places where you find a lot of poverty.
So it's not as if, once your overall economy
reaches the next level, the benefits of that
are necessarily as broadly shared as needs
to be.
And-
MALLABY: But if the government of a middle-income
country wants to reduce poverty-you know,
let's take China or India-it can borrow commercially
to do projects which are focused on poverty
reduction.
Having the Bank there, the World Bank there,
to be an additional source of-I mean, either
the government wants to do these projects
or it doesn't.
LEW: I think that there is a period in that
transition when the government wanting to
do it and the ability to do it are not totally
matched up.
And that's where I think having international
financial institutions-this is not concessional
financing.
I mean, I think that we have to maintain the
principle that below-market-rate lending is
restricted to the poorest countries.
And that is something that comes under pressure
on a regular basis.
MALLABY: Let me switch a little bit from development-
LEW: If I can switch-
MALLABY: Yeah, sure.
LEW: -I think it's also important to develop
new instruments.
We're seeing now, in refugee crises, that
there are geopolitical situations that create
surges of need.
And there aren't necessarily the tools in
place to deal with where those needs show
up in a timely way.
And one of the discussions that's under way
now is how to make sure that you have a facility
that can step in, in a case like a refugee
crisis, where, in one sense, it's a global
problem, but in another sense it has a very
local dimension because people end up in a
concentrated place or set of places.
I think that's an important conversation for
the 21st century.
We're seeing right now the challenge of dealing
with that.
And that's something that institutions like
the World Bank are set up to think through.
We're doing it now in a way that's adapting
old tools for a new challenge.
And that's why this idea of adaptation is
so key.
You have to be nimble enough to deal with
the problems that you face today and that
you're likely to face in the future, not always
looking backwards.
MALLABY: So on the subject of financial-crisis
management, your essay and your remarks both
draw attention to the IMF's role after 2008.
But I think it probably is fair to argue that
bilateral swaps between the Federal Reserve
and other economies that were in desperate
need of dollars were bigger in aggregate and
more decisive.
And that is a trend that ain't going away,
because the sheer volume of cross-border claims
has grown so much that even an expanded IMF
with more resources is going to have trouble
being big enough to deal with what happens
to South Korea when suddenly there's a massive
flight to safety in the U.S. and dollars flow
back into the U.S.
And then you have to have the Fed recycling
them.
So as you think about that, in the next big
financial crisis globally, I mean, the IMF
will be there to deal with medium-size things
like Ukraine.
But in a bigger sense, big crises, isn't it
really a case of central banks dealing with
each other?
LEW: Well, I'll leave the question of Fed
swap lines to the Fed, which has the authority
to make those decisions.
But I think if you look at the financial crisis
and the response to it, the IMF played a critical
role.
It was part of country plans in a number of
critical instances where, if you had not stabilized
those economies, we would have seen a new
bottom that was far worse than the bottom
we ended up hitting.
There was a sense that there was somewhere
to go, which psychologically had a very important
effect.
And I think if you look at the role of the
United States, I don't think it is a defensible
notion that the United States is going to
respond to every global crisis on its own
unilaterally.
While the Ukraine example may be a medium-size
country, look at the numbers that were involved;
I mean, a $17 billion IMF program.
You know, we've done three $1 billion loan
guarantees, you know, which in credit budget
scoring terms are less than a billion dollars
of budget exposure.
The leverage that we got by being part of
a larger effort, you know, is just the difference
between making a difference and not.
Ukraine's economy turned, you know, from negative
to neutral to maybe positive faster than anyone
thought.
And our loan guarantees alone wouldn't have
been enough to accomplish that.
I think one of the things that's happened
since the financial crisis is that the IMF
has developed some new tools.
The flexible credit lines are being used in
a different way and more effectively.
With quota reform, we have recapitalized the
IMF, taken the money and put it in the main
fund itself.
So I think right now the IMF has considerable
resources.
We do have to ask the question always, what
would be the consequence of the next crisis?
You don't have the luxury of knowing the precise
contours of a crisis until it's upon you,
which is why you have to have the tools in
place, but also the adaptability.
Look what happened after the financial crisis.
A new arrangement to borrow was funded rather
quickly to put in the IMF the facility that
could deal with that crisis.
If you had to create an IMF out of whole cloth,
you couldn't have put that in place so quickly.
And I don't believe that any one country,
not even the United States, could have had
that amount of firepower.
MALLABY: So you make in your essay a case,
and a persuasive one, that, notwithstanding
the governance advantage that the Fund and
the Bank begin with, quota reform has been
constructive because you're allowing emerging
nations to have a larger voice and stake in
the international system.
So I'm wondering if you would apply the same
logic to the question of global reserve currencies.
So right now you have the dollar very dominant.
You have the Chinese explicitly saying that
they don't like that and they would prefer
to internationalize the Renminbi and make
it a rival or at least another reserve currency.
You have various others expressing frustration
with the dominance of the dollar.
Some of it's ill-informed, but it's a sentiment
that's definitely out there.
Would it be in the U.S. national interest
if more global funding, including by the private
sector, took place in the form of issuing
Renminbi debt instead of dollar debt?
LEW: Obviously it's the marketplace that decides
these questions fundamentally.
And I think it is a fair statement that at
the moment there is really no likely competitor
to take the place of the United States and
the dollar.
The reason I raised the question in the essay
is that we can't just think about the next
year or two.
We have to think in decades-10 years, 20 years,
30 years.
And anyone sitting-you know, (added to ?) North
Korea sanctions, you know, that's a challenge.
We always have to maintain the ability of
the U.S. to act unilaterally in our own national
interest, but we have to do it in a way that's
mindful of the fact that we have something
that gives us power and leverage and economic
strength.
And that's something we need to also keep
an eye on protecting.
You know, I think if you look at the current
kind of global economic situation, and you
know, probably you'd have to say today it
will be a longer period of time that we have
than you would have said maybe five years
ago, because the United States has recovered
from the Great Recession in a way that really
demonstrates the resilience of the U.S. economy,
and notwithstanding the noise of our political
process, the ability of our political system
to respond in a timely manner.
I think when you look at a currency like the
RMB, the challenge is going to be for China
to make the kinds of changes that it needs
to make-to have its currency be truly convertible,
to have its markets be truly open to foreign
investment, and to services and goods from
abroad-I think that they've made progress.
It's clear that they've made progress, but
they're not all the way there.
They still have work to do.
And, you know, the reason that's an area where
we engage at a considerable amount of detail
is it's an area where China's economic leadership
knows they have to make these kinds of changes
for China's economy to be where it needs to
be in 10, 20, 30 years.
So it's an area of common interest, potentially,
but potentially also of conflict.
MALLABY: Let me just pursue this, because
your answer is provoking.
And I want to ask one more question, then
I'm going to come to the-to the members in
the audience.
So your essay does a good job of highlighting
the dilemma that, because of the position
of the U.S. dollar in the global system, it
gives one the opportunity to exercise sanctions
power, and that this is a tool of statecraft
that future presidents will be glad to have
because it's short of war and it avoids doing
nothing.
So that is all stipulated and a point well-taken.
There's also this balance between use of sanctions,
not overuse, because if you use it too much
you will incentivize people to move outside
the dollar system.
But I'm thinking about a different dilemma,
which is-the Triffin dilemma, namely that
whoever is the reserve-the issue of the reserve
currency is issuing safe assets that will
protect value during a crisis, so people around
the world are going to want that safe asset
as insurance.
They're going to come and buy lots of U.S.
dollar debt because it's safe.
And because it becomes easy to issue U.S.
dollar debt, the U.S. will almost by definition
issue too much dollar debt.
And, as a result, there will be these cycles
where the indebtedness of the U.S. becomes
a problem that threatens the very stability
that the U.S. had been creating for most of
the time.
And the way out-one consequence of that position
is a constant inflow of capital into the U.S.,
which makes the dollar stronger, which creates
the current account deficit, which creates
these global imbalances, you know, which then
you would like the IMF to go police, right?
So some of the things that trouble us in the
international order-you know, excess U.S.
indebtedness, global imbalances, and so forth-do
have their origins in an extreme reliance
on the dollar globally.
Hence, my question: Would it be better to,
you know, encourage-you can do-you can imagine
policies that would encourage private actors
to use other capital markets more.
You could make it more restrictive, harder
for corporates from Asia to come issue U.S.
dollar bonds.
LEW: You know, I think that the U.S. financial
markets have the leadership role they have
in the world because of all of the things
that make the United States the United States.
It's our political stability.
It's our resilience.
It's our-it's the depth and liquidity of our
markets, particularly our Treasury markets.
Those are all good things, and I don't want
to change that.
Actually, I want to protect that.
That's really one of the main points that
I'm-that I'm making.
I think, when it comes to fiscal policy, we
ought not to take our ability to borrow infinitely
as license to borrow infinitely.
And, you know, I've had two tours at the Office
of Management and Budget.
During one of them, we ran a balanced budget
and a surplus.
During the second, we dug our way out of a
very deep hole that we got into in the intervening
years.
We need to look on the horizon.
We've made great progress in this administration:
reducing the deficit by three-quarters as
a percentage of GDP, stabilizing the debt
as a percentage of GDP, and creating a window
where we now have time to deal with the longer-term
fiscal challenges on a stable foundation.
You know, that's something that's going to
be a challenge that has to be undertaken anew,
but I don't think our ability to borrow infinitely
ought to be viewed as a justification for
ignoring that, over the long term, maintaining
stable fiscal policy is very important to
our national strength.
We've achieved a great deal in this administration
to repair the damage that was done both by
policies and by recession.
But, going forward, it's going to be a responsibility
for a new team to take a stable economy and
look at the period beyond the horizon.
MALLABY: The indebtedness problem is not just
government debt, but it's the private.
LEW: No, I understand.
It's the private and, you know, we-you know,
we saw a period where, frankly, we were seeing
inadequate access to debt in this country.
It's only in the last few years that we've
seen businesses and individuals have the kind
of better access to credit that they should
have.
I mean, I think that families have improved
their balance sheets.
Businesses are sitting on a great deal of
capital right now.
So I think the current practices, if anything,
are on the recovering part of the curve.
Where it goes beyond is a question.
But we're a long way away from the kind of
easy borrowing that we saw in the decade before
the financial crisis.
I mean, I think the challenge we have is,
how do you make sure that you don't lend to
individuals and firms that are not creditworthy
just because they want to borrow?
On the other hand, how do we make sure that
individuals and firms that are creditworthy
have access to the credit they need, both
for their family needs and to invest, particularly
in small medium-sized enterprises?
We're not seeing as much investment as I would
like to see in some of these areas.
I wish that the-we've tried, actually, to
ease the credit box because we think that,
for mortgage lending purposes, if you have
a very solid credit history, you ought to
have access to a mortgage.
That's different than a subprime loan.
Same thing with a small business or an entrepreneur
who wants to expand their business.
And the two aren't completely de-linked, because
one of the ways that entrepreneurs typically
had access to credit was through mortgage
products.
So we still have work to do, but that's moving
in the right direction.
I think we're a ways away from having to worry
about kind of an overhang of loose credit
in that way.
MALLABY: OK.
So, yes, let's go right to-in the-
Q: Thank you very much.
I'm Barbara Slavin from the Atlantic Council,
where I run a program from Iran.
And I'm going to read this question, because
I'm not a banker, but I spoke to one who is.
We've seen a lot of problems with sanctions
relief for Iran.
And is part of the difficulty because they
have dollar assets now, in banks in China
and India and so on, that they are having
trouble accessing and using, moving?
Or is it because banks find it difficult to
do transactions without some reference to
the dollar?
And don't you need to reinstitute at least
a limited U-turn so that Iran can avail itself
of its own money which is sitting in primarily
Asian banks?
LEW: You know, we have been very clear that
the nuclear sanctions on Iran that limited
access to Iran's reserves and to financial
institutions were lifted when Iran complied
with its nuclear-related obligations under
the Joint Comprehensive Plan of Action.
We have been clear in going around the world
making that point, both government-to-government
and to financial institutions.
Iran has many challenges in doing business.
Some of them have to do with Iran's own business
practices.
Some of them have to do with Iran's other
activities outside of the nuclear arena, where
they continue to engage in supporting terrorism,
regional destabilization, missile testing
that is violating norms, and human rights
problems that they have in their own country.
So there are still sanctions on Iran in those
areas while the nuclear sanctions have been
lifted.
I think that we have to be clear.
Iran, complied with the nuclear agreement.
Therefore, the nuclear sanctions are lifted.
I think that that is a process that is becoming
more and more clear.
And we'll keep our part of the bargain there.
But the U.S. financial system is not open
to Iran and that is not something that is
going to change.
So the challenge is going to be how to work
through an international financial system
that is complicated, where there are-is a
lot of attention paid to what U.S. law requires.
And I think our obligation is to be clear,
which I've tried very hard to do and our team
has tried very hard to do.
You know, if you look at what makes a sanctions
regime work, a sanctions regime works if in
order to get relief from the sanctions a government
changes it policy.
So the government of Iran changed its policy,
that's why we lifted the sanctions that were
nuclear sanctions.
The government of Iran has not changed its
behavior in all of those other areas.
And there still are other sanctions in place.
And navigating through that is going to be
a challenge, but it's one where I think clarity
will help.
We're not proposing that the U-turn be changed.
MALLABY: Stephen Myrow.
Stephen, just there, behind you.
Q: Thank you, Sebastian.
Steve Myrow, Beacon Policy Advisors.
Mr. Secretary, given the premise that global
leadership begins here at home, I'd like to
ask for a second about the Puerto Rican debt
crisis.
I know that your Treasury Department has been
working closely with the House Natural Resources
Committee on legislation.
It sounds like we might get a new bill as
early as today.
What we're hearing is that Republicans in
Congress to get on board will probably push
for a weaker restructuring authority where
they have collective action clauses, plus
the litigation stay.
And if you combine that with the debt moratorium
that the island itself has been preparing,
is that something that Treasury can get behind?
LEW: There's still an ongoing process.
People were working through the weekend on
it and I don't believe it's completed yet.
What we've been very clear about is that the
only way for Puerto Rico to resolve the situation
it faces is for there to be a comprehensive
restructuring of the debt.
And that along with that, there needs to be
a very strong oversight board to make sure
that Puerto Rico continues on a path-gets
on a path and stays on a path that can be
sustained.
There are a lot of details, but when you get
down to the bottom line, the question to us
is does that restructuring authority work?
It has to work or it's not going to be acceptable.
It won't-it can't be something that you put
a label on but in the marketplace doesn't
work.
There's still some open issues.
We've had a very good working relationship
on a bipartisan basis, working through many,
many technical issues.
But there are still a number of very difficult
issues that are open that, if resolved in
the right way, will lead to bipartisan support
just won't work.
And we're not going to support something that
doesn't work.
MALLABY: Another Steve here.
Microphone back there.
Q: I do have a question, but if it's OK with
you, I would yield to Dr. Rivlin.
MALLABY: OK.
Sorry, I didn't-OK, fine.
Q: (Laughs.)
Mr. Secretary, you've been very clear about
the connection between U.S. economic leadership
and trade and international organizations.
But U.S. economic leadership is a very abstract
concept.
And it's pretty clear to people in this room.
It's not clear to the general public.
And indeed, it seems to conflict with the
people who are cheering let's make America
great again.
(Laughter.)
So my basic question is, how do you establish
the connection between U.S. economic leadership
in the world and a strong U.S. economy, which
is clearly what everybody wants?
LEW: Look, it's obviously a very important
question.
And we know that jobs that are supported by
trade pay better than jobs that are not supported
by trade.
We know that a world where markets are closed
to the United States is going to lead to a
less-wealth performing U.S. economy.
That's not necessarily broadly embraced now.
I think, frankly, one of the things we have
to do is be more clear about what are the
standards that are going to be in place in
countries like the TPP countries that sign
on.
What does it mean to extend higher labor standards
in a country like Vietnam?
These are somewhat abstract questions, but
if you have high labor standards in the United
States and low labor standards in other countries,
it means the other countries are always going
to have lower costs and be able to out-compete
you.
As the other countries raise their standards
and meet our kinds of labor concerns, and
our kinds of environmental concerns, and our
kinds of business practice concerns, the playing
field becomes more level for the U.S. to complete
better.
I actually think one of the challenges we
have is how to make sure that things like
trade adjustment assistance don't just get
public attention at the moment when there's
an effort to pass a trade promotion authority
bill or a trade agreement.
There has to be tension on those issues in
the intervening years.
We tend to have challenges getting our system
to focus on these things except at the moments
when we're trying to get approval for trade
legislation.
I think the fact that we could get a majority
of Congress to support trade promotion authority
just a few months ago is quite significant.
I think all of us who believe that the benefits
of U.S. economic leadership are profound,
both in economic and geopolitical terms, have
more work to do to make the case to people
who have legitimate worries about an economy
that has, for decades now, not necessarily
provided the kind of opportunity to middle-class
workers and their families that they want
to have and they have a right to expect.
That's not all because of trade.
I think trade has become one of the things
that's easy to point to.
But between globalization and technological
change and income concentration, we've seen
an awful lot of change in our country in the
last 25 years.
And I think if we address those root issues
by having better education, more skills for
the economy of the future, infrastructure
that will make it easier to the jobs you need-if
you don't live near the jobs that are available,
the burden of getting a job is hard.
If you can't travel there because there's
no mass transit or the roads take two hours
instead of 35, 40 minutes, it becomes a real
hurdle to your own personal mobility.
So I think we have a lot of domestic things
we could do to concentrate on building our
economy in a way that gives people real confidence
in their own economic future.
And I actually think most of the kinds of
things I just described are the kinds of things
which you can have bipartisan consensus on,
if it was in the context of an overall, you
know, fiscal approach where you had resources
to address problems that have bipartisan support
to address.
The challenge on infrastructure now isn't
that people don't want better roads and better
ports and better airports.
It's now to pay for it.
So it really comes back, as you and I both
know, to where's the money come from.
And hopefully the work of the last several
years has moved us back towards a more mainstream
conversation of those issues.
We saw it at the end of last year, and I certainly
hope that continues.
MALLABY: And what strikes me about Alice Rivlin's
question is that she's plainly correct that
parts of the primary debate are surfacing
fairly powerful skepticism about globalization
and international engagement.
It's also true in Europe that animosity towards
supranational economic institutions is at
an all-time high.
I mean, the very cohesion of the European
Union is in doubt.
But actually, the interesting thing is that
we're having this conversation, in the sense
that I can remember some of your predecessors
who would be making a speech essentially saying
that the Bretton Woods institutions have allowed
themselves to become irrelevant, bordering
on archaic, and really they need to be either
scrapped or radically changed.
And I would be asking the questions, but isn't
there some value in it?
And you've taken the opposition position,
wholeheartedly supporting them, and supporting
the international system.
And I'm therefore in the position of prodding
you to defend that position.
So I think there is an interesting flip in
some sense-
LEW: But I can point to just two things in
this last year that kind of partially answer
Alice's question, but address yours.
We've made enormous progress in the G-20 this
year on base erosion and profit shifting,
and that's closing the tax loopholes that
allow, you know, the legal shifting of money
to low- or no-tax environments.
We've seen just in this last week the outrage
of people around the world because those kinds
of opportunities exist.
You know, we in the United States have taken
a leadership role in doing things to try and
make it more transparent who the real owners
are, putting in place tax information-sharing
agreements that make it easier for tax authorities
to cooperate.
But getting the G-20 to agree in this area,
we've make more progress in the last year
than in the last 20 years on that issue.
On things like the financial action taskforce,
working on a global basis to try and put real
barriers in the way of anyone trying to use
the international financial system for illicit
or malign purposes.
We have a lot more work to do, but we had
a meeting at the U.N. Security Council in
December where there was a unanimous resolution
on the subject.
And it was the United States and Russia jointly
sponsoring it, you know?
So we have work to do.
It's not that we've achieved everything we
need to, nor that anyone sitting here in my
role will ever be able to say we've achieved
everything, but you have to adapt to the challenges
of the future.
If we could address this, you know, issue
of taxes becoming stateless income-you have
income that never gets taxed-I think it would
help address some of the international sentiment
that the system doesn't seem fair.
So I think the fact that we've worked on that
is very important.
We have to demonstrate it by making real progress.
MALLABY: Yeah, let's go right here.
Q: Hi.
Rachel Oswald with Congressional Quarterly.
A follow-on to Barbara's question earlier.
There have been a couple of bills filed in
Congress to address the U-turn concern, to
make it illegal.
What are your thoughts on those measures,
given that you have just said there are no
plans to allow limited U-turns at this point?
LEW: So what we have said-what the president
said about 10 days ago-is that we will work
on an international basis to make sure that
financial institutions in other governments
understand what the lifting of the nuclear
sanctions mean, and to provide the guidance
that's necessary for Iran to get access to
resources and to transactions that it has
a right to with the nuclear sanctions being
lifted.
And that's what we're doing.
I'm not going to address hypotheticals in
terms of any other actions.
MALLABY: Let's go-yes, right here.
On the-in front of you there.
Good, yeah, sorry.
Q: Hi.
David Apgar, Inter-American Development Bank
Group.
Thank you very much.
Let me ask a question that broadens Sebastian's
earlier question and lets you expand a little
bit on development.
Those of us in the business focus on our hard-won
successes, but outside of Washington the view
that development is broken has probably never
been more widespread, and not without reason.
You know, now we look back in history and
see wave after wave of competing approaches
to development have not provably had an effect.
And what has had more effect than anything
in recent experience were the efforts of the
Chinese party-the Communist Party in China
to lift hundreds of millions of people out
of poverty.
So this pessimism isn't all bad.
It's encouraged the private sector to step
up with a whole movement of impact investment.
But what I'm wondering is, give your understanding
of bilateral aid from your previous position
at the State Department, and your understanding
of multilateral efforts given where you sit
now, are there any deep changes that might
break the cycle of development ineffectiveness,
that you see?
LEW: Well, first, I wouldn't accept the premise
that our experience of development has been
ineffective.
It has not been perfect, and certainly some
things have worked better than others, but
the countries where you've seen the biggest
rise out of poverty have been very much the
countries that have been beneficiaries of
lending from institutions like the World Bank
and, in many cases, recipients of bilateral
aid.
I think that the-you know, when I was at the
State Department what I saw when I looked
around the world was a big challenge of coordinating
different streams of development assistance
that in a host country it wasn't always clear
what the goals were and who was working with
whom.
You know, working even within the United States,
we tried very hard to coordinate the bilateral
and the multilateral efforts that we have
underway, so that we have maximum advantage.
It's something that we looked at when I was
at the State Department from the perspective
of having responsibility for the bilateral
development assistance, and where I sit now
largely responsibility for the multilateral
development assistance.
But look at something like climate change.
Look at the conference I mentioned in Addis
Ababa, Funding for Development.
I don't think you could have imagined 10 years
ago that you would have had a gathering like
the Funding for Development Conference, where
three principles came out of it as being equally
critical.
One was that there's a need for ongoing official
development assistance.
Secondly, that there's a need for host government
investment in the same priorities.
And third, that there has to be public-private
partnership in order to get the full leverage
necessary to achieve the goals.
I think that is very important foundational
element to the COP21 agreements in Paris.
And it's an important concept as we go forward.
You can't look at any of these things in isolation.
The question is, when you put them together,
do they give you the results that you're looking
for?
But I think it's a mistake to think that everything
has been a great success.
But it's certainly a big mistake to think
that everything's been a big failure.
We have to adapt and learn how to take the
best of what we've accomplished and build
on that for the future.
MALLABY: I'll go back to Steve.
Generosity should be rewarded.
(Laughter.)
Q: Thanks.
Steve Charnovitz, George Washington University.
In your essay and your remarks, you've highlighted
the work of the World Bank on climate change.
The question I wanted to ask you was about
the World Bank role in human rights.
Recently the U.N. special rapporteur on extreme
poverty and human rights criticized the World
Bank for being a human rights-free zone.
So I wanted to ask you your reaction to that
criticism, and what you think the proper role
for human rights in World Bank lending is.
LEW: Well, one of the U.S. interests in the
World Bank in recent years has been to make
sure that there is a proper focus on the conditions
in the countries, both in terms of human rights
but also in terms of the impact on the community
of the investments that are being made.
That is something that we have been pushing
with a great deal of support from Congress.
And I think it's something that helps guide
the World Bank as it moves forward.
It is a challenge in many countries to get
along the path of progress on an economic,
political, human rights field all at the same
time.
But that's not an excuse for not pushing in
the right direction, and for having standards
of what is acceptable progress.
So it's an area where we will continue to
press.
I don't think that's a fair characterization
of the World Bank.
But again, I don't think it's fair to say
that in all of the countries where the World
Bank lends the practices are yet where they
need to get.
These are countries that are developing countries
in every regard, in many cases.
And in our bilateral programs, you know, we
tie aid to progress.
And we press for those kinds of standards
in international setting as well.
MALLABY: Last question, we'll go to the lady
in the green shirt here.
Q: Porter McConnell from the Financial Transparency
Coalition.
Thank you, Secretary Lew, for coming to speak
with us.
A question you sort of alluded to in the OECD's
base origin and profit shifting scheme-I guess
I'd like to push you on is that there's a
sense-you know, when I think of America's
economic leadership, I think of rule of law,
I think of transparency, I think of respect
for small and medium enterprise.
When I talk to my colleagues abroad they have
a pretty different picture right now.
They see a great place to hide illicit cash,
with no questions asked.
The big scandal around the Panama Papers was
less that you could do this in Panama, but
that so many Americans didn't need to do it
in Panama because they could do it in Delaware
or Nevada.
So I guess I'd love to hear from you what
you would say to those critics about the credibility
gap there.
LEW: I think that we have a tax system that
is amongst the best in the world and is a
standard that others aspire to in terms of
its independence and its reach.
You know, we have put in place, you know,
the ability to see what people's different
income streams are.
If it's not subject to tax, that's a policy
issue, not a transparency issue.
You know, we are working globally to make
sure that there's a sharing of tax information.
You know, the word FATCA is now an international
word because the United States adopted the
policy of making it obligatory on all countries
to share tax information so that you can't
hide income.
We're not all the way there.
The base erosion work we did was critically
important, but-I seem to keep coming back
to the meetings in Addis Ababa, but another
thing that came up at those meetings that
was critically important was how weak the
systems are internationally in so many countries,
and how much technical assistance countries
need to build the kinds of tax authorities
so that you can work with them to make sure
those gaps don't develop.
You know, we've pledged to double our Office
of Technical Assistance support.
We work closely with the IMF and other bilateral
partners.
But we're making real progress there.
We have more work to do.
I think that the idea that there's different
rules depending on kind of where you are in
the-in the hierarchy is unacceptable.
Everyone has to follow the law.
And if the laws permit the movement of income
to, you know, countries or places where they
are inadequately taxed, then that's a tax
policy question that we have to address.
Which is one of the reasons that we have proposed
business tax reform, so that the U.S. broken
tax system could be fixed, and we would tax
all U.S. income wherever it is in the world
at a reasonable level, and close the loopholes
that make our system as broken as it is.
We, right now, have a tax system that forces
companies to look for ways to avoid a statutory
tax rate that's the highest in the developed
world, even though our effective tax rate
is about average, because of the impact of
the system of deductions and credits, which-some
were worthy when they were put in place; many
are-have outlived their usefulness.
Some weren't necessarily useful when they
were put in place.
(Laughter.)
So we've got a lot of work to do.
But I think our economic leadership in this
area is still profoundly important.
And in the base erosion and profit-shifting
debate, you know, we've been right at the
heart of it globally.
So the world has more work to do here.
We collectively have more work to do here.
But I think, you know, we've made progress
and we will continue to make progress.
MALLABY: Well, Mr. Secretary, you've taken
us from Bretton Woods to the Panama Papers,
with many stops in Addis Ababa on the way.
(Laughter.)
Thank you very much.
It was a pleasure to have you here.
LEW: Great to be with you, Sebastian.
Thanks.
(Applause.)
(END)
