production. but greece has a cost of production, unit labor cost, 30% higher than germany. so every time they make an estimate of what the greek economy is going to do, it's going down. now, they say, well, by 2020, they're going to have a debt to gdp ratio of 120%. don't bet on it. their economy is collapsing. now, what are the solutions that are being given to them? they're told -- "the ft" every day practically has somebody who says let the germans inflate or print money. germany's debt is about 80% of gdp. if it does what "the financial times" gurus tell it to do, it'll soon be in the same sink that the others are in. you know, and the idea that germany is going to inflate its way out of this is nonsense. it has the highest productivity growth rate of any of them. so the result will be that the

others will inflate relative to germany. and that goes in the wrong direction. the german response is, well, let them deflate. what are we talking about? for greece we're talking about a 30% deflation. 30% deflation. that's like the great depression in the united states. you know, would you bet a plugged nickel that that's going to happen? the greeks are very, very slow to implement any reforms. 30% reduction in wages? it's just not going to happen. for italy, it's 20% to 25%. for spain, it's 20% to 25%. nobody even talks about cost of production. but cost of production is the solution to growth. so my proposal is a very simple one which no one in europe wants to hear. and i'll tell you why they don't want to hear it in a minute. what i say is, keep the euro. divide it in two. take the southern countries and have a soft euro. float it against the hard euro. the hard euro can adopt the

fiscal restraint. the soft euro will deflate, devalue against the hard euro. when it devalues to a new equilibrium, if they join the fiscal responsibility pact, they come back into the hard euro. that would do what the greeks, the italians, the spanish are used to. that is, you solve the problem by devaluing. and that will cut wages without having to go through the massive recession which is being imposed on greece and italy and the others. now, that would require to do -- to solve the problem that the germans and the french who after all run the eu don't want. and that is, they have to fix their banks, because their banks would be, many of them, under water. so they would have to, in my scheme of things, they'd have to lend the money to the banks to keep their capital up when they do this. but that would solve most of this problem and get europe back

to growth. they don't want to do that. you know, i have a close friend who is an adviser to the top of the german government. they don't even want to hear about it. because they don't want to do what they have to do for their own banks. >> i'm interested to -- first of all, let me say, i think you might find there's more support for that kind of analysis in europe than you think. i mean, including, actually, in the aft. i'll just say a word for my former employer. i think i have seen the occasional references to the competitiveness issue within europe. i think the ft is aware of that problem. let me just say that i'm a little surprised to hear you argue -- to hear you say that, you know, your long-term solution for the -- for europe includes the euro. that you're proposing this adjustment which would be, you

know, a hell of a -- have a hell of an impact on the european union. i'm not saying it's a small thing. but then you go back to fixed exchange rates. wouldn't -- i think i might have expected you to argue that the fixed exchange rates for europe were a mistake in the first place. >> well, i am not fond of the fixed exchange rate system. i take that as a constraint because everybody that speaks about this says we don't want to give up the euro. so i'm trying to find a way in which -- >> so you do accept some political constraints in your earlier analysis? >> oh, i believe -- i am, perhaps, on the side of saying that policy and politics have the same greek root, and it's not an accident. >> okay. so you think there is a way to rescue the -- the euro with -- with greece in the system? provided they're allowed this sort of one-shot devaluation? >> right, right. that will prolong the fixed exchange rate system. will it prolong it forever? who knows.

i mean, my crystal ball doesn't look that far ahead. >> okay. we're already -- i mean, i'm already conscious that we're running out of time. i feel like we're only just getting started here. if people go to the microphones to ask questions, i'll turn in just a second to see if anyone's there. i have another one i want to put to you if i may while people are organizing their thoughts. another very interesting column you wrote just the other day for the "wall street journal" took on another issue which is very saline to american politics right now. this is the question of inequality. you argued if i understood the column correctly that we're making too much of this issue in the u.s. that it isn't -- it isn't a distinctively american phenomenon. and dealing with the inequality problem, if we have an inequality problem, shouldn't be the organizing principle or shouldn't be an organizing principle for economic policy going forward. just -- i mean, have i got that

right? >> you did. >> okay. >> let me say, first, i am a strong believer in the idea that every election and certainly this one is an election about whether we have more spending or more -- or lower tax rates. that's always true. and to pat myself on the back, i wrote the most -- excuse me -- the most widely cited paper i wrote is a paper that says -- >> let me get you something to drink. >> -- exactly that. so, now, what the column says for the benefit of those people who don't read "the wall street journal" -- thank you. what the column says is -- it shows a picture of seven countries, diverse countries -- the united states, britain,

france, canada, australia -- those are among the seven. for 100 years it shows the share of the income going to the top 1%. that's what the people who complain about this most vociferously talk about, the one in '99. so it shows it. and what it shows most strikingly is that they all move down together. and they move up after 1980 together. now, there are two very interesting facts in that chart. at least two. the first one i've already told you. they all move together. the second one is that during that period in which we had massive redistributions in all countries, all seven countries had very little effect on the share of the 1%. the big fall in the share of the 1% comes as a result of the operation of capitalism. it reduced the real interest rate and, therefore, the income of those in the 1%.

now, after 1980 they all turn up, some more than others. the united states, britain and canada turn up the most. sweden somewhat less. france, much less. why do they turn up after 1980? could it have something to do with the fact that 600 or 700 million workers were added to the labor force in china and india and that holds down the incomes of people who are in labor? in low incomes, middle income groups? boy, we've certainly seen the destruction here. so it's pretty prima facie case that that's the case. what about the top 1% or the top 5%? why are they doing so well. incidentally, it's not my data. it's data i took from two swedish economists. the economist named sherwin rosen wrote a whole series of papers on the super incomes. and he said -- he attributed to and showed that it was pretty

responsible idea that these are people with very high skills. who are they? well, rock stars, athletes. no one complains about their getting high incomes. but i suppose there are people who think that it's wrong for alex rodriguez to make as much money as he does. but he gets it because he's a superstar. then there are surgeons, trial lawyers, even a few college professors. and businessmen. now, most of these people have extreme skills. try to think about what it takes to run a company that has branches in 100 different countries. and if it's a bank, that there are 50,000 people every day who are making commitments. it would kill you.

that's a big management job. that's why they get these high incomes. are there disparities in the thing? are there injustices in the thing? of course. life is full of injustices. but that's not the main point. the main point is that what's happening here is happening everywhere. so it's not a result of the local political decisions, the bush tax cuts or the obama expenditures. i mean, it may have an effect. but the dominant effect is an international effect. it's something that's going on. like the chinese and the indians adding enormous number of people to the labor force. >> okay. okay. could you just say who you are as you ask your question? thanks very much. >> i'm jeff kosnett. i'm a columnist and senior editor at kiplinger washington editors. i took classes from dr. meltzer in 1978. >> i'm sure he remembers you. >> my question is this.

you were describing the banks and their recent efforts which i guess are probably just starting to raise their dividends, buy back stock. in other words, do they want to go back to the days of when bank stocks paid dividend yields twice the s&p 500 and banks were largely run for their shareholders? i mean, it's one thing to say that this is appalling. it's not thing to say where is this going and why? thank you. >> let me just say, your interview is being incompetent here. we need to keep on a strict schedule. please keep your answer brief. it will have to be the -- >> i'm sorry. what did you say? >> i would stop it. that is i would reverse -- if we're going to bail out the banks, then congress should vote to lend them the money. which they haven't. >> why do you think the banks want to go ahead and do this, then, if it's contrary to good public policy?

>> because they -- it's not contrary to their private policy. >> i think we'll finish there. thank you very much, indeed. thanks, allan. >> thank you. >> thank you, clive. thank you, allan. president obama meets with the leaders of mexico and canada today for a north american sum at the white house. the three leaders are expected to talk act mexico's role as a major oil exporter and the keystone oil pipeline from canada. they'll hold a news conference at 1:15 eastern time live on c-span. late they are afternoon, canadian prime minister stephen harper addresses the wilson international center for scholars. he'll talk about issues between the u.s. and canada. prime minister harper has voiced disappointment with the ski keystone pipeline decision. canada has the world's third largest oil reserves after saudi arabia and venezuela. and that event is going to be at 4:00 p.m. eastern on c-span2.

while congress is on break this week and next, c-span3 is going to feature american history tv in prime time at 8:00 p.m. eastern. on the, the life of president dwight eisenhower. the architect of the memorial honoring the nation's 34th president and from president eisenhower's granddaughter, who opposes it. then an archival film about eisenhower made by the u.s. army. the international monetary fund meets this month for more talks on europe and other issues and the house financial services committee asked treasury secretary timothy geithner about that meeting and the stability of international financial system. republican committee members opposed contributions to the imf to help resolve the european debt crisis. this hearing is about 2 1/2 hours.

this hearing will come to order. the purpose of the hearing today is to receive the annual testimony of the secretary of treasury on the state of international -- the international financial system. the chair would note the very

notable absence of our chairman today, chairman bacchus, who is undergoing a minor surgical procedure. he is expected to rejoin us tomorrow. he regrets his absence. pursuant to rule 3 f 2 of the rules of the committee for the 112th congress, the chair announces the recognition of opening statements will be limited to the chair and ranking minority member of the full committee. and the chair and the ranking minority member of the subcommittee or their respective designees to a period not to exceed 16 minutes, evenly divided between the majority and minority. without objection, all members' written statements will be made a part of the record. the chair now recognizes himself for five minutes for an opening statement. clearly our economy is linked and intertwined with many others, especially europe's. almost all agree that europe's failure to adequately address its debt crisis can adversely

affect our domestic economy. the president has gone as far as to say, quote, the biggest head wind the american economy is facing right now is uncertainty in europe. i respectfully disagree. given current domestic exposures to european debt, hedging strategies in place and current account balances, i do not believe europe's problems are as threatening to us as they once were. the greater threat to our economy is that europe will successfully confront their debt crisis and we will not successfully confront ours. although the dollar remains the world's reserve currency, we are beginning to see some chinks in that armor. although our economy still remains the flight to safety, the question is for how long. interest rates remain historically low due to the feds tripling its balance sheet but this massive intervention is just masking true market interest rates that are making it easier for the administration to service the debt on the nation's first, second and third

trillion dollar plus deficits. everyone knows our debt is unsustainable and as herb stein once famously observed, if something cannot go on forever, it will stop. beyond the unsustainable debt, the administration has stated there are some encouraging signs in our economic recovery and i agree. but after three years, there continues to be too many discouraging signs. unemployment has now exceeded 8% for 37 straight months, the longest span of high unemployment since the great depression. when one adds in the people who have simply given up and left the labor force, those who have part-time work yet seek full time, the true unemployment rate should actually be considered to be 15.2%. according to the world bank, the ease of starting a business in the u.s. has now fallen from fourth in the world to 13th. according to the census bureau, almost half the nation is classified as low income or living in poverty. gas prices have doubled.

if this too slow and too weak recovery had achieved the average growth rates of the ten previous post-war recessions, gdp per person would be $4,528 higher and 13.7 million more americans would be working today. the american people know we can do better. perhaps more importantly is they see europe grappling with their debt crisis. they see no evidence that we are confronting our own. since the president took office, the national debt has increased 45%. from $10.6 trillion to $15.4 trillion debt held by the public -- gross debt, rather. in the budget the administration just released a few weeks ago, they would add another $11 trillion on top of it. what is most ironic is we convene a hearing that will largely focus on the european debt crisis is that when you look at the numbers, the u.s. has a worse debt-to-gdp ratio than does the eurozone.

there is no greater threat to our recovery than our own fiscal trajectory. unfortunately, the president's approach to europe appears to be do as i say but not as a do. now, the president knows what the cause is. he has said, quote, the major driver of our long-term debt is medicare, medicaid and our health care spending. nothing comes close. i agree. but there is nothing in his budget to reform, save and secure thee programs and i'm not the only one to take note. the los angeles times says it's past time for the administration to lay out a credible plan for bringing the deficit and debt under control. sadly obama's budget proposal shows he would rather wait until after the election to have that reckoning. the boston herald said president barack obama has apparently decided he is not going to be a part to the nation's enormous deficit which would make him, yes, part of the problem. as we discuss issues facing the eurozone, i want to make two things exceedingly clear. one, we cannot continue to

ignore our own unconscionable and unsustainable debt. secondly, u.s. taxpayers should not be expected to and cannot afford to bail out foreign countries. i am encouraged that the administration has stated that it does not plan to seek additional funding for the imf. but the imf has announced its intention to further expand its lending activity through bilateral loans. when it does, u.s. taxpayers will be increasingly exposed to greater risk as the u.s. has a 17.5% equity stake in all imf loan operations. the imf is venturing into uncharted territory. never before has it lent money to countries on the scale that it has to greece, ireland and portugal. in our discussion today the secretary will shed light on what we can expect the administration to pose on a long-term plan that will prevent the united states from being on the road to becoming the next greece.

mr. secretary, i look forward to your testimony. i will yield back the balance of my time. at this time the chair recognizes the ranking minority member for five minutes. >> i am pleasantly surprised that in the last 30 seconds of his statement the chairman managed to talk about the subject of this hearing. but most of it was a, i think, somewhat inaccurate attack on the general fiscal policy of the united states, and i remember a time when there were people on the conservative side who accused liberals of taking a blame-america-first strategy and saying everything was america's fault. apparently that practice has switched sides because we have a situation in which, as mr. bernanke said, and people sometimes forget ben bernanke was the single most important economic appointee of george w. bush. first at council of economic adviser, then at the federal reserve. and mr. bernanke has agreed with president obama that the european situation is one of the major threats to our being able to continue our recovery and at

a time when it is generally recognized by economic analysts that america did a better job of dealing with the crisis than europe and where america has been helpful in trying to get europe to move but where there were still serious problems, the chairman says, no, it's america's fault, that europe should be apparently the example for us, even though if you look at developed world economies today, america is performing far better than any of the european economies. the european economies are not doing nearly as well in economic growth as we are. but the chairman would rather make a partisan attack on the administration. when he does get to the international situation, it does seem to me he gets it very wrong. he does acknowledge that there is some impact from the european debt crisis, but he is somewhat critical of our efforts to deal with it, particularly the imf. the notion that we should use our voting power on the international monetary fund to keep them from participating in

an effort to deal with the european crisis is economic self destruction. the fact is that the imf is playing a very important role. it has been somewhat successful so far in helping. and the decision today that america was going to prevent any imf participation in an effort to stabilize the financial situation in europe would have a disastrous effect on the american economy. now, a disastrous effect on the american economy would also have a negative effect on the president' chances for re-election. we did talk about the deficit. the chairman contrasts the european's view on debt and their actions to ours. the europeans have one great advantage with regard to trying to cut their debt.

they have outsourced their defense to the united states taxpayer. if the european nations, our nato allies, the eu members were spending a percentage of their gdp comparable to ours, their debts would be far greater. conversely, if we were to be able to reduce our gdp spending on defense to being only, oh, maybe twice what the average european one is, we would be making great progress. the chairman quotes the president as saying medicare and medicaid are the greater drivers. i don't recall in what context the president said that, but i think that's wrong. i think that the excessive military spending, which in some cases has done more harm than good, such as in the war in iraq, and which is showing increasingly futile in afghanistan, but the united states taking over, as it has since world war ii, the defense for japan, the defense for germany, the defense for other wealthy nations, that's a major factor. so to talk about the europeans

as models of how to deal with their debt and denounce america for higher debt and ignore the fact that a major part of that is that we are carrying their defense, let's join on cutting that. i am having a hard time reconciling my republican colleague's that it's important to cut the deficit and keep taxes the same with a decision to go into syria, with a decision to get more militarily involved earlier in iran weather the criticism of the president talking act withdrawing from afghanistan, for the criticism of the president for getting out of iraq. i do not understand how many of the republicans who are critical of the president for not spending tens and tens and perhaps hundreds of billions more on the military over the next few years than he is predicting reconcile that with the notion that we must cut the deficit. now like the chairman, i'll close by getting to the subject. we have a very important issue here. there is a debt crisis in europe that is threatening america.

we have the best performing of the developed world economies, but it's not doing good enough. one of the major threats to that would be the crisis in europe. i support what the administration and federal reserve have done to deal with that, and that includes support for the imf. >> the chair now recognizes the chairman of the subcommittee on international monetary policy and trade for three minutes. the gentleman from california, mr. miller. >> thank you, mr. chairman. secretary, it's good to have you here today. it's been a while since we've seen you. senator bernard has been very informative and helpful to us. there's just a concern today. i know you recall when we went through our crisis that europe was very cautious in staying over there and that was an american problem. we're very cautious in that way too. the imf has been very good in giving technical advice an direction on what they should do to resolve their exposure to the european crisis, but we're concerned that it's not transported over to us. now, we understand the nexus between trade and financial service sectors that we have

between our countries, but this hearing today is very important because we need to really understand where we're going, where the administration is going, and where we end up. we don't want to end up with their debt in our lap and the american taxpayers are very concerned about that. that's not an accusation, just a genuine concern. i've said all along this european problem is a european problem. no doubt at all that we are connected with them. but we need to insulate u.s. taxpayers for the problem being exported over to us. there's a huge interconnectedness between trade and the financial markets, and that's a good reason for this hearing today. and i hope you can give us your objectives and share your insight on where you think we're going on that. there's a serious concern raised in congress that imf resources will be used in the eurozone and if that happens and we're their largest shareholder in imf that that's going to be used as a bailout for europe and the burden will fall back on us. and i hope in your comments today you can address that, because that really is a huge concern for us. we're just trying to come out of our crisis, and i'm going to

restate again, when we were going through our worst time europe -- and you dealt with it, because i remember reading stuff of your involvement -- europe was very concerned that it was not a european crisis, it was a u.s. problem and we needed to resolve it ourselves. this committee has the same belief. yes, we're concerned about europe and we're concerned about their crisis. we want to assist them in any way we can, but the financial burden should not fall back on this country to resolve their problems over there. some of the major regulations the administration is imposing will have the effect of imposing that burden on us, we believe, especially in our financial sectors, because they're not adopting similar policies to what we're adopting over there and it will put us at a really financial disadvantage. the voel kerr voelker rule is a great example. there's not a european country that seems to want to comply with the regulations placed on our companies. if they don't, what position does that put the american companies at a disadvantage to the european companies in the future? if we're ever going to get out of the situation we're in today