Special Master for TARP Executive Compensation

Special Master for TARP Executive Compensation Kenneth R. Feinberg
Testimony before the House Committee on Oversight and Government Reform

Mr. Chairman:

I thank you and the Committee for the opportunity to testify today. The subject of executive compensation continues to be a top priority of the American people and the international business community, so I welcome your invitation and look forward to participating in this hearing.

As you know, in June of this year, I was asked to serve as Special Master for TARP Executive Compensation by the Secretary of the Treasury. In that capacity, I have a number of responsibilities under the relevant statutory^[1] and regulatory^[2] authority. These responsibilities include interpreting the regulations, and evaluating and making determinations regarding compensation payments to, and compensation structures for, certain employees of TARP recipients receiving exceptional financial assistance.

In these capacities, I have spent the past five months carefully considering the terms and conditions of the 2009 executive compensation for senior executives at those seven corporations that received exceptional financial assistance from the federal government: AIG, Bank of America, Citigroup, Chrysler, Chrysler Financial, General Motors and GMAC. These executives include five "senior executive officers" and the twenty "most highly compensated employees." My mandatory jurisdiction under the regulations is limited to the senior executives at these seven companies and only these seven companies. Although I do have interpretive authority under the Standards, and advisory authority under the law to make recommendations and nonbinding determinations as to officials of other companies who received TARP financial assistance, I have no legal authority to make final determinations pertaining to executive compensation for any companies other than these seven.

Mr. Chairman, I refer you and the Members of the Committee to the Report of the Special Master for TARP Executive Compensation: 2009 Executive Compensation Determinations for the TARP Exceptional Assistance Recipients, dated October 22, 2009, a copy of which is included with my prepared testimony. This Report includes my compensation determinations concerning senior executives at each of the seven companies referenced above, and provides a comprehensive explanation and analysis of the reasoning which underlies such determinations. I welcome any inquiries you may have concerning my Report.

In your letter of October 15, 2009, inviting me to testify, you raised three questions for me to focus on during my appearance here today. I treat these questions in the order you presented them in your letter.

I. What standards and considerations are you using to evaluate employee compensation at the seven companies that submitted such plans for review?

I was guided by the rules and principles in the statute and the Treasury regulations in evaluating employee compensation at the seven companies. For example, the Treasury regulations expressly make clear that I must consider competitive market forces in determining compensation levels that will permit the seven companies to remain in business, to thrive financially, and to eventually repay the taxpayers for TARP financial assistance. These companies must be able to attract sufficient talent to prosper. At the same time, however, the law requires me to take into account whether the terms and conditions of compensation are performance-based and tie compensation to the companies' prospective performance and financial success. In addition, the regulations make clear that my compensation determinations should be made in such a way that considers whether senior executives are provided incentives to avoid taking excessive risks to receive greater amounts of compensation. The law also anticipates that a portion of compensation be tied to the repayment of TARP financial assistance, and requires companies to "claw back" incentive compensation that is based upon inaccurate financial statements or performance metrics.

In sum, the standards and considerations I used in evaluating employee compensation at the seven companies can be found in the statute and the accompanying Treasury regulations: in these laws, Congress and the Treasury provided me the guidance needed to make my final determinations. Based on this guidance, I determined that a new compensation regimen should be implemented at these seven companies: guaranteed compensation is to be replaced by performance-based compensation designed to tie individual executives' financial opportunities to the long term overall financial success of each Company. Short-term profits must give way to longer-term financial stability and success.

II. What specific proposals have been received from the seven companies and what specific actions have you taken with respect to those proposals?

Mr. Chairman, I refer you and the Members of the Committee to my Report (attached) which details the individual submissions made by each of the seven companies, and also describes in comprehensive fashion my response to each of these submissions. The general conclusions I reached after careful evaluation and analysis of the submissions were the same for six of the seven companies--I concluded, pursuant to the statute and the Treasury regulations, that each submission would result in payments contrary to the "Public Interest Standard," and should, therefore, be rejected. The "Public Interest Standard" is the term I used in my Report to describe the regulatory standards that I am required to apply in making determinations. Instead, as my Report spells out, I made important revisions to the submissions as a precondition to approving compensation structures and payments for each individual covered executive at these six TARP recipients. (Chrysler Financial has unique circumstances, and I determined that its proposal was appropriate in light of them.

I can summarize the flaws in the six individual company submissions as follows:

1. The companies requested excessive guaranteed cash – salaries and bonuses – for company executives;
2. The companies requested that stock issued to these executives be either immediately redeemable or redeemable without a sufficient waiting period;
3. Many of the companies did not sufficiently tie compensation to performance-based benchmarks and metrics;
4. Many of the companies did not sufficiently limit or restrict financial "perks," such as private airplane transportation, country club dues, golf outings, etc., and in some cases provided excessive levels of severance and executive retirement benefits;
5. The companies did not make sufficient effort to fold guaranteed compensation contracts – entered into prior to the enactment of the current compensation regulations – into 2009 performance-based compensation.

In modifying these six submissions in order to satisfy the "Public Interest Standard," I made important changes designed to tie compensation to prospective company performance:

1. I greatly reduced the amount of 2009 guaranteed cash compensation made available to senior executives. On the whole, cash (which, in the past, included cash base salaries and cash bonuses) was reduced by approximately 90%. Overall total compensation was reduced by approximately 50%.

2. In place of cash, I substituted "stock salary" which, in accordance with Treasury regulations, vests immediately upon issuance but may only be redeemed in three equal, annual installments beginning in 2011, with each installment redeemable one year early if TARP obligations are repaid. The objectives are clear – to tie individual compensation to longer-term performance metrics, and to encourage senior executives to remain at the company for a period of years to maximize their personal benefit from the overall profitability of the company itself. The value of "stock salary" will depend on the companies' financial success in coming years. At the same time, I also permitted incentive payments of "long-term restricted stock." This long-term incentive stock vests only if executives remain employed for three years after grant, and it can be cashed in only in 25% increments for each 25% of TARP obligations repaid by their employer. Again, the goal is to tie individual compensation to the overall financial success of the company.

3. By implementing the ideas of "stock salary" and "long-term restricted stock," only redeemable after multiple years of company performance, I tied individual compensation to long-term company success.

4. I reined in "perks" by expressly requiring that any such perks beyond $25,000 per individual must first receive the approval of the Office of the Special Master. No longer will senior executives be entitled to excessive use of private planes and other compensation-related financial benefits.
I also prohibited additional company contributions to executive retirement programs..

5. I succeeded in almost all cases in getting the companies to agree to restructure guaranteed contracts and other forms of guaranteed compensation into prospective, performance-based compensation packages. These companies agreed, in almost all cases, to transfer guaranteed forms of compensation – entered into with company officials before the enactment of current legal requirements – into "stock salary."
I am very reluctant to even attempt to invalidate the sanctity of contracts entered into well before enactment of the current law; however, I did work closely with the companies in an attempt, cooperatively, to restructure these "grandfathered" financial guarantees by making them part of my 2009 final compensation determinations.

Mr. Chairman, I refer you and the Members of the Committee, to my Report which spells out in further detail how we modify company submissions to comply with the "Public Interest Standard."

III. What recommendations do you have for oversight of TARP recipient employee compensation schemes in the future?

The Treasury regulations speak quite clearly to this question.

First, the Standards require that the Office of the Special Master now turn its attention to reviewing compensation structures for the remaining executive officers, and 75 next most highly compensated employees, in each of the seven companies. The regulations do not require the Special Master to make individual compensation determinations for these individuals; instead, the regulations require that the Special Master approve the compensation structure for these individuals. The law affords me 60 days to do this from the time that I deem the company submissions with respect to these individuals "substantially complete." I have received all of these pertinent submissions from each of the seven companies but have not yet concluded that they are "substantially complete," thereby triggering the 60-day limitation.

Second, the Office of the Special Master must soon turn its attention to the process for determining the 2010 compensation for the senior executives at each of the seven TARP exceptional assistance companies. I believe we have made important progress in this regard as a result of completed efforts at 2009 compensation. Nevertheless, there will undoubtedly be new compensation issues which will confront us in 2010. (For example, we anticipate dealing once again with claims of "grandfathered" retention contracts and other guaranteed forms of compensation which will have to be considered by the Special Master as part of 2010 submissions for the senior executives; in addition, it is anticipated that the list of senior executives for each Company will undergo some modification, requiring a new evaluation of certain individual compensation packages submitted by each company.)

Finally, I do not recommend that my responsibilities related to compensation determinations for senior executives, as currently defined by Treasury regulations, be expanded beyond the current seven companies receiving exceptional TARP financial assistance. I believe Congress and the Treasury have already spoken with respect to the compensation restrictions that apply beyond this group of firms. My limited mandatory jurisdiction involving just these seven companies is justified by the fact that the American taxpayers have a vested interest as particularly significant stakeholders in these seven companies. But, the federal government should not enter the business of micromanaging compensation practices beyond these seven companies by expanding my jurisdiction or broadening my discretionary authority. Hopefully, the individual final compensation determinations I make may yet be used, in whole or in part, by other companies in modifying their individual compensation practices. I believe the final compensation determinations I make and discuss in my Report are a useful model to guide others in the private marketplace. But that is where my authority should end. I do not believe it necessary or wise to broaden my jurisdiction or make my legal authority more pervasive.

Mr. Chairman, this concludes my formal written statement, and I welcome any questions from you and the Members of this distinguished Committee.

Thank you.

Weekly Review and Outlook 26-30/10

Top 5	Current	Last	Change (Pips)	Change (%)
NZDJPY	69.41	67.29	+212	+3.05%
CHFJPY	91.28	89.25	+203	+2.22%
EURCAD	1.5803	1.5459	+344	+2.18%
AUDCAD	0.9711	0.9505	+206	+2.12%
EURJPY	138.21	135.47	+274	+1.98%
Dollar
EURUSD	1.5008	1.4904	+104	+0.69%
USDJPY	92.08	90.89	+119	+1.29%
GBPUSD	1.6309	1.6354	-45	-0.28%
USDCHF	1.0086	1.0181	-95	-0.94%
USDCAD	1.0531	1.0373	+158	+1.50%
Euro
EURUSD	1.5008	1.4904	+104	+0.69%
EURGBP	0.9201	0.9111	+90	+0.98%
EURCHF	1.5138	1.5175	-37	-0.24%
EURJPY	138.21	135.47	+274	+1.98%
EURCAD	1.5803	1.5459	+344	+2.18%
Yen
USDJPY	92.08	90.89	+119	+1.29%
EURJPY	138.21	135.47	+274	+1.98%
GBPJPY	150.17	148.64	+153	+1.02%
AUDJPY	84.92	83.27	+165	+1.94%
NZDJPY	69.41	67.29	+212	+3.05%
Sterling
GBPUSD	1.6309	1.6354	-45	-0.28%
EURGBP	0.9201	0.9111	+90	+0.98%
GBPCHF	1.6449	1.6649	-200	-1.22%
GBPJPY	150.17	148.64	+153	+1.02%
GBPCAD	1.7172	1.6963	+209	+1.22%

Sterling dominated the headline last week and had a roller-coaster ride as expectation on BoE quantitative easing program flip-flopped. While dollar dipped through 1.5 level against Euro, it was mixed in general and managed to close higher against Japanese yen and Canadian dollar. The Japanese yen was the worst performer last week and weakened broadly. Canadian dollar, on the other hand, failed to ride on persistent strength in crude oil and weakened on BoC's comments on intervention.

Fed Beige Book released last week showed that stabilization or modest improvements are seem in housing and manufacturing sectors. However, commercial real estate markets remained weak. There is also little or no price pressures for the moment. Credit quality is having further erosion. Housing data from US was weak with housing starts and rose a mere 3k to 590k in September while building permits dropped 7k to 573k annualized rate. House price index dropped -0.3% mom in August. Though, existing home sales rose strongly from 5.09m to 5.57m in September. PPI unexpectedly dropped -0.6% mom, -4.8% yoy while core PPI also dropped -0.1% mom with yoy rate slowed to 1.8%. Jobless claims unexpectedly rose to 531k.

Euro extended recent rally against dollar and managed to close above 1.5 psychological level last week. Solid data from Eurozone gave some help to the strength of the common currency. Strong rebound in EUR/GBP also helped Euro. Manufacturing PMI and Services PMI improved to 50.7 and 52.3 in October respectively. Germany Ifo business climate also rose to 91.9 in October. Nevertheless, Euro has lost some momentum after breaching 1.5. While there is no indication of reversal, we'd expect a short top term to be around the corner.

Sterling had a roaster coaster ride last week, rallied on speculation that BoE will pause the quantitative easing program in November but was sold off sharply after much worse than expected Q3 GDP report. The less dovish than expected BoE October minutes, which showed unanimous vote to keep rates and the GBP 175b asset purchase campaign unchanged, lifted sterling to an intraweek high of 1.6692 against dollar and 0.8996 against euro. However, sterling's rally halted after disappointing retail sales report which showed 0% growth mom in September. Pound then reversed and fell sharply on Friday after shocking poor Q3 GDP report, which unexpectedly contracted for the sixth consecutive quarters by -0.4% qoq, the longest losing streak since record began in 1950s. Year-over-year rate also disappointed by contracting at -5.2%. The poor GDP report revived speculations that BoE might be forced to extend the asset purchase program in November. Technically, GBP/USD and GBP/JPY both held below key near term resistance level and thus retained the bearish outlook in spite of strong rebound last week. EUR/GBP also held above key support level will retain the bullish outlook. After all, the pound would likely remain pressured leading to November's BoE meeting.

The Japanese yen was broadly lower this week on carry trades as investors are already looking at prospect of rate hikes from some centrals banks going forward. NZD/JPY was the biggest winner last week after RBNZ Governor Bollard said that the strength of NZD won't be impediment to raising interest rates. AUD/JPY also extended recent strength to close higher at 87.87 while EUR/JPY rose sharply to 138.16. USD/JPY also rode on broad based weakens in yen and climbed to 92.04. While yen crosses will likely extend recent rise, the risk of reversal is increasing in case of much overdue correction in global equities.

Canadian dollar was another weaker currency last week on central bank comments. The Loonie indeed closed lower broadly even though oil priced managed to made another high at 82 last week. BoC Governor Carney expressed his concern on the strength of the currency on recovery as well as inflation and stressed that intervention is "always an option". BoC left rates unchanged at 0.25% last week and reiterated the conditional commitment to keep rates low until Q2 of 2010. The accompanying statement, as well as the Monetary Policy Report released on Thursday, noted the threat of rising Canadian dollar to recovery in the economy. On thing to note is that USD/CAD is so far still staying below 1.0590 resistance and another fall could still be seen before it bottoms out.

Looking at the charts, US stocks managed to edge higher last week but failed to sustain gain and closed the week lower. Upside momentum is clearly diminishing as seen in bearish divergence condition in daily MACD in S&P 500. At this point, there is no indication of reversal yet with 1040.92 support intact. But we'd continue to expect further loss of moment in case of another rise and upside would likely be limited by 50% retracement of 1580 to 667 at 1123 and finally bring long awaited correction.

Crude oil turned sideway after edging higher to 82. There is no sign of topping at this moment yet. But as we'd expect rebound from 33.2 to conclude inside fibonacci zone of 76.77 and 90.4, crude oil will likely lose momentum on next rise.

Gold was bounded in sideway trading last week but after all, there is no sign of reversal yet. Current rally could still extend further to 1133 projection target next. As gold has likely resumed the long term up trend, current rise is in favor to continue further to next projection target of 1258 after taking out 1133.

Downside momentum in the greenback was seen diminishing last week. While EUR/USD closed above 1.5 level, the move was note accompanied by rally in the strong AUD/USD, not even USD/CAD. GBP/USD's failure below 1.6740 suggests that more downside is in favor this week. The developments argue that greenback is possibly close to a bottom and this is inline with the view that stocks and crude oil should further lose momentum on next rise and bring long awaited correction. The biggest uncertainty will lie in gold which may extend recent rally after completing the current sideway consolidation.

Dollar index dropped to new 2009 low of 74.94 last week but turned sideway since then. Initial bias remains neutral this week with 4 hours MACD staying above signal line. In case of another fall, we're expecting further loss of momentum and dollar index should draw support from the lower trend line (now at 74.82) and rebound strongly. A break of 75.76 will indicate that a short term bottom is formed and strong rally should be seen to upper trend line resistance at 76.51 first. However, strong break of the lower trend line will target 74.31 support next.

In the bigger picture, dollar index's five wave decline from 89.62 should be near to complete and a rebound is due. Strong support should be seen at around 74.31 support level and bring near term reversal. Though, a break of 77.47 resistance is needed to confirm that a short term bottom is formed and bring rebound to 78.33/81.47 resistance zone. Otherwise, outlook will remain bearish.

Currency Heat Map Weekly View

	USD	EUR	JPY	GBP	CHF	CAD	AUD
USD
EUR
JPY
GBP

The Week Ahead

Main focus of the week will be on Advance Q3 GDP report from US. Expectation was rather high with consensus at 3.1% qoq growth which leaves more room for downside surprise. Dollar would likely be supported in case the data missed expectation as stocks would probably use that an excuse to trigger the long awaited correction. Another main focus will be on RBNZ rate decision. While markets are all expecting the bank to keep rates unchanged, focus will be on hints of when RBNZ would start to remove policy accommodation. The accompany statement would possibly trigger some volatility in yen crosses on carry trades. Australian CPI will also be closely watched and any upside surprise there will trigger speculations that RBA would speed up the rate hike cycle for meeting the inflation target.

Other important data to watch include:

• Monday: Australia PPI; German Gfk consumer confidence
• Tuesday: Eurozone M3 money supply; US S&P Case-Shiller price index, Conference Board consumer confidence
• Wednesday: Japan retail sales; Australia CPI; Germany CPI; US durable goods, new home sales, RBNZ rate decision
• Thursday: Japan industrial production; Germany unemployment; Eurozone confidence; US advance Q3 GDP
• Friday: BoJ meeting, Japan CPI, Manufacturing PMI; UK Gfk consumer confidence; Germany retail sales, Eurozone CPI; Swiss KOF; US personal income and spending, Chicago PMI

EUR/GBP Weekly Outlook

EUR/GBP's pull back from 0.9410 extended further to as low as 0.8996 last week but after all it was held above mentioned 0.8983 cluster support (61.8% retracement of 0.8722 to 0.9410 at 0.8985) as expected. Friday's strong rebound and break of 0.9190 minor resistance indicates that such pull back is completed. Initial bias is on the upside this week for a retest of 0.9410 resistance first. Break will confirm that whole rally from 0.8399 has resumed and should target 0.9799 high next. On the downside, however, a break of 0.8996 will now indicate that rise from 0.8454 has completed and bring deeper fall towards 0.8704/8837 support zone.

In the bigger picture, medium term correction from 0.9799 has completed with three waves down to 0.8399 already and rise from there is tentatively treated as resumption of long term up trend. Break of 0.9799 bring rally to next medium term target at 61.8% projection of 0.6535 to 0.9799 from 0.8399 at 1.0416. We'll hold on to this bullish view as long as 0.8704 support holds.

In the long term picture, long term up trend in EUR/GBP might be resuming as correction from 0.9799 has completed at 0.8399. Decisive break of 0.9799 high will confirm this bullish view and target 261.8% projection of 0.5680 to 0.7258 from 0.6535 at 1.0666.

The Special Master for TARP Executive Compensation Issues First Rulings

Today, the Special Master for TARP Executive Compensation Kenneth R. Feinberg released determinations on the compensation packages for the top executives at firms that received exceptional TARP assistance. Under the Emergency Economic Stabilization Act (EESA) as amended in 2009, the Special Master has a mandate to review all forms of compensation for five most senior executive officers and the next 20 most highly compensated employees at the seven firms that received exceptional TARP assistance (AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial).

The determinations announced today for the top 25 most highly paid at the seven firms receiving exceptional assistance: 1. Reform Pay Practices for Top Executives to Align Compensation With Long-Term Value Creation and Financial Stability · Reject cash bonuses based on short-term performance, as required by statute, in favor of company stock that must be held for the long term · Restructure existing cash "guarantees" into stock that must be held for the long term 2. Significantly Reduces Compensation Across the Board · Average cash compensation down by more than 90 percent · Approved cash salary limited to $500,000 for more than 90 percent of relevant employees · Average total compensation down by more than 50 percent · Exceptions where necessary to retain talent and protect taxpayer interests 3. Require Salaries to Be Paid in Company Stock Held Stock Over the Long Term · Stock is immediately vested, requiring executives to invest their own funds alongside taxpayers · Stock may only be sold in one-third installments beginning in 2011--or, if earlier, when TARP is repaid--aligning executives' interests with those of taxpayers 4. Require Incentive Compensation to be Paid in the Form of Long Term Restricted Stock – and to be Contingent on Performance and on TARP Repayment · Require executives to meet goals set in consultation with the Special Master, and certification of achievement of goals by an independent compensation committee · Any incentives granted paid only in stock that requires three years of service and can be cashed in only when TARP is repaid 5. Require Immediate Reform of Practices Not Aligned with Shareholder and Taxpayer Interests · Limits "other" compensation and perquisites · No further accruals under supplemental executive retirement plans or severance plans

1. Reforms Pay Practices for Top Executives to Align Compensation Practices With Long-Term Value Creation and Financial Stability: The Special Master's rulings represent a fundamental transformation from the pay practices of the past. These decisions will significantly alter the way that executives covered by the Special Master's decisions--including the senior executive officers and next 20 most highly compensated employees of each of the seven recipients of "exceptional" assistance under the TARP (AIG, Citigroup, Bank of America, Chrysler, GM, GMAC and Chrysler Financial)--are paid.

· Rejects Cash Payments Based on Short-Term Performance, as required by statute: Traditionally, compensation for these employees has included large cash amounts, including significant cash bonuses. These payments gave executives incentives to take short-term risks and little reason to protect the long-term the health of the company or financial stability. After today's rulings, as required by statute and Treasury regulations, these executives will receive the overwhelming majority of their pay in company stock that may only be sold over the long term, aligning their interests with those of taxpayers and shareholders.

· Restructures Existing "Guaranteed" Cash Payments into Stock Held For the Long Term: Under the pay practices of the past, several executives in this group were awarded cash "guarantees" in 2009. Guaranteed minimum amounts give employees little downside risk in the event of poor performance--but upside when times are good. The Special Master required these agreements to be restructured. Under today's rulings, these amounts will be paid in company stock that must be held over the long term.

· Citigroup and Phibro: At Phibro, Citigroup's commodities trading unit, the Chief Executive Officer was to receive a significant cash bonus based on the short-term results of significant risk-taking. The Special Master rejected this approach, and Citigroup agreed to sell Phibro to a company that has not received taxpayer funds. Under today's ruling, nothing may be paid to the Phibro CEO until the sale is complete.

2. Significantly Reduces Compensation Across the Board: To break from the pay practices of the past, the Special Master has reduced compensation across the board--both in terms of cash and the total compensation executives will receive.

· On Average, Cash Compensation Decreased by More Than 90 percent: The Special Master rejected cash payments based on short-term results that may prove illusory, and cash guarantees that separate pay from performance. Overall, the Special Master reduced cash pay by more than 90 percent from 2008 levels--and, as required by Treasury regulations, cash bonuses may no longer be paid to any of these employees.

· Approved cash salary generally limited to $500,000: Consistent with the Administration's February 4 guidance on executive compensation at TARP recipients, the Special Master approved base salaries of $500,000 or less for more than 90 percent of the employees in this group. Base salaries greater than $1 million were approved in just three cases: for the new CEO of AIG, as previously announced, and for two employees of Chrysler Financial, which will wind down its operations in the near term and cannot grant employees long-term incentives.

· On Average, Total Compensation Decreased by More Than 50 percent: Even including the value of stock that must be held for the long term, the Special Master reduced the total compensation packages for executives in this group to less than half of 2008 levels.

· Exceptions Where Necessary to Retain Talent and Protect Taxpayer Interests: Although the Special Master's rulings generally emphasize decreases in both cash and total compensation across the seven companies, increases in compensation were permitted where shown to be necessary to retaining key talent critical to a company's long-term success--and, ultimately, ability to repay the taxpayer.

3. Requires Salaries to be Paid in Company Stock Held Over the Long Term: The Special Master's rulings fundamentally change the structure of compensation at these firms. Rather than cash, today's rulings require that the majority of salaries be paid in stock that must be held for the long term--giving executives incentives to pursue long-term value creation and financial stability.

· Stock is Immediately Vested, Requiring Executives to Put Their Own Funds at Stake: Rather than just cash, executives will earn base salaries in the form of vested stock in their companies. In effect, the Special Master is requiring each executive to invest their base salary in the long-term future of the firm, alongside taxpayers. These structures ensure that executives do not have incentives to take the excessive risks that contributed to the financial crisis.

· Stock May Only Be Sold in One-Third Installments, Beginning in Two Years: Unlike the pay practices of the past, which allowed executives to sell stock in their companies immediately, the Special Master's rulings require stock to be held for the long term. Stock received as salary may only be sold in one-third installments that will not begin until 2011, unless the taxpayer is repaid earlier.

4. Require Incentive Compensation to be Paid in the Form of Long Term Restricted Stock – and to be Contingent on Performance and on TARP Repayment: As the Secretary noted in his June 10 statement, incentive pay can be undermined by compensation practices that set the performance bar too low or simply reward rising tides. The Special Master's rulings require that incentives be paid only if executives reach objective goals agreed upon in consultation with the Special Master--and only if TARP is repaid.

· Requires Achievement of Goals Set in Consultation with the Special Master: The Special Master's rulings permit these executives to receive incentive pay only if the executives attain objective, predetermined performance goals set in consultation with the Special Master. Achievement of these goals must be certified by each company's compensation committee--which, under Treasury regulations, must be composed solely of directors fully independent from management.

· Requires Three Years of Service, and TARP Repaid, Before Payment: To ensure that taxpayers continue to receive the benefits of the executives' talents, the Special Master's ruling requires that any incentive awards be paid only if the employee provides at least three years of service to the company after the award is made. And, under Treasury regulations, the awards must be paid in the form of restricted stock that may not be paid unless the company repays its TARP obligations.

5. Requires Immediate Reform of Practices Not Aligned With Shareholder Interests: As the Secretary noted in his June 10 statement, in some cases golden parachutes and supplemental executive retirement plans have expanded beyond their original purpose, and may not enhance the long-term value of the firm or allow shareholders to easily ascertain the full value of the "walkaway" pay an executive will receive when departing the firm. The Special Master's rulings place tough new restrictions on these payments--as well as perquisites and other personal benefits--for executives at companies that have received exceptional taxpayer assistance.

· Caps perquisites and "other" compensation: Several experts, including the Conference Board Task Force on Executive Compensation, have concluded that executives--and not companies--should generally cover the costs of personal expenses. The Special Master's rulings generally cap these types of payments at $25,000, with limited exceptions for unusual circumstances that can be justified to the Special Master.

· Additional limitations on "golden parachute" payments: Large "golden parachute" or severance payments often serve to enrich executives rather than provide reasonable compensation during unemployment, and often do not enhance the long-term value of a company. Tough new Treasury regulations prohibit these payments to the senior executive officers and five most highly compensated employees at all companies that have received taxpayer assistance. The Special Master's rulings go further, however, and prohibit companies from increasing the amount of any "golden parachute" payable to any of the top 20 most highly compensated executives during 2009.

· Freezing supplemental executive retirement plans: Supplemental executive retirement benefits can provide substantial cash guarantees to departing executives, regardless of performance. And, as the Secretary noted on June 10, these complex benefits can make it difficult for shareholders--and, in the case of exceptional assistance companies, taxpayers--to ascertain the full amount of pay an executive will receive upon retirement. The Special Master's rulings conclude that that executives should provide for their retirements with wealth based on performance while they are employed, rather than being guaranteed substantial retirement benefits beyond those provided to everyday workers. As a result, the Special Master's decisions prohibit additional accruals under supplemental executive pension programs and company credits to other non-qualified deferred compensation plans following the release of today's rulings.

Technical Analysis for Major Currencies

EURO

The resistance level at 1.4990 halted further inclines yesterday for the Euro versus Dollar pair, which resulted in a downside correction to reach the 61.8% correction. This correction hit the key support for the bullish channel that the pair has been trading within, where we see positive signs on the stochastic indicator making us believe the pair is to incline on the intraday basis targeting 1.5100 as far as 1.4785 is intact.

The trading range for today is among the key support at 1.4675 and the key resistance at 1.5280

The general trend is to the upside as far as 1.4135 remains intact with targets at 1.6000

Support: 1.4905, 1.4825, 1.4785, 1.4745, 1.4675
Resistance: 1.4990, 1.5020, 1.5080, 1.5130, 1.5205

Recommendation: Based on the charts and explanations above, our opinion is buying the pair from 1.4905 to 1.5020 and stop loss below 1.4825 might be appropriate.

GBP

The Cable attempted to breach the pivot resistance yesterday at 1.6445, yet the negative pressure continued to drag the pair to the downside to consolidate within 1.6430 and 1.6380 once again, seen in the above image. Momentum indicators are still negatively pressuring the pair, yet we expect the general trend today is to the upside confirmed with the breach of 1.6430 to target 1.6740.

The trading range for today is among the key support at 1.6100 and the key resistance at 1.6740

The general trend is to the upside as far as 1.4840 remains intact with targets at 1.7100

Support: 1.6380, 1.6320, 1.6270, 1.6210, 1.6165
Resistance: 1.6430, 1.6500, 1.6600, 1.6635, 1.6660

Recommendation: Based on the charts and explanations above, our opinion is buying the pair with the breach of 1.6430 to 1.6600 and stop loss below 1.6320 might be appropriate.

JPY

The USD/JPY pair surged to the upside yesterday within a minor bearish channel, which delayed the pair from reaching the key support for the key bullish channel currently residing at 89.85. The stochastic indicator is showing a bearish crossover, which may take the pair to the mentioned key support before rebounding back to the upside targeting 92.00. This uptrend remains valid as far as 89.85 is intact on the four hour charts.

The trading range for today is among the key support at 86.75 and the key resistance at 93.30

The general trend is to the downside as far as 102.60 remains intact with targets at 84.95 and 82.60

Support: 89.85, 89.45, 88.90, 88.35, 87.80
Resistance: 90.80, 91.30, 92.00, 92.80, 93.30

Recommendation: Based on the charts and explanations above, our opinion is buying the pair from 89.85 to 91.30 and stop loss below 88.90 might be appropriate

CHF

The Dollar versus Swissy attempted to breach the resistance level at 1.0125, yet failed to do so due to the negative pressure that held the pair below this level. Momentum indicators are currently neutral and we are waiting for the bearish signs to support the short term downtrend targeting 1.0000. This decline remains as far as .0285 is intact.

The trading range for today is among the key support at 0.9880 and the key resistance at 1.0450

The general trend is to the downside as far as 1.1225 remains intact with targets at 0.9600

Support: 1.0080, 1.0000, 0.9935, 0.9880, 0.9840
Resistance: 1.0125, 1.0185, 1.0260, 1.0285, 1.0350

Recommendation: Based on the charts and explanations above, our opinion is selling the pair from 1.0125 to 1.0000 and stop loss above 1.0185 might be appropriate

CAD

The Dollar versus Loonie pair surged yesterday, after the interest rate decision to support the bullish technical pattern, seen in the image above, which took the pair near the key resistance at 1.0565 to complete the upside correction that we expected. The short term trend remains to the downside as far as 1.0565 is intact; therefore we expect the pair to reverse to the downside after reaching this resistance to target 1.0300 initially. The stochastic indicator supports our overview.

The trading range for today is among the key support at 1.0200 and the key resistance at 1.0670

The general trend is to the downside as far as 1.1870 remains intact with targets at 1.0000

Support: 1.0435, 1.0380, 1.0255, 1.0205, 1.0150
Resistance: 1.0565, 1.0625, 1.0670, 1.0720, 1.0800

Recommendation: Based on the charts and explanations above, our opinion is selling the pair from 1.0560 to 1.0435 and stop loss above 1.0625 might be appropriate

Ecpulse

Technical Analysis for Precious Metals

Silver

Silver also collapsed downwards, approaching the defined technical target of 17.20, influenced by the hourly bearish harmonic [Bat] pattern as we discussed yesterday. Now, breaching the uptrend line of this harmonic structure has cleared the path for further bearishness over the intraday basis. Note that the current correctional movement may extend towards 17.55-17.60 zones in order to re-test the broken trend line before resuming the downside rally, targeting 16.90 zones.

The trading range for today is among the key support at 16.40 and key resistance now at 18.50.

The general trend is to the upside as far as 12.45 remains intact with targets at 19.40.

Support: 17.35, 17.28, 17.16, 17.05, 17.00
Resistance: 17.52, 17.60, 17.67, 17.76, 17.80

Recommendation: Based on the charts and explanations above our opinion is, selling silver from 17.55 targeting 16.90 and stop loss above 18.10 might be appropriate

Gold

Three dollars separated between yesterday's recorded low of 1051.00 and our first detected technical target of the internal [C] wave of our captured Elliott sequence-check the analysis here-. Now, further declines are to be witnessed over the intraday basis, particularly after breaching the harmonic uptrend line of the hourly bearish formation as shown on the secondary image. AROON up has penetrated the value of 70.00 downwards, supporting our scenario which is targeting 1025.00 areas.

The trading range for today is among the key support now at 1009.00 and key resistance now at 1100.00.

The general trend is to the upside as far as 865.00 remains intact with targets at 1129.00.

Support: 1053.00, 1047.00, 1042.00, 1035.00, 1025.00
Resistance: 1058.00, 1062.00, 1066.00, 1070.00, 1074.00

Recommendation: Based on the charts and explanations above our opinion is, selling gold from 1058.00 targeting 1042.00 and stop loss above 1071.00 might be appropriate.

Ecpulse

Technical Analysis for Precious Metals

Gold

As we mentioned, the metal is building the right shoulder of the classical head and shoulders top pattern as seen on the above four-hour chart. Now, its facing the upper line of the recently established bearish channel that we think will be capable of forcing the metal to move downwards for the rest of the day to resume the suggested Elliott cycle.

The trading range for today is among the key support now at 1006.00 and key resistance now at 1100.00.

The general trend is to the upside as far as 865.00 remains intact with targets at 1129.00.

Support: 1050.00, 1045.00, 1042.00, 1037.00, 1030.00
Resistance: 1058.00, 1062.00, 1066.00, 1070.00, 1074.00
Recommendation: Our mornig expectations remain valid

Silver

As we discussed in our morning report, the metal has retested the previous broken support level of 17.50. Now, we think that the strength of the potential reversal zone for the bearish harmonic pattern is to force the metal to the downside targeting 16.70 -61.8% fibonacci level of CD leg-. Areas of 17.90 should hold to keep the negative outlook valid.

The trading range for today is among the key support at 16.45 and key resistance now at 18.50.

The general trend is to the upside as far as 12.45 remains intact with targets at 19.40.

Support: 17.35, 17.28, 17.16, 17.05, 17.00
Resistance: 17.52, 17.60, 17.70, 17.76, 17.80
Recommendation: Our mornig expectations remain valid

Ecpulse

Daily Technical Analysis

EURUSD Outlook

The EURUSD slipped above the range are of 1.4850 - 1.4950 yesterday, topped at 1.4980. The bias is bullish in nearest term targeting 1.5080 and 1.5140 but we need a consistent move above 1.4950 to confirm the bullish scenario. Like I said yesterday, the market has been quite volatile lately produced some false break so be careful and execute stop losses without any doubt. Any movement back below 1.4930 area should lead us back into no trading zone, re-testing 1.4850/30, but the mode remains bullish and short position is not recommended. Buy on dips but do not short on rallies

GBPUSD Outlook

The GBPUSD continued it's bullish momentum on yesterday, topped 1.6433 and closed at 1.6422. On my daily chart below we can see that price is now testing the upper line of the bearish channel, which is the final resistance of my bearish outlook. I think we have a nice place around that area to place a short position targeting at least 1.6300 area. The risk-reward ratio also looks good with tight stop loss above the bearish channel. A violation to the bearish channel should be seen as the end of the bearish scenario and the beginning of bullish phase back towards 1.7042 area in longer time frame.

USDJPY Outlook

The USDJPY continued the downside consolidation yesterday. On h4 chart below we can see that after violated the bearish channel (red) the pair has been moving a new bullish channel (blue) but the price now is challenging the lower line of the bullish channel and 90.40 area. As long as the pair stay above 90.40 and the bullish channel remains valid, I still prefer a bullish scenario targeting 91.50 and 92.50 area. Break below 90.40 and violation to the bullish channel should lead us into no trading zone as direction would become unclear.

USDCHF Outlook

The USDCHF had a bearish momentum yesterday. On h4 chart below we can see two false breakout followed by a significant bearish momentum. The bias is bearish in nearest term and still targeting 1.0000 area. Immediate resistance at 1.0166. Break above that area should lead us into no trading zone but long position is not recommended at this phase.

EURJPY Outlook

The EURJPY didn't make a significant movement yesterday, indicating that the pair is still consolidate. I still prefer a bullish scenario with 136.88 and 138.67 area as potential bullish targets. Immediate support around 134.70/50 area. Break below that area should lead us into no trading zone but short position is not recommended.

GBPJPY Outlook

We have volatile market yesterday. Price break below my support level 148.00, bottomed at 147.07 but closed higher at 148.88, a case of a false breakdown, which usually trigger significant bullish momentum. The bias is neutral in nearest term and I don't like high volatile market since for me volatile market indicating unclear direction, so I think I will stay out for now and wait for further development today. I still prefer bullish scenario and short position is not recommended at this phase. Immediate support at 148.00 followed 147.07. Initial resistance (potential target) at 150.35.

AUDUSD Outlook

The AUDUSD had a significant bullish momentum yesterday. On h4 chart below we can see that the pair has made a breakout above range area indicating potential bullish continuation. The bias is bullish in nearest term targeting 0.9350 before aim for 0.9540 area. Immediate support at 0.9270. Break below that area should lead us into no trading zone but short position is nor recommended and the mode remains strongly bullish

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Chairman Ben S. Bernanke' statement

At the Federal Reserve Bank of San Francisco’s Conference on Asia and the Global Financial Crisis, Santa Barbara, California

October 19, 2009

Asia and the Global Financial Crisis

The rise of the Asian economies since World War II has been one of the great success stories in the history of economic development. Japan's transition to an economic powerhouse was followed by the rapid ascent of the Asian tigers, and subsequently by China taking a prominent place on the world economic stage.¹ Since the beginning of this decade, Asia has accounted for more than one-third of the world's economic growth, raising its share of global gross domestic product (GDP) from 28 percent to 32 percent.² Importantly, its economic success has resulted in large-scale reductions in poverty and substantial improvements in the standards of living of hundreds of millions of people. China and India, which together account for almost 40 percent of the world's population, have seen real per capita incomes rise more than 10-fold and 3-fold, respectively, since 1980. As would be expected given the increasing size and sophistication of their economies, the nations of the region have also begun to exert a substantial influence on global economic developments and on international governance in the economic and financial spheres.

It is widely agreed that a key source of Asia's rapid advancement has been the openness of countries in the region to global trade and finance. Notwithstanding this consensus, the considerable progress of these countries in developing domestic institutions, policies, and industrial capacity--together with their strong growth in the initial phase of the ongoing global financial crisis--led some to speculate that the Asian economies had "decoupled" from the advanced economies of North America and Europe. Of course, in hindsight, given the magnitude of the shocks that have struck these advanced economies over the past two years, as well as their strong economic and financial links to Asia, it should not have been surprising that Asia was ultimately hit quite hard by the global downturn, even though the origins of the turmoil were elsewhere.

As a prelude to the papers and discussions to follow, I will provide a brief overview of the Asian experience during the global financial crisis. I will highlight the diversity of experiences, both within Asia and between Asia and other regions, and draw some inferences about the different channels through which the effects of the financial crisis were transmitted around the world. I will discuss Asia's policy response to the economic and financial consequences of the crisis. Finally, I will focus on medium-term challenges. For both Asia and the United States, perhaps the greatest medium-term challenge is to achieve more balanced growth and, in the process, to further reduce global imbalances.

Asia's Experience in the Crisis

During the years following the financial crisis of the late 1990s, many emerging market economies, in Asia and elsewhere, took advantage of relatively good global economic conditions to strengthen their economic and financial fundamentals; they improved their fiscal and external debt positions, built foreign exchange reserves, and reformed their banking sectors. Hence, at the onset of the financial turmoil in the summer of 2007, the Asian economies appeared well-positioned to avoid its worst effects. Although global financial markets, including Asian markets, deteriorated sharply following the start of the crisis, Asia's recovered swiftly, with equity prices reaching new highs early in the fourth quarter of that year. Moreover, economic activity in the region continued to expand.

However, toward the end of 2007, at about the same time that the United States entered a recession, the headwinds facing the Asian economies appeared to strengthen. Asian equity markets began to fall again--they were to underperform global markets throughout much of 2008--and other signs of financial stress, such as widening credit spreads, appeared as well. By the second quarter of 2008, many of the region's economies were slowing, and growth in Hong Kong, Singapore, and Taiwan--small, open economies particularly sensitive to shifts in global conditions--had ground to a halt.

In September and October 2008, as you know, the global financial crisis intensified dramatically. Concerted international action prevented a global financial meltdown, but the effects of the crisis on asset prices, credit availability, and consumer and business confidence resulted in sharp declines in demand and production worldwide. Reflecting this worsening economic climate, Asian GDP growth slowed further in the second half of 2008. For the region as a whole, the economic contraction in the fourth quarter of 2008 was pronounced, with activity falling at an annual rate of nearly 7 percent.³ The fourth-quarter declines were especially dramatic in Taiwan and Thailand (more than 20 percent at an annual rate) and in South Korea and Singapore (more than 15 percent at an annual rate). Among the major Asian economies, only those of China, India, and Indonesia did not contract during the crisis.

Early this year, with many of the Asian economies in freefall, a quick recovery seemed difficult to imagine, but recent data from the region suggest that a strong rebound is, in fact, under way. Although the regional economy continued to contract in the first months of 2009, it expanded at an impressive 9 percent annual rate in the second quarter, with annualized growth rates well into double digits in China, Hong Kong, Korea, Malaysia, Singapore, and Taiwan.⁴ At this point, while risks to the economic outlook certainly remain, Asia appears to be leading the global recovery.

Diversity of Experiences

This brief review of Asia's experience during the crisis raises a number of important questions: Through what channels were the effects of the financial crisis transmitted across the globe? In particular, why was Asia, whose financial systems largely escaped the serious credit problems that erupted in the United States and Europe, hit so hard by the global recession? What enabled the Asian economies to bounce back so sharply more recently? And why did some countries--around the world and within Asia--suffer much deeper contractions than others? Some light can be shed on these questions by examining the diversity of experiences among both Asian and non-Asian economies during the downturn.

Transmission Channels: Trade and Finance

The crisis that began in the West affected Asia through various transmission channels, whose relative importance depended in some degree on the particular characteristics of each economy. However, for virtually all of the Asian economies, international trade appears to have been a critical channel. Exhibit 1 shows the course of global merchandise exports since the beginning of this decade. As the exhibit shows, after a period of strong growth, international trade plunged about 20 percent in real terms from its pre-crisis peak to its trough in early 2009 (the dashed red line), and about 35 percent in U.S. dollar terms (the solid blue line).⁵ The trade-dependent economies of Asia could certainly not be immune to the effects of such a decline.

Why did global trade fall so abruptly? The severe recession in the advanced economies greatly restrained aggregate spending, including spending on imports, but the decline in international trade appears surprisingly large even when the depth of the recession in the advanced countries is taken into account. One possible explanation for the outsized decline in trade volumes lies in the extreme uncertainty that prevailed in the darkest months of the crisis. Consumers and businesses knew last fall that economic conditions were poor, but, in light of the severity and the global nature of the financial crisis, many feared outcomes that might be much worse. Perhaps to a greater extent than they might have otherwise, households and firms put off purchases of big-ticket items, such as consumer durables and investment goods. Durable goods figure prominently in trade and manufacturing, so these sectors may have been particularly vulnerable to the elevated uncertainty and weakened confidence that prevailed during the height of the crisis.

Credit conditions also likely affected the volume of trade, through several channels. The turmoil in credit markets doubtless exacerbated the sharp decline in demand for durable goods, and thus in trade volumes, as purchases of durable goods typically involve some extension of credit. Manufacturing production, a major component of trade flows, may have been cut back more sharply than would otherwise have been the case as producers, concerned about credit availability, attempted to preserve working capital. Finally, although it is difficult to assess the size of the effect, problems in obtaining trade finance may have also impeded trade for a time.

With trade falling sharply around the world, economies particularly dependent on trade were hit especially hard. Exhibit 2 illustrates this point for a group of Asian and non-Asian economies. The vertical axis of the figure shows real GDP growth, measured relative to trend, during the most severe stage of the downturn, and the horizontal axis shows a measure of openness to trade.⁶ Combinations of growth and openness observed in various economies are indicated by red squares for a number of Asian countries and by black dots for several non-Asian countries. The exhibit shows that countries most open to trade (those located further to the right in the figure) suffered, on average, the greatest declines in growth relative to trend. The most extreme cases are Hong Kong and Singapore, shown to the far right; the economies of Korea, Taiwan, Thailand, and Malaysia, which are also very open, suffered significant growth deficits as well.

Indeed, the GDP contractions in some Asian economies during that period rivaled those during the Asian financial crisis of the late 1990s. Relative to pre-crisis trend, the six Asian economies just mentioned plus Japan experienced declines in real GDP growth of about 13 to 20 percentage points at an annual rate during the last quarter of 2008 and the first quarter of 2009. Growth fell somewhat less severely in the Philippines and only moderately in Australia and New Zealand. As noted earlier, real GDP growth remained positive throughout the crisis in China, India, and Indonesia, but, as exhibit 2 shows, even those fast-growing economies experienced noticeable declines in growth relative to their earlier trends. The exhibit shows that a similar relationship between growth and openness to trade holds for non-Asian countries; for example, more trade-dependent nations like Germany saw sharper declines in output during the crisis than other less-open economies.

Variations across countries in trade openness do not fully explain the diversity of growth experiences during the downturn, suggesting that other factors were also at work. Notably, although financial institutions in emerging market economies were not, for the most part, directly affected by the collapse of the market for structured credit products and other asset-backed securities, financial stress nevertheless affected these countries. As international investors' appetite for risk evaporated, the flow of capital shifted away from countries that had historically been viewed as more vulnerable, including some emerging Asian and Latin American economies, even though many of these countries appeared to be much better positioned to weather an economic crisis than in the past. Moreover, regardless of perceived risks, financial institutions pulled money from risky assets in advanced and emerging markets alike in an effort to strengthen their balance sheets.

Following the reversal in capital flows engendered by the crisis, strains in banking appeared across Asia, leading to severe credit tightening in some countries. Fears of counterparty risk disrupted interbank lending in many countries, intensifying already existing funding difficulties. The drying up of the wholesale funding market hurt Korea's banking system in particular; prior to the crisis, it had accounted for about one-third of Korean bank funding. In Japan, some banks' exposures to equity markets damaged their capital positions. With Asian banks experiencing dollar funding pressures similar to those arising elsewhere in the world, the Federal Reserve established 5 of its 14 liquidity swap lines with central banks in the region: Australia, Japan, Korea, New Zealand, and Singapore. The reversal in capital flows also caused rapid exchange rate depreciation in some countries, particularly Korea, Indonesia, and Malaysia. The Korean won depreciated 40 percent against the dollar from the beginning of 2008 through its trough in March of this year, and it has only partially recovered. Over the same period, the Indonesian rupiah fell 22 percent against the dollar.

Exhibit 3 shows the relationship between rates of GDP growth during the downturn, relative to trend, and financial openness, as measured by the sum of each country's international assets and liabilities relative to its GDP.⁷ The exhibit shows that, for both Asian and non-Asian economies, financial openness was associated with greater declines in output, though the linkage appears somewhat less tight than that for trade.⁸ Again, the most extreme cases are Singapore and especially Hong Kong (which is not shown, as it is more than twice as open as even Singapore). Taiwan is another example of a financially open Asian economy that experienced a particularly severe downturn. By the same token, China, India, and Indonesia, the three Asian countries in which output expanded throughout the crisis, are among the least financially open.

Trade and financial channels influenced other emerging markets as well, such as those in Latin America and Eastern Europe. Many of these economies also contracted sharply, but thus far they have recovered more slowly than economies in Asia. In the case of Latin America, closer links to the U.S. economy (especially in the case of Mexico) and greater dependence on commodity exports (whose prices declined during the most intense phase of the crisis) were additional sources of weakness. In Eastern Europe, preexisting macroeconomic imbalances and structural weaknesses likely magnified the effects of the adverse global shocks.

It is important not to take the wrong lesson from the finding that more open economies were more severely affected by the global recession. Although tighter integration with the global economy naturally increases vulnerability to global economic shocks, considerable evidence suggests that openness also promotes stronger economic growth over the longer term. Protectionism and the erecting of barriers to capital flows should thus be strongly resisted. Instead, as I will discuss, striking a reasonable balance between trade and growth in domestic demand is the best strategy for driving economic expansion.

Policy Responses

By and large, countries in Asia came into the crisis with fairly strong macroeconomic fundamentals, including low inflation and favorable fiscal and current account positions. Good fundamentals, in turn, provided scope for strong policy responses in many countries. China, Japan, Korea, and Singapore were among those employing relatively aggressive policy strategies; in particular, China undertook a sizable fiscal program, supplemented by accommodative monetary and bank lending policies. The stimulus packages in China and elsewhere have lifted domestic demand throughout the region, boosting intraregional trade.

Not all Asian nations responded so aggressively to the crisis. Some countries with weaker fiscal positions no doubt felt constrained in the extent of fiscal stimulus they provided. Similarly, monetary policies were likely influenced by differences in inflation performance. On the one hand, countries experiencing low inflation or deflation, such as China, Japan, and Thailand, were able to implement expansionary monetary policies without concerns about increasing inflationary pressures. Indeed, Japan used unconventional monetary easing in part to avoid deeper deflation. On the other hand, inflation concerns were more pressing for Indonesia, the Philippines, and Korea, with the result that their monetary policy responses may have been more muted than would otherwise have been the case. The national variation in policy responses likely also reflected differences in the severity of the crisis across countries.

Generally speaking, the Asian response to the crisis appears thus far to have been effective. Importantly, as I have suggested, the Asian recovery to date has been in significant part the result of growth in domestic demand, supported by fiscal and monetary policies, rather than of growth in demand from trading partners outside the region. To illustrate the point, for each of the countries in the region, exhibit 4 shows industrial production (the solid blue bars) and exports (the striped red bars) measured relative to the pre-crisis peak.⁹ You can see that the blue bars are generally taller than the red bars, indicating that, except for New Zealand and Hong Kong, industrial production has rebounded by more than exports. Indeed, industrial production in China, India, and Indonesia has already reached new highs, and it is within about 5 percent of its previous peak in Australia and Korea. We would expect to see this pattern if growth in domestic demand, rather than growth in exports, was the predominant driver of increases in domestic production.¹⁰ The revival of demand in Asia has, in turn, aided global economic growth.

Despite the initial successes of Asian economic policies, risks remain. As in the advanced economies, unwinding the stimulative policies introduced during the crisis will require careful judgment. Policymakers will have to balance the risks of withdrawing policy support too early, which might cut short a nascent recovery, against the risks of leaving expansionary policies in place for too long, which could overheat the economy or worsen longer-term fiscal imbalances. In Asia, as in the rest of the world, the provision of adequate short-term stimulus must not be allowed to detract from longer-term goals, such as the amelioration of excessive global imbalances or ongoing structural reforms to increase productivity and support balanced and sustainable growth.

Lessons from Crises and Medium-Term Challenges

For now, Asian countries look to be weathering the current storm. In part, their successful responses reflect the lessons learned during the Asian financial crisis of the 1990s, including the need for sound macroeconomic fundamentals.

One crucial lesson from both that crisis and the recent one is that financial institutions must be carefully regulated, transparent, and sufficiently well capitalized and liquid to withstand large shocks. In part because of the reforms put in place after the crisis of the 1990s, along with improved macroeconomic policies, Asian banking systems were better positioned to handle the more recent turmoil. With the increased prominence of the Group of Twenty (G-20) as a forum for discussing the global responses to the crisis, emerging market economies, including those in Asia, will play a larger role in the remaking of the international financial system and financial regulation.

Another set of lessons that Asian economies took from the crisis of the 1990s may be more problematic. Because strong export markets helped Asia recover from that crisis, and because many countries in the region were badly hurt by sharp reversals in capital flows, the crisis strengthened Asia's commitment to export-led growth, backed up with large current account surpluses and mounting foreign exchange reserves. In many respects, that model has served Asia well, contributing to the rapid growth rates in the region over the past decade. In fact, it bears repeating that evidence from the world over shows trade openness to be an important source of economic growth. However, too great a reliance on external demand can also pose problems. In particular, trade surpluses achieved through policies that artificially enhance incentives for domestic saving and the production of export goods distort the mix of domestic industries and the allocation of resources, resulting in an economy that is less able to meet the needs of its own citizens in the longer term.

To achieve more balanced and durable economic growth and to reduce the risks of financial instability, we must avoid ever-increasing and unsustainable imbalances in trade and capital flows. External imbalances have already narrowed substantially as a consequence of the crisis, as reduced income and wealth and tighter credit have led households in the United States and other advanced industrial countries to save more and spend less, including on imported goods. Together with lower oil prices and reduced business investment, these changes in behavior have lowered the U.S. current account deficit from about 5 percent of GDP in 2008 to less than 3 percent in the second quarter of this year. Reflecting in part reduced import demand from the United States, China's current account surplus fell from about 10 percent of GDP in the first half of 2008 to about 6-1/2 percent of GDP in the first half of this year.

As the global economy recovers and trade volumes rebound, however, global imbalances may reassert themselves. As national leaders have emphasized in recent meetings of the G-20, policymakers around the world must guard against such an outcome. We understand, at least in principle, how to do this. The United States must increase its national saving rate. Although we should deploy, as best we can, tools to increase private saving, the most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time. For their part, to achieve balanced and sustainable growth, the authorities in surplus countries, including most Asian economies, must act to narrow the gap between saving and investment and to raise domestic demand. In large part, such actions should focus on boosting consumption. Admittedly, just as increasing private saving in the United States is challenging, promoting consumption in a high-saving country is not necessarily straightforward. One potentially effective strategy is to reduce households' precautionary motive for saving by strengthening pension systems and increasing government spending on health care and education. Of course, such measures are likely to improve welfare and productivity as well as to contribute to more balanced, robust, and sustainable economic growth.

Conclusion

The United States has benefited significantly from Asia's rapid development and integration into the global economy, and the payoffs to the Asian economies from global economic integration have been substantial as well. Indeed, the financial crisis has starkly demonstrated the extent to which the fortunes of the United States, Asia, and the rest of the global economy are intertwined. These powerful economic linkages, as well as the importance of both the United States and Asia in the global economy, underscore the need for consultation and cooperation in addressing common issues and concerns. Our shared stakes in the prospects of the global economy bring with them a heightened responsibility to work together to maintain those prospects. I am optimistic that the United States and Asia will rise to the challenge and address in a mutually beneficial fashion the range of issues confronting the global economy. Conferences such as this one, which bring together policymakers and scholars from both sides of the Pacific, will further the cause of this cooperation.