U.S. Department of the Treasury

(Archived Content)

FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. It is a pleasure to be here today and to have the opportunity to speak with you. This conference and the honors that will be awarded during the next few days to some of the most creative financial minds in corporate America are aptly named after our nation's first Secretary of the Treasury, who was among the most creative and important financial minds in our nation's history. Alexander Hamilton was not only our first Secretary of the Treasury and one of the founding fathers of our country, but he also laid the foundations upon which our system of public finance is built. In the years following the enactment of Hamilton's financial program in 1791, the nation experienced a period of rapid growth, paying down the national debt by over 40%.

As you know, today our nation is in a period of significant economic growth and prosperity. We are about to complete our third consecutive year of budget surpluses - results not achieved in over half a century. And we are in the midst of an unprecedented economic expansion. For the first time in a generation, more Americans are now sharing in this prosperity. The purchasing power of wages is now rising even for families in the bottom 20% of wage earners, and unemployment is at its lowest level in 30 years.

Reflecting upon this prosperity and growth, there are three topics I would like to address today:

• First, a brief examination of some of the factors underlying our nation's current economic growth;
• Next -- since this is a conference of corporate chief financial officers, treasurers, and other financial officers -- a focus on one of those factors - the role of the government's policy of fiscal discipline, including its direct and indirect impact on your own efforts to finance corporate growth;
• And, finally, since I have been asked to provide a View from Washington, a brief update on some legislation that is currently pending in Congress that is likely to be of particular relevance and interest to this group.

We are in the midst of what has been called a virtuous economic cycle - with reduced public borrowing, lower interest rates and more rapid economic growth leading, in turn, to even higher budget surpluses and faster economic growth. But this is no time for complacency. As Secretary Summers has said, prosperity and credibility are attributes that are rented, not owned. The decisions that we, as a nation, make now regarding our economic future will have a tremendous impact on our ability to prolong this virtuous cycle.

Obviously, a number of factors have contributed to our current economic good fortune. At the top of the list is the contribution of American businesses and workers. It is hard to overestimate the value of the entrepreneurship, innovation, and hard work that have helped to make us world leaders in so many industries.

The dawn of the information age has been another key factor in breaking down old and constraining paradigms. Information technology has spurred a remarkable increase in productivity, allowing us to sustain an unprecedented combination of high GDP growth with low unemployment and inflation.

  The Importance of Fiscal Discipline

Although there is much that is new in the New Economy, one thing that is not new is that business activity - the growth and expansion into new markets, the development and implementation of new technologies - must be financed. Given the professional roles played by each of you here today, it seems appropriate to focus upon the financing of our economic boom and the important national policy of fiscal discipline.

In 1993, the Administration made a decision to reduce the deficit. At that time, the debt held by the public was $3.2 trillion, and it was projected to grow to $4.8 trillion by the end of fiscal year 1998. Instead, it peaked in 1997 at $3.8 trillion. Nineteen-ninety eight brought our first surplus in nearly three decades, and we reduced our national debt by $51.2 billion. This year, we have achieved our third consecutive surplus, putting us on track to pay down the debt by over $220 billion this fiscal year, and bringing our three year total debt reduction to $360 billion - or almost 10% in just three years. Projections for the future anticipate a continued acceleration of debt reduction, with OMB's Mid-Session Review estimating that the paydown over the next three years will exceed $600 billion.

Debt reduction benefits our economy in many ways. Clearly, debt paydown has an enormous impact on the federal budget. In 1997, at the peak of our debt levels, the interest payments totaled $244 billion. Even today, net interest alone costs the federal government $223 billion per year (or 12 cents of every federal dollar) - still the third largest item in our budget. To put that $223 billion in perspective, this year's budget (2001 Mid-Session Review) allocated approximately $22 billion for agriculture and $50 billion for transportation.

Debt reduction would free for other purposes the significant resources currently used to pay interest alone and, as President Clinton has commented, lift the burden of interest payments off our children and grandchildren. And, importantly, as we face the specter of the retirement of the baby boom generation, debt reduction puts us in the best position to continue to meet our obligations to our seniors.

Perhaps even more important than the impact of debt reduction on the federal budget are the many benefits it brings to the American economy more broadly. For American families, the reduced pressure on credit markets should lower the costs of borrowing for major expenses like homes, cars, and student loans.

For corporations, national fiscal discipline translates into one of the foundations of the virtuous cycle. As reduced government borrowing continues to make more funds available for the private sector, the cost of capital should continue to decline relative to what it would have been in the absence of such policies. The resulting increased national savings and additional resources flowing into financing capital investment should continue to lead to increased productivity and output growth. This, in turn, fuels job creation, helps to extend the period of prosperity, and leads to an increased standard of living.

In 1999, through paying down debt, over $88 billion that would otherwise have been absorbed by government borrowing became available for more productive use in the economy. This year, that number is expected to exceed $220 billion. For comparison, total U.S. corporate long-term issuance in 1999 was approximately $675 billion.

It is worth taking a moment to examine these figures in the context of our capital markets. In 1992, Treasury debt represented approximately 31% of U.S. fixed-income markets. At the end of 1999, that figure had been reduced by one-third to 21%, as the borrowing needs of American corporations continued to grow. In 1992, total corporate borrowing was just over $2.1 trillion. By the end of 1999, it had more than doubled. Such growth would certainly have been more costly if the government had not been significantly reducing its own debt over the same period.

Ultimately, this relative reduction in the supply of Treasury securities will lead to an adjustment by market participants. Treasury securities play a number of important roles in our capital markets, including serving as a pricing benchmark, a hedging vehicle, and a low risk investment for both domestic U.S. and international investors.

Today, the market for Treasury securities is the deepest, most liquid securities market in the world. As the supply of Treasury debt continues to decline, other instruments will increasingly serve the functions for capital markets that Treasuries currently serve. Such transitions will not take place overnight, but rather will result from gradual adjustments. Secretary Summers and Chairman Greenspan have often praised our financial markets as being among the most innovative, competitive, and dynamic in the world. And there can be little doubt that our markets will successfully adjust to a reduced supply of Treasury securities.

Indeed, such adjustments are already underway. For example, many of you who finance in the bond market have begun to consolidate your issuance into fewer, larger issues. As such issues become benchmarks in their own right, they will share in the benefits of benchmark status.

Also, the opportunity exists for the development of new types of low-risk debt instruments as the supply of risk-free Treasury securities continues to decline. For example, asset-backed securities professionals for years have been issuing super senior tranches designed to provide an enhanced degree of safety in order to take advantage of the premium the market is willing to pay for low risk assets. And it is quite likely that there are many types of instruments and transactions not yet imagined that will, in the future, help to fulfill the important roles played by Treasury securities today.

In addition to the new roles these capital market changes may create for corporate and asset-backed securities, swaps and other derivative instruments are also being increasingly used as both pricing benchmarks and hedging vehicles. For example, Eurodollar futures are already used as a primary hedging instrument in the short end of the yield curve, and interest rate swaps are widely used for pricing and hedging because of their broad availability and liquidity. Further innovations will likely enhance these roles and allow swaps to perform additional functions in the marketplace.

I am sure that, as CFOs and corporate treasurers, most, if not all of you, use such swaps and other derivative instruments extensively as part of your risk management strategies. I know that you all are well aware of the benefits that OTC derivatives can provide, not only as risk management tools, but also to the economy more broadly, including increasing the efficiency of capital allocation. You also, no doubt, have recognized the speed at which this market continues to grow. According to the Bank for International Settlements, the global OTC derivatives market, in notional terms, exceeded $85 billion at year-end 1999.

Given the importance of these markets to you - and to our economy more broadly - I would like to briefly discuss some important legislation currently pending before the Congress. Among other things, this legislation would allow the electronic trading and centralized clearing of derivatives, thereby helping to:

• reduce counterparty credit risk;
• promote innovation;
• make our markets more competitive, transparent, and efficient; and
• reduce the costs of hedging risk and reducing exposure to other markets.

It is important that Congress enact such legislation this year. While the current framework here in the U.S. remains outdated, markets overseas are developing in legal and regulatory environments that allow greater innovation. Unless our laws and regulations relating to derivatives are modernized, we run the risk that innovation will be stifled by the absence of legal certainty, depriving the American economy of the benefits that direct access to efficient and transparent derivatives markets can provide, and hampering the efforts of our businesses and markets to compete globally.

Despite the fact that there is little time left on the legislative calendar, we believe that the final days of this Congress present a unique opportunity to modernize our laws regarding derivatives. For the first time, the members of the President's Working Group on Financial Markets - chaired by Secretary Summers and including Chairmen Greenspan, Levitt, and Rainer - have reached agreement on a set of unanimous recommendations designed to achieve this goal. Those recommendations formed the basis of legislation that has now passed all of the relevant committees in both the House and the Senate.

With an agreement reached by the SEC and CFTC on the trading of single-stock futures just over a week ago, the major obstacles to forming a consensus bill appear to have been eliminated. It would be unfortunate if we were to miss this historic opportunity to modernize the regulatory structure of our derivatives markets.

Let me just finish by saying that while we are all encouraged by the state of our economy, we must not take it for granted. While our businesses, workers, and entrepreneurs are at the forefront of generating economic growth, it is important that we continue to pursue policies that promote the virtuous cycle - and particularly, maintain our policy of fiscal discipline.

Thank you.