While defending the need for international bailouts during economic crises, Treasury Secretary-designee Lawrence H. Summers testified Thursday that private-sector lenders cannot get off scot-free.
Policymakers must ensure that "lending decisions are based on the strength of the underlying project and the underlying borrower and not any presumption ... of the availability of bailout funds," Mr. Summers told the Senate Finance Committee at his confirmation hearing.
Committee members are expected to approve Mr. Summers' nomination by a wide margin Tuesday, but that did not stop lawmakers from grilling the deputy secretary about U.S. support for the International Monetary Fund.
As the point man for the administration's response to the Asian economic crisis, Mr. Summers argued that the IMF should rescue countries in such serious financial trouble that they cannot repay lenders and could spark downturns in other parts of the world.
But, he said, "the IMF will have to work to assure ... that private- sector actors and financial institutions take their role in the resolution of crises."
Mr. Summers received no questions, nor made any remarks, about financial reform. However, the legislation to eliminate the barriers separating the banking, insurance, and securities industries will be a prominent topic at his second confirmation hearing Tuesday before the Senate Banking Committee.
Senate Banking Chairman Phil Gramm, R-Tex., who is also a member of the Finance Committee, praised Mr. Summers on Thursday as one of the smartest federal officials but challenged him on budget and trade issues.
Mr. Summers also had to answer tough questions about bankruptcy reform, the Clinton administration's failure to offer Social Security reform legislation, and his views on using the budget surplus for tax cuts.
Mr. Summers agreed that "opportunistic bankruptcies" force responsible borrowers to pay higher interest rates, but he defended the administration's demand that legislation not deny the needy their right to get debts excused.
He also promoted Social Security reform and President Clinton's proposed "USA accounts" as better uses of the surplus than tax cuts.