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Top Democrats Push Obama on Capital Controls

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At a point in the election season when politicians of the same party tend to sweep their differences under the rug, two senior Democrats have sent a strong letter to the Obama administration on a subject unknown to most American voters.

This is the issue of capital controls -- various measures governments use to control volatile flows of money across their borders. Iceland, for example, used them to prevent massive capital flight in the midst of their meltdown. Other countries have used them to prevent speculative bubbles. In fact, governments that used capital controls during the 2008 crisis were among the least hard-hit, according to International Monetary Fund research.

However, despite their proven effectiveness in many cases, these policy tools are prohibited by U.S. trade and investment policies. Particularly in the wake of the worst financial crisis in 80 years, it's an embarrassingly outmoded position that only serves the narrow short-term interests of global financiers and corporations.

Thankfully, two top Democrats are not willing to just overlook the problem. In a letter to Treasury Secretary Timothy Geithner, Representatives Barney Frank and Sander Levin stated they could not support U.S. trade agreements unless the administration produces a "binding interpretation" of U.S. policy clarifying that governments would not be subject to investor lawsuits if they use this policy tool to manage financial volatility.

Frank is the ranking Member of the Financial Services Committee, while Levin is the leading Democrat on trade policy as the ranking Member of the Ways and Means Committee. They are part of a growing chorus calling for trade reforms to allow greater flexibility on capital controls. In fact, in their letter to Geithner, they cited a statement signed by more than 250 economists calling for such changes in U.S. policy.

The Frank-Levin letter comes at a key moment. In April, the Obama administration released a new model U.S. bilateral investment treaty. Despite strong calls for reform from public interest representatives on an official advisory body, the new model maintains the old language prohibiting capital controls, with no exceptions for times of financial crisis. Governments that violate such rules face the prospect of being sued by foreign investors in international tribunals.

The administration intends to use this new model as the template for bilateral investment treaties with China, India, and several other countries. It's also a strong indication of what they're seeking in ongoing negotiations over a Trans-Pacific Partnership, a trade agreement involving at least eight other governments.

By stepping up pressure from Congress, Frank and Levin may help alter the outcome of these negotiations. By showing that the views of U.S. officials are not monolithic, they may embolden negotiators from other countries who are seeking a more reasonable approach. Two of the governments involved in the Trans-Pacific talks, Singapore and Chile, sought exemptions for the use of capital controls to prevent crises when they negotiated bilateral trade agreements with the United States about a decade ago. At that time, the Bush administration refused to concede, beyond putting some modest limits on how much investors could demand in compensation for certain types of controls.

Today, we have the opportunity to apply lessons from a financial crisis caused by poorly controlled financial activities. And it's never been clearer that financial stability at home and abroad is essential for U.S. economic health. When our trading partners fall into financial crisis, we lose export markets and jobs. When hot money makes it impossible to control currency values, it hurts long-term investors and exporters and importers from the United States.

It's in all of our interest to support a fresh, flexible approach to capital controls.