Guests: Stanley Fischer, Livio Di Matteo

PIYA CHATTOPADHYAY: Hi I'm Piya Chattopadhyay and this is the Friday edition of The Current. 

PC: The U.S. president has been taking runs at the head of the U.S. Federal Reserve. Blaming the Fed for bad economic news has come in handy for Donald Trump. The Federal Reserve has raised interest rates four times this year and the president is complaining those hikes are too high and are coming too fast. Like the Bank of Canada, the U.S. Federal Reserve is independent from the government in deciding the interest rate and money supply. But President Trump has publicly criticized Fed Chair, Jerome Powell, and privately mused about firing the man he nominated to lead the American Central Bank. And that sparked a legal debate about whether a president can even remove a Federal Reserve Chair. Stanley Fischer is watching all of this unfold from a unique vantage point. He was vice-chair of the Federal Reserve from 2014 to 2017, serving under presidents Barack Obama and Donald Trump. Before that he was governor of the Bank of Israel. And we've reached Stanley Fischer in New York City. Hello to you. 

STANLEY FISCHER: Hi, how are you?

PC: I'm okay. When you hear President Trump say those things about the Federal Reserve what do you want to say to him? 

STANLEY FISCHER: You're making a mistake. When you criticize the Fed in the way you do, you challenge its independence, and when you challenge its independence, it has to demonstrate its independence. And that may lead to the interest rate being higher, rather than lower, as a result of the criticisms you make. Don't do it. First of all you don't know. Secondly, it's not the Fed that is the cause of everything that's going on. The fact that you are overthrowing a world order that has existed successfully on average, since the end of World War II, is fundamental to what is going on now. The Canadians would know that NAFTA suddenly disappeared to be replaced by something else that is close to NAFTA and this sort of thing is going on all over the place. And if we get ourselves into the world - which we seem to be doing - in which it is okay to impose tariffs on everything, to give subsidies everywhere, we will be in a world of the 1960s and 70s in which we were struggling to get out of the aftermath of World War II and the Great Depression. 

PC: Okay so clearly you're clearly not on side with the president's assessment of what's really going on in the U.S. economy. But let me put this to you. You know he does have his defenders and they say look raising interest rates, the Fed doing that, is putting stress on lower and middle class Americans. So how does the Fed justify the increases would be the question. 

STANLEY FISCHER: The Fed justifies the increase is because it's defined in law is to keep the economy-- is to maintain full employment and to end low inflation. We are in that situation now as a result of the policies pursued since the great financial crisis. And the problem with his arguments are he assumes that monetary policy works immediately. It doesn't. It takes time. So they've got to ask themselves where - if the economy continues on the path most people think it will - where will we be six months to a year to a bit later from now, if we don't take action now to deal with the fact that the economy is very strong. And that's the problem. With due respect people from the real estate sector always think interest rates are too high. 

PC: And so the Federal Reserve, like all central banks, plays a long game when it comes to setting policy, right. It isn't tied to a circle of elections and re-election and all those things. It's looking long game. So how do you think this particular team at the Fed is doing right now?

STANLEY FISCHER: I think they are doing well under difficult circumstances. When the president decides to attack you ,for some reason or the other, you are placed before a dilemma; do you do the right thing professionally or do you try and make peace with the powers that be? You have to do the right things professionally. That is what they are doing. 

PC: There are some reports that the head of the Fed, Jerome, Powell may be seeing the president, the U.S. President in January, that meeting may take place and that of course raises the question of the independence of the Federal Reserve which it is built in to the infrastructure that the central bank is independent. Do you think that that kind of meeting might at least send the wrong message at least perception wise?

STANLEY FISCHER: Well the president will of course expect that interest rates come down immediately afterwards. They won't. They'll be kept on a course that has been discussed for a long time and has been talked about within the Fed at every single meeting of the Fed since certainly when I was there, a year and a half ago and is part of the way the Fed does business. It looks ahead and asks what it ought to do. So it's not going to change the polls very much. J. Powell is a very good banker. He's a very reasonable person. And whenever I've read or listen to what he has to say, I say well that makes sense. And I think this is making sense now. And that meeting could go very badly from the viewpoint of the president. If he attacks Powell in the meeting in the way he's attacked others in meetings, Powell is going to have to find some way of demonstrating that he is continuing down the professional road that he's on right now, and that he will not be shaken by the president. Because we know full well that if inflation gets out of control the Fed will be blamed. And that is one of the things that it has to take into account. 

PC: You worked at the Fed under this president, Donald Trump, and the previous one, Barack Obama. What differences did you see from the inside in terms of these administration, in terms of how central bankers were expected to go about their jobs? 

STANLEY FISCHER: Oh I think that what you see is a remarkably professional organization. I found it amazing when I joined the Fed that it very rarely was necessary for me, if I needed to understand effect to understand something that was happening in the economy, to go beyond the professional stuff we had. Of course we listened to the everybody who was talking about the economy, discussed what they had to say. But it is an outstanding group of people. And the interesting thing is that this board of the Fed, the monetary policymaking group, is actually very strong. And this is a board that was appointed by the president. He may feel unhappy about it now, but his initial choice was the right one. 

PC: And so given what you've just said, what is the optimal balance, the relationship between politics and economics in the Central Bank?

STANLEY FISCHER: The Fed can't cannot look at the political situation and say this will make us popular. It's got to figure out what is the right thing to do. It's got the law defines its goals, its goals to maintain full employment and [unintelligible] stable prices. And I think you and Canada have roughly similar goals. And that's what they have to do and that's what they do and that's what the discussion is about. I didn't hear any politics going on. I'd heard about criticisms but I didn't hear anybody saying, "Well we've got to really take that into account". Many many a politician has learnt a lesson that if you attack the Fed, you get yourself into a big problem because you'll be getting inflation down the road if what you want is low interest rates. And when you get that somebody is going to ask, "Well whose idea was that?" The answer will be whoever was pushing and succeeding perhaps, not in this case they weren't succeeding, to push the Fed, the interest rate sitting group in a direction it didn't want to take. It shouldn't do that.

PC: Just to put the America

n situation in context. When you look around the world, do you see other countries where the central bank is being criticized by its leader or a high level politician and vulnerable to volatile politics?

STANLEY FISCHER: Yes I think when you look, there is a set of countries - I'm not going to get into this in detail - but there's a set of countries in the world who are behaving now according to assumptions and principles that essentially reject the world to which we've evolved or which we had evolved, in the previous American administration and in most of the industrialized world. And those countries which do not follow principles in which they allow the central bank to be independent--.

PC: Like which countries? 

STANLEY FISCHER: I am not going to get into, as former Fed person, criticizing which countries. But you know who I'm talking about. Some of them are in Europe. Many of them once were Latin America. They are not there now. They have given central banks independence. And in other countries in the world. So that is a sign of a weak and non-democratic government. That's what's going on.

PC: Stanley Fischer we'll have to leave it there. Thank you very much. 

STANLEY FISCHER: Thank you very much.

PC: Stanley Fischer is a former vice chair of the U.S. Federal Reserve and he's also the former governor of the Bank of Israel. We reached him in New York City. Well heated debate over the central bank in America isn't exactly new in the United States. A fight from 1790 is being revived now on stage in the hit Broadway musical Hamilton. 

PC: In Cabinet Battle Number One founding father Thomas Jefferson argues against Alexander Hamilton's proposal for a central bank. That battle is one of many colorful stories in the history of central banks. And fill us in, I'm joined by Livio Di Matteo he's a professor of economics at Lakehead University in Thunder Bay. Hello. 

LIVIO DI MATTEO: Good morning to you. 

PC: Let us start with those days of Hamilton What were the conditions that led to the debate over the creation of a U.S. central bank? 

LIVIO DI MATTEO: Well this was in the aftermath of the birth of the American republic. There was a lot of Revolutionary War debt. And there was also a debate between those who wanted I guess a stronger federal and more central government - I guess federalists - and the other side which I guess you would term anti federalists, by the standards of the time. So if you look at the debate between Jefferson and Hamilton, Alexander Hamilton basically wanted a bank of the United States, a central bank to consolidate the debt and issue a national currency. And the reason he wanted that was to create financial stability which in turn would lead to investment and economic growth Foster manufacturing development, etc. On the other side you had Thomas Jefferson. He basically thought a central bank in a sense would favor Eastern banks and creditors and that would basically create a concentration of financial power and Jefferson was more of a de centralist. You know his vision of the republic in the ultimate sense was a sort of a nation of Stout Yeoman in decentralization. And so the debate in the sense also outlined the powers under the Constitution. So I mean a central bank wasn't specifically enumerated in the U.S. Constitution. And so much of the debate was whether the creation of a central bank was implied under something called the necessary and proper clause. And I don't want to get into too much detail. I'm not a U.S. constitutional expert. But in the end the bank was created but it was tenuous. The first bank was created about 1791. The second one in 1816 and after that in the 1930s, interestingly enough a populist president Andrew Jackson under his tenure the bank ended. And so you had basically a more free banking so to speak until the creation of the Federal Reserve in 1913. And the Federal Reserve in the end its creation also sort of reflected that tension between centralization and decentralization and distrust of Eastern banking interests. Because in the end they went to sort of regional system as opposed to the I guess the decaying system where you have one central bank. They have a Federal Reserve System. 

PC: So I'm glad you mentioned Canada because when and why did we get our central bank?

LIVIO DI MATTEO: We were late comers. The first central banks actually start to emerge as market economies start to develop although interesting enough the reason they developed was to finance government war expenditures and war debt, and act as sort of marketers of that debt. So you know the first banks, central banks, are the Swedish central bank 1668, the British banks 1694. Then in the 19th century you get a number of them and France. The Bank of Japan, the Bank of Italy the Reichsbank. Canada is rather late. We emerge during the Great Depression in 1935. And so we come about sort of at the tail end of the 20th century and our bank sort of comes about under the rubric of price stability and maintaining full employment. There is a responsibility for the money supply and the credit system currency, and it's bankers bank also, the bank for the federal government. 

PC: I want to ask you about - because we're talking about you know tensions between politicians and central banks - and we've talked to both the U.S. and its president butting on monetary policy. What's the situation like in Canada? Like have we had a dispute between the government and the central bank?

LIVIO DI MATTEO: Well our banks since the late 1960s has been an independent central bank. Day to day operations are free of political influence. However that role in a sense is legislated by the government. I mean the Bank of Canada is created by an act of parliament. So in a sense the independence has been granted by politicians and as defined by the political system. So our central bank like many Central Banks are independent in government but are not independent of government right. So it's a fine line that governments have have to play. Now in our case the major incident that we had is late 1950s early 1960s in which the then governor of the Bank of Canada, James Coyne, began speaking out on government fiscal policy. And so his argument was that the government of the day which is the Diefenbaker government, also by Canadian standards I guess an early populist government in some respects, was running deficits and spending too much and that this would fuel inflation. And so that was resented by the prime minister of the day. And so there was also pressure on the Bank of Canada to basically not raise interest rates. The Bank of Canada wanted to keep its interest rates given policy. So in the end what happened there-- there was also a bit of a personality conflict I believe between the two gentlemen. But in the end the House basically declared the Bank of governors a position vacant. The Conservatives had a majority declare position vacant. The Senate basically turned that down. However once the government of the day has expressed a sort of lack of confidence in the office of the governor of the Bank of Canada he resigned. The aftermath of that was the 67 Bank Act basically laid down the rules in that the central bank is independent on a day to day basis. But the ultimate responsibility for monetary policy and direction does lie with the government. However that's the ultimate responsibility on a day to day basis and even over the longer term. The Bank of Canada has a pretty free rein to basically set long term policy, and that's how it should be and that governments benefit from that. I mean politicians benefit from having an independent central bank because when unpopular actions are taken such as raising interest rates to tame inflation they can point at the bank and say well we're not doing it the bank is independent. But I mean most politicians often [unintelligible] both ways. Then if there's some type of downturn they would like the bank to stimulate the economy and they said you don't mind if the bank lowers interest rates to stimulate the economy during a downturn. But then when the economy improves and inflation starts to pick up they're probably not keen when the bank raises interest rates in order to restrain inflation. 

PC: Okay. Livio Di Matteo, we'll have to leave it there. Thank you very much. 

LIVIO DI MATTEO: Oh you're quite welcome. 

PC: Livio Di Matteo is an economics professor at Lakehead university and we reached him in Thunder Bay, Ontario.