Stanley Fischer, vice chairman of the board of governors at the Federal Reserve System, joins
Laurence D. Fink, chairman and chief executive officer at BlackRock and member of the board of directors at the Council on Foreign Relations, to discuss how the Federal Reserve System has evolved over time, and challenges for the future. In addition to the Federal Reserve’s dual mandate of price stability and sustainable employment, Fischer cites the crucial need to insure stability of the financial sector. Fischer describes ways the Fed has increased financial stability since the crisis, but says that the shadow banking system remains an issue. He explains why the Fed has a 2 percent inflation target, and says that the effects of lower oil prices on decreasing the inflation rate will be temporary.
This meeting is part of the Stephen C. Freidheim Symposium on Global Economics: 100th Anniversary of the Federal Reserve System, made possible through the generous support of Stephen C. Freidheim.
Stanley Fischer on ‘too big to fail’:
“…if anybody ever tells you they've solved the too-big-to-fail problem, don't let them be a supervisor of the financial system. Because if they think they've really finally solved this problem, they haven't looked at monetary history, they haven't looked at banking history, and they haven't looked at financial history. …And you've got to deal with them with all the tools you're legally allowed to use.”
Stanley Fischer on shadow banking, the non-banking financial intermediaries that account for 80 percent of the U.S. financial system:
“One of the most complicated maps you've ever seen was produced in the New York Fed showing the shadow banking system and the interactions between it…it's to understand what that system is as a system, how it interacts with the banking system, and who has any authority that will enable them to undertake actions to deal with a firm, which is if it's large enough or interconnected enough, would create a big problem if it failed. That's what we're doing now. And then, if we the Fed have the authority to regulate it. Then on the basis of that analysis, we would then go ahead, if we have the authority...and if we don't, then it goes to the FSOC and is discussed there.”
Stanley Fischer on the Fed’s powers as lender of last resort:
“…I fear there may be a future crisis, financial crisis, in which we'll be very sorry that the Fed's powers to act as lender of last resort…are being constrained significantly by changes in the Fed's authority with respect to emergency loans that were made in the Dodd-Frank law.”
HAASS: Well, good afternoon. I'm Richard Haass, president of the Council on Foreign Relations. And I want to welcome everyone either in this room physically or watching us on CFR.org. And I want to thank you for coming to or viewing the fourth Stephen C. Freidheim Symposium on Global Economics.
This annual effort was created to address the broad spectrum of issues affecting Wall Street and international economics. And it was established through the vision and generosity of Steve Freidheim, who's the chief investment officer, founder, and managing partner of Cypress Capital Partners. And Steve's been a good friend of this organization for years, and we are grateful to him and we're glad he can be with us today. So, Stephen, thank you.
Today's event is also presented by the Council's Maurice R. Greenberg Center for Geoeconomics, formerly led by Sebastian Mallaby, currently by Michael Levi, and we're glad to have the two of them, as well. And the symposium this year is tied to the 100th anniversary, the centennial of the creation of the Federal Reserve System. And throughout the afternoon, we will hear from experts on monetary policy, present and former practitioners about — about the Fed, about how its approach to monetary policy has changed over its century-long history, and we'll look at monetary policies more broadly, given where the world economy is.
The line-up is about as impressive as it gets. In a few minutes, we'll hear from Stanley Fischer, who's vice president of the Federal Reserve, and Larry Fink, who's chairman and CEO of BlackRock. More important, he's a member of the board of directors here at the Council on Foreign Relations.
Just to give you a sense of perspective. And it's a real pleasure personally and professionally for me and for us to welcome back Stan, who was a distinguished visiting fellow here at the Council prior to his — prior to his confirmation.
Then we will segue into a second session which will look at the history of the Federal Reserve System and some of its current directions. And we've got Liaquat Ahamed, one of the great writers about economic history. We've got our newest senior fellow, Willem Buiter. We've got Mark Gertler and, again, Sebastian Mallaby on that panel. And then, third, and last but not least, we've got Arminio Fraga, Jacob Frenkel, Philip Hildebrand, and Mervyn King, four former central bankers of Brazil, Israel, Switzerland, and England, respectively, with our own Roger — with Roger Altman. And that will be the — again, the third of three sessions, and it will look really at the question of the Fed and its relationship to other central banks around the world, as seen from abroad.
So as you can see, it is a remarkable schedule. Timing could hardly be better, given what's going on in the world. So, again, thank you for being here. Thank you again to all those who made it possible and who have agreed to participate. And with that, I turn things over to Larry Fink and Stanley Fischer.
FINK: Stan, how was your commute today? Good?
FISCHER: It was just fine, thanks.
FINK: It's a real pleasure for me to be here today. I'm going to welcome everybody to the Council on Foreign Relations for the opening session of the Stephen Freidheim Symposium on Global Economics with Stan Fischer. I want to thank the CFR for hosting this event, and it's a real pleasure for me to be interviewing my friend, Stan Fischer.
Stan is one of the giants of capital markets and the central banks. He's had an impact on policy and policymakers across the world. He influenced many people possibly in this room, but many people through his work as an economist and a professor, and also through his own distinguished and notably successful career as a central banker.
Prior to taking the vice chairman's seat at the Federal Reserve this past May, Stan was formerly the governor of the Bank of Israel from 2005 to 2013. His leadership and his skills helped Israel weather the crisis exceptionally well and provide an example for many nations around the world. Importantly, though, Stan's — prior to Stan's work in Israel, Stan worked in the private sector as a vice chairman of Citigroup. He was the first deputy managing director of the IMF and the chief economist for the World Bank. And then, before that, Stan was a professor of economics at MIT, where he was a thesis adviser to future central bankers like Ben Bernanke and Mario Draghi.
Born in Zambia, and did his studies at the London School of Economics and MIT, and also taught at the University of Chicago. Throughout Stan's career, he's been an adviser, been a source of wisdom, and a friend to people making some of the most difficult and most challenging decisions on behalf of their nations and on behalf of the entire world. So it's an honor for me to be here sitting next to Stan and interviewing him.
But before I start the formal interview, I just need to — I know a lot of you really want to know what's going to happen in interest rates, and we're not here about — talking about that today. And so I just — so I'm not going to ask Stan any of those questions. I don't want to be presumptuous of it, but I would — when we go into the Q&A, I would ask all of you not to be presumptuous of a question that Stan's not going to be able to answer. So let's try to find some questions that we know he can answer, and let's not put Stan on the spot here.
So with those conditionalities, let me begin. All set, Stan?
FISCHER: All set, thanks.
FINK: Perfect. So you have observed the Fed for many years from an extraordinary position from a variety of vantage points, as I said, a professor from MIT, the World Bank, the IMF, the private sector, the head of the central bank of Israel. How have you seen the role of the Fed evolve from all these different perspectives? And what did you learn about the Fed and the effectiveness through all these different perspectives?
FISCHER: Well, the — I started learning about the Fed when I was an undergraduate. And in those days, we spent a lot of time on the Fed's annual report of 1923, which set out how it thought monetary policy worked. I was amazed to discover in the NBR's most — one of the NBR's recent lists of papers, a paper saying, "When did the Fed give up on its 1923 principles?", which included preventing banks' lending for speculative purposes. That was one of the things that they were supposed to stop.
And the answer was, it's never quite clear. It's not quite clear when they gave up, but as late as 1970, they were still referring to that. So I'm afraid that what goes on is — some of it is learning what works and what doesn't. Some of it is relearning what works and what doesn't. And you're quite hard put to figure out when they've learned things and when they've unlearned things.
What I think we have now is a situation in which we understand the monetary policy aspects, what you can do with changing the interest rate and also with the most recent crisis, with other operations, involving asset markets, quantitative easing in particular, and I think that is fairly well established, fairly well understood, and will continue to be a part of monetary policy for a very long time.
I expect that the approach to monetary policy — and I'm talking about monetary policy — known as flexible inflation targeting, namely you try to keep inflation under control at around 2 percent — but you also take account of what's happening to the economy, what's happening to output, that that general approach will be there for a very long time.
The other fact which has come up is, should the Fed be involved in regulation in stabilizing the financial system? And that was something that was believed in 1923, was regarded as not very important in the early 2000s, and is now very important. And I think we're learning that. I don't think we've learned how to deploy it, but we've learned that we have to figure out how to undertake financial sector stabilization, and that's something which we'll develop in the next few years, and I think we're beginning to get a hold of that — that material now.
FINK: I'm going to ask you a question related to what you just said. Do you believe that central banks around the world, including the Federal Reserve, are the best equipped to handle this macroprudential policy? Or could it be the SEC or other agencies then?
FISCHER: I think the — with regard to the banking sector, the central bank — or with regard to — whoever it is that supervises the banks is in a very good position to do macroprudential. And typically, although not in the United States, in smaller countries and less sophisticated economies, the knowledge on how to deal with the financial sector is centralized in the central bank. That's not necessarily the case in the United States. The British in 1997 gave the central bank independence one day and the next day took away bank supervision from them.
And I think people in the central bank were very glad to have the supervision taken away from them in 1997. They were more glad to get it given back to them in 2008, after we'd seen the first bank runs in Britain for 140 years as a result of the new institutional structure that had been developed, which put bank supervision — financial sector all together outside the central bank. Now it's more in the central bank than it is anywhere else, and we have two very different models, ours, which is very decentralized, with the Federal Open — with the Financial Stability Oversight Committee, the FSOC, in charge of coordinating a bunch of independent regulators, which each of which wants to guard its independence, versus the British, where the authority is very clearly in the central bank, and we'll have to watch and see how those two work out.
FINK: This may be an unfair question, because you've only been at the Federal Reserve for a number of months, not a complete year. What surprised you in your most recent period of time there that you didn't expect when you were looking from the outside in?
FISCHER: Well, I'd known that the quality of the staff was very high. It is exceptionally, exceptionally good. I think it's true that I haven't yet had a question about things the Fed should be doing that I have had to send out a question and not got an answer, have gotten a good answer on all of those, and it's a very impressive bunch of people there. That isn't a big surprise. That's a small surprise.
The biggest surprise is this Sunshine in Government Act, which forbids the board of the IMF, the seven members — let me say this carefully — the seven members who in principle should be the members of the — of the Federal Reserve Board actually were only at five at present, and the odds on another two being nominated and approved before twenty-something is — is pretty low. So we're operating with five.
We are not allowed to meet — a majority of the board cannot meet...
FISCHER: ... together, if it is likely that a subject related to monetary policy will come up at such a meeting, without it's being declared a formal meeting, with minutes being taken, and if it's a closed meeting, without it being recorded, why it should be closed. This means it's very hard for the seven of us or the five of us today to sit down and discuss issues in a very informal way. And I think that is a big surprise. I hadn't understood it. People say, "I told you that," when I say to them it's a surprise. Well, there's a story — which is a long one — which ends with somebody complaining about somebody who says, "That guy knows everything but realizes nothing." Well, I knew that, but I didn't realize what it meant. And it's a powerful impact. It has a powerful impact.
FINK: But you can have your assistant meet with the other five governors' assistants, correct?
FISCHER: As far as I know, yes. This is — you don't want to answer...
FISCHER: But, yes, in principle, you can go around and talk to each of your colleagues.
FINK: It takes longer.
FISCHER: It takes longer, and there is something about a group discussion that is different than a sequence of two-person discussions.
FINK: I agree with that. This is another unfair question, because you've only been there a very short time, but what type of mark do you want to leave at the Federal Reserve, if there is such a mark? You know, what do you want to be known for?
FISCHER: My guess is that I want to be known for having done the job well and appropriately. And I'll leave it at that.
FINK: I think that's a fair one. So some of your students — Mr. Bernanke and Mr. Draghi — have played an important role in the history of the central banks. Do you think they paid any attention to you in their dealings with monetary policy from what theoretically they learned as a thesis adviser?
FISCHER: Well, certainly when Mario Draghi was a student, I wasn't the main teacher on monetary policy. Franco Modigliani was. And everybody learned something from — from Franco. And when Ben was a student, he — I may have taught a bit, but, you know, Ben did his own research, which — the most important research relevant to what Ben Bernanke did between 2007 and 2011 was Ben Bernanke's research on the monetary mechanism, what is it that matters, and whereas the theory had been Milton Friedman's argument had been the quantity of money really matters, Ben's research suggested to him that the amount of credit really matters, that the credit mechanism is really critical to how the economy works, which implies that if your banking system breaks down, you have a huge problem.
And Ben understood that. And some of the actions which he, together with Tim Geithner and with Hank Paulson, at the very beginning undertook were based on his own research. And I didn't tell him he had to do that. He did it, and he did it extremely well. So I think that they learned a lot at MIT about being pragmatic, about not being too — too confined by their theoretical apparatus — whatever the plural of apparatus is — and learned that when you do applied work, you really have to look at facts and come up with practical solutions. That was very deep in the MIT approach.
FINK: So taking that, what do you think today — how would you describe the central objectives of the Federal Reserve is today?
FISCHER: Well, we have what the law saws, and our law is basically that we have to achieve two goals. One is maximum — we put in parentheses afterwards — sustainable employment, and the second is price stability, which is defined as 2 percent inflation. Now, those are the underlying goals that we have to attain, known as the dual mandate. And we have now the additional issue, which is critical, of figuring out how to combine that with insuring financial sector stability.
What we've seen since 2007 is what a mess you can get if your financial sector gets into severe trouble. That was one of those other things that you know, and there was a Reinhart-Rogoff book called "This Time is Different," which was written before the crisis, but which drove home the point that a recession that is accompanied by a major financial crisis is going to be a very severe recession and take much longer to recover from than a standard recession. And I think our challenge is to make this recovery from that one that we won't have to go through again, one hopes ever, but at least for a very, very long time.
FINK: So how much progress do you think we've made in financial stability since the financial crisis?
FISCHER: I think the — we've done a lot on stabilizing the — taking actions that should stabilize the banking system. I think the measures of increasing bank capital, of increasing required liquidity by — by the banks and then in other areas, requiring more — most derivative transactions to go through organized exchanges, et cetera, those measures I think for the banking system in the first instance and a few that deal with other institutions, have made a lot of progress, and will ensure a far more stable banking system for some time. As long as the regulators are aware that regulation is a sort of game of cat-and-mouse — there are regulations, people try to find their way around them, you try to catch them, and may put — change the regulation appropriately — you can't sit on a bunch of regulations and expect that you solved any problem forever. You have to be vigilant in dealing with what — with developments in the economy.
I don't think we've solved the problems of how to deal with what's known as the shadow banking system, the non-banking financial system, which is unique in the United States in being very large relative to the banking system. Twenty percent of the financial system measured by the size of assets is banking system in the United States and 80 percent is non-banking. In other countries, the proportions could be reversed.
FINK: But also that's a good thing, because we have here capital markets and this is why possibly we have — we've been able to stabilize faster than other markets that are more dependent on just banks as a source of capital, correct?
FISCHER: Well, you're — you're a co-discoverer of Alan Greenspan's spare tire theory of financial systems, which was that ours is better because there are all these spare tires around. If you can't get — if you've got to put on an extra tire, you can get it at somewhere other than the banking system. And I think that's true. But I think we couldn't have actually got to where we've got if it hadn't been for the speed with which the Fed turned to stress tests early in 2009 and implemented them and recapitalized the banks, whereas the Europeans are still about to do that. And the speed with which the American regulators and monetary policymakers were willing to — were willing and took a risk in undertaking is practically unique.
FINK: Do you worry about a persistence of low interest rates worldwide and the impact on savers?
FISCHER: Well, we recognize — it's not an accident that we call the increase in the interest rates, which Larry has kindly put off — off our agenda for the rest of the day — it's not an accident we call it normalization. Zero interest rates are not normal. And operating with them is very difficult. So I think this is not normal. It creates certain difficulties. But what we have learned is that you can operate reasonably well in these circumstances, as the Fed did from 2008 until today.
FINK: But my worry is — you know, I wasn't trying to get into the interest rate forecast — I was trying to think about what the inequalities it creates, people who — obviously, low interest rates have really benefited the equity markets, as people are looking to put money elsewhere. And it has created, I think, more societal divisions. Thomas Piketty's book discusses that. Any thoughts on that? Or any issues around this whole issue of the people who have had money and capital and financial assets have done quite well, but so many parts of the economy are absent that type of investment?
FISCHER: Well, I think it's clear that those people who have their assets all in government bonds, which were short term by — for whatever reason have — have not done well in this crisis. But, you know, there are a lot of people who are not wealthy who nonetheless have savings in funds and their pension funds. So it's not uniform that if you're — if you're poor, you're going to be hurt by this particular type of monetary policy. On average, I suspect, it would be easier for people who are poorer if bank interest rates were higher and if other interest rates were higher. But it's not guaranteed to be that way.
FINK: Before opening for questions, I want to ask you one more question. What does Stan Fischer worry about?
FISCHER: You're talking about policy?
FINK: No, I mean, it could — are you coming home for dinner? No...
FISCHER: We're — sort of short term, the big issue we're discussing now is liftoff of interest rates. That's a lot of thinking going on in the Fed now. When is that going to happen? How's it going to be done? Are there techniques we're putting in place with reliance on the interest rate, on excess reserves as the main instrument for getting the interest rate on other assets to change and a lower bound put in place through the use of reverse repos, is that going to work exactly as we planned? Very little works exactly as planned, and what are alternatives if that doesn't work? I think about that a great deal.
If you ask in a longer-term sense, I'm concerned about the maintenance of the important success of monetary policy in the United States, which is that the Fed, with respect to monetary policy, is completely independent. And it is particularly independent of political views. The Fed really does not, as far as — there's nothing I've seen which suggests that we're sitting around wondering whether we'd win the election if we did this, rather than that, because we don't run in the elections.
And there are sort of measures being discussed about supervising what we do more closely. We are strongly in favor of the modern approach to central banking, which is, the central bank has a clearly defined mandate and it is transparent and it is accountable to the people who define that mandate. And that mandate is defined, in essence, by the Congress.
And we should be transparent. We are remarkably transparent as central banks go. Our minutes are published within a couple of weeks of our meetings. Within a period that is very short — five years — transcripts are published. It's usually much longer in other countries, of our meetings. And I think the Fed is remarkably transparent.
But there are those who want us to be more transparent. And I don't think — there comes a point when you've got to have a discussion where you can say things that you don't necessarily want to be published. What is the problem? The problem is, you sometimes discuss — you need to discuss out-of-the-box ideas, particularly if you're in a crisis of some sort. You put those in something that's going to be published, in essence, two weeks later, you're going to frighten the markets and — but you can't have an organized discussion without having — in our framework — without having them be published. That's something that worries me, and I would add to that a little bit, that I fear there may be a future crisis, financial crisis, in which we'll be very sorry that the Fed's powers to act as lender of last resort have been transcribed — are being constrained significantly by changes in the Fed's authority with respect to emergency loans that were made in the Dodd-Frank law.
Those are things which I think we have to think about and continue to think about as we think about the long-run ability of the central bank to do what central banks do, which is to stabilize short-run panics and short-run crises, and that is up in the air at the moment. Let me just add something. We frequently here it said, have you fixed the too-big-to-fail problem? Well, we'd all like to fix the too-big-to-fail problem. I hope I never have to deal with a big institution that is about to fail and have to make decisions of the quality that were made, of the type that were made in 2007, 2008, 2009.
But my answer to that is, if anybody ever tells you they've solved the too-big-to-fail problem, don't let them be a supervisor of the financial system.
Because if they think they've really finally solved this problem, they haven't looked at monetary history, they haven't looked at banking history, and they haven't looked at financial history. These things happen. I think they even made a movie about that. And you've got to deal with them with all the tools you're legally allowed to use. And it's important that you don't take away — that it's important for the stability of the economy that you have those tools when unexpectedly one night — it always happens at night...
FINK: Or a weekend.
FISCHER: ... on a weekend, somebody calls you and says, "You've got to do something. This institution is heading for big trouble, which will cause a major conflagration." That's when you need these powers.
FINK: I would imagine today, though, with all the higher capital standards and liquidity rules, as you suggested, all the things to have greater protection, if there is another big crisis, it's probably not going to be one institution, because it could be — it could be more. And, I mean, that's...
FISCHER: Well, yeah — all right. Change the word "institution" to "institutions."
FINK: Institutions, yeah.
FISCHER: You really need to have those powers, and some of them have been taken away.
FINK: I agree with that. It's time to open up for questions. I would remind everybody, we're being webcast, so raise your hand, I'll select the person. Wait for the microphone to come, and then, importantly, one question, please, and two, address who you are. So there's a question right over here, and two questions there right over here first.
QUESTION: Hi, Sy Jacobs, Jacobs Asset Management. You spoke earlier of the 2 percent inflation target. And I was hoping you could address the evolution of it, where for at least most of my lifetime and a lot of years beforehand, the goal was more generally lower — lower inflation is better than higher inflation. And, in fact, through our economic history, inflation under 2 percent was in both normal and coincidental with prosperous times. So how did we get to this point where now the Fed seems to be talking about 2 percent inflation target as something we need to push inflation up to, that somehow 1 percent inflation is dangerous when previously it was prosperous?
FISCHER: I'm not sure whether — whether the correlation of low inflation with — with prosperity is exactly right. But let's leave that aside. How did we get to 2 percent? There is — there is a tradeoff. Obviously, high inflation is bad. There are lots of — lots of papers being written explaining why that's the case. Why not zero? The concern is about the real interest rate that is whether you could get — sometimes it now seems, in order for the economy to get to full employment, you need a real interest rate that is the interest rate minus expected inflation, to be negative.
If zero inflation is your target, then people expect zero inflation, and you can't push the interest rate below zero, then you're stuck. So that 2 percent is a — is a buffer which means there's some ability to get the real interest rate to be negative without overdoing on that issue. In some — Olivier Blanchard, my co-author and friend, who's a chief economist at the IMF, has argued that number shouldn't be 2 percent, but should be 4 percent. I disagree. I think that we've got to keep inflation significantly lower than 4 percent, but that you need some cushion against the need for sometimes negative real interest rates, I do believe. And similar argument, it's much easier to — if you have zero, you'd have limits on how much you could reduce wages, if you needed to reduce them, and it's a little easier to raise wages than to reduce them, so that's another reason why a little inflation eases the system.
FINK: Question back here?
QUESTION: Gary Ross of PIRA Energy. Saudi Arabia just gave the world an over trillion-dollar tax cut. Are you more worried about deflation or inflation?
FISCHER: Well, you've put your finger on a nice complicated question.
The — you know, the argument I just made about why you want to get inflation up to 2 percent would suggest that I should be very worried. I'm not very worried, because the deflation or the — the lower inflation that we'll get from the lower price of oil is going to be temporary. They're not going to keep driving the price of oil down. So we'll have a short period, and I hope it sticks there, of declining prices, and that will reduce the inflation rate.
I wouldn't worry about that very much, because that period of — of low inflation is actually happening in a time — as a result of a phenomenon that's making everybody better off, and furthermore likely to increase GDP, rather than reduce it. So I wouldn't worry about that too much, and frequently central banks take out the price of energy from the price index, because movements in energy are very — energy prices are very volatile and, you know, they go, quote, "in the opposite direction." This is related to something called supply shocks, but that's for the advanced meeting for later. And this is a supply shock, and you treat them differently than a shock that's caused by an increase in demand. So I would worry less about that.
FINK: Before I get another question, Stan, a couple governors used to tell me there was something called good deflation and bad deflation. Do you believe there could be such a thing, like lower oil prices conceivably is good deflation?
FISCHER: Yeah, I mean, that — that sort of thing is — is positive, if that's — if that's the cause of it, yeah.
FINK: Interesting. Back there. Yes.
QUESTION: Rachel Robbins. Hi, Stan. Stan, can you talk a little bit more about the shadow banking system and what, if anything, you think should be done at a policy level to ensure that there is the financial stability over this 80 percent that you don't — you have less control over?
FISCHER: Well, the — you know, there are real institutions in the — in the shadow banking system. There are hedge funds. There are insurance funds.
FINK: Even asset managers.
FISCHER: Even asset managers, I've been reliably informed.
And other financial institutions, some of those have regulators. The insurance companies, for instance, have regulation. Others do not have — have regulation. And what is being done right now is mapping out this system. One of the most complicated maps you've ever seen was produced in the New York Fed showing the shadow banking system and the interactions between it and, you know, everybody is talking to everybody else, doing business with everybody else, it's to understand what that system is as a system, how it interacts with the banking system, and who has any authority that will enable them to take action — undertake actions to deal with a firm, which is if it's large enough or interconnected enough, would create a big problem if it failed. That's what we're doing now.
And then, if it's — if we the Fed have the authority to regulate it. Then on the basis of that analysis, we would then go ahead, if we have the authority — for instance, we have control over margin requirements — and if we don't, then it goes to the FSOC and is discussed there.
FINK: Right up here.
QUESTION: Stan, put on your professor hat. Put on your professor hat, Stan, and suppose you've set a question for the prelim that said we've had negative real interest rates for three years in much of the world and we still have persistent disinflation. What's going on here?
FISCHER: Yeah. Well, were you a student at Chicago when I was there?
FISCHER: Well, I'll let you in on a secret. Sometimes you put questions on the prelims when you didn't know the answers.
QUESTION: I'll let you in on a secret. I know that.
FISCHER: But seriously, before people think that's true, I think that what we've seen — we've seen a real recovery — we've seen the return of the United States economy to a growth rate that has been pretty steadily about 2 percent to 2.5 percent, occasionally 3 percent. It's been fluctuating in that area.
So I think in the United States, first of all, it isn't deflation. We have low inflation. We do not have prices declining. So I think in the United States, the negative interest rates have worked. At the long end, by the way, the interest rates have typically been slightly positive in real terms, so we're talking about the short-term interest rate.
And I think it's working. It's just taking its time. If you look at the things that haven't really recovered, the construction set is remarkably weak, and when you think of what happened up to 2007-2008, you can understand why that sector hasn't fully recovered yet. So I think you can understand this in terms of the things that Reinhart and Rogoff wrote about.
I don't know enough — Britain is roughly in the same situation as us. European inflation is positive, not negative. So I think the — if your answer is, why are we growing so — if your question is, why are we growing so slowly rather than why is inflation negative, which I don't think it is, I think there are a lot of very complicated issues, among them the decline — apparent decline in the rate of productivity growth in the — in the United States economy and globally.
FISCHER: Good, well, coming from you, it'll do.
QUESTION: Stan, my name is Hariharan. Almost coinciding with your start at the Fed, is that an important pivot in the Fed communications now, which starts to recognize the importance of international matters, like the dollar and fragilities in the global system because of rate policy? Because historically, we've always been brought up thinking that the Fed took decisions based almost entirely on a domestic policy initiative.
FISCHER: Yeah, well, if there's a connection, it's coincidental. The fact is, the U.S. economy is far more open than it used to be. We do much more international trade than we used to. We're more interconnected on the side of goods production and demand for goods than we have been for a very long time, possibly ever, I think, now. So we're more open, and that's a reason to look at it.
The other reason may be that because the rest of the world is rising to our standard of living, because asset movements are so much larger than they used to be, capital — I'm going to digress, footnote.One of the questions that — that interests me is, what is it that has made the United — at the end of World War II, the U.S. economy accounted for 50 percent of world GDP. You can understand why an economy that big would have an influence on the rest of the world. It's now about 22 percent. But it doesn't seem to have much less of an impact. Why not?
I think it's because the capital markets have become more and more important, and New York is still a major capital market of the world, and what interest rates are here, what rates of return on equity are here influence the rest of the world, and, in turn, comes back to influence us, so I think that is another reason why there may be — if this is true — why there may be more attention to developments in the rest of the world, as we — as we look at interest rate setting.
FINK: Byron? We need the microphone up here.
QUESTION: Byron Wien, Blackstone. In 2008, the Federal Reserve had a balance sheet of $1 trillion. Today, it has a balance sheet of over $4 trillion. Some would argue that a significant amount of that expansion of the balance sheet went into financial assets, where the purpose of it was to stimulate the U.S. economy. And the monetary policy is a very inefficient way in my judgment to try to stimulate the economy. Now we're at a point where Mario Draghi is being encouraged to do the same thing in Europe. Is it going to work there? And did it work in the United States?
FISCHER: Well, I've said a few times that I think it did work in the United States, and I haven't changed my mind since — since then. Mario Draghi is dealing with a very, very difficult situation in terms of both the economics and the capacity of the European Central Bank to make decisions. I believe that the same arguments that are true for quantitative easing as a way of dealing with the U.S. economy do hold in Europe. And it looks like that they may be moving in that direction. If they do, I expect that will have a positive effect.
You have to always, in economics, in anything, move away from the belief that something is a magic solution. There are no magic solutions in economics. Does it have a positive impact? Yes. Is it all that needs to be done? Probably not.
FINK: Way in the back.
QUESTION: Andrew Gundlach from Arnhold Bleichroeder. One of the imbalances present in '07 that are still present with us are the balance of payments — balance of payments imbalances, surpluses in Asia, deficits here, and then surpluses in, say, Germany, Holland, deficits in the other European countries. Is that a source of concern to you? How do they get cleared?
FISCHER: The United States' current account deficit is much — is much reduced. China's surplus is much reduced. And they get cleared over the course of time by movements in the exchange rates and by asset movements. So I don't think those remain the problem that they were when the — when the Great Recession began.
As to Germany and intra-European imbalances, there is a problem there which arises from the fact that exchange rates are fixed and can't adjust to deal with Germany's very large surplus and the smaller surpluses of the others. But it is worth noting that the countries which had very huge deficits, like Spain, like Greece, have got much smaller deficits now. So the adjustment is taking place, and we shouldn't expect everybody to have a balanced account. One of the reasons for global trade is that some countries save more and some countries invest more relative to their income. And the ones who want to invest more and have profitable investments should be able to run current account deficits.
FINK: OK. Henny?
QUESTION: Henny Sender, the Financial Times. You rightly point out the disproportionate effect the U.S. has in the world today. How realistic is it for other countries, whether Brazil or China, who have said when the Fed makes monetary policy, they need to take into consideration the impact it has on the rest of the world? How sympathetic are you to that plea, as somebody who's been in a very different central bank? And how realistic are those pleas? Thank you.
FISCHER: Well, I'll answer by giving you the answer I used to give when I was in another job. I used to say it would be much more convenient for us if the United States had a higher interest rate — Israel didn't have a financial crisis, so it didn't go through the need for a zero interest rate, but you couldn't not follow the United States interest rate, because otherwise — sort of waves of money would have been coming into this very small economy and caused a huge appreciation which would have had a very negative effect on growth.
But I used to say, I'd much rather have to struggle with a low United States interest rate and a growing U.S. economy than have a nice comfortable interest rate from the viewpoint of the Bank of Israel, where I was then, and have a slowly-growing American economy. The income effects of U.S. growth are very, very important for the rest of the world, and so I don't even think that the argument "You should take us into account," et cetera, and not raise — and not reduce your interest rate as much as you plan, I don't think that's good, either, for the other countries.
QUESTION: I'm Jim Nathan. I'm from — I'm Jim Nathan. I'm from Alabama. I don't quite get...
FINK: You won.
QUESTION: We did.
I don't — I don't quite understand the argument that — that higher interest rates would help mitigate inequality. People of modest means carry very high credit card balances. They have to go for payday loans. They hope to buy a mortgage. If a mortgage is so difficult and so high that they can't carry the cost, it's extraordinarily difficult. I don't get — I mean, who saves? The people who save usually have disposable income. Poor people don't have disposable income. And I could go on. And modest — and low interest rates, you know, they may benefit wealthy people, but at least they don't hurt poor people.
FISCHER: Well, I'm not sure that — think of those poor people who don't work are on — who are retired, in essence, work on Social Security and have savings. Those are the people who will lose something by having — having higher interest rates. And credit card interest rates don't adjust that much to what the — what the Fed's market interest rate — the Fed's interest rate is.
So I think that possibility is out there that the — that the very low interest rates have some impact, but I think typically marginal. You say none at all. I say some, but not very large on the distribution of income.
QUESTION: Niso Abuaf, Pace University. What do you think of the research that suggests that the political and regulatory environment in the United States causes financial crises, whereas the ones in Canada does not? Thank you.
FISCHER: Well, the Canadian — the Canadian and — to some extent — the Australian, and at one point you could say the British financial systems haven't had financial crises, and to attribute that solely to the supervisory system seems to me inaccurate. The Canadian banking system has several very large banks and they have one — well, they have until recently one aspect that U.S. banking system didn't have, which was Canada-wide branching. So they managed to get a lot of offsetting shocks taking place during the history of the Canadian economy.
The — so I don't think that's alone what caused the stability of the Canadian system or since the 1930s, of the Australian system. Beyond that, it is clear that the complexity of the American system and the complexity of the regulatory system may have something to do with the difficulty of maintaining banking sector stability in the United States. We did run for eighty years without a major banking crisis, until the present crisis, and I hope we run for more than eighty years without another one.
FINK: One last question. Yes?
QUESTION: (OFF-MIKE) was wondering how (OFF-MIKE)
FINK: Try another microphone.
QUESTION: Peter Hooper from Deutsche Bank. Just wondering how you assess the labor market currently. And in particular, do you favor U6 or U3 in terms of gauging how much slack there is? And the behavior of wage inflation, is it surprising we've had so little pickup? Or are we starting to see something? How much has pent-up wage disinflation affected things? Just a broad sense on your view of the labor market.
FISCHER: Well, the really big fact that I think about with the labor market much of the time is the fact that unemployment rate has come down much more rapidly than was expected as little as a year-and-a-half ago. Now, you can then start saying, well, you should look at a broader definition of unemployment and all that, but that, too, has come down more recently, quite rapidly. U6 has come down quite rapidly, as well.
So I think the labor market has shown behavior that is not fully consistent with the way GDP is growing, unless you assume that productivity growth is down, which I think is measurably true at the moment, and we don't know how long — how long it will continue. You know, it is often the case in economics that you're waiting to see a phenomenon. Somebody did something that should have produced X, and there's no X on the horizon. My experience has typically been that if you wait another six months or longer, X will suddenly make a belated appearance.
I don't know if that's what's going to happen. That's what I think may well happen with wage inflation. We've just got to wait and see if it does happen, well and good. If it doesn't, well, I don't know about well and good. If it doesn't, well, that's good news on the inflation front.
I keep getting people sending me very nice charts which essentially show a curve that — if I'll do it from your angle that's sort of going down — sort of that's very flat at the bottom and is just about to be turning up. That's the wage inflation. And there is always some definition of wages and some definition of unemployment, such that that is true. Whether that's what's actually going to happen, we don't know, but I think that has a significant chance of being about to happen, about to — with "about to" being several — a considerable time, to coin a phrase.
FINK: Well, this ends this session. I want to thank Stan.
I think — I think we all learned why the United States is better off having Stan Fischer as our vice chairman of the Federal Reserve. And, Stan, thank you again for your public service.
FISCHER: Thank you.