When Stanley Fischer speaks, Ben Bernanke listens
When Stanley Fischer spe
When US Treasury Secretary Timothy Geithner landed in Istanbul for a global economic summit on October 2, his first meeting among the finance ministers and central bankers invited from more than 150 countries was with a man who controls an economy smaller than Missouri's.
The private dinner discussion - details of which were withheld from the press - was a sign of how Bank of Israel Governor Stanley Fischer's influence exceeds the impact of Israel's $200 billion gross domestic product. Fischer, 66, is a former Massachusetts Institute of Technology scholar who has been a mentor to a group of US policy makers trying to lead the world out of the worst recession in 60 years.
Among his former students: Lawrence Summers, director of US President Barack Obama's National Economic Council; and Federal Reserve Chairman Ben S. Bernanke, whom Fischer advised on Bernanke's graduate thesis in 1979. As first deputy managing director of the International Monetary Fund during the 1990s, Fischer worked with Geithner and Summers, then US Treasury officials, to resolve financial crises in Mexico, Russia and Southeast Asia.
"Many central bankers value him as a thinker about central banking, about monetary and financial policy," says Nobel Memorial Prize-winning economist and MIT professor emeritus Robert Solow, one of Fischer's own mentors.
Fischer also earned a reputation as a trailblazer after he cut Israel's benchmark interest rate by 50 basis points to 3.75 percent on October 7, 2008 - acting the day before colleagues in the US, the UK and the euro zone. (A basis point is 0.01 percentage point.) He then reduced the rate seven more times to a record low of 0.5% by April 2009. On August 25, Fischer became the first central-bank governor in the world to reverse course in response to signs of a financial recovery when he raised the benchmark a quarter point to 0.75%. Bank chiefs in Australia and Norway followed.
On November 23, Fischer tightened credit again, raising the benchmark by a quarter of a percentage point to 1%.
"Israel's economic indicators point to a recovery, but uncertainty persists regarding its strength," the bank said in a statement. "Even after this increase, the interest rate in December will be at the low level of 1 percent, continuing the accommodative monetary policy that is intended to support further economic recovery."
In 2008, Fischer - in an effort to save Israel's export-driven economy - ordered the Bank of Israel to buy dollars in unprecedented amounts to drive down the value of the shekel. From March 2008 to October 2009, he built foreign-currency reserves to $61.2b. from $28.5b.
The purchase program helped weaken the shekel against the dollar by 22% during two quarters of economic contraction, assisting companies such as Teva Pharmaceutical Industries, the world's biggest maker of generic drugs. Following the rate cuts and dollar purchases, Israel attained growth of 1% in the second quarter of 2009, snapping six months of recession. The country's GDP expanded 2.2% in the third quarter.
"The Bank of Israel has built strong credibility over the years for being ahead of the curve both in easing and tightening cycles," says Turker Hamzaoglu, a London-based economist for Bank of America Corp.'s Merrill Lynch & Co.
Sending a signal
Other central bankers should consider following the Bank of Israel's lead, says New York University economics professor Nouriel Roubini, who forecast the global financial crisis in 2006. The world economy already faces the chance of another credit bubble as investors take advantage of low US rates to borrow in dollars to buy higher-yielding assets such as equities and commodities, he says.
"That's actually a signal to other central banks," Roubini says. "While of course they have to worry about recovering growth and avoiding deflation, by keeping interest rates at zero and massive quantitative easing, we risk creating another asset and credit bubble."
Quantitative easing is the term some central banks use for programs that inject cash into recession-wracked economies.
Fischer says his former student Bernanke's decision to take an activist role in pumping money into the US economy was driven by his academic studies.
"Ben Bernanke's thesis was on the Great Depression, and it has had a tremendous influence on what he's done, because he really understands that period, and it is one of the reasons he's been so decisive," Fischer says.
It's now time for Bernanke and other central-bank colleagues to strengthen regulation of banks to avoid the next asset bubble, Fischer says.
"We need to complete the things we started saying we had to do, which is to fix the financial system," he says. "Particularly in the United States, it looks like it's going to be a drawn-out battle."
Fischer is also telling economic policy makers that more tough choices lie ahead.
"There will have to be tax increases in several countries, and there will have to be bigger reductions in spending than the public is thinking about," he said at an IMF meeting in Istanbul on October 3.
Fischer - who conducts all his official business in Hebrew with an accent that betrays his upbringing in southern Africa - was once viewed as an outsider in Israel. Now as the country's economy enters a recovery, some analysts see him as the nation's indispensable man.
"It could be a potential catastrophe for the economy and to the market if Fischer is not kept here as long as possible," says Zvi Lubetzky, chairman of Tel Aviv-based IBI Investment House, which manages more than NIS 14b. "His presence provides adult supervision."
Fischer says he had to step in to fill a leadership void in September 2008. At the time, the failure of Lehman Brothers Holdings triggered a worldwide credit freeze just as Israel was in political paralysis, following then-prime minister Ehud Olmert's decision to step down to fight corruption allegations.
"I think due to the force of the political calendar, of political forces, the burden did fall on monetary policy," Fischer says.
As Fischer nears the end of his first five-year term in April, he is striving to modernize the central bank by installing a six-person monetary-policy committee to set rates - currently the decision is Fischer's alone to make - and end the Finance Ministry's control of central-bank salaries.
The measures, contained in the proposed Bank of Israel Law that has yet to be approved by legislators, may determine whether he will serve a second term. Fischer declined to say in an interview whether he would accept an offer from Prime Minister Binyamin Netanyahu to serve another five years at the bank.
"His biggest contribution is not necessarily his decisions - it's his presence," Vered Dar, chief economist at Tel Aviv-based Psagot Investment House, says. "There is a very significant 'Fischer effect' here."
Even with such support, Fischer isn't immune from criticism, particularly after he raised Israel's benchmark rate in August.
"Rate increases should be postponed until we see a real recovery in the global and Israeli economy, because they will strengthen the shekel and weaken the competitiveness of exports," says Ori Yehudai, chief executive officer of flavoring company Frutarom Industries, who represents the Manufacturers Association of Israel.
Fischer's independent nature can be traced back to his unusual path to the central-bank job. His father, Philip, was a Latvian-born Jew who migrated in 1926 to Northern Rhodesia (now Zambia) and ran a general store in a small village. Fischer's mother, Ann, was the daughter of Lithuanian immigrants who had moved to South Africa. The couple raised Stanley and his younger brother in Northern Rhodesia.
Fischer's parents moved to Southern Rhodesia (now Zimbabwe) when he was 13, and he completed high school there. In the last year of high school, he switched his specialization to economics from science after speaking with a student from the London School of Economics and Political Science. Fischer also joined Habonim, a Zionist youth group, along with Rhoda Keet, his future wife, with whom he now has three sons.
In the early 1960s, Fischer spent six months on a kibbutz on the Mediterranean coast, where he combined learning Hebrew with manual labor.
"I picked bananas, and I planted them - which is harder than picking them," he recalls.
From bananas to statistics
Fischer traded manual labor for academia in 1962, when he gained admission to the London School of Economics. He then won a scholarship from MIT, where he studied for a doctorate under future Nobel laureate economists Paul Samuelson and Solow.
"Here at MIT, the place where modern central bankers mostly seem to have been born, Stan Fischer was both an outstanding student and an outstanding intellect," says Samuelson, 94, author of Economics: An Introductory Analysis, first published in 1948 and still a standard textbook. Central bankers Mario Draghi of Italy, Jose de Gregorio of Chile and Athanasios Orphanides of Cyprus are also MIT graduates.
After earning his PhD in 1969, Fischer took a teaching job at the University of Chicago. His friends say he isn't a disciple of the so-called Chicago School's belief in the inherent efficiency of markets.
"He discovered for himself that he was an MIT sort of economist at heart," Solow, 85, says. "You can classify economists into system builders and puzzle solvers, and at MIT we are generally a puzzle-solving department," he says.
After more than a decade in academia, Fischer faced the first of many puzzles in his public career when president Ronald Reagan's secretary of state, George Shultz, named him to an advisory panel to create a stabilization program for Israel, then plagued by an annual inflation rate that peaked at 445% in 1984.
From 1988 to 1990, Fischer was chief economist at the Washington-based World Bank. His successor in the job was Summers, who would later become president Bill Clinton's Treasury secretary. After a stint teaching back at MIT, Fischer joined the IMF as deputy to managing director Michel Camdessus in 1994.
Both men faced their biggest test during the Mexican currency crisis of 1994. The US Congress approved a $20b. aid package - half the amount that the US administration had requested. The US government turned to the IMF to fill the gap.
"We got the request from the US at midnight and met very early in the morning in Camdessus's office," Fischer recalls. "The first thing Camdessus said was: 'Gentleman, this is a crisis, and in a crisis you don't panic.' Then, very coldly and calmly, we just got down to what the alternatives were."
Together the IMF and US government cobbled together a loan package to the Mexican government valued at $50b. - an effort that involved multiple phone calls between Fischer and Summers, then a Treasury undersecretary. After leaving the IMF in 2001, Fischer joined Citigroup as a vice chairman.
In 2005, Fischer accepted the central-bank job in Jerusalem. Inside Israel, there was some skepticism about a candidate who needed to apply for Israeli citizenship before taking the position. Outside the country, Fischer's friends fretted about Israel's febrile political environment.
"My only fear was that he'd be eaten alive," Solow says. "Israeli politics is small-group stuff; personalities count and there are occasional sharks in the water."
The Knesset is still wrangling over granting Fischer control of central-bank salaries, which are among the highest in the country's Civil Service. Fischer should prevail in his quest for independent control, largely because of his importance to the Israeli economy, says Jacob Frenkel, Bank of Israel governor from 1991 to 2000.
"The policy makers still owe him," he says. "Israel will benefit immensely by having him stay on."