In commenting on Stanley Fischer’s tenure as governor of the Bank of Israel, Gilad Alper cites selective evidence and blames Fischer for the costs associated with certain policy decisions, yet attributes the benefits of those same policies to some kind of “economic miracle” (see “Stan’s not your man,” The Jerusalem Post, February 12, 2014).
Financial market traders (as well as people living on fixed incomes) tend to prefer high interest rates since they potentially enhance their wealth. But monetary policy has broader consequences and responsible policymakers like Fischer take them all into consideration, not just those that will affect a specific group of people, when making monetary policy decisions.
Alper criticizes the Bank of Israel’s easy monetary policies for contributing to an expansion of credit, yet conveniently ignores the fact that those same policies helped reduce upward pressure on the value of the shekel relative to the major world currencies (which, by the way, were in a free-fall at the time), thereby contributing to Israel’s export boom.
The Bank of Israel’s policy of accumulating foreign reserves was one of the most important factors that helped defend the Israeli economy from the contagion effects of the global economic and financial meltdown.
As made clear at the time, the Bank of Israel was also building its foreign reserves to enable the economy to continue functioning in the event of an attack by one of its neighbors. Effective leaders like Fischer understand that economic policies are not always made on the basis of economic factors alone.
Although some Israelis would argue that they live in a major, advanced economy, it is silly to suggest that an emerging economy like Israel should use the same criteria employed in economies 50 to 60 times its size in managing its foreign reserve and exchange rate policies.
Although Fischer often spoke about the risks associated with the Bank’s policies, including the possibility of fueling a real estate bubble, these risks were swamped by other more immediate economic and national security concerns.
Israel’s dysfunctional real estate market is primarily the result of bad policies creating the wrong incentives and too many real estate agents trying to “make an easy shekel.” Both problems, which are outside the reach of monetary policy, could be addressed by Israeli policymakers if they had the political will to do so.
Democratic societies depend on well-functioning institutions to develop and implement policies that ultimately enhance the wellbeing of their citizens. Although they are established and run by individuals, these institutions need to be greater than the sum of their parts to be effective. History is replete with examples when individuals usurped or were granted unchecked power, resulting in putting private interests ahead of public interests.
Throughout his career Fischer has contributed to strengthening economic institutions around the world. In addition to steering the Israeli economy through the greatest global economic storm since the Great Depression, as governor of the Bank of Israel, he designed and implemented some of the most important institutional reforms since Israel’s own economic and financial crisis in the late 1980s (which, by the way, he also helped resolve), e.g. establishing the country’s first monetary policy committee (similar to those in place in Europe and the United States), increasing supervision over the banks and placing limits on loans and mortgages to reduce real estate speculation.
He shepherded the Bank of Israel law through the Knesset and also resolved long simmering personnel disputes that he inherited.
The US economy (as well as other economies around the world) is just beginning to get “back on its feet” after the most disruptive economic and financial crisis experienced in over 70 years. And, as we have seen just within the past few weeks, footloose capital continues to seek out short-term gains and wreak havoc on individual economies and their currencies.
The delicate job of unraveling the monetary stimulus put into the global financial system over the past few years is likely to prove to be a greater challenge than introducing the stimulus in the first place.
Janet Yellen’s deep appreciation for the intricacies of the US economy and Fischer’s unique experience with financial crises not only prepare them for their jobs, but make them the best candidates to manage the next chapter in the recovery from The Great Recession. We should be grateful for their willingness to serve. Nominating them to the US Federal Reserve will probably prove to be the most important decisions of President Barack Obama’s second term.
The author was a Research Associate at the Peterson Institute for International Economics, a public policy research center in Washington, DC. He also served as an economist in the Research Department of the Bank of Israel from 1986 to 1988.