Stan’s not your man

Fischer’s track record as the governor of the Bank of Israel is a topic of heated debate in Israel.

February 11, 2014 22:30
3 minute read.
Stanley Fischer.

Stanley Fischer nice background 512. (photo credit: REUTERS)


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The rumored nomination of Stanley Fischer to Federal Reserve vice chairman is being greeted with enthusiasm by the US media and many economists.

However, Fischer’s track record as the governor of the Bank of Israel is a topic of heated debate in Israel.

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The Israeli economy did fare better than most Western economies during the aftermath of the bursting of the US real estate bubble. However, this relatively solid performance is best explained by the resilience of the export sector (pharmaceuticals, military equipment, technology, Intel’s large new facility that went online in 2009) and also by the fact that Israeli commercial banks engaged in the sub-prime craze only to a limited degree.

Fischer had little to do with any of these factors. Rather, the former governor was particularly active and aggressive in cutting the base lending rate. When Fischer took office as governor in May 2005, the interest rate was 3.5 percent. In November of 2008, he started to cut the interest rate as a response to the onset of the financial crisis and by the time he left office in June 2013, the rate stood at 1.25%.

There was nothing unique in Fisher’s response, as most central bank governors were implementing aggressive monetary policies in response to the crisis. Unfortunately, Fischer was also not unique in that his monetary policy is accused of creating asset bubbles.

Fischer hoped that cutting the interest rate would make loans cheaper and would encourage economic activity. Fischer’s policy did indeed cause Israelis to take on more debt, but most of that credit expansion was in mortgages and government debt. Only a small portion went toward capital investment – less than 20%, based on BoI data.

Ironically, in his attempt to counteract the impact of the bursting of the US real estate bubble, Fischer managed to inflate a whole new bubble in Israel. During his eightyear tenure, real estate prices increased by 85%.

This sharp increase led to growing frustration among the Israeli middle class. According to a recent study, an Israeli citizen needs on average 135 monthly salaries to afford an apartment, compared with 76 salaries in France and 64 salaries in the UK.

THE IMPA CT of Fischer’s policies is felt in other assets as well. The TA -25, Israel’s main equity index, hit a record high in 2013 while corporate profits are 10-20% below their peak, and forecasts are for profit growth to decelerate in 2014. There’s little doubt among many economists in Israel that Fischer’s low interest rate policy is a major factor behind these frothy equity valuations.

Finally, Fischer was quite active in the forex market trying to bolster the USD vs. the strong local currency.

Responding to the exporting sector lobbyists complaining about the weak USD, Fischer increased the foreign currency reserves of the BoI to $78 billion in June 2013, up from $29b. in 2007. Israel now has a foreign currency reserve of about $10,000 per capita, compared with OECD average of $4,600.

In a country that suffers from a high cost of living, an even stronger currency would have lowered the cost of imports (Israel imports transport fuel, raw materials, consumer electronics, clothing, furniture etc). What Israelis got instead is more dollars per capita than almost any other country.

Fischer, like most central bankers, did not see the US real estate crisis coming and underestimated its devastating impact. However, he does support QE3 and his policies in Israel mirrored those of most other central bankers. So if President Barack Obama and Federal Reserve chairperson Janet Yellen were looking for a like-minded, run-of-the-mill central banker, they got their man. If they were looking for something better, they should have looked elsewhere.

The author is a senior analyst at Excellence Nessuah. He was formerly with Merrill Lynch New York and Commerzbank London.

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