Mario Blejer: One Too Many Financial Crises Left Him a Changed Banker

The great global downturn of 2008 seems to have altered the views of the leading candidate for Bank of Israel governor.

It has been a long time since a new player in the Israeli economy has garnered as much curiosity as Mario Blejer, Prime Minster Benjamin Netanyahu's pick to be the next governor of the Bank of Israel. Despite being one of the world's most prominent economists, who has filled a series of senior positions in the International Monetary Fund, the Bank of England and the World Bank, most Israelis had never heard of him until he was rumored to be in the running for the top job in the nation’s central bank.

Apart from the widely reported affair between his then-estranged wife, Piroska Nagy, and Dominique Strauss-Kahn, during his stint as IMF chief, very little is known about Blejer’s private life. At a lecture in October, Blejer, 65, described himself as someone who "wears a kippa only at home, not at work and not when I am doing things that are 'less than okay.'"

Blejer studied and taught in Israel and visits every few months to see his daughter, who lives here. He is well known to the economic establishment in Israel. Born in Argentina in 1948, he came to Israel to study economics and Jewish history and later got a master’s degree at the Hebrew University. He received his doctorate at age 27 from the University of Chicago, the home of Milton Friedman and monetarism. Chicago is also the alma mater of Jacob Frenkel and Leo Leiderman, Netanyahu's first two candidates for governor of the Bank of Israel.

To gain a better understanding of the man and how he would act as Bank of Israel governor, we have to look back at the key events that shaped his worldview in the IMF, the World Bank and the Central Bank of Argentina.

In his final post at the IMF, before going to the Central Bank of Argentina, Blejer was an economist for the Asia-Pacific region when the Southeast Asian financial crisis broke out, in July 1997. The crisis, which started with the Thai baht, took the IMF entirely by surprise, as Blejer admitted in an interview with Al Jazeera in 2011. Much of the onus was placed on the IMF.

It sought to liberalize the region’s economies by encouraging them to remove barriers to the movement of capital in order to encourage foreign investment. The result was a huge influx of so-called hot money that created an asset bubble and threatened the collapse of Asia's leading economies.

The IMF's response to the crisis, to treat the situation as a typical financial crisis, only made things worse: It made fiscal austerity a condition for aid. But because the Asian economies had small, if any, deficits, the demand to cut back government spending only exacerbated the crisis.

Before moving to the Asia-Pacific division of the IMF, Blejer held another important post there, as senior adviser to the Europe and Central Asian division. He was one of the architects of Russia's transition from a communist to a free-market economy, a process in which IMF economists were deeply involved, and later played a role in Russia’s subsequent 1998 financial crisis.

In his book “Globalization and Its Discontents,” the Nobel Prize-winning economist Joseph Stiglitz was highly critical of IMF policies during that period. He argues that the single-mindedness of the institution's economists, their desire to push privatization at all costs (including Russia's emerging democracy), as well as their use of measures such as ending price controls, led to declines in the standard of living, increased poverty levels and harmed Russia's ability to mobilize its human resources.

When the crisis erupted the IMF sided with Russia's oligarchs, who were stealing the country's natural resources. In fact, the IMF was a factor in creating the oligarchs to begin with, by advocating rapid privatization, in which state assets were sold off without competition or a regulatory framework. Stiglitz, a former chief economist of the World Bank, says the process simply replaced government monopolies answerable to no one with private monopolies that were not only answerable to no one but were arguably even more exploitative of their workers and customers.

But in 1993, five years before the crisis that caused the value of the ruble to tumble by 40%, Blejer published an article called "Russia's Economic Reforms Have Not Been a Failure: Some Reflections on Russia’s Economic Performance in 1992."

In it he wrote, "Objective indicators are indeed negative. Comparing the situation in January 1993 with conditions before the inception of the plan in, say October-November 1991, it looks as if nothing has gone right." But, Blejer concluded, the policy should be judged by its long-term goals, which were "the destruction of the old command-administrative structures and the attainment of irreversibility in the process of economic reform. These objectives have largely been achieved."

The 1998 crisis forced the IMF to lend Russia some $20 billion to avoid defaulting on loans.

In 1999, Argentina found itself in its most serious economic crisis ever. The Latin American country suffered from chronic high unemployment as well as pervasive corruption and tax avoidance. Exports were being hurt by the strength of the dollar, economic growth was paralyzed and the government was running up massive debt.

With the encouragement of Western governments, Argentina had in the years before adopted a series of neoliberal reforms, including linking the Argentine peso to the dollar in order to counter hyperinflation (which had reached 5,000% in 1989) and privatizing some state-owned enterprises to reduce debt. But growth remained sluggish and the economy fundamentally ill.

Over the next three years, Argentina's GDP shrunk by close to 20%, the jobless rate soared to 25% and the peso lost 70% of its value after dollar linkage was ended. As interest rates on government bonds rose to 16%, Argentina had little choice but to turn to the IMF, the World Bank and the U.S. Treasury for help. But the IMF, annoyed that Argentina had never been fully implemented the first round of reform it had recommended, turned down Buenos Aires. That in turn, led to a banking crisis, as Argentineans began sending dollars abroad. The government responded by limiting bank withdrawals to just $250 a week, which led to rioting. In the last week of 2001, Argentina was declared insolvent.

After serving as a senior adviser to the IMF, Blejer returned to Argentina in March of that year to be deputy governor of the central bank. His 21 years at the IMF had provided him with close contacts on Wall Street, in Washington and at the World Bank, not to mention ties with Argentina’s political establishment, including Economy Minister Domingo Cavallo. But as Blejer soon discovered, the upheaval in Argentina was so great that old associations meant little. Cavallo was forced to quit after eight months in office.

In January 2002, after Roque Maccarone resigned, Blejer became head of the central bank. His time at the top was as brief as it was stormy, lasting just five months. He repeatedly threatened to quit over his disputes with Finance Minister Roberto Lavagna. In an interview with the magazine Central Banking later that year, Blejer said he wasn't excited about taking up the role but he felt someone had to come in to address the country's severe problems.

Blejer was given the job as governor in part because it was hoped he could establish a good rapport with Argentina's creditors. He represented the country in negotiations amid threats by President Fernando de la Rúa to renege on part of its debt. At the same time, Blejer had to deal with the banking crisis he inherited. Blejer opposed the ceilings on withdrawals and instituted a program under which bank customers wishing to withdraw funds would receive treasury bills instead of cash. Blejer argued bitterly with de la Rua and Lavagna over his plan.

Meanwhile, Blejer tried to renew Argentina's credit line, frozen at the end of 2001, but did not succeed during his brief tenure. He also intervened in the currency market to the tune of $2 billion, which amounted to as much as 15% of Argentina’s foreign currency reserves, to prevent a further depreciation of the currency.

In June 2002 Blejer announced his resignation, ostensibly for health reasons and to return to his family in the United States. But most Argentineans believed the clashes with Lavagna were the real reason.

Blejer later told Central Banking that the reasons for his resignation were both personal and professional, including concerns about his personal security and that of his family, but in his letter of resignation he stressed his concerns about the central bank’s independence. Blejer said his greatest achievement as governor was bringing hyperinflation under control. Deposits fell to $15 billion, from $85 billion, he noted, but only one bank actually closed on his watch. Blejer's successor, Aldo Pignanelli, also resigned after half a year.

In the decade-plus since his resignation Blejer has written extensively, been a television commentator and he established a consultancy.

He was also on the board of directors of the Argentinean energy company YPF, which was nationalized last year. As a result, he was one of 12 nonmanagement directors named in a class-action suit by a Michigan pension fund in connection to losses related to the state’s actions. The plaintiffs claim the company did not sufficiently inform investors of the risk involved in holding shares of the company.

Three years ago, Amado Boudou, then Argentina's finance minister and today its vice president, invited him back to the governor's office. Blejer declined, and in any event the sitting governor of the central bank refused to resign.

The global financial crisis, which began after Blejer left the Bank of England, apparently led him to revise some of his views on central banking. In an interview with The Wall Street Journal, Blejer was labeled as an inflation hawk who changed his spots: A man who was a devout believer in central-bank independence began wondering out loud whether inflation should be a central banker's only concern.

"I think that was an idea that had a very strong political base but I’m not sure” anymore, he was quoted as saying in the January interview. “And moreover it was based on some real arrogance on the part of economists.”

The European debt crisis changed Blejer's stated views. In an opinion piece he wrote for The Financial Times two years ago he called the European Union rescue program for Greece a "Ponzi scheme."

Continuing, he wrote: "Some of the original bondholders are being paid with the official loans that also finance the remaining primary deficits. When it turns out that countries cannot meet the austerity and structural conditions imposed on them, and therefore cannot return to the voluntary market, these loans will eventually be rolled over and enhanced by eurozone members and international organizations."

Another indication of Blejer’s changing views comes from a comment he wrote for Bloomberg.com in March, in which he explicitly calls central bank independence a thing of the past. Central banks are now targeting benchmarks like unemployment and economic growth, agendas that were once the preserve of politicians, he said.

"Central banks don’t have an advantage in other policy objectives, aside from fighting inflation. So there is no strong reason to give central bankers latitude in the design and implementation of policies," he wrote, concluding that central banks would see their power diminished over time as a result. "There are some positive aspects to this development. It restores balance to decision making and helps policy coordination, particularly in times of economic stress. It does require, however, that political interference should be restricted," he said.

Bloomberg