Many Israelis take pride in the appointment of Stanley Fischer as vice chairman of the U.S. Federal Reserve last week. It's not often that one of our own, a Jew and former governor of the Bank of Israel, makes it into the heart of the U.S. financial system.
Some Americans are less sanguine, however, pointing out that Fischer's performance as central bank governor may have been a lot less impressive than it originally seemed. And one pundit, Jesse Colombo from Forbes magazine, goes as far as saying that the new vice chair of the Fed "will be a disaster for the U.S. economy."
Fischer, Colombo concedes, was highly praised for his management of Israel’s economy during and after the global financial crisis. He received A ratings from Global Finance magazine’s Central Banker Report Card in 2009, 2010, 2011 and 2012, and the Bank of Israel was ranked the world’s most efficiently functioning central bank under Fischer’s leadership in 2010.
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So, it's not only Israelis who rate Fischer's talents highly. But Colombo is happy to take on the common wisdom.
Israel’s so-called economic strength, he writes in Forbes, is "the byproduct of a temporary economic bubble that Fischer helped to inflate rather than the result of sound and sustainable monetary policies."
Fischer, Colombo says, belongs to the New Keynesian school of economics, which he describes as being "notorious for using incredibly stimulative monetary policies (also known as 'money printing') to create artificial economic growth, while virtually ignoring the existence of obvious economic bubbles and the risks of monetary policy-induced inflation."
A prime example of such artificial economic growth, he writes, was the growth of Israel's M1 money supply by "an astounding 250 percent" during Fischer's tenure. That growth, he says, caused consumer prices to increase by approximately 25 percent according to the official CPI, though he cautions that "government statistics agencies are known for developing inflation indexes that understate the true rate of inflation for the purpose of justifying inflationary monetary policies and preventing public outrage."
The result, Colombo says, was the housing bubble, that began to inflate under Stanley Fischer’s watch and is still going strong. Israel’s property prices have soared by 80 percent since 2007 and 67 percent since 2009. "Israel experienced the largest property price increase of all OECD nations during Stanley Fischer’s time as Bank of Israel governor."
In fast-rising money supply environments like Israel’s, Colombo writes, "growing asset bubbles (including property bubbles) often act as a 'relief valve' for inflationary pressures. While these asset bubbles help to disguise the effects of inflation on the economy for a time, they set the stage for economic crises when they inevitably pop."
Not only is Israel's housing market more overvalued and less affordable than ever before, but the housing bubble has been fueled by a 78 percent increase in outstanding mortgage debt from the end of 2007 to the end of 2012 – and up to 90 percent of mortgage loans made in recent years have adjustable interest rates, "which is the same mistake that was made during the U.S. housing bubble."
When Israel's mortgage interest rates rise from their current low levels, the many borrowers who used adjustable rate mortgages to purchase property will be significantly harmed.
Israel’s economy, Colombo concludes, "is experiencing an inflationary 'bubble boom' that is typical of rising money supply environments. The fact that rapid increases of the money supply lead to inflation and bubbles is obvious to nearly everyone but heavily indoctrinated Keynesian and neoclassical economists like Stanley Fischer, who are greatly overrepresented on the boards of central banks."
In Colombo's view, "the accolades that the international economics community has heaped on Stanley Fischer are the result of a temporary bubble-driven economic boom that will end in a crisis when it finally pops."
In his new role as vice chairman of the Federal Reserve, Stanley Fischer will "undoubtedly encourage policies that further inflate the U.S. bubble-driven economic recovery, or what I call the 'Bubblecovery.'
"Due to the Fed’s monetary policies since the financial crisis, new bubbles are ballooning throughout the U.S. economy… These post-2009 economic bubbles are helping to create the illusion of economic growth and activity, but will end in another crisis when they pop. Considering Fischer’s beliefs, he will be right at home at the Fed."