Opinion |

How Stanley Fischer Created a World He Doesn't Quite Get

The father of activist central banking, his baby left in its wake economies that don’t follow the familiar old rules

David Rosenberg
David Rosenberg
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 U.S. Federal Reserve Vice Chair Stanley Fischer addresses The Economic Club of New York in New York, U.S. on March 23, 2015.
Stanley Fischer, in 2015Credit: Brendan McDermid, Reuters
David Rosenberg
David Rosenberg

Stanley Fischer’s decision to step down as vice chairman of the U.S. Federal Reserve doesn’t just mark the end of a brilliant career as an academic economist and policymaker. It marks the end of an era.

On a personal level, Fischer remains modest and self-effacing at a time when bombast and controversy is the norm for leaders, most particularly the one in the White House that he was serving. A recent interview with him by The Financial Times found Fischer gently joking about his expense account and his age, while sipping water and ordering a simple fish dish that he never finished.

Philosophically, Fischer has stood for close regulation of the financial markets when less thoughtful politicians and policymakers seemed to have forgotten the lessons of last decade’s banking tsunami.

In the Israeli context, Fischer gave a lot of thought to the Palestinians and to their economic prospects, helped them when he was in office and looked on with distress as the peace process ground to a halt. That, too, made him a throwback to another era when Israel looked on the Palestinians as anything other than a security problem.

When crisis erupts

Alas, Fischer is also a central banker from another era. Going back to the start of his academic career in the 1970s, he became the leading advocate of activist central banking.

Back then, fiscal policy was king. Fischer argued that central banks, from the U.S. Federal Reserve to the Bank of England to the Bank of Israel, could do more than ensure price stability. They could help stimulate economic growth, especially in times of crisis.

Central bankers around the world came to adopt Fischer's "New Keynesian" economics, especially after the global financial crisis erupted a decade ago. They cut rates aggressively -- even going so far as to order negative interest rates -- and bought trillions of dollars of assets to stimulate their economies.

Ben Bernanke, who had the luck of stepping into the role as boss of the Fed just as the U.S. and world economies were unraveling, had been a student of Fischer’s at MIT and put his teacher’s ideas into practice.

As governor of the Bank of Israel, Fischer did the same. He acted decisively, slashing interest rates on the one hand while, on the other hand, intervening in the foreign currency market to devalue the shekel by 25%.

His move marked a decisive break from a 10-year-old policy of non-intervention.

It all worked to amazing effect. Israel had only a single quarter of negative economic growth and exports grew. By September 2009, just a year after the pivotal event of Lehman Brothers’ collapse and while much of the rest of the world was still reeling from the financial crisis, Fisher correctly felt that the Israeli economy was strong enough to raise interest rates again. It was an acting of daring: he was the world’s first central banker to do so.

The last adult

Moreover, Fischer steered Israel through this hurricane pretty much all alone.

Prime Minister Ehud Olmert had stepped down days after Lehman Brothers imploded. The rest of Israel’s political leadership was distracted by Tzipi Livni’s failed effort to re-form the coalition and then by elections. A new government wasn’t in place until the following March by which time, Fischer's rescue operation was been complete.

Fischer had an advantage over his central banker counterparts in the U.S. and Europe in that Israel wasn’t facing a banking and financial market crisis. He can take a degree of credit for that, too, because he kept Israeli banks on a short regulatory leash in the years before the crisis. They complained bitterly about the constraints, but that's how they weathered the crisis.

Ironically, the global economic universe that has emerged from all this is something that Fischer and his fellow central bankers would never have imagined.

The world’s economies have taken a long time to recover.To this day, interest rates on government debt in parts of Europe remain negative. The money supply has ballooned and unemployment has fallen, but inflation remains stubbornly low and investment levels are low. Stock markets are soaring.

The facts of economic life that Fischer and other central bankers knew and worked with, now seem to challenged by alterative facts they have don’t fully understand. There is a serious risk – but how serious and how it could play out, no one really knows – that the long-term impact of an extended period of super-low interest rates will mean, but policy makers aren’t confident enough to bring it to a rapid end. At the Fed, policy makers are still arguing about when to reverse the course that Bernanke instituted a decade ago.

Fischer is as wise and as knowledgeable as any of the world’s central bankers, but in this topsy-turvy world, all that experience and wisdom doesn’t mean as much as it once did.

At age 73, Fischer had every right to resign, but one has to wonder if he knew a potentially dangerous period is coming, that will require new people and new approaches. Better to leave it them.



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