Stanley Fischer saved Israel from the Great Recession. Now Janet Yellen wants him to help save the U.S.
By Dylan Matthews, Updated: January 13 at 9:58 am
Every August, central bankers from across the globe, who collectively pull the levers of the world economy, descend on Grand Teton National Park in Wyoming. They enjoy a symposium of big economic ideas and strenuous afternoon hikes. At one of their dinners a few years ago, Federal Reserve Chairman Ben S. Bernanke looked around at some fellow titans of finance.
“Do you know what everyone at this table has in common?” he mused. “They all had Stan Fischer as their thesis adviser.”
So, since the guys running the world economically have done such a great job of it in this century, promoting their aged mentor makes perfect sense.
Stanley Fischer, who Barack Obama nominated on Friday to be Janet Yellen's vice chairman of the Federal Reserve, is one of the most accomplished economists alive. Any one of his past jobs would be a crowning achievement in an economist’s career.
As a professor at MIT — arguably the best economics department in the world — he helped found a school of economic thought that has come to dominate departments across the country. He also advised an all-star crew of grad students who went on top jobs in the policy world, including Bernanke, European Central Bank President Mario Draghi and former chief White House economist Greg Mankiw.
Mankiw was George W. Bush's chairman of the Council of Economic Advisers. Heck of a job, Manky!
As the No. 2 official at the International Monetary Fund, he helped contain the Asian economic crisis of 1998.
Let's not talk about Fischer's sizable role in the Russian economic crisis of 1998.
As a vice chairman at Citigroup, he ran all work for public-sector clients at what was at the time the world’s largest bank.
Let's not talk about Citigroup's role in the Great Financial Crash of 2008.
And in 2005, Israeli Prime Minister Ariel Sharon and Finance Minister Benjamin Netanyahu picked him to lead the central bank of a country he had previously only visited.
Ariel Sharon and Bibi Netanyahu: two pure meritocrats without a biased, nationalistic, ethnocentric bone in their bodies. They would have picked Fischer for the job even if he were a Palestinian.
No matter — Fischer’s results were more than enough to assuage any doubts. No Western country weathered the 2008-09 financial crisis better. ...
It’s fair to say he’s been embraced by the Israelis. Upon his resignation as governor of the Bank of Israel, Meirav Arlosoroff of the liberal daily Haaretz newspaper wrote that he is a “leader in whom the Israeli public had absolute trust” who “stood amid all the financial and leadership chaos like a fortress of stability, logic, level-headed judgment and international reputation.” Both Netanyahu and opposition leader Shelly Yachimovich lavished him with praise.
Netanyahu reportedly attempted to keep Fischer in Israel by offering him the finance ministry.
That Netanyahu, he's the ultimate believer in Open Borders cosmopolitanism.
But rather than enter politics, Fischer returned to America, joining the Council on Foreign Relations as a senior fellow in September.
A "decent interval" between his two jobs ... Nobody can say Obama is appointing Israel's central banker; they have to say he is appointing a former central banker for Israel. That could have been decades ago, right? You might almost think that Fischer's decision to resign early from his Israeli job was because he was tipped off about getting the American job, but that would be a conspiracy theory, so it's wrong. To posit a conspiracy theory, you'd have to believe that Stanley Fischer, Ben Bernanke, Janet Yellen, and Larry Summers are all friends.
He retained his American citizenship while in Israel, and spent his entire adult life here up until his move to Israel. He was a candidate to lead the Federal Reserve Bank of New York in 2003 (Timothy F. Geithner got the job instead), and the failure of his 2011 bid to run the IMF was attributed in many circles to his being “too American” for a job traditionally reserved for a European.
Fischer was widely considered a dark horse contender to succeed Bernanke, though his chances were always lower than those of Janet Yellen or Larry Summers (who Fischer hired as a professor at M.I.T.). Yellen's decision to pick him as her deputy surprised observers not because of Fischer's time abroad but because he is, if anything, overqualified for the no. 2 position.
The market for top central bankers is increasingly global, most vividly illustrated by former Bank of Canada governor Mark Carney's appointment to lead the Bank of England.
The Carney Precedent justifies the Fischer Precedent. What will the Fischer Precedent be used to justify? I mean, shouldn't the CIA look to the global pool of talent? Who has more talent than Mossad? Or what about the NSA? Why should its leadership be restricted to Americans when the leaders of Israel's Section 8200 may well know more about certain software code embedded in NSA processes than NSA's current leadership?
You know, with that world-historical lane closure crisis deflating Chris Christie's chances in 2016, the GOP should think a little more imaginatively about its next presidential nominee. I know an MIT grad with plenty of high level experience who seems to be getting bored with just pushing the Pals around. Bibi 2016!
In this post-crisis era, the job of a central banker requires someone who is simultaneously a brilliant economist, regulator, diplomat and politician. There are few figures today who fill those roles as successfully as Fischer.
Just ask various Russian billionaires currently residing in London and New York.
Astride the divide
America is Fischer’s adopted homeland: He was born in Mazabuka, a medium-size town in Northern Rhodesia, now Zambia. At 13 he moved to Southern Rhodesia (now Zimbabwe), where he stayed until heading to the London School of Economics.
He went to MIT for his doctorate, banging out a PhD in three years and then landing an assistant professorship at the University of Chicago. When Fischer arrived in Hyde Park in 1969, a chasm was about to open between Chicago, along with its peers near the Great Lakes — schools like Carnegie Mellon University and the University of Minnesota — and coastal powerhouses such as the University of California at Berkeley, Harvard, and, perhaps most notably, MIT. ...
Fischer was one of the few figures at the time with bona fides on each side of the argument. He was at Chicago when Lucas formulated his critique, but had MIT’s Samuelson on his dissertation committee, and in 1972 returned to that department as a professor. Perhaps as a consequence, his students remember him as an unusually diplomatic presence during the decade’s theory wars. ...
The fruit of Fischer’s effort to integrate the two approaches is known today as “New Keynesian” economics. It is the dominant approach in most leading economics departments, with Mankiw, Bernanke, IMF chief economist Olivier Blanchard and many others contributing to the movement.
... Fischer also retained respect for his old Chicago colleague Milton Friedman, who shared some of Lucas’s ideas. ...
The man [Bernanke] who would spend his Fed chairmanship flooding the economy with dollars to try to prevent a second Great Depression first learned how to do it from Friedman and Schwartz. And he learned about Friedman and Schwartz from Fischer.
People don’t give up tenured spots in the MIT economics department. It’s one thing to take a few years’ sabbatical to take a policy job, as Fischer did from 1988 to 1990 when he served as the World Bank’s chief economist. But it’s quite another to resign such a post permanently, as Fischer did in 1994 when he joined the IMF as its second-in-command.
He was recruited by Summers, who had gotten his first academic job at MIT on Fischer’s recommendation, and who was at that point undersecretary of Treasury for international affairs....
Fischer’s seven-year tenure, ending in 2001, came at a particularly rocky time for the IMF. The “structural adjustment” programs of tax increases and budget cuts it had recommended to developing countries had led to a political backlash, and anti-globalization activists began to regularly protest its meetings. Colleagues remember Fischer as a believer in IMF policies, but one who took critics’ voices into account.
“When he interacts with you, he starts with the assumption that he can learn a lot from you,” said Mohammed El-Erian, who leads the bond fund PIMCO and served at the IMF with Fischer. “He doesn’t intimidate you with his brilliance, he engages you with his brilliance.”...
Fischer left the IMF in late 2001, and some months later joined Citigroup in New York as a vice president. Three years into that role, in 2005, he was offered the post of governor of the Bank of Israel. At the time, Israel’s central bank was highly centralized, with the governor having near-absolute power to pursue whatever policy course he wished. Fischer accepted. Though he did not relinquish the U.S. citizenship he had held since 1976, he became an Israeli citizen upon arrival, in accordance with the law of return for non-Israeli Jews.
It was not, however, Fischer’s first time living in Israel. He had taken frequent vacations and sabbaticals to the country with his wife, Rhoda, throughout his academic career. Nor was it his first time providing it with academic expertise. In the mid-1980s, when he was at MIT, he advised the Israeli government on how to extricate itself from its inflation crisis. Later that decade, he — along with Anna Karasik, Leonard Hausman and the Nobel laureate Thomas Schelling — was part of a project attempting to put together economic solutions to the Israel-Palestine conflict.
That culminated in a book, “Securing Peace in the Middle East,” in which Israeli and Palestinian economists, representing their governments, agreed on a plan to eliminate restrictions on Palestinian employment in Israel, to transfer of control over Gaza and the West Bank to the Palestinians, and to implement a system of free trade in the region.
The recommendations closely resembled the eventual form of the Oslo peace agreement between Israel and Palestine. ...
You can just tell how even-handed Fischer was by how much he was hated by Sharon and Netanyahu. Oh, wait ...
Hausman remembers Fischer mostly as a fiercely competent and easy-to-work-with project leader, but identifies a passion for the subject as well. “Israel, I think, always was a big part of his heart and mind,” Hausman said. “But also, Stanley was and is a big believer in Israeli-Palestinian and Israeli-Arab peace on reasonable terms.”
Fischer remembers the process fondly. “I had never worked with Palestinians before,” he said. “I learned that if you want to work well with people with whom you disagree, it’s important to frame problems as merely technical ones.”
So, listen up, dummies: Fischer's jobs in Israel and now in America are merely technical ones. You shouldn't be asking lowbrow political questions like: "Whose side is this guy on?"
The Israeli economy that Fischer took over in 2005 was a world apart from the one he advocated in the early ’90s. The security wall meant that West Bank residents could no longer work in Israel with any ease. Since 2008, Gaza has been cut off from not just the Israeli economy but also from the world. Nevertheless, Fischer has retained his popularity among Arab colleagues. Hausman points out that Arab countries were a major base of support for Fischer’s unsuccessful 2011 bid to lead the IMF — rather remarkable for an Israeli candidate.
Being governor of a small country’s central bank during a worldwide financial crisis isn’t anyone’s idea of a fun job. Israel, like many other nations, was hit with the consequences of screw-ups made on Wall Street and in Washington. U.S. policymakers could have, in theory, prevented the crisis; at his post in Israel, Fischer had no such ability. But Fischer had a weapon of his own: the shekel.
Central banks generally have a lot of control over how much their countries’ currencies are worth relative to others. And reducing a currency’s value increases a country’s exports, which can often lead to economic growth.
Big central banks tend to be cautious about using that lever. If Bernanke halved the value of the dollar relative to, say, the Chinese yuan, that would dramatically increase U.S. exports and probably economic growth, too, but it would also wreak havoc with the global financial system. Every dollar-denominated asset in the world, including all manner of bonds, would plummet in value.
It’s less risky for small countries. There aren’t massive piles of shekels lying around in other countries the way there are with dollars and euros, and Fischer took advantage of that fact. On May 30, 2008, a dollar was worth about 3.2 shekels. On March 6, 2009, it was worth 4.2 shekels. In less than a year, Fischer had reduced the value of the shekel by about 25 percent — a massive devaluation.
It worked. Exports soared, and 2008’s trade deficit of $2 billion became 2009’s trade surplus of $5 billion. While other countries fell deeper into recession, Israel brushed its shoulders off.
When the White House first considered appointing Fischer as Yellen's deputy, the idea was dismissed as implausible. Not because Fischer was too controversial, that is, but because officials didn't think he'd be willing to take it.
But after discarding the idea, Obama's aides were surprised to get a call from Yellen, who, reports Bloomberg's Julianna Goldman, told them, "not only did she want Fischer at the Fed, she had already reached out to him and sold him on the idea." ...
Fischer's views on financial regulation are harder to gauge. ...
The role will likely be the last for Fischer, who at age 69 [actually, 70] is three year's Yellen's senior, and its significance is well summed up by Yellen's runner-up, Summers. Speaking at an IMF forum in Fischer's honor, Summers declared, "The number that is in my mind is a number that I would guess is entirely unfamiliar to most of the people in this room, but is familiar to all of the people on this stage, and that is 14.462. That is the course number that Stan Fischer's course in monetary economics at MIT for graduate students was. It was an important part of why I chose to spend my life as I have -- as a macroeconomist -- and I strongly suspect that the same is true for Olivier [Blanchard], and for Ben [Bernanke, and for Ken [Rogoff].
So, if you've loved the economic performance of America and the world in the 2000s, you've just got to love Stanley, according to the people who have been running things so brilliantly.