Mentor of Central Bankers Fischer Rues Complacency in New Growth

Bank of Israel Governor Stanley Fischer
Bank of Israel Governor Stanley Fischer. Photographer: Simon Dawson/Bloomberg

Stanley Fischer in December 2008 connected the bankruptcy of Lehman Brothers Holdings Inc. and Bernard Madoff’s ruinous $20 billion fraud to a false sense of security that brought the world to the brink of depression. Three years later, he rues the same creeping complacency.

“Nobody should be relaxing at this stage,” Fischer, governor of the Bank of Israel, said in a Feb. 20 interview in his Jerusalem office. “It’s important that we keep asking what can go wrong next, because something will go wrong somewhere, sometime, and it’s important to try to anticipate where and what it might be.”

Fischer, 68, offered his warning the day before the Dow Jones Industrial Average topped 13,000 for the first time since 2008 and crude oil jumped to a nine-month high amid mounting optimism about the global outlook. Economists at Citigroup Inc., where Fischer worked as vice chairman until moving to Israel in 2005, raised their forecast on Feb. 22 for expansion worldwide this year to 2.4 percent from 2.3 percent.

“It’s too early to tell” if the worst is over, said Fischer, who is in his second term overseeing Israel’s $245 billion economy. “There remains the problem of restoring European growth, which hasn’t been dealt with yet, and it’s very hard to see how to deal with it.”

Fischer’s views carry international clout because of a four-decade career spanning academia, banking and policy-making. As a professor at the Massachusetts Institute of Technology, he was Federal Reserve Chairman Ben S. Bernanke’s thesis adviser and taught European Central Bank President Mario Draghi before helping to end financial crises in Mexico, Russia and Asia as the International Monetary Fund’s No. 2 official in the 1990s.

‘Looking Much Better’

While the U.S. economy is “looking much better” and it’s “pretty clear” Bernanke has been a success, Fischer questioned why the Fed is signaling it has no plans to raise rates in the near future.

“I’m interested in why the Fed’s forecasts appear to be more cautious than that of most private forecasters,” Fischer said. Bernanke’s pledge to hold the benchmark federal funds rate close to zero at least through late 2014 was a “pretty brave and pretty strong step.”

The former IMF official said Greece faces a “very tough situation,” even after securing a 130 billion-euro ($174 billion) bailout this week in return for fresh austerity measures. “One sympathizes enormously with what the Greek people are going through,” he said.

Madoff Ponzi Scheme

Fischer, whose term ends in 2015, often has warned and acted against complacency. In a December 2008 interview, he likened Madoff’s Ponzi scheme, which defrauded investors of an estimated $20 billion, to the global financial crisis, saying that sophisticated investors missed warning signs in both cases that something was awry.

Two months earlier, he had beaten the Fed and ECB by a day in cutting interest rates following Lehman’s collapse, reducing the base rate by half a percentage point to 3.75 percent. The rate went as low as 0.5 percent, then in August 2009, Fischer was the first central bank governor to raise rates in response to signs of a financial recovery and to call for a “radical restructuring” of global finance. The rate is currently 2.5 percent.

“One of my lessons from the last crisis is about the importance of active supervision,” he said in the interview.

On that score, Europe failed by ignoring the risks in its banking system and then assuming it could defuse its debt crisis without IMF assistance, he said. He praised his former student Draghi for issuing emergency loans to banks for three years and cutting the ECB’s key rate to 1 percent within two months of taking office Nov. 1.

‘Brave’ Draghi

“The fact that Mario Draghi came in and the ECB cut interest rates twice -- boom, boom; I thought he’d wait -- indicates he is brave,” Fischer said. “He sent the right signal to the market.”

Fischer’s global view was formed by a life that took him from Africa, where he was born, to cities including London and Boston before Israel.

His father, Philip, was a Latvian-born Jew who migrated in 1926 to Northern Rhodesia, now Zambia, and ran a general store in a small village. Fischer’s mother, Ann, was the daughter of Lithuanian immigrants who had moved to South Africa.

Fischer’s connection with Israel dates back decades. He was a member of Habonim, a Zionist youth group, along with Rhoda Keet, his future wife, with whom he has three sons. In the early 1960s, he spent six months on a kibbutz on Israel’s Mediterranean coastal plain, where he combined learning Hebrew with manual labor. He conducts his official business in Hebrew with an accent that divulges his upbringing in southern Africa.

MIT Scholarship

Fischer earned his undergraduate and master’s degrees at the London School of Economics. He then won a scholarship to MIT, in Cambridge, Massachusetts, where he studied under future Nobel laureate economist Paul Samuelson, whose picture hangs on a wall in his office alongside an image of Theodor Herzl, the father of modern political Zionism.

During Fischer’s watch, the stock market in Israel, whose 7.8 million population is about the size of Switzerland’s, was upgraded to developed-market status by MSCI Inc. in May 2010. The same month, the 63-year-old country was accepted into the Organization for Economic Co-operation and Development. About 60 Israeli companies are traded on the Nasdaq Stock Market, the most of any nation outside North America after China.

Fischer, who keeps fit by running on the beach, says his most difficult decision as governor was to intervene in the exchange-rate market, breaking a decade-long tradition.

Shekel Depreciation

Between March 2008 and last summer, the Bank of Israel bought foreign currency to help moderate gains in the shekel and support exporters, more than doubling reserves to a record $78.1 billion in August 2011 from $28.5 billion. The shekel has depreciated by about 5 percent against the dollar in the past six months.

While the IMF criticized the intervention in a November 2010 report, saying it “undermines the credibility of the floating exchange-rate regime,” it said this month the policy “was warranted by the exceptional circumstances” of recent years.

The buying spree helped cushion Israel’s economy, which recovered from the 2008 crisis faster than most advanced nations, with estimated gross domestic product growth of 4.8 percent last year, more than triple the average pace for the 34 OECD nations. Growth has exceeded this average every year since 2004.

‘Less Opposition’

Fischer, who oversees an economy smaller than Missouri’s, has been outspoken on encouraging ultra-orthodox Jewish men to join the workforce to sustain the country’s prosperity. He said there is now “less opposition” in the ultra-orthodox community, which represents about 10 percent of Israel’s population. An estimated 60 percent of these men don’t have jobs and instead spend their time studying religious texts.

“It’s definitely changing,” Fischer said. “The men are beginning to go out to study secular subjects and to work in the formal labor force.”

The country’s High Court of Justice this week ruled as unconstitutional a law that allows seminary students to indefinitely defer army service, a key step to integration into the workforce. Prime Minister Benjamin Netanyahu said his government will formulate a new law that will lead to a more-just distribution of the burden across society.

Better Returns

Israel has produced better risk-adjusted returns than all other developed stock markets in the past decade as the technology-driven economy attracted investors. The Bloomberg Riskless Return Ranking shows the Tel Aviv TA-25 Index returned 7.6 percent in the 10 years ended Feb. 17, after adjusting for volatility, the highest among 24 developed-nation benchmark indexes.

Still, Fischer, ever cautious, said he’s “a little discouraged,” at how the global economy is unfolding in the 21st century “because it’s taking so long to fix our current problems.”

“The U.S. has always risen to the occasion when it has had to,” Fischer said. “I hope and expect that happens again.”

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