Stanley Fischer is the governor of the bank of Israel. Could he play the same role here?
Stan Fischer saved Israel’s economy. Can he save America’s?
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.”
Stanley Fischer, who this month announced that he will step down as governor of the Bank of Israel, 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.
As the No. 2 official at the International Monetary Fund, he helped contain the Asian 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.
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. No matter — Fischer’s results were more than enough to assuage any doubts. No Western country weathered the 2008-09 financial crisis better. For only one quarter — the second of 2009 — did the Israeli economy shrink, by a puny annual rate of 0.2 percent. That same period, the U.S. economy shrank by an annual rate of 4.6 percent. Many countries, including Britain and Germany, fared even worse. While they were languishing, by September 2009 Fischer was raising interest rates, all but declaring the recession defeated.
It’s fair to say he’s been embraced by the Israelis. Upon his resignation, 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.
So what’s next? Fischer is in apparent good health at age 69. He has retained his American citizenship and deep ties to the United States. 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.
His former advisee Bernanke will end his term as Fed chair in January 2014. Could the teacher follow the student? Could Fischer move from Jerusalem to Washington? It’s not as crazy as it may sound; the market for top central bankers is increasingly global, most vividly illustrated by the November selection of Bank of Canada governor Mark Carney to lead the Bank of England. In this post-crisis era, the job of a central banker requires someone who is simultaneously a brilliant economist, regulator, diplomat and politician. Among Fed watchers, there is quiet, off-the-record talk that that person might be Fischer.
Paul Samuelson, the Nobel-winning economist whose textbook inspired Fischer to become an economist. The two would come to know each other when Fischer joined MIT, first as a grad student and then as a faculty member. (Daniel Lippitt / AP)
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.
Fischer had originally intended to study chemistry, but in his last year in Africa he discovered his eventual field. “I was told by my parents I should really do something useful when I grew up,” he said in an interview. “And the older brother of a friend of mine had just come back from the LSE. So he showed me Samuelson, gave me some tutorials, and I was hooked.” That would be Paul Samuelson — famed textbook author, Nobel laureate, and professor at MIT.
Around the same time, Fischer tackled John Maynard Keynes’s “The General Theory of Employment, Interest, and Money.” “I was immensely impressed,” he said, “not because I understood it but by the quality of the English.”
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. The divide, known as the “saltwater-freshwater dispute,” was sparked when one of Fischer’s Chicago colleagues, Robert Lucas, launched an aggressive critique of Keynesian economics.
As Lucas saw it, the Keynesians had split economics in half: microeconomics, which posited that consumers and firms made rational economic choices to maximize their own welfare, and macroeconomics, which said that mercurial swings occurred in the economy as a result of the choices made by those same actors. When they panicked and stopped spending, recessions occurred. Once they were reassured, the economy recovered.
This didn’t make any sense, Lucas argued. Why would rational individual choices add up to irrational changes in the economy as a whole? When Keynesian theories struggled to make sense of the 1970s paradox of slow growth and high inflation, Lucas’s argument struck a chord.
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.
“Stan was very much an open-minded adviser,” said Mankiw, who now chairs Harvard’s economics department. “He wanted students to think broadly and take progressive points of views he didn’t necessarily agree with.”
“He was not fundamentally a rat-exian,” Bernanke said, invoking the derogatory slang that Keynesians used to describe Lucas and his theory of “rational expectations.” “He was basically a Keynesian in his instincts, so he got along just fine with Samuelson and [fellow MIT professor Robert] Solow.”
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.
But Fischer was arguably first out of the gate. He helped originate the argument that “sticky prices”— that is, practical impediments to changing prices for goods, such as the expense of printing a new restauarant menu — mean that even rational, self-interested businesses and consumers can make choices that add up to an economy much like the one Keynesians describe.
Fischer, Bernanke said, wrote “one of the very first papers that had both sticky prices and rational expectations in it.” By doing this, Fischer had in effect united the two sides of economics. “I still think Keynesian economics is extremely important, and if anybody didn’t think so, this crisis should have made them rethink,” Fischer said in an interview.
Fischer also retained respect for his old Chicago colleague Milton Friedman, who shared some of Lucas’s ideas. In the late ’70s, Fischer urged one PhD advisee to take a look at Friedman and Anna Schwartz’s “A Monetary History of the United States,” a revisionist history that blamed the Federal Reserve for the severity of the Great Depression. More decisive monetary policy, they argued, could have cauterized the wound.
“I was struck that monetary policy was so consequential,” that advisee, Bernanke, said recently. “It was critical to the Great Depression. It had played a key role in the 19th century. So he had a lot to do with getting me interested in monetary economics and economic history.”
The man 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.
The rest of this article is at http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/15/stan-fischer-saved-israels-economy-can-he-save-americas/
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