Stanley Fischer, “Central Bank Governor of the Year”
By Amotz Asa-El
In January 2005, when Israel’s then-Finance Minister Binyamin Netanyahu asked Stanley Fischer, the President of Citigroup International to become Governor of the Bank of Israel, many people thought he was joking.
No one doubted the professional credentials of the economics professor who earned fame as a World Bank and International Monetary Fund executive. However, few saw the bony, bespectacled, soft-spoken Rhodesian-born graduate of British and American universities relocating to Israel at age 62, after spending his entire career in Boston, the Beltway, and Wall Street. Moreover, the position at stake, formally bestowed by the President of Israel, requires fluent Hebrew, whereas Fischer wasn’t even an Israeli citizen, and his Hebrew, while harking back to his childhood in the Habonim youth movement, had never been publicly tested.
Half-a-decade on, the man who arrived as an oddity is a celebrity, both locally and internationally.
Linguistically, Fischer disarmed the sceptics early on, when he emerged from several weeks of private Hebrew lessons and, facing a battery of microphones and cameras, calmly fielded the business media’s questions in flowing, if measured, Hebrew. Economically, it was a time of global optimism, as even the oil crunch, the one dissonance on traders’ screens at the time, reflected a new harmony whereby north and south were growing simultaneously. Further, politically, Fischer arrived after Netanyahu’s market reforms had been mostly completed, thus creating an added sense of stability and the impression that Fischer would be a nice complement to someone else’s economic leadership.
But this was Israel, and three months after Fischer moved into his spacious office on the top floor in the Bank of Israel offices in Jerusalem, Netanyahu was across the street at the Prime Minister’s office, handing then-PM Ariel Sharon his resignation to protest the impending disengagement from Gaza. Within hours, Fischer was on the phone with a new finance minister, Ehud Olmert, the second of five finance ministers and three prime ministers with whom Fischer would work during his first five years in office.
His initial patron’s abrupt departure taught Fischer the first of his job’s unwritten requirements, which is to represent and cultivate stability in a chronically unstable political system. A daunting test in its own right, he passed it with flying colours after confronting separately the two horsemen of political mayhem – war and corruption. The shekel’s exchange rate and Israel’s credit rating emerged unscathed from both the Lebanon War of July-August ’06, and the resignation the following year of Finance Minister Avraham Hirschson in the wake of embezzlement allegations relating to a previous position (he has since been convicted and jailed.)
Fischer’s success in those years stemmed from his quiet but firm insistence that Prime Minister Olmert, who succeeded Sharon in early 2006, limit his stated plans to ease the fiscal discipline that had been implemented by his predecessor’s government. The markets detected Fischer’s resolve and assumed that, if Olmert chose to ignore his central banker’s advice, the latter would not hesitate to raise interest rates. The government, for its part, avoided a showdown with Fischer, realising that no politician could take on his aura of professionalism and impartiality.
And so, with his first term in office past its middle point, Fischer had established himself as a kind of gyroscope that keeps the Israeli economy on course no matter what happens inside the country politically or, on its borders, militarily. But then the system was jolted from beyond the horizon.
The global meltdown caught Israel in a moment of particular political vulnerability as Ehud Olmert had been forced to step down and an early election had already been called. It was the kind of combination that under other circumstances might have made for fascinating economic drama, and tragedy, too; but neither ever arrived.
While most developed economies entered into severe recessions, Israel had a mere two quarters of negative growth, and unemployment quickly returned to its pre-meltdown lows. Moreover, Israel’s historically endemic trade deficit ended as Israel became a net exporter – while inflation remained negligible; public debt and the budget deficit ranked as among the world’s lowest; and per-capita foreign currency reserves were and remain among the world’s highest.
Of course, attributing all this to one individual would be absurd. The Israeli economy’s current accomplishments are the aggregate result of 25 years’ worth of reforms by a succession of governments and central bankers. However, Fischer did several things both on the eve of and the morning after the meltdown that crucially helped Israel endure it.
Perhaps most critically, the Bank of Israel severely limited the average depositors’ ability to run an overdraft. Since, in Israel, credit card transactions are directly and automatically charged to one’s bank account, the loss of the ability to run negative balances in their consumer accounts made it much more difficult for the average household to spend more than it was earning. In other words, while the American middle class was frantically over-consuming on credit, Israel’s was forced to measure and plan its spending.
At the same time Fischer also imposed on the commercial banks a reform that rationalised and capped the fees banks were charging depositors, a move that increased the public’s trust in the banks. Coupled with previous reforms that forced the commercial banks to shed non-financial assets and to spin off their long-term savings activities, both the banks and the households became less adventurous just at the time when in other developed economies over-borrowing and other forms of financial adventurism were becoming commonplace.
That was all before the meltdown, and it helped Israel arrive at the global crisis less exposed to what became known as toxic assets. After the meltdown, new action needed to be taken – and it was.
In one particularly unusual move, Fischer removed the CEO of the second-largest financial institution, Bank Hapoalim, whom he suspected of making questionable transactions. That executive was later arrested, but even before that the message to the rest of the industry was harsh; be careful with the public’s money, or you’ll be held personally accountable.
Even more dramatic was Fischer’s response to the situation in the currency markets. Since the winter of ’08, the American dollar has been depreciating against assorted currencies, including Israel’s. The shekel’s appreciation was so sharp that it seriously burdened Israeli exporters, as they were paying salaries in increasingly expensive shekels and earning revenues in increasingly cheap dollars.
Fischer responded by announcing that the Bank of Israel would buy US$25 million daily, a sum he later raised to US$100 million, adding that it would continue until a total of US$10 billion had been bought. Though risky, this extraordinary measure worked, and helped Israeli exporters weather the global storm as the shekel, at one point trading at 3.2 to the US dollar, gradually slid back 20% to 3.8 or so. (The US dollar has since returned to 3.57 shekels, reflecting the greenback’s renewed weakness, but that’s a separate story.)
While this treatment dealt with the short-term symptom, Fischer also conducted some long-term surgery, by getting the Knesset to pass a new Bank of Israel Law. Replacing an antiquated law from 1954, the new law, among other things, placed the formulation of monetary policy in the hands of a six-person committee – half of it from outside the central bank – defined price stability and economic growth as the bank’s aims; and, learning a lesson of the recent meltdown, allowed it – in the event of a serious crisis – to infuse cash into some commercial entities other than banks.
Overall, Fischer maintained his poise in face of the global crisis, often showing the way to other central bankers. Thus, he was the first to lower interest rates back when the crisis began, and in late ’09 he was the first to raise them, and in both cases his lead was soon followed by others. Indeed, Fischer, who served as US Federal Reserve Chairman Ben Bernanke’s thesis adviser, has come to loom so tall among the world’s central bankers that during the IMF’s recent convention in Washington he was formally crowned by Euromoney magazine “Central Bank Governor of the Year 2010.”
This is not to say that there is no trouble in paradise.
Fischer himself now warns that Israel’s property market, among the hottest in the world, requires “treatment,” as he puts it in a typical understatement. His announcement several months ago that he would limit mortgages to 60% of a purchased asset’s value has failed to burst what he suspects is a potential market bubble.
Fischer also sees a paradoxical threat in Israel’s recent discovery of natural gas in its Mediterranean waters. The resource find is expected to yield the annual equivalent of 5% of Israel’s current national budget for more than half-a-century and this might cause what economists call the Dutch Disease – a flood of foreign currency gradually raising the prices of local labour, money and manufactured goods and eventually weighing down the entire economy. Fischer’s recommendation in the face of this is to emulate Norway’s model of depositing its petrodollars in long-term funds where they are dispensed slowly to last for generations.
As long as he is around, chances are high that such a prescription will indeed become policy, as the man who initially seemed like a curiosity has emerged as both the compass for, and emblem of, an increasingly respected Israeli economy. Fischer’s example may or may not inspire a new kind of immigration to Israel, one that follows rather than precedes accomplishment, and is driven by conviction rather than by persecution or shortage. Yet even if the course he has taken fails to attract many imitators, Stanley Fischer’s arrival and achievements in Israel already have demonstrated to Jews both within and beyond Israel that, even at retirement age, immigrants can help build, reshape, and reinvent the Jewish state.