Stanley Fischer saved Israel from the Great Recession. Now Janet Yellen wants him to help save the U.S.

January 13

Stanley Fischer will serve as Janet Yellen's no. 2 at the Fed. (Simon Dawson/Bloomberg)

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 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.

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 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.

But rather than enter politics, Fischer returned to America, joining the Council on Foreign Relations as a senior fellow in September. 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. 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.


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. “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.

Abandoning the pinnacle


Using aggressive currency devaluation, Stan Fischer helped Israel achieve a much shallower recession, and thus faster recovery, than the U.S. (Data: OECD)

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. “We in the Treasury thought it was obvious that the strongest possible person for that position was Stan Fischer, and urged his appointment on the IMF,” Summers said.

“I remember being struck. As a young, rising 30-year-old academic, my idea of the pinnacle of achievement was a tenured professorship at MIT or Princeton,” Bernanke said. “But I think from Stan’s point of view, it was just one other thing that he wanted to do.”

Mankiw, who led the Council of Economic Advisers under George W. Bush, sees the appeal.

“He came back to MIT briefly between the World Bank and the IMF, and I happened to be visiting that year, and I got the sense he was a little impatient with academics,” Mankiw said. “When people come back from policy jobs, the pace of academics can seem slow and the things people debate can seem arcane.”

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.”

During Fischer’s tenure, he had to confront both the 1994 Mexico and 1998 Asian financial crises. The IMF contained both problems, preventing global meltdowns, although success came at a high cost. Without Fischer’s diplomatic skills to broker necessary deals, El-Erian said, things could have gotten much worse.

Others are more skeptical. The Asian crisis in particular entailed real economic pain: Thailand’s stock exchange lost 75 percent of its value amid huge layoffs. Indonesia’s economy shrunk an astonishing 13.5 percent in 1998 alone.

But Fischer’s allies argue that he fought against the IMF’s worst tendencies at that moment. Summers, who at the time was deputy secretary of the Treasury, recalls working closely with the IMF and credits Fischer with resisting an early IMF instinct to demand tough austerity measures of affected countries.

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.

“According to the leaders of the PLO, the book served as the first concrete piece of evidence to them that Israelis would work with them as equals,” Hausman said. Fischer’s work, he said, was “the interpersonal and intellectual basis for the Israeli-Palestinian economics agreement that was signed in Paris in April 1994.”

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.”

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.


Fischer and Bernanke laugh at the Jackson Hole, Wy. monetary policy summit last summer. (Ted S. Warren / AP)

Joining the dream team

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."

The move was especially interesting on Yellen's part because she and Fischer, while broadly in agreement on many issues, differ on perhaps the biggest one the Fed faces at the moment. Under Bernanke and Yellen, the bank has leaned heavily on "forward guidance," or statements and actions meant to shape the expectations of markets for where inflation and growth will be in the future, as a tool to speed up the recovery. Yellen has been particularly enthusiastic about this approach, which is premised on the idea that, if markets believe the Fed when it says short-term interest rates are going to be near zero for the foreseeable future, then those markets will reduce long-term interest rates in turn, promoting growth.

Fischer, however, has been more skeptical. “You can’t expect the Fed to spell out what it’s going to do,” Fischer said in September. “Why? Because it doesn’t know.” Fischer's point is that when the Bernanke Fed has made promises like "interest rates won't rise until 2015," markets simply don't believe them. What if, next month, we discover there's much less oil in North Dakota than we all thought, the price of crude goes through the roof, and suddenly inflationary pressures emerge? The Fed can't credibly promise to keep rates low in that scenario, however unlikely it is. And if markets don't believe the Fed when it promises things, then the desired growth effects of forward guidance won't emerge.

That said, Fischer and Yellen sing  a similar tune when it comes to forward guidance based not on dates, but on tangible numbers like the unemployment rate or the inflation rate. That approach — which has been part of the Fed's policy since December 2012 — allows an escape hatch in the case of freak events like the North Dakota hypothetical; if the promise isn't "we won't increase rates until 2015" but instead "we won't increase rates until unemployment is below 6.5 percent or inflation is above 2.5 percent," then the Fed is still free to adjust in response to sudden changes in unemployment or inflation.

Fischer is much more sympathetic to this form of conditions-based forward guidance. "You have to decide whether you give dates, which is what they gave in the beginning, or whether you give conditions," he told Bloomberg. "They’ve moved to giving conditions. That’s more appropriate."

Fischer's views on financial regulation are harder to gauge. While, between his time at the IMF and at Citi, Fischer has considerable experience with the financial sector, the leader of the Bank of Israel does not have to manage globally important banks and insurance companies quite like the Federal Reserve chair does. Fischer has suggested, however, that he may have sympathy for governor Jeremy Stein's view that the Fed should use monetary policy to pop bubbles like the housing bubble that lead to the 2008 crash. Fischer himself applied these so-called "macroprudential" policies  respect to Israel's housing sector, which he worried was overheating.

The role will likely be the last for Fischer, who at age 69 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]. It was a remarkable intellectual experience, and it was remarkable also because Stan never lost sight of the fact that this was not just an intellectual game: getting these questions right made a profound difference in the lives of nations and their people."

As impressive as Fischer's career to date has been, whether he -- and Yellen -- get those questions right has rarely been more critical than it is right now.

This post is based on a profile originally posted on February 15, 2013.

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