The Head of the Table

Posted in Uncategorized

Stanley Fischer will step down as governor of the Bank of Israel in June, halfway through his second term, for “personal reasons,” he said last week. There is nothing mysterious about his decision.

His eight years on the job there have been an unparalleled success.  He has been at odds with the Netanyahu administration, according to The Financial Times and The Wall Street Journal. (If that’s so, it is characteristic that he would have waited until after the Israeli elections to announce his resignation — and before  World Economic Forum meeting  in Davos last week broke camp.) He’ll turn 70 in the autumn.

The interesting question is, what will he do next?

Having steered Israel’s economy with barely a scrape through the worst crisis since the Great Depression, Fischer becomes a leading candidate for two quite different jobs, both of historic importance.

One possibility is chairman of the Federal Reserve Board.  No one has a better claim to replace Ben Bernanke when his second term expires next year than his teacher.  As the FT’s Martin Wolf hinted last week, “If [Fischer] is allowed to use what he has learnt in some other role, Israel’s loss could be someone else’s gain.”

Another job he might take up is the one he left 25 years ago, professor of economics – not necessarily literally, at the Massachusetts Institute of Technology, but figuratively, as principal architect of a reinterpretation of university-based macroeconomics.

He is uniquely qualified for either role.

Fischer’s career has been so far divided into three parts. After graduate school (London School of Economics, MIT, and a crucial four-year stint teaching at the University of Chicago, 1969-73), he taught at MIT for fifteen years, bridging the gap between one era and the next. He produced two macroeconomic textbooks with MIT colleagues, one with Rudiger Dornbusch, the other with Olivier Blanchard, and had dozens of talented students, including Bernanke and Mario Draghi, president of the European Central Bank.

The next seventeen years he spent doing international economic policy, starting in 1988-90 as chief economist for the Word Bank, returning to MIT for four years, then serving from 1994-2001 as first deputy managing director of the International Monetary Fund.  Those were the years of serial crises: Mexico, Thailand, Korea, Brazil, Russia and Argentina. He then spent three years on the beach as vice-chairman of Citigroup.

Fischer was appointed Governor of the Bank of Israel in 2005. He arrived at a time when the Israeli economy was recovering from a recession brought on by the second Intifada; the unemployment rate was 11 percent. He chose to live in Tel Aviv instead of Jerusalem, learned to speak Hebrew fluently on his long daily commutes, raised interest rate targets slightly to lean against the boom, and quietly combined the bank’s foreign exchange operations and domestic monetary department into a single markets group.

As the international situation deteriorated after August 2007, large sums of money began flowing into Israel, seeking safe haven.  The shekel appreciated 20 percent against the dollar and recession loomed – exports account for more than 40 percent of GDP.  But when Fischer began buying $100 million a day of foreign currency in the summer of 2008, the shekel fell against the dollar and Israel escaped the global recession with only a momentary pause.

When strong growth resumed, Fischer again raised rates slightly and reined in on house price speculation by mandating lower loan-to-value ratios for mortgages.  The economy has grown 15 percent over the past three years. The performance made him a folk hero in the fractious nation and earned him the sobriquet “The Responsible Adult” – a superhero, the newspaper Haaretz wrote last week, “with the power of trustworthiness.”

The crisis veteran is an obvious choice for the Fed job. Not only must the enormous sums of money the Fed has spent buying assets in its quantitative easing campaigns be withdrawn without touching off higher rates of inflation.  The Chinese economy also is a source of concern, after its breakneck 35-year boom.

In addition to Fischer’s expressed wish to see more of his children and grandchildren, all in the United States, he seems to have a continuing taste for power. He bid on a five-year term as managing director of the IMF in 2011, but was edged out by France’s Christine Lagarde. (The post traditionally goes to a European.) Age is no bar to successful central banking, as both Paul Volcker and Alan Greenspan have shown. To this point, the leading candidate to replace Bernanke has been vice chair Janet Yellen, former president of the Federal Reserve Bank of San Francisco, a strong candidate in her own right, and the first woman to be considered for the position. President Barack Obama will make the decision, sometime later this year.

Less obvious is the role that Fischer might play in the reconstruction of textbook economics. Economists at the frontier have bickered for thirty years about what they know and how they know it.  The argument over the limits of the dynamic stochastic general equilibrium models that have found favor in recent years among both New Classical and New Keynesian economists is of scant interest to those outside the profession.

With the 2007-08 crisis, the argument has taken a new turn. In Macroeconomics After the Crisis: Time to deal with the Pretense-of-Knowledge Syndrome, in the Journal of Economic Perspectives in 2010, Ricardo Caballero, of MIT, distinguished between a core of macroeconomics, concerned with formal precision, and a periphery, seeking to understand the mechanisms that drive the real economy.  “Macroeconomists can no longer continue playing internal games,” he writes. “The alternative of leaving all the important stuff to the ‘policy’ types and informal commentators cannot be the right approach.”

It’s just possible, however, that shifting the core and the periphery will be no more unthinkable than the geomagnetic reversals  that have taken place periodically over the history of the earth (you know – where the magnetic north and south poles exchange places, though granted, in this case, 450,000 years would be a long time to wait). The “policy types,” macroeconomists working for central banks and international financial institutions, many (but not all) of them trained at MIT in former years,  clearly have had many successes in the last thirty years, channeling markets that have arisen with greatly expanded global trade, and staving off disasters that have regularly threatened. The have compiled a record of their deliberations in the Macroeconomics Annual Research Conference of the National Bureau of Economic Research, which Fischer organized in 1986.  Maybe it is the Pretense-of-Ignorance Syndrome that needs to be addressed instead.

It is not clear where the Fischer family wants to live.  They clearly enjoyed New York when he was at Citigroup.  They enjoyed Boston, too, when they were raising children. Before making the decision to move to New York, in 2002, Fischer told his friend and co-author Blanchard, in an extensive and thoughtful interview for Macroeconomic Dynamics in 2004, that he had debated “long and hard, very hard,” about going to an academic or research institution, or becoming an independent – “to work at home, act as an economic adviser, take part in conferences and sit on boards.” Now Fischer may be facing that choice again

Will he get the call to lead the Fed? Who knows? This much is clear. Where Stanley Fischer sits, there will be the head of the table.