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Crisis Maven


Central banker Stanley Fischer on current and past financial upheavals.

Stanley Fischer gave up a lucrative job as vice chairman of Citigroup in 2005 to become governor of the Bank of Israel, but he remains an authoritative voice on the U.S. credit crunch. Fischer navigated crises in Argentina, Asia and Russia while occupying the No. 2 post at the International Monetary Fund in the 1990s. The 64-year-old economist also knows U.S. Federal Reserve Board chairman Ben Bernanke better than most — he advised Bernanke on his doctoral thesis while teaching at the Massachusetts Institute of Technology in the 1970s.

Fischer praises Bernanke’s activism, including the Fed’s intervention to support a rescue of Bear Stearns Cos. He also sees a need to improve risk management practices but is skeptical that any quick fixes can forestall future problems.

Fischer spoke to Institutional Investor Contributing Editor Vita Bekker at his Tel Aviv office last month.

1 Institutional Investor: How does today’s credit crisis compare with the ones you battled at the IMF?

Fischer: Crises have a certain rhythm — in particular, a period in which everything looks like it’s just getting worse and worse. Then the authorities begin to get a hold of the issues, the markets begin to get over the shock and begin to operate again, and gradually, things start improving. I think that what we’ve seen in the past few weeks is a turning point. This crisis is different in that it started in the U.S., in the most advanced financial system, with the biggest financial institutions getting into trouble. It’s not as serious for the U.S. economy as the various emerging-markets crises were for the economies in which they happened. But because the U.S. is so much bigger, this has larger implications for the global economy.

2 Should central banks target asset bubbles?

The question is whether in assessing the state of the economy you should be taking asset prices into account. My view is, definitely. They are part of what determines which way the economy is going to go in the future. You obviously can’t make that the sole goal of monetary policy, and that’s where the dilemma lies. But I don’t think you can afford to ignore them.

3 What’s your assessment of Bernanke as a crisis manager?

It is frequently necessary, if you are trying to prevent great damage to an economy, to use the legal authority you have and do things you wouldn’t do in normal times. I think what was done in the case of Bear Stearns was necessary and very efficiently done. Ben Bernanke is managing one of the most difficult situations that I’ve seen very well. In every crisis I was in, the big question was, How do you identify what’s actually happening, how do you identify what’s essential and what isn’t essential? You’ve got to choose a path. That’s very hard because it’s only clear ex post facto what is the right path.

4 What lessons do you think should be learned from this crisis?

There is a lesson about risk management in individual institutions that I think is important, but I’m not sure quite where to take it. I was inside a company that I think managed risk extremely well from a technical viewpoint — I’m talking about Citigroup. Very sophisticated calculations were made about what the risks were, what hedging was going on, what happened if there was some disturbance to the system. But what didn’t happen was a stepping back to say, “Now, this is the world as it is normally; what is it that could change all these correlations?” It’s a difficult problem within companies, and for those who manage the system as a whole.

5 How has the Bank of Israel dealt with the weakness of the dollar against the shekel?

The exchange rate was dropping at an extraordinary pace. We checked around; the markets seemed not to be functioning normally, and we intervened in a big way. It happens that we intervened at what is the lowest exchange rate. We were probably lucky. But the markets go on forever. As long as the economy is successful, the shekel is likely to strengthen.