Last updated: January 29, 2013 7:37 pm

Israel’s loss could be someone else’s gain

Prominent macroeconomist steps down from central bank

The surprise announcement of the resignation in June of Stanley Fischer will deprive Israel of the services of one of the world’s foremost macroeconomists and policy makers.

As governor of the Bank of Israel since 2005, he has successfully steered this small open economy through the storms of the global and eurozone financial crises with a characteristic combination of pragmatism, toughness and intelligence.

His as yet unexplained departure will be a big loss for Israel. But it will also free the US, of which he is a citizen, and the international community to make further use of his remarkable abilities.

The economic record of Israel during Mr Fischer’s time as governor has been remarkable. After a brief and shallow dip between the third quarter of 2008 and the first quarter of 2009, gross domestic product rose by 15 per cent over the subsequent three and a half years. The rate of inflation has remained quite close to 2 per cent in recent years, despite Israel’s vulnerability to external shocks. Unemployment has fallen to 7 per cent of the labour force, down from close to 11 per cent when Mr Fischer became governor.

Such a combination of economic dynamism, low unemployment and price stability is the holy grail of policy making in macroeconomics. The central bank is certainly not responsible for the first and is only partly responsible for the second.

The Israeli economy has benefited from the prowess of its entrepreneurs, the strength of its high technology and from substantial economic reforms, though it has also been vitiated by a huge rise in inequality.

The central bank is responsible for sustaining stability. Apart from skilful monetary policy, the Israeli central bank made early use of what are now known as “macroprudential” policies – attempts to affect asset price booms and credit bubbles other than via monetary policy. As other central bankers are likely to find, such interventions, particularly in housing markets, proved highly unpopular. Mr Fischer was also willing to intervene in currency markets, to lean against the wind of inflowing “hot money”, accumulating substantial reserves in the process.

This remarkable (and justified) pragmatism came not only from Mr Fischer’s academic work as a macroeconomist, but also from his prior experience as a policy maker, notably as first deputy managing director of the International Monetary Fund between 1994 and 2001.

During that period, he was largely responsible for managing the Asian financial crisis of 1997 and 1998, the Russian financial crisis of 1998, the Brazilian currency crisis of 1998-99 and the Argentine crisis that ended in the latter’s default in 2001.

Inevitably, the decisions taken by the fund during that period were highly controversial. But nobody could doubt the extraordinary self discipline, energy, intellectual clarity and willingness to act that he brought to these extraordinary series of events.

Mr Fischer has taught many distinguished economists including, not least, Ben Bernanke, chairman of the Federal Reserve. He has continued to teach through his approach to policy making. The relatively unideological approach to monetary policy and financial regulation that he embodies is clearly now the conventional wisdom. But he was wise enough to see the need before the crisis.

If he is allowed to use what he has learnt in some other role, Israel’s loss could be someone else’s gain.

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