What is the conceptual basis of liberalism in economics? It is the belief that the balance between supply and demand for every product, financial asset, or service is the best criterion for setting the price of that product, asset, or service. In other words, competition or the lack of competition for permanent or temporary ownership of that product, asset, or service will set the trend in its price.
This is neither acceptance or rejection of this statement of principle, only the establishment of a starting point for understanding what lies at the conceptual core of the world view of policy-makers who favor economic reality. There is no question that Israel's economic leaders, including Stanley Fischer, are among those who were and are identified with this ideology.
Nevertheless, Fischer is known for his war against speculators in the foreign currency market. Although they acted, and continue to act, in accordance with the rules of the market game, i.e. the rules of supply and demand, as far as Israel's former governor of the Bank of Israel was concerned, they harmed an important element of the Israeli economy - the export sector. This was justification for this governor, with full political support, to take an ideological time-out, and become a massive counterforce against these legitimate market forces.
The Bank of Israel's foreign currency reserves ballooned from $27.5 billion at the end of 2007 to $81.8 billion at the end of 2013. This growth proves that Fischer and his successor are prepared to carry out their duty as "policy managers" rather than merely "referees of the game".
And now, this same Stanley Fischer will be appointed as vice chairman of the US Federal Reserve (albeit the appointment is not yet closed because of objections by some important Democratic senators). Not only that, but the mentor of outgoing Federal Reserve Board Chairman Ben S. Bernanke and European Central Bank President Mario Draghi is supposed to assist incoming Fed Chairwoman Janet Yellen to do the hardest thing of all: lower the dosage of the money drug that has been injected into the veins of the financial markets.
$85 billion in the US, and $200 billion globally, had to find a parking space every month until, in early December 2013, Bernanke decided to begin tapering the quantitative easing by $10 billion a month. This still leaves just over $190 billion from China, Japan, the UK, and other countries.
What can we learn from Fischer's past in Israel about his future as vice chairman of the Fed?
First, he is prepared to fight market forces in order to put his position on the economic agenda and in the history books. Although he will only be appointed as vice chairman, he will be a highly influential deputy, with huge prestige, in the world's most important financial institution.
Second, he is prepared to take unorthodox steps (we saw this in the macro-prudential measures against mortgage borrowers) in order to maintain his policies.
Third, he has apparently sewn up massive political support. There is no doubt that he is smart enough to defend himself against a possible failure of his decisions. This is especially true as he is the deputy, and not the primary figure facing the public and the legislators.
Fischer's fight to secure the job as the head of the IMF showed his political ambition and aggressiveness, even though his chances against Christine Lagarde were truly negligible. Therefore, his desire to succeed in the job in order to become the next chairman of the Fed will be no small motive in everything that he will do in the job.
Fischer's success, according to the consensus, in dealing with Israel's crisis in 2008 is a large part of the esteem in which he is held, but he faces an awesome and appalling task. He and his boss must find a way to maintain slow growth (some would say, minimal growth) despite the tapering of quantitative easing.
It should be realized that a halt in or backsliding from the tapering would be perceived as the first stage in a catastrophic loss of credibility by the Fed. The risk of a downward spiral of the financial system, which would destroy the so important wealth effect, could definitely bring back the nightmare of a 10% unemployment rate and zero or negative economic growth.
All this leads to one simple conclusion: Stanley Fischer, as Janet Yellen's deputy, will be an activist, creative, and definitely not very liberal vice chairman of the Fed.
His success, and her success, will be measured by the continued credibility of the Fed by the financial markets, through a measured and orderly rise (rather than a wild skyrocketing) of yields on long-term T-Bills. This will pave Fischer's path to the top of the Fed.
The writer is the head of the research department at FXCM Israel Ltd.
Published by Globes [online], Israel business news - www.globes-online.com - on January 15, 2014
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