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Economy

Yellen's New Deputy Is a Closet Reformer

Stanley Fischer, nominated to be her No. 2 at the Fed, will probably want to rein in the banks as much as she does.

Fischer is another fighter. He's likely to arrive with some big ideas about how to reshape the system.(Chip Somodevilla/Getty Images)

photo of Michael Hirsh
January 10, 2014

Stanley Fischer was an adjunct member of the now-infamous "Committee to Save the World" in the late 1990s that consisted of Robert Rubin, then-Fed Chairman Alan Greenspan, and Rubin's deputy, Larry Summers. And like several other close associates of Rubin, Fischer followed the former Treasury secretary to Citigroup for a spell.

The difference is, Fischer, who was nominated Friday to be Janet Yellen's No. 2 at the Federal Reserve, was appalled by what he saw on the inside of the giant bank while working as its vice chairman. Citigroup, he thought, was just too big and too unmanageable—trying to do too many unrelated things, like selling insurance to bank customers. Fischer has told associates that he quickly decided that the idea of a "financial supermarket" didn't work, and that investment and commercial-banking cultures did not mesh well.  

Although he's renowned as a economic centrist—and a legendary teacher at MIT whose students included Ben Bernanke and Mario Draghi, Europe's central bank chief—as well as someone who will likely be more hawk than dove on inflation, Fischer is also something of a closet reformer when it comes to Wall Street. Recently some progressives like Sen. Elizabeth Warren, D-Mass., have raised questions about Fischer. "I want to [like him as vice chair]—I want to be hopeful that Fischer's going to work in the right direction," she told Bloomberg News. "I am not sure."  

 

In fact, despite his history as an associate of the Rubin-Greenspan-Summers troika responsible for disastrous deregulation in the 1990s, Fischer has come out for greater banking reform than the others have over the last several years.

At the Jackson Hole meeting of central bankers in August 2009, Fischer began to endorse the stronger views of former Federal Reserve Chairman Paul Volcker, who was pushing for what later became known as the Volcker Rule, which bars federally insured banks from the riskiest trading. He also publicly questioned the inclination of then-Treasury Secretary Tim Geithner and Summers, President Obama's chief economic advisor, to allow the big banks that had precipitated the financial crisis to remain intact. "We seem to be taking it for granted that we should go back to the structure of the financial system as it was on the eve of the crisis," said Fischer, who was then the governor of the Bank of Israel. (As former Federal Deposit Insurance Corp. Chairwoman Sheila Bair later wrote in a memoir, "I couldn't think of one Dodd-Frank reform that [Geithner] strongly supported. Resolution authority, derivatives reform, the Volcker and Collins amendments—he had worked to weaken or oppose them all.")

Most recently, Fischer delivered a zinger to Summers, his friend and former student, at a forum at the International Monetary Fund last November, which was held to honor the 70-year-old Fischer. After Summers remarked casually that "there were very few financial crises in the 35 years after the Second World War" because people were still being "careful, in a way, in the aftermath of the Depression," Fischer demurred. He said, "Larry, I wonder whether the 35 years after World War II had something to do with the fact that financial liberalization hadn't yet happened, and that that had something to do with the stability of the financial system." As Fischer well knew, it was under Summers and Rubin, in the 1990s, that financial liberalization seriously took off—first with the repeal of the Glass-Steagall Act separtating investment and commercial banking in 1999, and then with Summers' sponsorship of the Commodity Futures Modernization Act, which created a global laissez-faire market in tens of trillions of dollars' worth of unmonitored over-the-counter derivatives trades, among other moves.

As an economist, Fischer is indeed renowned as as centrist, or someone who can "bridge the spectrum between 'saltwater' [Keynesian] and 'freshwater' [free market]," as Harvard economist Ken Rogoff puts it. But he also appears to be fully on board with the aggressive pro-reform views of Yellen, who in speeches and interviews has already indicated that she plans to rein in systemic risk in the banking system even more than has been accomplished under the Dodd-Frank law.

Fischer, who served as chief deputy at the IMF in the late 1990s and was instrumental in restabilizing the global financial system after the peso and Asian crises of that era, also brings a lot of practical crisis-fighting experience to Yellen's new team. 

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