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.

Former Bank of Israel Governor Stanley Fischer participates in an economic forum on 'Policy Responses to Crises' at the International Monetary Fund headquarters November 8, 2013.
National Journal
Michael Hirsh
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Michael Hirsh
Jan. 10, 2014, 9:31 a.m.

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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