The Barack Obama administration has indicated that Stanley Fischer is the leading candidate to become vice chairman of the Federal Reserve System. In the initial rush of response, commentators tripped over themselves to praise Fischer’s academic experience in the 1970s and 1980s, his work at the World Bank and the International Monetary Fund in the 1990s, his time as a senior executive at Citigroup Inc. in the early 2000s, and his work as governor of the Bank of Israel from 2005 until this year.
A moment’s reflection on this record should give pause. Close examination reveals two quite different Stan Fischers, in the sense that at different times in his busy career he has demonstrated diametrically opposed views on the systemic risks posed by large banks. Given the Fed’s newly established leading role as a regulator, it is entirely reasonable to ask: What exactly are his current views?
To be clear, Fischer is very smart and extremely thoughtful. (I knew him when I was a graduate student at the Massachusetts Institute of Technology in the 1980s.) He is capable of updating his views based on the evidence.
And his approach to monetary policy, while considerably more hawkish than that of Janet Yellen, whom he would replace as the No. 2 Fed official, isn’t unreasonable. In thinking about when to taper bond purchases and what happens next, it makes sense to have diversity of opinion on the 12-member Federal Open Market Committee.
The much more difficult issue is how forceful Fischer will be on financial regulation and systemic-risk supervision, which are handled primarily by the seven-member Fed Board of Governors. (This paper offers a primer on the precise powers of the Fed board after the Dodd-Frank reforms.)
And the board is looking a bit thin on regulatory and supervisory issues. Of the current pro-reform governors, Sarah Bloom Raskin is leaving to become deputy Treasury secretary, and Daniel Tarullo may soon return to academia. The White House is moving to reappoint Governor Jerome Powell, a Wall Street executive who has hardly been a strong voice for reform, and to bring in Lael Brainard, a former Treasury official with little expertise on regulatory matters.
Yellen, who is awaiting confirmation as Fed chairman, has good instincts, but she will need a vice chairman who is strong and effective on regulation. The record of the senior staff on these issues is, at best, mixed -– left to their own devices, some would probably prefer the lax approach of the Alan Greenspan era.
The White House has rebuffed repeated bipartisan suggestions that the vice chairman post be filled by Tom Hoenig, former president of the Kansas City Fed and now No. 2 at the Federal Deposit Insurance Corp., or Sheila Bair, the previous head of the FDIC, who are both strong advocates of reform.
Fischer has been very close to Larry Summers and Robert Rubin for a long time. In 1994, as senior officials in the administration of President Bill Clinton, they placed Fischer at the IMF. As first deputy managing director, he cooperated closely with the Treasury Department -– including on proposals to liberalize capital flows.
Rubin subsequently brought Fischer to Citigroup -– an institution that mismanaged risk on a massive global scale, including during his tenure there from 2002 to 2005. (His offer letter, obtained from Securities and Exchange Commission records, includes the kind of structure for “ongoing incentive compensation” that was normal on Wall Street at that time but contributed directly to the financial crisis at a huge cost.)
Risk-taking at Citigroup increased significantly in 2004 and 2005, when Rubin was chairman of the executive committee of the bank’s board, with disastrous consequences in the years that followed. Bonuses that were paid in those early years weren’t subsequently clawed back, either as losses materialized or when the government had to step in with huge bailouts.
Fischer reported directly to Rubin, but there is no record that he sounded any kind of alarm, public or private. In that regard, he is no different from any other Citigroup executive of the period.
Fischer is now a distinguished fellow at the Council on Foreign Relations in New York, where Rubin is co-chairman. Summers and Rubin are unapologetic about their roles in financial deregulation during the 1990s, even though these measures were a big part of what allowed Citigroup (and other companies) to become so much larger and take on so much additional risk. Summers’s record was a major reason he was turned down as a potential Fed chairman by Senate Democrats earlier this year. Fischer’s impending nomination was welcomed by the Institute for International Finance, a lobbying group for the largest and most systemically risky global banks that has Citigroup’s chief executive on its board.
Fischer, however, is his own man. He was never as closely implicated in the financial deregulation of the 1990s as Summers and Rubin were. Fischer learned the hard way, including from the Asian crisis, how financial systems can threaten to bring down economies (though some of the IMF programs pushed for more financial liberalization than now seems appropriate; the mistaken presumption was that allowing in U.S. and other foreign financial companies would necessarily provide stability).
Fischer has expressed skepticism about the value of megabanks at their current scale. He has also seemed to favor limits on proprietary trading. And he has certainly expressed support for higher equity capital levels than were in place before the crisis.
But Fischer’s public pronouncements are only slightly more on the side of reform than the platitudes expressed by international bodies such as the Financial Stability Board and the Basel Committee on Banking Supervision. His private views are less clear, but there is no compelling evidence that he would be as tough as Hoenig or Bair.
If Fischer has reconsidered the deregulatory consensus of the 1990s and the big-bank mania of the early 2000s, he deserves serious consideration. And if he demonstrates that he will push to implement fully the Dodd-Frank financial reforms and do what is necessary to end “too big to fail,” he should receive strong support.
But if Fischer can’t distance himself sufficiently from the heyday of Rubin and Citigroup, it will be an uphill climb to confirmation.
(Simon Johnson, a professor at the MIT Sloan School of Management as well as a senior fellow at the Peterson Institute for International Economics, is co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”)
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