How the Fed’s Would-Be No. 2 Helped Wreck Russia
The news that President Obama will nominate former Israeli Central Bank Chairman Stanley Fischer to be the next vice chairman of the Federal Reserve was greeted with a chorus of approbation from the media. A Forbes headline exclaimed: “The Markets Should Celebrate Stanley Fischer as Number Two at the Fed, A Perfect Ten Strike.” With the addition of Fischer to the Fed leadership “it’s almost like a central bank hall of fame” gushed a Stanford economist to Bloomberg News, while a former colleague of Fischer’s noted, “The only area I can imagine where Stan will be attacked will be his roughly four-year period 10 years ago as a vice-chair of CitiBank.”
Fischer certainly brings impressive credentials to the job. An MIT-trained economist, Fischer served as the Chief Economist at the World Bank in the late 1980s before going on to serve as First Deputy Managing Director of the IMF from 1994 to 2002. But Fischer’s tenure in the latter position merits more scrutiny than we thus far have seen in the largely rhapsodic reaction his nomination has garnered in the media.
As the Center for Economic and Policy Research noted back in 2011, when Fischer was floated as possible replacement for the disgraced Dominique Strauss-Kahn, “the IMF’s intervention in Russia during Fischer’s tenure led to one of the worst losses in output in history, in the absence of war or natural disaster.” Indeed, one Russian observer compared the economic and social consequences of the IMF’s intervention to what one would see in the aftermath of a medium-level nuclear attack.
Yet the IMF’s role in helping to create the conditions that pushed Russia into crisis in the 1990s seems to be missing not just from the recent coverage of Fischer’s nomination but from his own analysis during that period. In a speech to the U.S.-Russian Investment Symposium at Harvard in January 1998, Fischer painted a rather rosier picture of the situation in Russia than was warranted at the time. “Six years after the start of the Russian economic reform process, much has been achieved and the continued progress of the economy towards economic normalization is not in doubt.”
While Fischer noted that “output is still well below the levels of six years ago, it has begun to grow again; inflation has been reduced to near single-digit levels.” He concluded his address with an upbeat assessment: “up to this point, the optimists on Russia have been more right than the pessimists. There is good reason to believe the optimists will continue to be right.” [emphasis added]
That speech was simply magical thinking disguised as policy analysis in light of the following. A mere six months after Fischer predicted the “optimists” would win out, the Russian government devalued the ruble, defaulted on its debt, and declared a moratorium on payment to foreign creditors. By August the Russian stock market lost 75 percent of its value and inflation jumped over 80 percent. The following month saw Russia’s GDP collapse by 50 percent, while capital investment and meat and livestock herds fell by around 75 percent. By the time the decade was out some estimates had anywhere between 50 and 75 percent of Russians living below—or barely above—the poverty line.
The recovery was long in coming. In 2003—fully five years after Fischer’s speech—Russia’s GDP remained almost 30 percent below what it was in 1990 while capital investment remained a mere 10 percent of what it was then.
Neither the IMF’s performance—nor Fischer’s confidence in happy outcomes—were altered by the events in Russia, if his remarks to the Argentine Banking Association in June 2001 are anything to go by. Touting “the impressive developments in the Argentine economy over the past decade,” Fischer acknowledged some of the economic difficulties that were facing Argentina but noted that the “situation is a result of the dependence of growth on too large fiscal deficits.” And so the answer lay in cutting the budget because “fiscal tightening can be expansionary—can lead to a virtuous circle…by producing a sustained reduction in the risk premium and domestic interest rates.”
Not long after, the Argentine government, acting on Fischer’s advice, imposed austerity measures with unsurprising results. By the time 2001 came to a close, the official unemployment soared to around 20 percent; protests rocked the country which forced President Fernando de la Rua out; and the government defaulted on $155 billion in foreign debt, which remains, to this day, the largest debt default in history. Argentina’s poverty rate increased by about 50 percent, while its GNP fell by 11 percent by the end of 2001.
And so the question remains: is there any reason to believe Fischer is the right person to help steer the Fed in light of the ongoing jobs crisis here in the United States? As the Roosevelt Institute’s Jeff Madrick has pointed out, “His resume suggests that in his bones he is an austerian. Although he cut rates sharply during the crisis as head of the Israeli central bank, this is not proof he can manage an economy that is struggling to recover.”
If you consider the following, the U.S. economy still has quite a long way to go. There are, as of this writing, three unemployed people for every available job; the long-term unemployed (those who have been out of work for 27 weeks or more) account for well over a third of all unemployed; the labor force participation rate—at around 63 percent—is the lowest it has been since 1978. To make matters worse, on December 28th 1.3 million people lost their unemployment benefits.
In the final analysis, the trouble with the Fischer appointment stems not so much from the issue of his dual citizenship, which is an objection others have made, but from his long track record of implementing neoliberal economic “reforms” without paying due attention to their consequences for people of ordinary means. At base, the problem with the Fischer/IMF approach to political economy is that, as with ideologies generally, they are teleological in nature; the assumption that history or the “laws of economics” are on your side is a dangerous one, especially to people who aren’t in power, which is to say, almost everyone else.
President Obama would do well to reconsider the wisdom of this particular appointment.
James Carden served as an advisor to the U.S.-Russia Bilateral Presidential Commission at the State Department from 2011-2012.