The Stage is Set

One of the enduring mysteries of the second term of the Obama presidency may turn out to be the riddle of how Stanley Fischer, 70, wound up as governor and vice chair of the Federal Reserve Board – assuming that he does.

It is the president’s decision whom to choose, of course, but surely much of the credit at this point belongs to Janet Yellen, 67, whose own nomination as chair is awaiting the advice and consent of the Senate, perhaps as early as this week. That she would accept the highly-regarded Fischer as her deputy bespeaks an easy confidence on her part.

As a professor at Massachusetts Institute of Technology for nearly twenty years, Fischer taught monetary economics to a generation of students who subsequently became central bankers, including Ben Bernanke of the Federal Reserve Board and Mario Draghi of the European Central Bank.  He then became a central banker himself, serving two highly successful terms as governor of the Bank of Israel, from 2005 until last summer.

Fischer’s bruited nomination is good news on other grounds as well.

For one thing, it continues the trend of putting aside national pride in order to hire the best regulatory talent.  The Bank of England last summer chose Mark Carney of Canada as its director. Draghi moved from his native Italy to Frankfurt in 2011 to direct the European Central Bank.

For another, Fischer’s confirmation might also shift US-Israeli relations onto a slightly higher plane.  Having grown up the son of farmers in northern Rhodesia (now Zambia), Fischer emigrated with his family to the United States in 1960.  He declined to give up US citizenship to head the Bank of Israel, opting for joint citizenship. He was especially successful there in maintaining links with Palestinian banking authorities and sometimes served as a counterweight to the policies of prime minister Benjamin Netanyahu.

A certain amount of Congressional chest-thumping over Fischer’s nomination is inevitable. Progressives are suspicious of the three years he spent as a high-ranking executive at Citicorp after serving seven years in the 1990s as deputy director of the International Monetary Fund. But opposition seems unlikely to cause the nomination to fail.

Most important, Fischer’s participation would strengthen the Fed at a time when New York is about to enter a new round of competition with other global banking centers, especially London. It is fitting that news of his pending nomination should appear the same week as the US regulatory authorities involved signed off on the Volcker Rule, the 882-page rider to the Dodd-Frank Act that is designed to prevent banks from trading with their own money. Now that this last major piece of post-crisis regulation is in place, banks and other credit intermediaries of all sorts can begin to restructure themselves. Expect a period of banking innovation and jurisdiction-shopping to commence

It took forty years for rival banks, securities firms, and start-ups in between to begin to invent ways around barriers to growth and risk-taking that the Glass-Steagall Act of 1933 interposed. It won’t take nearly so long in a polycentric world to innovate around the more binding provisions of the complicated Dodd-Frank Act. Never has it been more important that banking regulators be on their toes.

2 responses to “The Stage is Set”

  1. “Never has it been more important that banking regulators be on their toes.”

    True, but how does one attract the best talent to these positions when the pay is a pittance? Given the potential damage rogue bankers can inflict on the economy, paying top regulators seven figure sums should be a no-brainer.

    That’s why people like Fischer, who have seen the real world at Citicorp, are of such value. The regualtory system needs to ‘buy’ more such talent from the dark side if it to have any chance of staying ahead of the game.

    While a dedicated few can afford to devote a large part of their lives to public service (BB, Yellen) most are more preoccupied with keeping bread on the table.

  2. “Never has it been more important that banking regulators be on their toes.”

    Even better if the regulators step on a few bankers’ toes.

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