What Stanley Fischer Did at the IMF

(Originally published here.)

Stanley Fischer has officially beennominatedto serve as vice chairman of the Federal Reserve. Although he is eminently qualified, one item on his resume is a potential cause for concern: his tenure as second-in-command of the International Monetary Fund from 1994 through much of 2001, a period when the IMF was aiding Russia’s post-Soviet transition, as well as responding to crises in Asia and Latin America. Even with significant caveats, the record of the IMF during this period was undistinguished. During his confirmation hearings, senators should ask Fischer what role he played in the key decisions and whether he would have done anything differently with the benefit of hindsight and experience.

Especially relevant to Fischer’s potential role at the Fed is the question of whether it is appropriate to preemptively intervene to minimize the potential impact of financial imbalances — an issue the IMF faced repeatedly during his tenure. An article Fischer wrote for Foreign Affairs in 1998 captures the Fund’s official position in the 1990s: “For the IMF fire brigade to arrive with lights flashing and sirens wailing before a crisis occurs risks provoking a crisis that might not otherwise happen.” In other words, do everything possible to avoid directly precipitating a crisis.

Many of the IMF’s staff economists had been skeptical in private about government commitments to exchange-rate stability in Thailand, Indonesia, Korea and Argentina throughout the 1990s, yet those concerns weren’t expressed openly by IMF officials. The IMF’s sanguine public posture helped encourage both foreign lenders and local borrowers to take more currency risk than they should have. Excess investment during the good years was one consequence, but the bigger problem was the widening mismatch between short-term debts denominated in dollars (and yen) and incomes earned in local currency. Had the IMF been more open with its concerns from the beginning, it is possible that less capital would have flowed to countries that couldn’t handle it and that the eventual crises would have been less traumatic.

It would be helpful to know how Fischer felt about these issues at the time, because they are relevant to the Fed’s mandate to stabilize the business cycle and monitor excessive risk-taking in the financial system.

One disturbing clue to Fischer’s personal views comes from an essay about the IMF’s experience in Russia. According to John Odling-Smee, the IMF’s point man in eastern Europe in the 1990s, “Fischer had for some years advocated exchange rate-based stabilizations” and specifically encouraged the Russian government’s decision to establish a crawling peg for the exchange value of the ruble against the dollar — over the objection of IMF staff. Given the internal divisions over the policy within the Russian government and central bank at the time, Fischer’s position was probably instrumental in pushing the government to take an unnecessary risk.

While it isn’t directly related to Fischer’s potential responsibilities at the Fed, the Senate should also look into Fischer’s role in the botched liberalization of the Russian economy. According to an essay Fischer wrote for the Economist magazine in 1998, “the IMF has been the world’s main vehicle for assisting Russia and promoting economic reform” since 1992, so it’s reasonable to hold the IMF at least partially responsible for encouraging the introduction of market mechanisms without first establishing the necessary legal, cultural and political infrastructure. According to Odling-Smee, this was a conscious choice:

The IMF recognized that many reforms would take years to complete, especially the construction of the legal infrastructure for a market economy, privatization and restructuring of large enterprises, and the creation of a market system for banking and finance. But this was not seen as a reason for postponing the main stabilization and liberalization measures.

Unfortunately for Russia, this set of priorities helped make it possible for oligarchs to strip the state of assets as the economy collapsed.

A thorough review of Fischer’s time at the IMF probably will make him look better than he already does in most people’s eyes. Still, it would be imprudent to vote to confirm him without knowing all of the relevant facts.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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