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stanley Fischer [+ AddtomyrT Stanley Fischer, Fed vice-chair, on the risky business of bank reform Over trout in Washington, the economist discusses his fears over US post-crisis banking 66 Lunch with the FT wv ff in Fas & | saveromyrr AUGUST 15,2017 by: Sam Fleming in Washington It is an oppressively hot early August day, even by the steamy standards of Washington DC. In Georgetown, the elegant neighbourhood favoured by the capital's lobbyists, lawyers and media personalities, many of the residents have fled for cooler climes, leaving the streets quiet. I'm at Bistrot Lepic, a genteel restaurant and wine bar nestled in the midst of Georgetown’s antique shops and picture framers. Near me, two neatly dressed, silver-haired gentlemen sit in sunlight by the window, earnestly discussing a new ‘Trumpian drama: the rise and © James Ferguson precipitous fall of Anthony Scaramuce! It is hard to think of a sharper contrast of reputation than that between Donald ‘Trump's shortlived, foul-mouthed communications director and the man I'm about to meet. Stanley Fischer is the embodiment of the old-school global leader. Courtly, quietly spoken and unobtrusive, he turns no heads as his slight figure makes its way to our table. Im his near-five-decade career, Fischer could lay claim to being one of the godfathers of modern economic policy. It was Fischer who helped set the direction of central banking practice as an academic in the 1970s, and then, as first deputy managing director at the International Monetary Fund, he played a leading role in the response to the Asian and Russian crises of the late 1990s. He went on to steer Israel through the global meltdown of 2007-09 as governor of the country’s central bank. Fischer, soberly dressed in the rote-issue dark suit of the central banker, pokes fun at my appearance as he takes his seat, claiming he’s never seen me wearing a tie before. He is now number two to chair Janet Yellen at the US Federal Reserve. But with ‘Trump preparing to install his own management and shake up the way the Fed oversees the financial system, the economist may be out of the central bank a year from now. Having led a worldwide effort to strengthen financial regulation after the crisis, US politicians are now attempting to throw things into reverse — something Fischer bluntly describes as “extremely dangerous and extremely short-sighted”. America’s role as guarantor of global organisations such as the IMF can no longer be taken for granted, he fears. “Ihad a picture of the world economy in which the United States was an anchor, not a source of volatility,” Fischer says. “This really changes things.” This verdict is striking coming from a top US policymaker, but Fischer has seen a similar story play out before. Born in the former UK protectorate of Northern Rhodesia in the 1940s, Fischer grew up in the twilight of the British empire. America is losing its status as the world’s hegemonic power — just as Britain did before it, he suggests. Fischer chose Bistrot Lepic because he and his wife, as Georgetown residents, are regulars; the self-effacing 73-year-old notes itis one of the few establishments they know where their arrival lowers the average age. The restaurant has been a Georgetown fixture since the 1990s, and its menu is steadfastly Gallic — snails in garlic butter, seared foie gras — with the occasional modern twist. I try to cajole Fischer into taking a glass of wine. He declines, observing drily that he has no need of “artificial stimulants” to unburden himself. He adds for good measure that Fed rules mean the FT will not be paying for his share of the meal. Fischer decides to sit out the starter and watch me eat my soup — correctly anticipating I'll go for gazpacho. As we chat about his childhood in what was later to become Zambia, I reflect that if there were ever a tribe of economists who are “citizens of the world” — to borrow the phrase dismissively deployed by the UK prime minister Theresa May — Fischer is one of them, He has dual Israeli and US nationality and has held an array of passports, including for the now-defunct states of Northern and Southern Rhodesia and, briefly, the UK when he was a student there, Fischer's father Philip was an immigrant from Latvia who owned a country store in the town of Mazabuka, in southern Zambia. His mother Ann was born in Cape Town, the daughter of Lithuanian immigrants. They came as part of a procession of Jewish migrants from northern Europe to southern Africa, following in the footsteps of relatives. The young Stanley grew up surrounded by farmers; it was rare, he says, to meet an African who could afford shoes Britain's influence loomed large. He still remembers the excitement he and his fellow schoolchildren felt when the UK governor visited his school, sporting a hat with a feather sticking out of its brim. “L am a product of the British empire, there is no question about it,” he says. He returned to Africa in 2000 with two of his three sons and was struck by the progress from the barefoot poverty he was surrounded by asa boy. The family moved to Southern Rhodesia, where a teenage Fischer got to know his wife Rhoda through a Zionist youth movement called Habonim, or “The Builders”. Israel went on to play a central role in Fischer’s life, and today he is manifestly dismayed by the state of relations between the Israelis and Palestinians. Having worked in the 1980s on a plan for a viable economic future for both sides, Fischer describes the current situation as very sad. “Ihe dynamics are just very bad and know people on both sides [who], if they had been in charge of negotiations with a reasonable mandate, would have made it work.” Tt was a friend’s brother, back home in Africa during a break from the London School of Economics, who introduced Fischer to the work of John Maynard Keynes. He was still a teenager, he recalls, sipping water as I slowly drain my bowl of gazpacho. “It was almost the first book I read in economics: The General Theory. I didn’t understand anything,” He decided to rectify that by moving to London to study at the LSE, beginning an. ‘economies career that became one of the most celebrated of the late 20th century. Fischer in the 1970s was an enfant terrible, pushing the idea that activist central banks can stimulate economic activity. Those views proved enormously influential. Ben Bernanke was one of Fischer's PhD students at Boston's Massachusetts Institute of Technology; as Fed chair he would later blast trillions of dollars at the markets to battle the financial meltdown that started in 2007. Fischer today heads a financial stability committee at the Fed that was set up with the express focus of preventing a re-run of boom and bust. As we meet on August 3, the Dow Jones Industrial Average is hitting record highs, long-term real interest rates are extraordinarily low, and former Fed chair Alan Greenspan has just warned of a bond bubble. Human beings, says Fischer, borrowing from Milton Friedman, are not rational, but they are great at rationalising things. He agrees with Greenspan, saying the Bistrot Lepic & Wine Bar 1736 Wisconsin Ave, Washington DC Gazpacho $10 persistently low level of real long-term ‘Truite meuniére $20 interest rates is a conundrum. “I don’t feel I Poulet de Cornouailles $25 understand it fully, and therefore I feel uncomfortable,” he says, referring to the rapid ascent of equities. Part of the reason for the post-election stock market surge was ile flottante x2 $10 Bottle Evian $7 a Bios Drea a belief that Trump would push through tax Teed tea $3 reform and infrastructure. That justification ‘Total Gine tax and service) for booming equities has evaporated, $124 however, Fischer says. “The truth is our political system doesn't look like it is going, to deliver very much in the way of what we hoped it was going to deliver on November 8 2016.” What Republican control of Congress and the White House may well herald, however, is deregulation. Recently the US Treasury put forward a document proposing ways of easing capital standards underpinning banks. The Fed has also been facing Congressional attacks on its independence — both attempts to curb its ability to lend in an emergency and demands that it pay greater attention to monetary poliey rules. -erisi Fischer is openly incredulous, describing the moves to unwind the pos system as “mind-boggling”. The US political system “may be taking us ina direction that is very dangerous”, he says. For example, the big US banks passed their stress-tests — the annual Fed-led exercises that gauge their health — and the cry goes up that it is time to reduce their capital requirements or make the tests more transparent. “Tt took almost 80 years after 1930 to have another financial erisis that could have been of that magnitude. And now after 10 years everybody wants to go back to a status quo before the great financial crisis. And I find that really extremely dangerous and extremely short-sighted. One can understand the political dynamics of this thing, but one cannot understand why grown intelligent people reach the conclusion that [you should] get rid of all the things you have put in place in the last 10 years.” I point out that even if the Treasury wants to ease up on regulation, the Fed retains enormous discretion over how it oversees the megabanks. “We have a lot of autonomy, but what goes on in Washington is so different from the UK,” he counters. “The Congress is very involved in these things and the pressure is on now to ease up. The pressure to ease up on small banks is fine with me. But the pressure I fear is coming to ease up on large banks strikes me as very, very dangerous.” Midway through this discussion, a couple with an enthusiastic toddler sit close to us. Fischer ignores our high-spirited neighbour as he makes his way through a plate of pan-seared trout. I've opted for Cornish hen, which comes encrusted with seeds and garnished with a curry sauce. The bird sits on a bed of saffron rice accented by the sweetness of sultanas; it is quite delicious. Task about the political upheaval in the UK, and Fischer says the weight of opinion among economists is that Brexit will be damaging to Britain's economy. “The unexpected outcomes of a variety of referenda may he an indication of the complications of making decisions via that method,” he adds diplomatically. The US and its allies, including Britain, managed to piece together a global system after the second world war that “worked pretty damn well”, he says. Now it is unclear that it will survive. Fischer worries about attacks by lawmakers on global regulatory bodies such as the Financial Stability Board, arguing the rules it proposes are good for the world if everyone adopts them. “The system needs a hegemon. It was Britain for a very long time. It moved to the US fairly quickly,” he says, “We are left with a world that doesn't quite have an anchor country, or a hegemon or whatever you want to call it, unless things change in the us” After leaving academia, Fischer spent his career as an enforcer for the liberal economic order he now frets is at risk of dissolving, holding the post of World Bank chief economist, first deputy managing director at the IMF, vice-chairman of Citigroup, and governor of the Bank of Israel. When it became clear Fischer would go to the Fed in 2014, staffers in the US prepared for the arrival of a central banking demi-god. In the event, Yellen and her more hawkish deputy have sometimes been at loggerheads. “Although she looks like your grandmother, she is a lot tougher,” he says of Yellen, describing her as “stubborn with good reason”, When someone goes after her, “she goes right back”, Fischer adds. I ask ifhe is speaking from personal experience, and Fischer says: “We don’t have that style of argument but in essence she has done that to me.” oe Fischer says that the oceasion on which he It took 80 years after 1930 went publie about a disagreement with the to have another crisis of chair “had less to do with the merits of the that magnitude. After 10 years everybody wants to go back to [the] status quo. Ifind that extremely dangerous case than the fact that I wasn't consulted on a decision”. The vice-chair declines to give further details, but he is likely referring to an eruption that came in Jackson Hole, Wyoming, in 2015, when Fischer gave a markedly hawkish interview to CNBC that jolted Walll Street even as the Fed was putting plans for a rate increase on hold because of market volatility. ‘Today Fed interest rate policy is up in the air because of remorselessly weak inflation numbers. Fischer acknowledges there are divisions within the Fed over how to respond. “There will be arguments on both sides on this thing. I'm not sure where that diseussion is going to end up. This continuation of lower-than-expected inflation rates is something we have to think about.” Fischer leaves half of his trout, and looks bemused when the waitress asks if he'd like to take it away. He and I both move on to an ile flottante — an agglomeration of meringue, sugar and almonds adrift in a sea of cream — before rounding things off with a double espresso. ‘The coming months at the Fed will be dominated by speculation about its future leadership, with Yellen’s term as chair due to expire in February. The battle, as currently framed by Trump, is between Gary Cohn, the director of the president’s National Eeonomie Council, and Yellen. Fischer declares that the current incumbent would be an “excellent choice”, pointing out that she has made the potentially market-unsettling process of unwinding Fed stimulus “sedate, She has done it very well.” ‘That said, Fischer says he likes Cohn, whom he used to sit next to at dinners thrown by Goldman Sachs during the Email IMF’s annual meetings. And he isn’t worried that Cohn is not an economist. “The chairman of an institution such as Get a shot of weekend inspiration each the ed, one of the primary things he needs is the ability to ‘Saturday with the best in life, arts and culture. Bre caicu judge the advice he is getting,” he says. i As for Fischer himself, his term as vice-chair is due to end eet midway through next year, although his term on the board of governors expires two years later. He declines to speculate over whether he will win reappointment: “I keep saying to myself, ‘You don’t actually have anything to decide, ” he says. ‘The betting is that Fischer does not win another term. If he leaves, it will be another sign of the fading of an old regime — the departure of an éminence grise among western economic policymakers. The Fed’s board of governors may soon look radically different. After we part, Fischer disappears into his waiting air-conditioned black sedan, a temporary respite from the sweltering Washington summer. For the Fed, the political heat will be unrelenting. Sam Fleming is the FT’s US economies editor Illustration by James Ferguson “Sepytight The Financial Times Limited 207 Alrights reserve. You may share using our article tools Please don' copy Brticles from FTcom and redistribute by emall or post to the web y f = Fas & | savetomyet