Stanley Fischer

Stanley Fischer does not look like the sort of man who can move markets or bring demonstrators into the streets. He is polite to the point of being reserved and soft-spoken to the point of being inaudible. At public gatherings, he gives the distinct impression that he would be happier reading a book. But, as first deputy managing director of the International Monetary Fund in Washington, D.C., he has been at the heart of what is perhaps the most serious economic crisis since World War II and has helped to craft policies that have turned his employer into one of the most reviled institutions in the world.

The range of people who hate the IMF is startling, from right-wing Republicans, who accuse it of using taxpayer dollars to bail out foreign dictators and international speculators, to left-wing Democrats, who accuse it of caring more about economic orthodoxy than the plight of the poor, to enormous swaths of the population of the emerging world. Earlier this year, a group of South Korean demonstrators summed up the prevailing attitude across Asia with a simple gesture: wearing bandannas emblazoned with the slogan “IMF=I’m fired.”

The reason for the institution’s unpopularity is not hard to find. The fund’s job is to keep the international financial system in order. But, in the past 18 months, it has spectacularly failed to prevent economic chaos from spreading from Southeast Asia to Russia, and it is only just holding the line in Latin America. Adding to the impression of incompetence is the fact that in some countries, particularly Indonesia, the IMF’s usual recipe of economic austerity threatened to sink millions of people into poverty and had to be dramatically rethought.

There must have been times recently when the 55-year-old Fischer, who is married and has three grown sons, craved the tranquillity of the Massachusetts Institute of Technology, where he was an economics professor for more than 25 years before being tempted to Washington in 1994. He has spent the past year and a half rushing from one global hot spot to another. Back in the United States, he has had to deal with withering criticism from some of the sharpest minds in his profession, notably Harvard’s Jeffrey D. Sachs. The IMF habitually relies on Fischer, its No. 2 official, rather than his French boss, IMF Managing Director Michel Camdessus, to explain its actions to American audiences, perhaps because it feels that Camdessus would simply confirm Republican suspicions that the IMF is a tool of foreign interests.

For all the fund’s problems, Fischer has a big advantages over even his most eloquent critics: They cannot agree on what they would do if they were in his place. Some want to reduce the fund to a shadow of its former self. Others want to expand it into a global central bank. Some support draconian capital controls. Others argue that currencies should be allowed to float freely. Fischer, at least, knows exactly what he thinks.

Question: Do you think that this is the worst economic crisis since World War II? Is it worse than the international debt crisis of the 1980s, for example?

Answer: My guess is every crisis looks like the worst you’ve ever been in. I remember 1973 and the oil shock. We had lived for 25 years with cheap energy, and we were not going to have cheap energy anymore. That was pretty frightening. The 1980s were, possibly, a little less so because it was more focused in Latin America, but in 1982 and 1983 it looked bad. I think history always looks better than it felt at the time.

Q: Do you think the IMF got it wrong in Asia? Did the tight policies that you imposed push an already teetering economy into depression?

A: Let me talk about the two countries where it is clearest: Thailand and South Korea. It is very unusual that a country uses up all its reserves. By the time we got to both Korea and Thailand there was no way of avoiding a crisis. The effects of the crisis depended on how much money you could give them. If we had had huge amounts of money, say, $100 million for Korea and $60-70 million for Thailand, you could have enabled them to rebuild their reserves immediately and have somewhat lower interest rates. But that was never in the cards. I’m sure that these crises were in the cards on the day we arrived, and well before that.

I think the tight monetary policies were absolutely essential to return stability. We said right from the beginning that interest rates would stay high until the currency stabilized and then would come down. They have. They’re lower now in Korea and Thailand than elsewhere in the region. They’re lower than they were at the beginning. Indonesia is a more complicated case where the policies that were prescribed at the beginning were not actually very restrictive. Fiscal policy tightened by one percentage point, which is not much, in order to deal with the cost of the banking crisis. Monetary policy was supposed to be firm, but not excessively. We think the crisis there is far more political in origin. I don’t think people understood us, or anybody else, that a regime that looked so stable was not. It soon became clear that [former Indonesian president] Suharto had no intention of delivering. And that was sort of how the thing got out of control.

Q: The United States has just allocated you $18 billion in funds. Do you think the IMF will ever have enough resources? Or is the IMF gradually evolving into a global lender of last resort, a sort of world central bank, with a commensurate appetite for capital?

A: We’ve actually got $90 billion, because the U.S.’s $18 billion is 18% of the shares. Many of the other countries were waiting for the United States, and I expect we’ll have the money in a few months. There is an insatiable appetite for loans, and the moral-hazard issue is a real one. We have to evolve a method of assisting countries without creating a presumption that we are always there no matter what. In other words, we have to find ways of involving the private sector, and that’s something that we’re going to work on. I think the lender of last resort question that you raise is interesting because some of the things that are being proposed, like the contingency facility, which President Clinton has proposed, have elements of that. I don’t know which way it will evolve, but that is one route that could be taken. We’re clearly in for the process of change in the next five to 10 years.

Q: There has been a great deal of talk about redesigning the world’s financial architecture. Do you think there is a case for going back to the drawing board? Or can we rely on incremental reforms?

A: You can’t dismantle the current system. You can only reform it. You could create a system at the end of World War II because the previous one had been thoroughly destroyed. Now, we’ve got one which functions, but not perfectly, and you’ve got to fix it. The elements are there, and putting them together is something we’re going to work out in the next few months. What is critically important? What can we work on in the short-run? What will take longer? Improving financial systems will take much longer, so I don’t think you’ll see something radically different. The question of the volatility of capital, which was always there, but which has become central after Russia, hasn’t got as much of the focus as it should have. I think we will have to look at questions of what is producing volatility from the supply side, i.e., from the industrialized countries, as well as in the Pacific Rim countries.

Q: You actually want to do something about the flow of capital?

A: I think something has to be done. We know about leverage, and we know how critical it is, but the scale of the devastation that was wrought by Russia, which when all is said and done is not a massive economy, is just astounding.

Q: Do you have any regret about the IMF’s role in pushing for the liberalization of capital flows over the past decade? Do you think there is any merit in capital controls?

A: What we have always emphasized is orderly liberalization. The fund has never pushed a country to liberalize on the outflow side before they’ve got a sufficiently strong balance of payments, and we have consistently come out and said we see merits to Chilean-style capital controls, which are essentially taxes designed to discourage short-term flows. You actually make a deposit in the central bank, so if you only keep the money there for a short time, it is very expensive. If you keep it there for five years the cost per year is very low, so it is a way of reducing volatility. There has been a lot of controversy about whether those things work. But the Chilean central bank governor said to me, “If these things don’t work, I’d like to know why I have these huge sums of money on deposit in my bank by people who are investing in Chile.”

Q: How about the broader case for capital controls?

A: I think the inflow controls may be important, but I don’t put much stock in outflow controls. If you look at the countries that blew up worst, Korea liberalized in exactly the wrong way and encouraged short-term inflows. Thailand encouraged massive short-term inflows. Brazil, now under attack, has had capital controls for a long time, but they are not a guarantee of anything. What we keep emphasizing is that we still believe that orderly capital liberalization is something we should all be aiming for. It means getting a decent financial system. But I would say that after Russia, the emphasis on making sure that there is transparency on the side of suppliers is much greater.

Q: You say you are looking for ways to create a more transparent world financial system. What can you do to encourage this?

A: We should never imagine that we won’t see financial panics again. [They have] been around for at least 200 or 300 years, and markets do get overenthusiastic. They also get too pessimistic, which is where they are today. On improving the system to make crises less frequent and less large, there is, first of all, increased . . . information on what countries are doing. . . . Second, there has been a lot of work going on to improve the supervision of the financial sector and to improve the surveillance of financial systems in developing countries. I think all that is important. What we lack are enforcement mechanisms. That’s the part where the system hasn’t figured out the answer.

Q: What enforcement mechanisms could you have?

A: I don’t know what we’re going to get down the road. But if you lend to a country with a lousy banking system that’s been certified to have a lousy banking system, you’re going to have to set aside significant reserves. You have to extend that from the banks which we do control to other lenders which we don’t control, and that means something quite big in terms of what might need doing.

Q: Not long ago, it was enough for the IMF to step in for financial markets to be reassured. Is this still true after the Asian debacle? Or is the IMF beginning to lose the credibility that is so essential to its success?

A: The change in the system is that you have much larger flows of capital now, and they’re not all bank capital. When you can’t keep the private sector in or when they panic, which is something like what’s happening now, then they may be looking to a program as a way of enabling them to get out. Those are the circumstances where the programs haven’t worked. That, plus weak political systems.

Q: Do you think we are witnessing the end of globalization?

A: No, I’m quite sure we are not. I’ve been strongly struck by the reaction of the people we met in Washington [at the IMF’s annual meeting last month]. They aren’t going to impose them unless this crisis gets much worse. . . . The Latin Americans were so strong in what they said about no capital controls and maintaining openness. We went through this a little bit during the Mexican crisis, and certainly it was one of my fears that the collapse of what we thought was a model reformer was going to destroy what is called, with less admiration than before, the “Washington consensus.” Instead, it led to a reassertion when people realized that Mexico hadn’t reformed as much as it should have. The most interesting thing I have heard said about this crisis was by the Argentine foreign minister, who said that there are always crises, there will be future crises, but these crises end. If we keep our nerve, and if we do what we can to protect ourselves, we’ll come out of it much stronger than if we panic and impose controls.

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“We said from the beginning tht interest rates would stay high until the currency stabilized and then would come down. They have.”

“Every crisis looks like the worst you’ve ever been in. . .I think history always looks better than it felt at the time.”

“If we keep our nerve, and if we do what we can to protect ourselves, we’ll come out of it much stronger than if we panic and impose controls.”