U.S. Federal Reserve Vice Chairman Stanley Fischer (Photo credit: Wikipedia)
As the governor of the Bank of Israel from 2005 to 2013, Stanley Fischer earned praises for his management of Israel’s economy during and after the Global Financial Crisis. In 2009, 2010, 2011 and 2012, Global Finance magazine’s Central Banker Report Card gave Fischer an “A” rating. Bank of Israel was ranked the world’s most efficiently functioning central bank under Fischer’s leadership in 2010.
Contrary to popular belief, Israel’s so-called economic strength is the byproduct of a temporary economic bubble that Fischer helped to inflate rather than the result of sound and sustainable monetary policies. Stanley Fischer is a member of the New Keynesian school of economics – a group that is notorious for using incredibly stimulative monetary policies (also known as “money printing”) to create artificial economic growth, while virtually ignoring the existence of obvious economic bubbles and the risks of monetary policy-induced inflation.
During his tenure as governor of the Bank of Israel from 2005 to 2013, Stanley Fischer’s New Keynesian policies caused the country’s M1 money supply to surge by an astounding 250 percent:
Source: Trading Economics
Israel’s money supply growth during this period caused consumer prices to increase by approximately 25 percent according to the official CPI, but this figure is dubious like many government-published inflation measures are. Government statistics agencies are known for developing inflation indexes that understate the true rate of inflation for the purpose of justifying inflationary monetary policies and preventing public outrage.
The Israeli public wasn’t fooled by these questionable inflation figures, however, when hundreds of thousands of people flooded the streets in 2011 and 2012 to protest the soaring cost of living. Led by a 25-year-old video editor-turned activist named Daphni Leef, hundreds of inflation protestors also set up tents in the middle of streets in Tel Aviv and other major cities to protest the country’s rapidly-rising housing costs, which are the result of a housing bubble that began to inflate under Stanley Fischer’s watch.
In fast-rising money supply environments like Israel’s, growing asset bubbles (including property bubbles) often act as a “relief valve” for inflationary pressures. While these asset bubbles help to disguise the effects of inflation on the economy for a time, they set the stage for economic crises when they inevitably pop. Following this pattern, Israel’s property prices have soared by 80 percent since 2007 and 67 percent since 2009:
Israel experienced the largest property price increase of all OECD nations during Stanley Fischer’s time as Bank of Israel governor, which has made the country’s housing market more overvalued and less affordable than ever before. For example, Israel’s average apartment price-to-average monthly salary ratio remained stable at 100 from 1996 to 2008, but has surged to 130 in the past half-decade. According to the IMF, Israel’s home prices are now 25 percent above their equilibrium value. Rents have also inflated significantly since 2008, with the average rent in Israel having risen by 49 percent, with even larger increases of 61 percent and 53 percent in Tel Aviv and Sharon.
Israel’s housing bubble has been fueled by a 78 percent increase in outstanding mortgage debt from the end of 2007 to the end of 2012. Up to 90 percent of mortgage loans made in recent years have adjustable interest rates, which is the same mistake that was made during the U.S. housing bubble. While at the helm of Bank of Israel, Stanley Fischer dramatically reduced the central bank’s benchmark interest rate, which caused mortgage interest rates to drop in turn. The risk that Israel faces is the eventual increase of mortgage interest rates from the current low levels, which will harm the many borrowers who used adjustable rate mortgages to purchase property. (Read my recent report on Israel’s economic bubble to learn more.)
To summarize, Israel’s economy is experiencing an inflationary “bubble boom” that is typical of rising money supply environments. The fact that rapid increases of the money supply lead to inflation and bubbles is obvious to nearly everyone but heavily indoctrinated Keynesian and neoclassical economists like Stanley Fischer, who are greatly overrepresented on the boards of central banks, unfortunately. Austrian economist Murray Rothbard may as well have been describing Israel’s current economy when he stated in 1962 that “Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of ‘prosperity.’”
The accolades that the international economics community have heaped on Stanley Fischer are the result of a temporary bubble-driven economic boom that will end in a crisis when it finally ends. To reiterate what I stated in my Israel bubble report, “when evaluating central bankers, never mistake a bubble economy for talent.” Former Fed chairman Alan Greenspan received similar praises when he left the Fed in 2005 at the peak of the U.S. housing and credit bubble that he helped to inflate. Of course, by the time the bubble popped several years later, Greenspan had already sailed off into the sunset.
In his new role as vice chairman of the Federal Reserve, Stanley Fischer will undoubtedly encourage policies that further inflate the U.S. bubble-driven economic recovery or what I call the “Bubblecovery.” Due to the Fed’s monetary policies since the financial crisis, new bubbles are ballooning throughout the U.S. economy, including the stock market, bonds, certain segments of the housing market, technology startups, higher education, and automobile loans, to name a few examples. Like our housing bubble last decade, these post-2009 economic bubbles are helping to create the illusion of economic growth and activity, but will end in another crisis when they pop. Considering Fischer’s beliefs, he will be right at home at the Fed.
It is simply outrageous that another “bubble-blower” has been appointed to the Federal Reserve board when there are other qualified individuals who actually predicted and warned about the last decade’s bubbles that caused the Global Financial Crisis. Unfortunately, no action is likely to be taken nor will there be much of an outcry while the bubbles in the U.S., Israel, and elsewhere are still inflating and making their creators look like geniuses. The catastrophic popping of the post-2009 global bubble, however, will finally create the opportunity to rout reckless Keynesian-inspired economists like Stanley Fischer from public leadership once and for all.