Professor Stanley Fischer on Israel & The World Economy

Below are notes from a friend of a friend from the meeting with Professor Stanley Fischer on Israel & The World Economy on December 2, 2010

• Voted Central Banker of the year.
• Traditionally he gives economic update this time each year.
• Israel got through global crisis relatively well. Countries which didn’t have financial crisis got through the global slow down much better than those that did have financial crisis.
• No Israeli banks had any substantial financial problems.
• Israeli economy outlook. Key questions to ask are; what are interest rates (NY & London) doing in countries they have key business and export relationships with and what are growth rates.
• 2011 advanced economies growth expectation below 2010 modestly and for 2012 slightly better.
• OECD looks for 8% growth in trade 2011 & 2012, they are consensus, no opinion on their accuracy just a useful reference point.
• 70% of Israel’s exports are to Europe & US, export nearly half of their GDP.
• Largest level of unemployment going into recession at 5.9% and then unemployment went to 8% versus their fear it would hit 9%.
• Having more foreign reserves is better than having too few reserves. Countries with higher reserve levels did better than countries with lower reserve levels. He increased reserve levels from $22 bil (which was too low) up to $70 bil (which is high for a country with a GDP of $210 bil) but where he wants it to be. It was funded with borrowings at a cost of 2%, higher than the rates it earns on its dollars assets but is the position he wants to have. He makes huge “investment bets”. Deliberately underweighted US dollar then massively overweighted it.
• Government cut spending from 51% of GDP down to 42% of GDP. Needed to address structural problems by changing its budget. Cut social services and entitlements. Went into recession with a budget that wouldn’t permit increased spending without commensurate expense reductions.
• Gross public debt was 100% of GDP in 2003 and as of this year is now below 80%.
• Israeli’s FX policy is to intervene in the market in the case of fluctuations in the exchange rate that do not match fundamental underlying economic forces.
• “Macro-prudential measures” hasn’t reached popular vernacular as a phrase yet, but will. Revisions made on an institution by institution basis without sufficient awareness of systemic consequences. Moves seem prudent on a stand alone basis often are not.
• Australia housing prices up 250% in this decade. Israel recently, after having been flat, up 40%. The textbook response to a crisis is to reduce interest rates. It has consequences and the result is cheaper R/E affordability and as a result housing price inflation. Major crisis are often tied to excess leverage and speculation.
• Israel is not smarter than other countries. Israeli banks went bust 25 years ago and had to be bailed out. We were determined not to repeat that mistake. However, the cumulative memory is about 25 years so I hope they don’t repeat that mistake now. Throughout the crisis the Israeli bank examiner made the banks continuously increase bank capital. They focused on Basil III and bank capital is presently up to14%.
• They spend 7 ½ % of GDP on defense spending, almost double the level of the US.
• Less worried than others about QE2. Doesn’t think every country can set their exchange rates versus the dollar. Sees this as perfectly rational in a world where interest rates are zero. Prefers the policy to be whatever drives US economic growth, that is the key variable. There is a problem with capital flows into EM countries, no countries want to use currency controls, funds chasing growth but currency appreciation is a normal part of the adjustment process.
• By not pegging the Israelis shekel (currency) to the dollar he preserves fiscal flexibility.
• He thinks many hedge funds act in concert. Their attacks on sovereign debt, CDS and other asset classes should be eliminated. He doesn’t mind people, even internet kids making hundreds of millions of dollars personally. Thinks personal financial reward should be tied to real economic growth and job creation.
• In 1980 he sold all of Israel’s gold at $800/oz. Gold hasn’t yet doubled since then, so it was a good sale, he doesn’t own any and it has underperformed his other capital allocation decisions.