The View From Israel

Stanley Fischer may be thousands of miles from the epicenter of Wall Street's meltdown, but few people are better positioned to understand it. The 65-year-old former MIT economics professor supervised Ben Bernanke's doctoral thesis on the Great Depression. Later, Fischer worked as a senior IMF official during the Asian financial crisis. Three years ago he moved to Israel after finance minister Benjamin Netanyahu persuaded him to leave his job at Citigroup and take over as the Jewish state's central banker. He spoke with NEWSWEEK's Kevin Peraino at his office in Jerusalem. Excerpts:

NEWSWEEK: What were the key lessons from Bernanke's research on the Great Depression?
FISCHER: Ben has drawn two conclusions, which I think are right. The definitive [interpretation] when he was a student was that of Milton Friedman and Anna Schwartz, which was that the Fed didn't let the supply of money decline drastically [during the Great Depression]. Ben's thesis is: yes, but what really happened was that the credit mechanism collapsed. And it's clear from everything he's said that this emphasis on the credit system is still central to his thinking. And it happens to be correct. The second conclusion is that you've got to [ease the credit crunch] quickly. I'm sure nobody would say this in public, but if you make a few mistakes along the way, well, fine— keep going, fast.

Was it a mistake to let Lehman Brothers fail?
I think that'll be a big central question in the histories of this period.

What have been some of the other missteps so far?
There will be a question—and I'm as guilty as anybody—of what were we doing between July and August 2007 and now. There's also the issue of how you get the attention of the Congress. You can't go to them and say: I see a dark cloud on the horizon, and therefore I need $500 billion—give it to me because I'm worried. Part of the problem is that there were different views about what exactly needed to be done. A lot of people were saying that there should have been more focus on putting capital into the banks, but it's never the case that every economist is saying the same thing.

Where do you fall on that spectrum? Did you share the view of someone like Paul Krugman who was arguing for the government to take an equity stake in these banks?
I think it was clear that the government needed to inject capital into those banks. Whether it needed to take an equity stake immediately, or whether it wanted to put in something that gave it the option to take an equity stake later—that's a matter of judgment.

Banks in Israel were only recently privatized. Will any need to be renationalized?
I don't think we're going to have to do it. But if the banking system gets into difficulties, then there's no question that the government will stand behind the banking system. I very much hope we don't get anywhere near that.