The Fischer Model of Central Bank Leadership

Includes: EIS, ERO, FXE, ISL
by: Michael Eisenberg

As the markets this morning are flying higher from the "Shock and Awe" bailout plan from the ECB and the eurozone, it is worth considering where this shock and awe came from and how it is changing market dynamics. For decades, we all considered the role of the central bank, the Fed and others to be a steady hand guiding fiscal policy and moderating the economy. Hence, we hung on the minute nuances of statements from Greenspan, Bernanke, Trichet and others. They were careful with their words and even more measured in their actions. We had incremental moves in interest rates, hesitant and well-telegraphed intervention in markets and government debts and generally well-anticipated and expected policy decisions.

One man changed all of that over the last 24 months: Stanley Fischer, Governor of the Bank of Israel. The world looked on as Israel (and Australia) were first out of the recession, avoided bank failures and kept its currency relatively stable in the tornado of global currency fluctuations. The world looked on and learned. They watched what Fischer did and learned. And here was the conclusion: as markets turn more volatile and the world becomes more interconnected, the job of the Central Bank has changed. The Central Bank needs to keep markets guessing. It needs to create black swans (to borrow from Nassim Taleb) and needs to surprise the markets.

Fischer would unexpectedly intervene and buy dollars to keep the Israeli Shekel at a reasonable rate for exporters. He would buy government bonds if need be. Most importantly, he kept the markets guessing. It created a lot of one day volatility and frustrated traders but it engendered long term stability and let the economy have time to work itself out.

The ECB has now figured this out. Monday morning, it moved unpredictably. It created a huge bailout, "Shock and Awe in 3D," as one trader said. It bought an unannounced amount of Greek bonds; people are guessing $3Bn - $5Bn, but nobody knows. Traders guess it is in Greece, maybe Spain, maybe Portugal, but nobody knows. But it is a countervailing force to the huge drops driven by interconnected markets that create big drops in markets. The surprise intervention is helping the markets stabilize. "Surprise" is the new "stable." And, when history is written, one man's name will be on this new policy initiative, "Stanley Fischer." The ECB has learned and now maybe Bernanke can learn a thing or two from his old mentor.