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Bank of Israel chief warns 'worst is yet to come'

(Agencies)
Updated: 2008-12-23 07:52

Bank of Israel Governor Stanley Fischer likened Bernard Madoff's alleged $50 billion fraud to the global financial crisis: In both, sophisticated investors missed warning signs that something was awry.

"You get into a way of thinking," Fischer, who's been a student of the world economy for the past quarter century as an academic, banker and policy maker, said in an interview at the central bank's Tel Aviv offices.

"You get into a way of accepting things that people do," said Fischer.

Investors who placed their money with Madoff were lulled into complacency by his consistent returns, while those who piled into mortgage-backed securities were aided by AAA ratings that proved as flawed as forecasts of rising house prices.

Fischer, who advised Federal Reserve Chairman Ben S. Bernanke on his doctoral thesis at the Massachusetts Institute of Technology in 1979, said the US economy has yet to feel the worst from the financial turmoil.

Tough times ahead

"This is going to be tough," Fischer, 65, said. "The worst of the real side is yet to come."

St. Louis-based Macroeconomic Advisers forecasts that the US economy will shrink at a 6.5 percent annual rate this quarter and a further 4.2 percent in the first quarter of next year.

Fischer, who was first deputy managing director at the International Monetary Fund during the 1997-98 Asian financial crisis, saw a risk that today's turmoil creates a deflationary spiral in the US and world economies, in which prices, wages and demand all fall.

"It's a danger at the moment," the central banker said, adding, "we're not there yet".

US consumer prices dropped a record 1.7 percent in November, though Fischer pointed out that was mainly due to falling energy prices.

Whether deflation takes hold will depend on how successful Bernanke and other policy makers around the world are in reviving their economies, he added.

Watching his former student from a corner office in the bank's drab, off-white building in downtown Tel Aviv, Fischer said the head of the US central bank was putting the lessons he learned analyzing the Great Depression to work.