The true story behind the belated, grudging appointment of Israel's new central bank chief
What led Netanyahu to change his mind and elevate Karnit Flug, the woman he scorned thrice to the helm of the Bank of Israel?
What happened over there, behind closed doors? What led the prime minister, Benjamin Netanyahu, to change his mind and choose Karnit Flug as the next governor of the Bank of Israel – after he’d categorically ruled her out in not one but three rounds of selection?
It started on Thursday last week, during a routine economic discussion, scheduled long ago. Before the prime minister and several other people, Flug explained why she – as acting governor since July 1 – had elected to lower Israeli interest rates. She also elaborated on her forecasts for the economy and foreign currency market.
In contrast to the previous meeting, maybe because she didn’t see herself as a candidate to head the central bank any more, maybe because she felt more relaxed, Flug impressed Netanyahu with her analysis, the clarity of her policy, and in her report on consultations with Fed leaders Ben Bernanke and Janet Yellen.
It was a turning point. Everybody was well aware that Netanyahu wasn’t thrilled with any of the three shortlist candidates that he himself had proposed more than two months ago. He kept casting about for a rabbit in a hat. He even tried to tap Larry Summers, who’d withdrawn from the Fed race in the States, paving the way for Yellen to take over for Bernanke.
Yet after that one discussion she had handled with such aplomb, Flug was back in the ring, a serious contender. It didn’t hurt that Barack Obama had just decided to pick a woman, like Flug - the deputy to the outgoing governor. The last push came from the “responsible adult”, none other than the former governor Stanley Fischer, who’s back in New York. After that fateful meeting at which Flug impressed Netanyahu, Fischer called, yet again urging the PM to name her to the top of the central bank, yet again saying she was preferable to the shortlist three. That ended the wavering and today, Thursday afternoon, the announcement was made. Following the cabinet vote on her appointment come Sunday, Karnit Flug will succeed Fischer as governor of the Bank of Israel, becoming the first woman to hold the post.
The Flug era: That pesky shekel
The Bank of Israel was left bereft of formal of leadership for 112 days, even though Fischer announced his resignation six months in advance, and left only in June. The farcical process of replacing him can be seen from two angles.
One: Netanyahu behaved negligently. He didn’t look into skeletons in his candidates’ closets – Jacob Frenkel and Leo Leiderman. He didn’t seriously consider Flug’s candidacy, though Fischer had recommended her. The prime minister did not trouble to meet with her a few times, as one might have expected.
Yet it isn’t as though Flug suddenly discovered hidden veins of beguiling charisma. The impressive economic abilities she demonstrated on Thursday had been there already. Netanyahu simply didn’t bother to check. If he had, he might have chosen her to begin with, sparing himself and Israel much mortification.
Here’s the second analysis: Ultimately Netanyahu made the right decision. He swallowed his pride and chose her. One has to know how to do that sort of thing too.
The cabinet isn’t about to shoot her down; it’s over and all the above is academic. What matters now is how she copes with her mandate.
We know she can answer some questions, thanks to her closed conversations and actual deeds. She is deeply concerned about the strength of the shekel against the dollar, mainly because of the effect on hiring and unemployment.
Flug’s own research focused on the labor market. Her logic is this: The high-tech companies might be able to cope with the weak dollar, but labor-intense low-tech exporters with huge workforces can’t. They have to pay the workers in shekels and get feeble dollars in return. The upshot will be layoffs.
‘Tis true that big industry does well by the Bank of Israel’s efforts to weaken the shekel against the dollar. But what concerns Flug is the worker, and joblessness. Based on the interest-rate cut she ordered last month and her serial intervention in currency trading, clearly she means to aggressively support the dollar in the local market. We may yet see new methods to do so in the year to come.
Does that make Flug a socialist, too concerned about jobs and not enough about inflation, as Netanyahu has been fearing? Or is she yet another “capitalist pig” working to better the big industrialists?
The thing is that these definitions aren’t relevant any more. There’s no point in trying to cram Flug into some rigid stereotype.
What Flug will do
We know she will continue policy lines laid in place by Stanley Fischer, her mentor. She will probably consult a lot with him. We know she will follow the economic orthodoxy of the Western central banks, which includes transparency, official quantitative targets – and expansionary monetary policy, as long as there is a danger that growth will halt.
We know she’s worried that Israel will catch the “Dutch disease," drowning in dollars as it sells its gas. We know she will press for the money to be invested through a special fund as she battles the exchange rates.
She sees the rising price of housing in Israel -- one can hardly ignore it -- but she will try to deal with it through mortgage constraints, not by raising interest.
What she won’t do, certainly not right away, is revolutionize. Fischer didn’t touch the banks, he brought no message of competition there, introduced no reforms into the financial markets. She isn’t likely to either. Nor is she likely to stand strong before the cabinet though as central bank leader, she is its chief economic adviser. While the cabinet quailed before Fischer, the ministers probably aren’t afraid of her castigation. It will take time for that to evolve, if it does at all.
In any case Netanyahu with his conservative bent need not fear. Flug will apparently do exactly what Netanyahu would have done, if he’d been the governor of the central bank.