David's Harp / Fiasco at the Bank of Israel: Whodunnit?

Blame the process of picking a new governor, now driven by titillation and demagoguery, not the victims, Jacob Frankel and Leo Leiderman. There's something to be said for smoke-filled back-room politics.

Who would have thought on that fateful day last January when Stanley Fischer announced his resignation, that the Bank of Israel would remain bereft if a leader for weeks after he departed?

No one, of course. The process has been a travesty, but worse still, it's a self-inflicted one.

It isn't the fault of the failed candidates themselves, Jacob Frenkel and Leo Leiderman, or of Prime Minister Benjamin Netanyahu, who chose them.

The damage was inflicted by the media, who in the name of the new "people's economics" has turned a process that was once largely done behind closed doors into the house on Big Brother. Everything is open to view and subject to intense and often hysterical criticism.

The process may be democratic but it is certainly not very good.
Here are four questions we should be asking about what happened. Alas, the answers are not very encouraging.

1. Were Frenkel and Leiderman unfairly drummed out of the nominating process?

Yes, they were. There is a lot of overwrought talk about how the two men were not worthy of the public trust. But how were they were unworthy? The fact is no one can say with certainty.

The accusation against Frenkel – that he shoplifted a bag from the Hong Kong duty-free - was at best subject to dispute. The latest developments in the affair – with Hong Kong officials now saying he was indeed brought before a court, although the charges were later dropped – should serve as the final confirmation that nothing of any consequence happened in Hong Kong. In the case of Leiderman, the murmurings were even vaguer.

As defenders of the public good and all that, journalists are supposed to be suspicious and critical, especially of the powerful and the privileged. But they should also be fair. Perhaps Frenkel is a kleptomaniac, but with a single (denied) incident as the barely smoking gun, it strains the imagination to believe that a wealthy banker decided one day he would engage in shoplifting. The burden of proof that the incident made him unfit for office should be on the accusers, not on Frenkel.

Perhaps Leiderman had something to hide that made him unfit to be governor, but if it was something material it is doubtful he would have accepted the nomination in the wake of the Frenkel affair. More likely than not it was fear that if Frenkel could be pummeled into dropping out on so little, Leiderman could expect the same.
Distressingly, the other potential candidates are almost certainly saying the same things to themselves.

You're clean, you can run (but shouldn't)

2. Are office holders being held to new, higher standards? Or is it just demagoguery?

It would be very hard to answer the first question with a Yes. Just what standard was upheld? The only one that can be gleaned directly from the events of the last six weeks since Frenkel was nominated is that you can be skewered in public on the vaguest of charges.

What would have represented an advance in public discourse is if the public had had a chance to learn about the nominees' policy views and their leadership capabilities. There was some of that, but it quickly was pushed aside by more titillating factors. Thus, the answer to the second question is categorically a Yes, it is demagoguery.

It's a dangerous demagoguery, too. There aren't many people who can fill a post like Bank of Israel governor. The number of potential candidates that was raised is less than a dozen and that includes people who would ever consider the job. To start vetting so few candidates according to a standard that says the slightest hint of trouble in the past rules you out means the field will be considerable narrowed, maybe to no candidates at all.

Being squeaky clean is an important consideration in picking a governor, but if it becomes the sole criterion, we'll end up with second-best candidates, perhaps even mediocrities.

3. Is the process of choosing a new governor faulty?

Israel chooses its central banker much like other Western countries do. The chairman of the U.S. Federal Reserve is appointed by the president, with the Senate confirming the nomination. The president of the European Central Bank is nominated by the European Council. The Chancellor of the Exchequer appoints the governor of the Bank of England. In none of these cases is the process democratic or transparent.

However, a formalized process would be an improvement over the situation now, perhaps by means of a search committee appointed as the current governor's term is approaching its end or, as in the case of Stanley Fischer, when he announces his resignation. That would have spared the economy the wasted months last winter and spring when Netanyahu was not choosing a governor.

A search committee would not have been delayed by elections or idiosyncratic criteria, like the high priority Netanyahu assigned to finding a celebrity economist. But unless this search committee is going to be backed by an investigative team, it could end up with the same problems as Netanyahu's nominees.

4. How urgent is it to name a new governor?

More urgent than you would think.

The Tel Aviv Stock Exchange and the foreign currency market have both responded to the Frenkel-Leiderman flop with a wide yawn. To a degree they are justified: Monetary policy is decided by the Bank of Israel's Monetary Committee, not by the governor alone as in the past, although the committee itself is short its full quorum of members. Moreover, acting governor Karnit Flug is staying on despite repeated slaps in the face from the prime minister, who has twice opted to nominate someone else for the top job.

But the shekel-dollar exchange rate remains a serious problem that requires more aggressive treatment than it has received from the bank since Fischer left.
The dollar is now at a two-year low, but the Bank of Israel has largely stayed on the sidelines. Flug's ability to deal with it is stymied by her being an interim figure, with neither the ability to promise a long-term commitment to intervention nor the standing to withstand criticism if it fails.

When Frenkel was the nominee, there was at least a defined interregnum and a successor governor in the wings.; Now, with no nominee, Flug could be serving for a long time as a declawed governor without a mandate to act decisively. There is no imminent crisis demanding strong leadership, but it’s the nature of crises that they are unpredictable. Lehman Brothers' collapse in 2008 set in a series of events that demanded an immediate and forceful response. Back then, we had Stanley Fischer; today we have an acting governor who the prime minister thinks isn't up to the task..