Wanted: A Different Kind of Bank of Israel Governor

We can learn something about whom to pick as our own 'responsible adult of the economy' from the analyses surrounding the appointment of the next head of the Federal Reserve.

Economists Jacob Frenkel and Leo Leiderman came and went, and Israel’s central bank still has no governor − a public position that in many Western countries is considered second in importance only to the prime minister or president. Indeed, there are countries in which the governor of the central bank is considered even more important in the public perception. After all, politicians are not believed, and businessmen and bankers are not trusted. So the image of a stable, professional professor of economics, someone without political ambitions who is not inordinately greedy, is more credible in the eyes of many than anyone else in the governmental apparatus.

We now have four candidates: Argentinean Mario Blejer, Zvi Eckstein, Victor Medina and Michal Abadi-Boiangiu. The latter, currently accountant general in the Ministry of Finance, is apparently not interested, but the other three very much want the job. They have submitted documents to the Turkel committee, which evaluates the candidates’ suitability, they have appeared before the committee and are awaiting its seal of approval − and, of course, that of Prime Minister Benjamin Netanyahu.

The turmoil and rumor-mongering vis-a-vis the candidates for the governorship continue, after the recent rumors and scandals surrounding the Frenkel and Leiderman candidacies. Blejer is said to be a tycoons’ man. In fact, he is a member of the board of directors of a company controlled by none other than Eduardo Elsztain, the Argentine businessman who, for a while, agreed to enable Nochi Dankner to retain some control of IDB before backing out at the last minute, and then showing up as a potential buyer on his own. In Eckstein’s case, rumors have been circulating about poor human relations, along with questions about Stanley Fischer’s decision not to extend Eckstein’s term as deputy governor. Others, though, say that Fischer preferred a yes-man ‏(actually a yes-woman − Karnit Flug, now acting governor‏) and that the fact that Eckstein is a man who stands up for himself is not a minus but a plus.

But before all that, and before we factor the prime minister’s personal preference into the equation, it is pertinent to give thought to what sort of manager and what sort of person the “responsible adult of the economy” should be. There was much talk after the Frenkel-Leiderman fiascoes about the absence of an established appointment process for the governor of the Bank of Israel, either by means of an independent search committee or by addition of a clause to that effect to the Bank of Israel Law. In any event, in the present case the choice will again be made based on the existing method: Bibi will decide.

In the absence of other criteria or a professional appointment committee, one possible approach is to examine how things are done in other countries. By chance, the United States is also now contemplating the choice of a successor to Ben Bernanke, the chairman of the Federal Reserve, to take over at some point in 2014. The public discussion there recalls the Israeli dilemma. On the one hand, there is Janet Yellen, an experienced economist who is the current vice chair of the Federal Reserve’s board of governors; and on the other, Lawrence Summers, a star professor who has already held many other prestigious positions ‏(treasury secretary to President Bill Clinton, economic adviser to President Barack Obama, chief economist of the World Bank, president of Harvard University‏) and is currently an adviser to Citigroup and other financial institutions.

Overall, American commentators are inclined to think that Obama will ultimately prefer Summers. His prospects, according to the bookmaker Paddy Power, stand at 48 percent, as compared to Yellen’s 24 percent. He also apparently has the support of most of the influential individuals surrounding Obama.

Why? According to analyst Felix Salmon, Obama’s logic is the following: Most days it makes no difference who heads the central bank; what’s important is who heads it on Doomsday, the day when a vast crisis erupts. When that day comes, the argument goes, the White House will want a strong, larger-than-life figure at the helm, someone to take control and lead the efforts to cope with the crisis. For that, Summers is the most suitable candidate.

However, Salmon and others take precisely this logic and stand it on its head. Obama is wrong, they say. The fact is that in a crisis it makes no different who is heading the central bank, because its response is a foregone conclusion. Exactly as occurred in the crisis of 2008, the central bank will respond to a market crisis by opening all the financial faucets and promising liquidity to everyone in need, in every situation and in any amount. Summers, Yellen or any other Fed chief will react in exactly the same way, and so will the head of every central bank in the world.

Invoking the same logic, Financial Times commentator Philip Stephens sums up his analysis with the following recommendation to President Obama: “So who should he choose? Easy. Toss a coin.” Salmon goes farther, though. He argues that whereas everyone will respond identically in a crisis, it is during boring periods of calm that the head of the central bank has a crucial role to play. The reason? The bank influences growth, unemployment, bond and share prices, and no less important, helps prevent the next crisis. Accordingly, the key element here is the routine professional management of the bank and not the chief’s performance in a global crisis. In any case, Salmon observes, if the president should want Summers’ advice, “Larry will be right there, willing to give it.” The conclusion: “Summers should simply continue to make gazillions of dollars consulting for Citigroup. And should take his name out of the running.”

Cloning crisis behavior

Can we apply this logic and analysis to the choice of the governor of the Bank of Israel? It would appear that we can. During the financial crisis, Fischer, too, followed the orthodox “governor’s manual” to the letter, and did so in consultation with Bernanke and other central bank heads. He lowered interest rapidly, committed himself to saving the banks in whatever scenario of collapse occurred, and even bought government bonds in the capital market, like the “quantitative easing” in the United States. Without a doubt, the next governor, whoever he is, will clone that behavior in the next crisis. From that perspective, then, it makes no difference who gets the appointment.

The thing is, though, that the Bank of Israel needs to be managed in regular times, too, and during ongoing economic mini-crises, not only at a time of historic collapse. What’s needed, then, is professional management: thorough, bland and Sisyphean. The Bank of Israel and the government have to set policy for the currency exchange rate and implement it − by purchasing dollars in the market, for example. Already now, two months after Fischer’s departure, the word in the trading rooms is that the Bank of Israel is operating amateurishly and unprofessionally in the foreign currency market, and that the commercial banks are raking in easy money at its expense. Moreover, sources in the central bank have not denied this outright, admitting, “Some people left, there is a turnover, and not all the dealers in the trading room have the same degree of experience.” That is a management problem.

The routine activity of the Bank of Israel also includes the work of its research department, whose task is to provide an objective picture of the economy, without being influenced by politicians, people with capital or vested-interest groups. Armed with these analyses, the governor and his senior staff have the mission of reviewing the government’s activity and sounding an alarm when necessary. The governor has many tools for this. He can speak privately to the finance minister and the prime minister, approach MKs or address the entire public by means of a lecture, speech or press conference. This type of activity needs to be done even when no crisis exists, in connection with systematically important budget decisions and laws, regulation or problematic economic development.

It follows that a suitable governor need not be only a crisis manager or be able to converse with heads of other central banks, or the kind of individual who during the rest of the time will beef up his and Israel’s reputation at conferences and meetings abroad. The right governor also, and perhaps mainly, needs to be able to manage the bank’s ongoing work and to constantly critique the government and the treasury. He should also be well informed about most of the major economic issues that are up for discussion and decision. He should lead new reforms. For example, in the banking sector. He should address the housing prices crisis, and he should lead a discussion about whether to adopt new economic targets, as is the new flavor in the U.S., U.K. and Europe. This is a national obligation.

Precisely at a time when the treasury is being run by a minister who lacks an education in economics and economic experience, and with the prime minister preferring to focus on security and state-policy issues − the contribution of an objective, active governor who is not saddled with political considerations, is more important than ever.

If we accept the argument that we know how the Bank of Israel will react to a financial crisis, then Mario Blejer, for example, is not the right person to manage it. He is less knowledgeable about Israel’s ongoing problems, his economic views are unknown to the Israeli public, and he may be less familiar with the burning issues of the country and the hardships of its people or with the Bank of Israel’s personnel and modes of operation. The previous governor, Prof. Fischer, succeeded quite well even though he came from abroad and also lacked that knowledge, but that doesn’t mean that the formula of importing a governor from abroad is the right one every time.

The next governor should be something of the opposite of Fischer, Frenkel, Leiderman and Blejer. The charisma, the fluent English, the Chicago School policies and international connections − all carry less weight for a Bank of Israel chief than Netanyahu accords them. More important is the ability to run the bank’s operative and research units, diligence, expertise in local economic problems and challenges, and knowledge of the financial difficulties and injustices with which Israel’s citizens must cope. With respect to the cost of housing, for example.

Finally, it won’t hurt the new governor to possess a healthy dose of morality and to empathize with those in the country who have been battered by fate and those who just have a hard time making ends meet. If he doesn’t actively look for them, the new governor will not see all those people: They will remain transparent to him. They don’t show up at gatherings of the ruling class, the bank directors, the tycoons and the central bank governors − but they constitute the large majority of the country’s population.
 

Olivier Fitoussi