Jacob Frenkel, the Sequel, Will Have a Different Kind of Story

Central banking and the Israeli economy have changed since the incoming Bank of Israel governor's previous stint, in the 1990s.

David Rosenberg
David Rosenberg
David Rosenberg
David Rosenberg

As it turns out, there's no need to rush out analyses of what Israel will look like in the Jacob Frenkel Era, Part II.

After much praise and fanfare surrounding Monday's news conference, the word later came out that the next Bank of Israel governor will need several weeks, perhaps even a few months, to wind up his affairs in the United States before taking office. In the meantime Israel will have to manage with a central banker of less global renown – Karnit Flug, deputy to outgoing BoI Governor Stanley Fischer, who has been asked to fill in.

Sooner or later, however, Jacob Frenkel will arrive. Despite all the talk about continuity and Frenkel and Fischer's shared values, it is more likely than not that Frenkel will do things differently. Central banking and the Israeli economy have changed since his previous stint, in the 1990s. Fischer also changed, giving the central bank responsibility for the wider economy rather than focusing exclusively on price stability.

But Frenkel seems to think the essence of the central banker's job hasn't changed. "I really hope we won't fall into the mistake of old textbooks being thrown away and 'let's invent a new economic theory,'" he told Bloomberg News in April.

Who stands to lose or gain in the Frenkel Era? Let's see.

ISRAEL'S STANDING IN WORLD MARKETS is one of the reasons Prime Minister Benjamin Netanyahu has given for having to scour the four corners of the earth (with the exception of a small pocket of the Eastern Mediterranean) in search of a governor. But Israel's standing may well be the biggest loser of all. Yes, Frenkel is a figure of global renown, but the circumstances of his appointment have diminished him.

There is an inescapable sense that Frenkel was recruited at the last minute to rescue the prime minister from the embarrassing situation of not having a candidate, after months of dillydallying and mere days before Fischer was due to leave. The fact that Frenkel was not among the rumored candidates and that he won't be arriving for his first day of work for a long time yet certainly suggests that he was approached, and that he accepted, only at the last minute.

Neither this, nor his age (70), nor the fact that he is returning to the post after a 13-year absence enhance the prestige of the appointment. Israel's image as a young, dynamic, innovative economy isn't served by calling up someone from retirement.

THE ECONOMY may be a winner -- or not. It isn't quite clear why Israel desperately needs a central-bank governor of world renown. Greece maybe, perhaps China as its financial market implodes. But does Israeli need global protektzia?

It might, if its fiscal policy continues to be mismanaged. Israel will need someone of Frenkel's stature to convince credit rating agencies and foreign investors that all is well. In that respect, then, the economy will benefit from a Frenkel governorship.

On the day of the press conference introducing Frenkel, the incoming governor was greeted by a new Bank of Israel forecast showing the economy looking worse than previously thought this year and next, but inflation holding well inside its target range. Under the circumstances, it looks like a no-brainer: Frenkel can cut interest rates without any fear of stoking inflation. But he might not be comfortable with that: As he (now famously) told the Herzliya Conference this spring, "I wouldn't want to be a central bank governor today, when global interest rates are zero," because that would leave him without any policy tools except for ones he doesn't like, such as quantitative easing. With the base lending rate now at 1.25%, it would take him a long time to get there.

THE HOUSING MARKET is either a winner or a loser, depending on whether you like high home prices (sellers, bankers) or not (buyers). Frenkel has a long-standing fear of financial bubbles. As Bank of Israel governor in 1994 he burst a developing one on the Tel Aviv Stock Exchange that he had inadvertently helped to inflate. No one could possibly accuse the TASE of being a bubble these days, but Frenkel may very well view the housing market as this year's bubble and a risk to the entire Israeli economy. Fischer's efforts to contain mortgage demand did not succeed, and the government has done little to address the problem of housing supply. That leaves Frenkel with no choice but to raise interest rates, even if it hurts the rest of the economy in the short run. "There have been very few financial bubbles in the past that weren't created by low interest rates," he told the Herzilya Conference.

THE SHEKEL is a loser. Fischer has been fighting valiantly to bring down the value of the muscle-bound currency. If he has little to show for it to date, he at least understands that it's his job to address the problem. But unless Frenkel has changed his views he is likely to step back from the intervention policy Fischer instituted this spring.

In an interview with the Israeli financial daily Globes in 2010, Frenkel cast doubt on the effectiveness of Fischer's previous round of intervention, saying it was "not sustainable because it is always too small in relation to the market." It's not up to the Bank of Israel to influence the exchange rate to help exporters; exporters must adjust to the exchange rate.

The only catch is that given the circumstances – Israel suddenly has natural-gas riches it never had before –the exporters' adjustment may well be closing up shop or moving it abroad.

YAIR LAPID is almost certainly a loser. The morning after Frenkel's appointment was announced the finance minister told local journalist Razi Barkai, "People had been coming to me and asking who will be the next governor. I would answer them, 'I'll tell you after you tell me what the governor does.' You know how they answered? Nothing, because no one really knows what the governor does."

As with many other matters economic, Lapid will learn soon enough what the Bank of Israel governor does. Frenkel, in his previous incarnation as governor, had no problem telling mere finance ministers how to manage their affairs. Indeed, he has a preference for avoiding them altogether and dealing with their bosses in the Prime Minister's Office.

THE BANK OF ISRAEL's PETTY CASH BOX is a loser, if experience is any guide. After he left the Bank of Israel in 2000 Frenkel was accused by the State Comptroller of running up excessive personal expenses and taking vacation and sick time improperly, and ordered him to repay NIS 238,000. Today the pressure on public figures to demonstrate personal fiscal rectitude is easily greater by a factor of 10. Just ask Bibi's ice cream supplier.

Frenkel could easily find himself enmeshed in petty but nevertheless distracting scandals that diminish his ability to do his job. We can only hope that if he is still adheres to the principles he practiced two decades ago he at least understands that populism has changed the political and media environment in which he must operate.

Jacob Frenkel.Credit: Bloomberg

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