Netanyahu, Stop Making Goo-goo Eyes at Celebrity Economists

The search that found Jacob Frenkel was flawed from the get-go and wasted valuable time.

David Rosenberg
David Rosenberg
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David Rosenberg
David Rosenberg

One wonders whether anyone in the deepest recesses of the Prime Minister's Office appreciates the irony in Jacob Frenkel's decision to withdraw his candidacy as bank of Israel governor.

The man supposed to act as Israel's economic foreign minister – someone with the reputation and gravitas that would entitle him to hobnob with the world's richest and most powerful, and pronounce on global issues – was brought down by an old, unproven accusation of shoplifting. Even if he had stuck out the vetting process, Frenkel would have been damaged goods by the time he arrived at the Bank of Israel.

But the choice of Frenkel was flawed from the start and that has nothing to do with alleged petty larceny, nor the fact that Netanyahu's office didn't do a thorough background check of their candidate.

The big problem was that Netanyahu thought it necessary to have someone at the helm of the Bank of Israel with a stature matching Stanley Fischer's and then wasted critical months in a desperate search for someone to meet that standard.

The result was a lengthy and needless interregnum between last January, when Fischer announced he was stepping down, and the end of June, when Frenkel was unveiled, just days before Fischer was due to leave office. Even if Frenkel had assumed his new post when he planned to in October, more months would have gone by, with an acting governor at the head of the central bank.

But why did the list of candidates have to be narrowed to a select group of globally renowned economists to begin with? Israel has been welcomed to the ranks of the world's developed economies with its membership in the Organization for Economic Cooperation and Development. It has free-trade area agreements with the United States and the European Union. It enjoys a strong inflow of foreign investment. Its economy, under Fischer's watchful eye, has performed admirably.

But Fischer was an enormously successful central banker not because he was on the A-list at International Monetary Fund conferences per se, but because he had he read the economic and political maps well, and changed his views and policies with the times. It wasn't a question of pedigree, it was nimbleness and courage.

As is turned out, Fischer's times at the Bank of Israel were tumultous; a lesser economist may have not risen to the occasion.

During his month as governor-designate, the A-listed Frenkel spoke very little in public about his views, but his history shows little sign of Fischeresque policy-making agility, and his 1990s-era philosophy would likely have been a poor fit for the economic realities of 2013.

What does the next Bank of Israel governor need to do?

He or she certainly needs to address the problem of the strong shekel and the threat of Dutch disease wiping out the country's export industries.

He needs to tackle as best he can, with the limited tool bag at his disposal, the problem of rising home prices and their devastating impact effect on middle class living standards.

He needs to strike a balance between the need to create a competitive and cost-effective banking industry while ensuring the banks themselves remain financially sound. He also needs to act as a scold to a government that has yet to prove it has finally put its fiscal house in order.

He needs to have wide vision that looks beyond the traditional central banker's task of keeping inflation under control, and takes into account the effects of economic policy on income inequality, unemployment and the standard of living.
In all these areas, it wasn't obvious that Frenkel was the right man for the job. He doubted the efficacy of currency intervention, showed little interest in the Bank of Israel's bank supervisory functions and evinced little sensitivity to the new socio-economic environment of 2013, one that demands government do more than ensure top line economic growth and jobs.

Whether you choose to dismiss it as so much populism or celebrate it as the dawn of a new era, no Bank of Israel governor can afford to ignore this new reality if he wants to establish his or her authority.

No one should discount Frenkel's record in the 1990s. He successfully grappled with inflation, a stock market collapse, the traumas to the economy from massive immigration and a government that like today's, was fiscally challenged. But that didn't necessary make him the best candidate to meet the very different challenges Israel faces today.

It is unfortunate, therefore, that Frenkel will probably go down in popular memory – as much as any central bank governor goes down in it – as someone caught shoplifting, though he categorically denies the allegations, and points out that the Hong Kong authorities have apologized to him over the incident. Unlike macro-prudential policies and quantitative easing, people can understand nicking a garment bag from duty-free.

We can be grateful that he will not be the next Bank of Israel chief, but did Frenkel deserve to go down for alleged shoplifting rather than on his economics?

It's hard for a commentator to admit this, but I don't know. On the one hand, it is hard to believe that someone of Frenkel's age and salary would have felt any need to steal anything. It is noteworthy that no one has come forward with other stories of shoplifting, which would point to a real problem.

On the other hand, if it did happen and wasn't the outcome of a simple misunderstanding as Frenkel says, the public could hardly dismiss what happened in Hong Kong as a youthful indiscretion. It has the right to expect public figures hold to a particularly high standard of honesty. That is particularly the case for someone like a Bank of Israel governor, who isn't elected and can't therefore argue that the public demonstrated its forgiveness for his foibles by electing him.

The Bank of Israel governor's standing is based on his or her economic credentials, policy views and an unblemished personal history. Of those three, Frenkel was not the ideal candidate in one category and was suspect in another. This time around we can only hope that Netanyahu will get down to business, stop making goo-goo eyes at international economic celebrities and quickly find someone who can simply do the job.

Jacob Frenkel, left, with Prime Minister Benjamin Netanyahu.Credit: Kobi Gideon

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