Fischer: Frenkel Must Work in Changed Economy, With Diminished Powers

In his farewell press conference, the Bank of Israel chief heaps praise on his successor and says his deputy Karnit Flug would have been a good governor, too.

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Jacob Frenkel will have to adjust to a changing economy and a post with less power than it commanded when he was Bank of Israel governor in the 1990s, Stanley Fischer said Tuesday in his final press conference as central bank chief.

"Concerning the policies that Jacob Frenkel will adopt and the assumption that he will take a more hawkish stance, you need to ask him," Fischer said. "To me, it's clear that the world in which we have operated in the last few years is completely different from the one in which Jacob Frenkel worked as governor."

Fischer noted that the governor's powers were reduced during his term under the Bank of Israel Law, which established a monetary committee to set interest rates, which were once the governor's sole prerogative.

"The incoming governor will encounter a different reality than the one he knew in his previous terms here. He will have less freedom to make policy decisions," Fischer said, citing legendary economist John Maynard Keynes' dictum that when conditions change, policies should change.

During Fischer's eight years at the helm, he eschewed traditional policies and intervened in the foreign currency market with the aim of weakening the shekel and helping exporters. At the height of the global financial crisis, he bought government bonds to support the markets and prevent a credit crunch.

Frenkel has yet to address the policy issues he faces as governor, but in the past he has said he believes that central bankers should keep to their traditional role as guardians of price stability.

In any case, Fischer heaped praise on his designated successor. "I've known Jacob Frenkel many years," Fischer said. "He was an important and successful governor under difficult economic conditions. There's no reason he won't be a very good governor in the years ahead."

Fischer declined to comment on the state comptroller's findings a decade ago that Frenkel had abused his expense account and other perks while in office. He said it was a matter for the Turkel committee vetting Frenkel's appointment.

Fischer also praised his deputy, Karnit Flug, who reportedly had sought the governor's chair and had Fischer's endorsement. She will be serving as acting governor until Frenkel winds up his affairs in the United States.

"Even though Jacob lived abroad, he didn't stop being Israeli for even a day," Fischer said. "There were excellent Israeli candidates, and Karnit Flug would have been an excellent governor, but I'm sure that Jacob will fulfill the task successfully."

Fischer didn't offer any advice for his successor. But he called the budget deficit "one of the biggest policy challenges" and said interest rates should be used to help exporters by weakening the shekel, even if that encourages higher housing prices.

Closer to home, Fischer said the next governor should act to narrow the wage gap between Bank of Israel employees covered under old wage agreements and newer hires who enjoy less favorable terms. "To enable the Bank of Israel to continue hiring the highest-quality staff, we need to deal with this problem," he said.

Fischer characterized his eight years at the Bank of Israel as a success, though he was careful to share the credit with the Finance Ministry.

He noted that Israel's national debt had fallen to 73.1% of gross domestic product from 93.9% when he took office. Unemployment among people 25 to 64 declined to 5.9% from 9.6%, while labor force participation grew to 74% from 67.9%. Average inflation was 2.5%, inside the government's target range of 1% to 3% annually.

On the other hand, the budget deficit widened to 4.4% of GDP from 1.7%, and the poverty rate remained virtually unchanged at 25%.

Stanley Fischer at his farewell press conference, June 25, 2013.Credit: Olivier Fitoussi

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