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Is Chauvinism Behind the Chaos at the Bank of Israel?

Karnit Flug was the natural successor to Stanley Fischer as Bank of Israel chief, but it won't happen because of a fossilized old boys' club

Asher Schechter
Asher Schechter
Asher Schechter
Asher Schechter

She is a highly esteemed economist; none contest that. Competent, trustworthy, a solid and reliable central banker who had reached a level never before reached by other women. For 25 years she has climbed the ladder, slow but steady, most recently serving as the outgoing governor's second in command. Many said she was his intended, almost-certain successor, and many high-ranking officials voiced their support of her, including the outgoing governor himself who recommended her for the job.

Thing is, she lacks glitz. She's just not glitzy. She's not showy, either. Doesn't have much in the way of pizzazz. And while some of her colleagues trot the globe charging lucrative consulting fees, she doesn't even have an English Wikipedia page to her name, let alone a top banking job on her belt.

And when it came time to replace the superstar outgoing governor, she was scorned in favor of a high-profile candidate. And when this snazzy man was forced to pull out of the race, another man, of similar background, was tapped. And when that man also withdrew his candidacy, she still didn't get the job.

No, we're not talking about Janet Yellen and Larry Summers, the two leading candidates for chairmanship of the Federal Reserve, but about Karnit Flug, currently the acting governor of the Bank of Israel, and the trope of outsider, male candidates who passed her by.

There are parallels to the heated contest between Yellen and Summers, but this is a dirtier business. Flug has reluctantly been cast as the anti-heroine of what has become known in news media around the world as the Bank of Israel "comedic farce" (Huffington Post), Israel's "Central bank soap opera" (Businessweek) or "comedy of errors" (Reuters).To recap: Despite a five-month notice by Fischer, Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid failed to name a candidate to replace him in a timely manner. Fischer had already left by the time they announced the appointment of Jacob Frenkel, who had already done 1.8 stints as governor of the central bank (he quit during the second one). With his history and appointments at top-tier international financial institutions Frenkel seemed just the ticket to the Israeli leaders seeking a candidate of Fischer's extraordinary caliber. But Frenkel withdrew following allegations that he'd been caught shoplifting a garment bag from a Hong Kong International Airport duty-free shop seven years ago.

Egg dripping from his face, Netanyahu tapped Leo Leiderman, Bank Hapoalim's chief economist. That idea lasted two days and died after a harassment allegation was brought before the vetting committee. It seems Eugene Kandel, the head of the PMO's National Economic Council, rebuffed Netanyahu's advances. Now the leading candidate for the job is apparently Mario Blejer, former president of the Central Bank of Argentina.

One suspects all this embarrassment could have been avoided if Karnit Flug - who Stanley Fischer himself touted as his successor – had been chosen.

This sentiment was echoed by many, including Labor leader Shelly Yacimovich, who after the Leiderman debacle said: "Netanyahu and Lapid should go to Karnit Flug's house, ask for her forgiveness and implore her to lead the central bank." Other Knesset members echoed her sentiment. Journalists, like Haaretz's Meirav Arlosoroff, also pleaded with Netanyahu to cut the shenanigans and appoint Flug before Israel's economic standing could be irrevocably tarnished. But Netanyahu has stuck to his guns: Karnit Flug will not be chosen.

Flug, for her part, announced her resignation after Leiderman's short-lived appointment, but agreed to postpone her departure until a new head is found.

Netanyahu's embargo on Flug has been and is still a source of controversy. Later this month, despite the summer recess, at the behest of the opposition the Knesset will convene a special session on Netanyahu's refusal to appoint her: "We demand that the prime minister and the finance minister appear before the Knesset and explain their stance," the summons to the session stated.

Like Knesset member Merav Michaeli, who initiated the special session, many are baffled by Netanyahu's stance on Flug, especially given the dearth of alternatives. Lapid, it was reported, did her candidacy, but was overridden.

Keynes in a skirt

It doesn’t take Columbo to understand why Flug was not chosen, or why Obama has been hesitant to appoint Janet Yellen: they're not part of the senior economists' old boys' club. (Neither Israel nor the United States have had a female central bank governor.)

Much like Yellen, Flug is a longtime civil servant, a central bank insider with no private banking experience and independent views that don’t always suit the government's official stance. She does not frequent Davos. She does not lead a jet-setting life.

Looking at Netanyahu's four candidates through that prism (including the reluctant Kandel): All are male. Two were born in Cordoba, Argentina, but that's just a coincidence. All earned their PhDs from the University of Chicago, the pinnacle of neo-liberal, conservative economic theory, the birthplace of the pioneering Chicago School of Economics and home to such capitalist chieftains as Milton Friedman and the much-disputed philosophy known as Monetarism. This is not a coincidence.

Other than that, they boast another quality that Karnit Flug simply does not have: an international pedigree.

Jacob Frenkel was vice chairman of AIG after his first stint as central bank governor in the 1990s, and is currently the chairman of JPMorgan Chase International. He is a world-leading economist (albeit one whose predictions in the past decade proved inaccurate, to put it gently) and is a regular fixture at the World Economic Forum in Davos.

Mario Blejer, since resigning his post as president of the Central Bank of Argentina after five turbulent months in 2002, has been earning lucrative fees in consultancy to private firms and governments. Leiderman, a former senior executive at Deutsche Bank, wields immense influence as the chief economist at Hapoalim, Israel's largest bank.

All of Netanyahu's candidates are wealthy, established, branded economists with a conservative viewpoint that matches his own, and vast experience in the banking world. Compared to the grey, local Flug, they are economic superstars, big-ticket items, much like Stanley Fischer. That's what Netanyahu wanted: a big-name, glossy economist with international renown that could sprinkle his stardust on Israel's less-than-shimmering economy.

As alumni of Chicago University and adherents of monetarism, small government and market efficiency, all are on the same page as Netanyahu. Not so Karnit Flug; much like Yellen in the U.S., she is a bit eccentric, free-spirited and boasts a more socially-oriented, Keynesian worldview.

While she wasn't expected to break with Fischer's policies, in interviews she discussed poverty and inequality – subjects with which she engaged extensively in her academic work - as two of the biggest problems afflicting Israel's economy. She expressed views that called on government to intervene and set concrete goals to reduce poverty – policies that the disciples of the Chicago School wouldn't be caught dead promoting.

And worst of all, she undermined Netanyahu, over and over again.

Eggs on 
Netanyahu's face

As head of the Bank of Israel research department, a role she filled for 10 years from 2001 to 2011, the department she headed published a number of reports contradicting many of Netanyahu's claims about his economic achievements.

One report in 2004, for example, clearly stated that Israel's economy came out of recession and began to grow

Karnit Flug. Credit: Tomer Appelbaum

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