Can Frenkel change his spots?

Avi Temkin

Jacob Frenkel will have to throw into the trash the belief that the markets should be allowed to supervise themselves.

Paradoxically, the necessary condition for Jacob Frenkel's success as governor of the Bank of Israel is to be the complete opposite of former governor Jacob Frenkel. He must carry out the opposite policies he led in his first term, and must set aside the "I believe" which has accompanied him during his career.

Frenkel was the governor who instilled in the Bank of Israel the faith that the sole job of a central bank is to protect price stability, and that the only tool to be used is the interest rate. He fought bitter battles, both with the Bank of Israel and outside of it, to establish this fact into the consciousness, colliding with the business sector and Ministry of Finance officials. He gained the upper hand in all of these battles.

The direct result of the victory of Frenkel's perspective was monetary policy which did not consider the job of stimulating growth, jobs, or exports. Frenkel always felt that the government should take care of growth through correct budget policy and by removing obstacles. This faith also applied to protecting exports and job creation.

More than a decade passed until Stanley Fischer was appointed governor of the Bank of Israel and opted for the opposite policy than that of Frenkel. Without any dramatic announcement, Fischer navigated policy in the opposite direction. He held that interest rate policy should take into consideration factors such as the growth rate. He did not hesitate to intervene in the foreign currency market when he found it necessary, and he did not consider inflation to be the sole target. Even within the principle of maintaining price stability, Fischer saw room for other objectives.

The key question is therefore whether Frenkel can, intellectually and emotionally, severe himself from his heritage and faith that he created and adopt the approach of Stanley Fischer. For example, will he agree to continue to intervene in the foreign currency market to protect the exchange rate. Will he give priority to questions of growth and carry out an expansionist monetary policy, even if he is not completely sure that it will have the expected effect on inflation.

The "old" Frenkel would respond in the negative to both these questions. In fact, he would be quick to raise the interest rate, explaining why it this is necessary to retain "policy credibility". So far, there is no hint that the current Frenkel will be any different from the old Frenkel, and until proven otherwise, we may be facing a U-turn in monetary policy.

Another, no less important, issue is financial regulation. Frenkel is not a big believer in regulation. He thought, and, by the way, still thinks, that the markets will always find the optimal solution to any problem. In his world, the 2008 crisis should not have happened. Fischer acted as someone who knows the critical need for an effective system of financial oversight and applied at the Banking Supervision Department.

Therefore, if there is a new Frenkel, he will have to throw into the trash the belief that the markets should be allowed to supervise themselves, and understand how much regulation and oversight of the banks and financial markets is needed. On this point, he is due to operate in territory where he has never felt comfortable: the world of regulations, supervision, and control. Here too, only time will tell whether he has changed his spots and adopted policies suited to the needs of the Israeli economy of 2013.

Published by Globes [online], Israel business news - - on June 24, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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