Tough task for Israel's new banking boss
Central bankers used to be grey anonymous figures that operated largely behind the scenes to set interest rates and stabilise currency markets. The great recession of 2008-10, followed by the crisis in euroland, changed all that.
It has been central bankers, as much as governments, that have been tasked with stabilising economies. In Britain, the current governor, Sir Mervyn King played a key role in the stabilising of a tottering banking system but as importantly the Bank of England’s inflation fighting mission was transformed into deflation fighting.
The Chancellor took on the task of controlling the budget and restoring fiscal credibility. But securing growth through interest rates and monetary policy was largely left to Threadneedle Street.
Britain has not been alone in this. Ben Bernanke at the Federal Reserve, a noted expert on depressions, has taken it upon himself to adopt some of the most radical polices in the American Central Bank’s history, choosing to link monetary policy in America directly to unemployment. And in Europe, the Italian president of the European Central Bank, Mario Draghi, cast away the caution of his predecessor, lowered interest rates and developed a series of new monetary instruments that have temporarily stilled the crisis of the euro.
Israel too has relied heavily on its central banker Stanley Fischer, the former deputy managing director of the International Monetary Fund. Fischer’s intention to resign from the Bank of Israel in June, 18-months before the end of his official term, has created a huge vacuum.
The Israeli Central Bank governor is widely credited with having steered the Israeli economy safely through the shoals of the financial crisis, heading off inflation and carefully managing the exchange rate for the shekel.
Zambian-born Fischer is now even mentioned as a possible successor to Shimon Peres as Israel’s president.
The showbiz element of central banking has its downside. The choice of Canadian central banker, Mark Carney — on a salary and benefits just shy of £1 million (including housing allowance) — has turned him into a superstar. Personal profiles proliferate and his arrival in London in June, to take over from Mervyn King, is being greeted as the second coming.
Carney inherits a much more powerful bank than that operated by King. By the time he arrives the Bank will have assumed full control not just of monetary policy, but prudential supervision of the banks and responsibility for financial stability.
The selection of Carney, the first foreigner to head the Bank of England, underlines how global central banking has become. Carney won attention for his role in keeping Canada’s banks sound during the financial crisis on Wall Street and steering the Canadian economy through the recession without capsizing. The Canadian will look at new approaches to running the Bank when he arrives in London, including the possible replacement of the monetary target (a government decision) with a new approach (money GDP) that formally gives the Bank of England a more active approach in securing growth.
Finding a new governor of the Bank of Israel will be an early c
hallenge for the next Netanyahu administration in Israel. One of the reasons that people set so much store about independent central banking is that it takes part of the task of running the economy directly out of politics.
This is especially useful under Coalition government where it is often difficult to agree strategy.
Finding economic superstars to take on the role of running the Bank of Israel has paid rich dividends for the country. Among Fischer’s predecessors were Josef Frenkel, the former chief economist of the International Monetary Fund (IMF), and the late Michael Bruno, who held a similar job at the World Bank. The strong representation of Jews in high-level economic policymaking means that there are plenty of choices if Jerusalem decides to look beyond its borders again. Figures such as John Lipsky, a former chief economist at JP Morgan Chase and until recently deputy managing director of the IMF, would almost certainly suit the role along with a slew of US Nobel prize-winning economists including such internationally renowned figures as Joseph Stiglitz. The attractions of running our own central bank, in a medium sized OECD economy, are considerable.
This is true in that the Fed job does not come up very often and the last two holders Alan Greenspan and Ben Bernanke have held onto the job for a considerable period of time.
The challenges of the Israeli economy are considerable. As an open economy, in which foreign trade and cash inflows play a big role, Israel faces tricky problems of inflation targeting and controlling the value of the shekel. As seriously, the OECD, IMF and others point to an unbalanced financial system dominated by a handful of powerful, oligarchical families.
Breaking the grip of this group on the economic system will be a critical challenge for whatever candidate, internal or external, eventually emerges as Israel’s next governor.
Alex Brummer is City Editor of the Daily Mail