Pinchas Landau
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Netanyahu’s new Bank of Israel Governor, no questions asked

Amir Yaron is clearly a good bet for the PM -- so what if the public doesn't know the appointee's views on the Israeli economy
Amir Yaron, Israel's designated Central Bank Governor (The Wharton School, University of Pennsylvania)
Amir Yaron, Israel's designated Central Bank Governor (The Wharton School, University of Pennsylvania)

Had it been up to him, Napoleon would probably have reappointed Karnit Flug as Governor of the Bank of Israel. That’s because Boney (supposedly) said that being lucky was the most important attribute a general could have — and Flug’s five-year term, which ends next month, was shaped by the great good fortune not to experience either domestic or global crises.

The chances that the next Governor will enjoy a tenure marked by stability, growth and the absence of major scandals, are vanishingly small. On the contrary, ten years after the Great Financial Crisis struck the global economy, and with the Israeli economy in an extraordinary seventeenth consecutive year of economic expansion, the odds are heavily weighted in the other direction.

Beyond the mere statistical probabilities — against which good luck might be sufficient protection — there are powerful reasons to believe that the next few years will be very different from the past few. Why that is so for the global financial system and economy is beyond the scope of this article, but the single most powerful factor at work globally — the rapid rise in interest rates and bond yields — is certainly germane to the Israeli economy, which is the focus here.

The absence of crisis meant that Flug’s tenure was painted in the color most beloved of central bankers — grey. Nothing of great substance happened — especially in the key areas under the Governor’s purview. Symbolically, the last meeting she chaired of the Monetary Committee (MC), which sets interest rates, decided to leave the Bank’s key interest rate unchanged at 0.1%.

Incredibly, this was the thirty-seventh successive decision to leave the rate unchanged, over a period stretching all the way back to February 2015, when the rate was cut from 0.25% to 0.1%. That is a display of inactivity not only totally unprecedented in Israel, but almost unrivalled anywhere. The most dramatic decision made during this period was to reduce the number of MC meetings from 12 to eight per year — after all, why bother to prepare, meet, discuss and then decide to do nothing every month, if you can achieve the same outcome every six weeks. That’s surely a more economical use of resources.

True, most of Flug’s predecessors would turn green with envy over such glorious grey nothing. They struggled most of the time with red and were happy to have occasional patches of orange. But that was a different era, in which large deficits were the norm and inflation was a constant problem.

In the decade since the global financial crisis, the Israeli economy has been one of the top-performing in the world. The past five years, in particular, have been a Goldilocks era, in which everything has been just right: growth has been between satisfactory and excellent; the hi-tech sectors (“Start-Up nation”) have generated large surpluses in the country’s current account, allowing it to accumulate considerable investments overseas; beyond high-tech, domestic growth has been strong and job-creation ceaseless, so that employment has marched upwards and unemployment shriveled to 50-year lows; and the government budget deficit has been below target for four successive years.

None of these things just happen by themselves. They have roots and causes that go back a long way and they carry “fingerprints” of people who made decisions — in this case, mostly the right decisions. Among those people are, prominently, Benjamin Netanyahu — in his earlier, reformist days, notably as Finance Minister in 2003-05, and also Karnit Flug, as deputy-governor and then governor — as well as many others.

But the success story is not guaranteed to continue. On the contrary, there is considerable evidence that Flug is jumping ship. And the single biggest reason why the Israeli economic outlook is clouding over is because the key decision makers have spent the last several years doing little or nothing to secure the future.

Netanyahu’s excuse is that he has been focused on foreign and security affairs. But the bitter truth is that, since 2013, Netanyahu has lost control of economic policy — because Likud’s limited Knesset strength has obliged him to cede one key ministry, and he chose to cede Finance. Furthermore, because of his row with then-Finance Minister Yair Lapid in 2013 and his appalling choices of candidates for the Governorship, he ended up by default with a Governor — Karnit Flug — whose view of political economics is vastly different from his own.

This time he was determined to obtain his kind of Governor — one from his kind of town, namely Chicago, the bastion of academic free market economics. Incredibly, he almost blew it again by initially proposing the same failed candidacies as last time but, in the end, someone found him Amir Yaron.

Yaron ticks almost all the boxes for Netanyahu: an Israeli-born academic, with a doctorate from Chicago, now a faculty member at a leading American university. Best of all, he is ‘clean’: no links with Israeli or other tycoons, no personal ‘issues’, nothing to prevent his rapid approval by the committee charged with vetting candidates for the country’s most sensitive posts.

That’s great, as far as it goes. However, the selection process does not allow, at any stage, for anyone to ask any questions of the proposed candidate. Thus we have no idea whether he has up-to-date knowledge and understanding of the Israeli economy and financial system of 2018 — which bears no relationship to the one he left behind thirty years ago, or to the American one his academic papers have analysed.

He has no practical — as distinct from theoretical — experience of central or even commercial banking. He has never run a large, bureaucratic organization, let alone one so cossetted and downright Bolshie as the Bank of Israel.

It is therefore a sure bet that for the next 12-18 months — if he is granted that much peace and quiet — he will be on what is being politely termed “a steep learning curve”. He will not interfere in general economic policy-making — a statutory task of the Governor — before, during or after the elections, nor in the coalition-building process, nor in the formulation of the 2020 budget by the next government.

Even the great Stanley Fischer — who knew a great deal about the Israeli economy, long before he became Governor — spent that long learning the ropes, and he had been number three in the IMF beforehand! But Fischer and, later, Flug — and, earlier, Klein and even Frenkel — had taken stands on the whole gamut of economic policy issues.

Will Yaron? If so, what are his views? Does he have the guts to stand up to the politicians — or the bankers — when the circumstances arise to make that necessary? Who knows? Who even cares? Netanyahu wants him, so his will must be done.

The selection and approval system is deeply flawed — that much is certain. Now we need lots of luck.

About the Author
Pinchas Landau is an economic and financial analyst, serving as a consultant to major financial institutions in Israel and abroad on domestic and global developments.
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