Until recently, the Bank of Israel was judged by experts in the field of central banking as being the best managed and most effective central bank among advanced economies during a time of global financial and economic turmoil. In a few short weeks, Israel’s Prime Minister, Benjamin Netanyahu, and his Finance Minster in his coalition government, Yair Lapid, have succeeded in doing what once seemed impossible; transforming his nation’s central bank’s once stellar reputation into a comedic farce.
The reason why until recently the BOI was viewed globally as a conspicuous success was largely rooted in the stewardship of its Governor, Stanley Fischer, whose term began in 2005 and ended recently. Fischer, who had previously served as the Chief Economist of the World Bank, provided agile and careful management of Israel’s central bank with the onset of the global financial and economic crisis in 2008. He was far more judicious when it came to cutting interests rates, in contrast with many of his peers, who pressed the pedal to the metal when it came to loose monetary policies. His policies are considered by experts to have been crucial in keeping the Israeli economy out of recession, and boosting exports, leading to one of the best performance metrics of any advanced economy since the onset of the global crisis. The consensus among central bankers is that Stanley Fischer was the best central banker in the world. A manifestation of the esteem felt for him was the effort by the previous prime minster of the Palestinian Authority to have Fischer appointed to run the International Monetary Fund after its then head, Dominique Strauss-Kahn, was forced to resign in disgrace (Fischer was disqualified due to his advanced age).
When Fischer decided to resign from his post at the Bank of Israel, he gave Prime Minister Netanyahu five months notice, ample time one would think, to find a suitable replacement. It seems that the time offered was largely wasted. The Israeli Prime Minster also ignored Fischer’s recommendation on his replacement, Dr. Karnit Flug, a distinguished economist who has worked for the BOI for the past 25 years, and has served as Stanley Fischer’s Deputy Governor since 2011. However, Netanyahu, according to the Israeli media, dislikes Dr. Flug’s philosophy, and therefore selected Jacob Frenkel, who had served as BOI governor previously. Then the news reports emerged about Frenkel being suspected of shoplifting from a duty free shop in Hong Kong. He denied the charges, but after three weeks he withdrew his candidacy. Clearly, Netanyahu and Lapid had done a terrible job of due diligence. With Fischer already gone, and Flug serving as acting governor, the speculation grew that Netanyahu and Lapid would forego “philosophical issues,” and appoint the person Stanley Fischer had recommended. To the surprise of many, the two politicians again sidestepped Ms. Flug, and this time selected Leo Leiderman, an economics professor who has also worked in private banking. Dr. Flug took the hint, and announced her resignation from the Bank of Israel, while agreeing to stay on for thirty days to facilitate Leiderman’s transition into the role of BOI governor.
Netanyahu and Lapid assured the Israeli business community that this time, they had truly done their due diligence. The words had barely escaped their lips when reports began proliferating in the Israeli media about Professor Leiderman’s penchant for consulting an astrologer on important matters, and accusations of sexual harassment while serving in an senior role at a major European bank. Within three days of his being introduced by Netanyahu and Lapid as the future governor of the Bank of Israel, Leiderman unceremoniously withdrew his candidacy.
Frenkel’s candidacy lasted for three weeks and Leiderman’s for three days. The joke circulating in Israel is that the next candidate nominated by Netanyahu and Lapid will last for three hours. One would think that after two disastrous nominations, the decision makers would have learned their lesson, and beg Dr. Karnit Flug to take the job. Yet, stories are still circulating in the Israeli media that Netanyahu continues to have problems with Flug’s philosophy, and remains convinced that his judgment on selecting the future governor of the Bank of Israel is superior to that of Stanley Fischer.
Netanyahu and Lapid, by their stubborn refusal to select a highly qualified woman and obvious best choice for a critically important position for the future sustainability of the Israeli economy, have succeeded in turning what was until recently the most admired central bank in the world into a global laughing stock.
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