Fischer bids farewell, says Frankel faces different reality since his last term

Outgoing BoI chief says successor will have less freedom to make policy decisions than he did in previous stint as governor.

Outgoing BoI Governor Stanley Fischer 370 (photo credit: Marc Israel Sellem/The Jerusalem Post)
Outgoing BoI Governor Stanley Fischer 370
(photo credit: Marc Israel Sellem/The Jerusalem Post)
Summing up his eight years as Bank of Israel governor in a final press conference on Tuesday, Stanley Fischer said that his successor Jacob Frenkel will face a different reality and a different institution than the one he left behind after his earlier stint as governor in the 1990s.
“The incoming governor will encounter a different reality than the one he knew in his previous term here, since he will have less freedom in making policy decisions,” Fischer said.
During his term, Fischer pushed through a new Bank of Israel Law that devolved interest rate decisions to a monetary committee and installed an administrative committee to make managerial decisions.
“It’s clear to me that the world in which we operated in recent years is completely different from that in which Jacob Frenkel worked in as governor,” he added.
“I’m the last person who would say that the position of governor is not an important one, but it is less important today than it was before the Bank of Israel Law was implemented and the council and committee were established,” Fischer said.
The outgoing governor went as far as to complain that newspaper headlines reporting on “Fischer’s interest rate decisions” were misleading.
“You should remember that decisions are made by the committee, which the governor is, of course, part of,” he said.
Meanwhile, Fischer felt ill and was treated by Magen David Adom paramedics at his home in Herzliya on Tuesday night.
Following treatment, he was in good condition and did not require hospitalization.
Frenkel’s nomination hit a road bump on Tuesday when the Movement for Quality Government in Israel watchdog NGO decried his reappointment as a breach of term limits.
Attorney-General Yehuda Weinstein on Monday issued his opinion to the prime minister that Frenkel’s return was acceptable because his first two terms (1991-2000) predated the 2010 law that established the limits. The final decision, however, rests with President Shimon Peres, who will choose whether to approve the nomination based on recommendations from a committee headed by former Supreme Court justice Jacob Turkel.
In a letter to Turkel and Peres, the NGO argued that term limits were intended, in part, to limit political influences on the central bank. “Institutional mechanisms were established by law to ensure the Bank of Israel’s independence; therefore the new mechanisms should apply, even retroactively.”
The Turkel Committee will also likely consider the repercussions of a scandal that followed Frenkel’s previous term, in which the state comptroller forced him to return NIS 238,000 to the state, insinuating that he had improperly collected a lavish severance upon his departure.
On that issue, Fischer came to Frenkel’s defense. “I’ve known Jacob Frenkel for decades,” Fischer said. “I understand the Jacob returned the money that the comptroller demanded he return, and the issue is resolved. There is a committee that will have to check the issue, a committee I greatly respect, and I suggest that we wait to see what it says.
“I believe that in several months, Jacob will stand before you at a press conference as governor,” he continued, crediting Frenkel as an effective governor whose reforms paved the way for the the bank’s successful navigation of the world financial crisis.
Looking back over his eight years in office, Fischer pointed to numerous economic achievements, though he did not shy away from outlining failures and future challenges.
“The Israeli macro-economy is an exemplary model for other economies,” the former World Bank chief economist declared. Since 2005, the country’s debt-to-GDP ratio had dropped from 93.9 to 73.1, even as other countries saw their debts rise as a result of the financial crisis. The employment rate increased from 67.9 percent to 74%, while unemployment dropped from 9.6% to 5.9%. The country racked up higher reserves – which Fischer said would act as safety buffers for the economy – and enacted numerous reforms to strengthen its banking sector.
Yet several challenges remain. The poverty rate in the country has hardly budged and the exchange rate is stubbornly high. “People want a strong economy with a weak exchange rate, and these two things typically do not go together,” he noted.
Keeping the country’s deficit in line remained one of the biggest challenges for the economy.
“I often say the economy has two doctors – the Bank of Israel and the Ministry of Finance, and their cooperation is very important.”
Fischer addressed difficulties in the housing market, where prices remain high. “It’s clear that the interest rate affects the demand for housing. We’ve been asked, if that’s the case, why don’t we raise the interest rate to lower the prices? The answer is simple: The added value of exports is 28-30% of GDP, and the added value of construction is 8%. You don’t use the interest rate to take care of housing prices at the expense of exports,” he said.
When asked to name areas in which he failed, Fischer said that a wage deal reached with the Histadrut labor federation needed to be revised if the Bank of Israel hoped to continue attracting qualified talent.
Approved plans to upgrade the central bank’s computers and modernize the building should be carried out swiftly, he added.
He also said that a system should be enacted to coordinate financial regulators, either by consolidating them or through a financial stability coordinator that would align their actions. “In every other economy there is a committee that coordinates these regulators, and it’s very important that we establish such an institution in Israel. Its importance is not felt in normal times, but primarily at a time of crisis.”
Fischer’s final day in office will be June 30, at which point his deputy, Karnit Flug, will take over as acting governor, pending Frenkel’s confirmation.
Before Frenkel’s nomination, several politicians had expressed hope that Flug would be nominated as the first female Bank of Israel governor.
“Karnit Flug could have been an excellent governor, though I’m sure Jacob will fill the position successfully,” Fischer said.