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/ By Alan Gallindoss /
Professor Leo Leiderman has now withdrawn his candidacy to become Israel’s next Governor of the Bank of Israel.
He did so in the wake of media reports which have been ridiculing his private interest in astrology which he says is just a hobby, and indeed it may well be. In any case there could perhaps be worse ways of developing economic forecasts in the “dismal science” as economics is known, where most economic forecasts are very often subject to extreme error by their very nature.
We wrote the other day in this newspaper that senior political and civil service appointments were something of of a blood sport here in Israel, and so it is now proving again, even faster than we thought, in this case as well.
Prime Minister Netanyahu and Finance Minister Yair Lapid are now left scrambling for an alternative. They could certainly do worse than to swallow their pride and appoint the Bank of Israel’s Deputy Governor Karmit Flug who is a very capable central banker and seems also to have been Stanley Fischer’s own candidate for the job. She would make an excellent candidate both as an able administrator – she has been acting Governor while the permanent position has been open since the end of June – and as an intellectual who reflects many of Stanley Fischer’s own views about the monetary activism required of a modern Governor. It is enormously significant that Professor Fischer was also one of Ben Bernanke teacher’s back in the day at MIT, and upon whom he clearly had a significant influence. As such Bernanke, who had deeply studied the US economic crash of the 1930s and was ready when the financial crisis struck with a modern approach that has basically, many credit him for, saved the day.
This reflects the fact that fighting inflation in today’s economic circumstances is no longer the only goal of a central bank, in a prolonged era where inflation has vanished and the counter-threat to employment of prolonged periods of actual possible deflation have come to the fore instead. In such a circumstance economic theory increasingly points to the need for accommodative forms of monetary policy to supplement fiscal policy, at least to a certain extent, in order to sustain employment levels in a dangerously contractionary world.
Old-style Chicago school conservatism is the style of economic thought Leo Leiderman is trained in and reflects deep in his own heart, whatever he has been saying to the contrary this week, as did the previous candidate Jacob Frenkel for that matter. However it has been substantially discredited in recent policy action and may be much better avoided in the candidate who gets the job. In Europe in particular, where extreme monetary and fiscal conservatism has proven extremely popular with policy makers, especially in Germany, which has been anxious to punish its southern, Mediterranean, European Union partner countries for prior economic excesses, its proposed austerity programmes has proven so far to be disastrous and had a profoundly negative influence on output and employment in those countries.
In the United Sates in contrast, mainstream Keynesianism economic thinking has been much more successful at helping the economy dig its way out of recession. And “quantitative easing” as the US Federal Reserve’s accommodative approach has been called, instituted by Ben Bernanke, has not, so far at least, led to inflationary problems at all.
The international club of Central Bankers is still something of a balding male bastion though, with so far only the Governor of the South African Reserve Bank Gill Marcus having cracked the glass ceiling and joined the club as its first female member. In the United States Janet Yellen, currently Deputy Chairman of the US Federal Reserve, though is herself one of the leading candidates to succeed Ben Bernanke later this year as Governor of the US Fed. No decision has yet been made there though, and Economist Larry Summers is said to have currently an edge at the White House.
Karmit Flug’s appointment might be a breath of fresh air, provided she can take the heat that will undoubtedly arrive when the spotlight is turned on her, if her candidacy should indeed move forward. However first she must now withdraw her resignation, which she had tabled on learning Professor Leiderman was to get the job.