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March 7, 2014

World Markets: It's Sink or Swim

Jacob Frenkel, chairman of JPMorgan Chase International, casts a worried eye over the world economy’s future and offers lessons learned from his tenure as governor of the Bank of Israel.


Jacob Frenkel has lived on both sides of the financial world: First, as a regulator — governor of the Central Bank of Israel — and now as a financial services firm; he’s currently chairman of JPMorgan Chase International. As a panelist in the Chazen Institute’s recent World Economic Forum, he had this to say about the road ahead in world markets:

What economists can’t (or shouldn’t) do: The purpose of economics is not to predict tomorrow but to understand processes as you go forward. So I will disappoint those who ask what should be his or her action tomorrow as they call the broker. This is not the type of analysis we bring.

Why some countries win: What is common to those countries that “made it” during the most recent crisis versus those countries that did not is that, by and large, market economies are doing better than centrally planned economies. It’s not an accident that the latter collapsed. The most recent crisis has highlighted the critical role that is played by the financial sector: a banking system that is well capitalized, that has ample liquidity, and that is not excessively leveraged, is much stronger than a banking system that is not characterized by these features. In fact, countries with strong banking systems weather the storm in a much better way than those with weak banking systems. Great attention must be given to strengthen the financial system in general and the banking system in particular.

The importance of financial regulation: Good regulation is an intrinsic part of a well functioning market economy. It is important, however, that these regulations are fully enforced. Hence, supervision, especially of financial markets, is also an integral part of a market economy. Clarity and transparency are two important building blocks that facilitate a well functioning system. As is said about transparency: what you see is what you get, and what you don’t see gets you.

Credibility is key: When we speak about the concept of credibility we say basically that the future matters. Because if we did not care about the future consequences of what we do today, we would not worry about being or not being credible. Credibility is a form of capital. Capital, like flowers, must be watered, must be maintained, and should not be depreciated. Credibility is accumulated slowly and lost quickly. As the saying goes, credibility is never owned, it is just rented.

What destroys society: I used to be a governor of a central bank of a country that had hyperinflation — Israel. I was governor throughout the 1990s. And I can tell you one thing: there is nothing that can destroy the fabric of society more than uncontrolled inflation. We should really watch for it. There has never been a situation in which inflation went out of control without the irresponsible excessive printing of money. The fact that we do not have inflation now and we did not have it for quite a few years in this part of the world is very good news, but I would never throw away the old textbooks dealing with inflation because they might prove their usefulness in the future.

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