Jacob Frenkel attended his first IMF meeting in 1986 and has not missed one in the past 40 years. He has worn many hats in those years and brought many perspectives to the IMF table as a top economist at the University of Chicago followed by two terms as the governor of the Bank of Israel then on to Wall Street as he rose as he spent more than 20 years as the chairman of JP Morgan international. And with all this he still found time to be head of the group of 30 and much more.
Jacob has never been one to hold back his beliefs in his years as a top academic economist. He has always believed in free markets. He finds the current assault on free trade by way of tariffs to be major policy mistake that could lead to even worse events down the road.
One of his warnings that has already to come to pass is the process of retaliation as U.S. and Chinese tariffs rise above 100%. He says the reciprocal tariffs are only postponed and “sit like a loaded gun on the table.”
In the second part of this interview he focuses on central banks and the importance of their continued independence. He is unnerved by the pressure on Fed Chair Powell by President Trump and sees it potentially undermining the Fed’s ability to make policy in its own independent way.
So dive in and hear, see what Jacob has to say. He is as great an explainer, and orator as he is an impassioned thought leader.
A world that is interdependent needs to remain interdependent 00:02:16:20
…A tariff story - You know, about in 1930, the US imposed an extraordinarily high tariff across the board, the initiative of senators and Congressmen Smoot-Hawley, and it is called the Smoot-Hawley Tariff Act, and it was designed in order, in quotation marks, to help American industry to help American label. A year earlier, in 1929, there was the large stock market crash and unemployment went up to 8%. And the question was what should the government do? And they unfortunately, in retrospect, it was a terrible policy. It was removed. Herbert Hoover, in fact, was the president at the time. He lost his presidency and Roosevelt came in and we went on. But this part of memory was part of our DNA. Hmm. Tariffs is not a healthy policy instrument. A world that is interdependent needs to remain interdependent and open. And it really proved to be a bad policy. That's why, in a way, when the current policy regime changed and President Trump imposed across the board tariffs and weaponized tariffs and economic policy to achieve other objectives, I was puzzled. And frankly, I was hoping that this was just a way to get countries to the table to negotiate because there are always stresses.
The art or the SHOCK of the deal? 00:04:07:03
And President Trump has a track record of making the deal. And so I was hoping this would not actually be implemented. Well, the jury's still out. We will need to see whether it is being removed or not. But markets do not wait to see things happen. They act on expectations of what would happen if those threats are implemented. And I believe the markets are telling us <beware>, I hope policymakers in the US think twice. It's not going to end well if you are going to do it that way <reciprocal tariffs>. And why? I come back to how it's going to end because we don't really know. But it all started by imposing tariffs across the board. The markets immediately shuttered and thereafter, the President decided to postpone it.
Gun still on the table 00:05:09:03
…Let's remember, postpone does not mean eliminate it. Right. And the markets indeed did not take this as a cancellation of the bad news, but rather as the gun is still on the table.
What is the real objective; what such an expedited process? 00:05:41:04
My first question. Is it more the way he has done it, the extent to which he has done it, the sort of the speed with which he's done it? What does he do when he first goes wrong? Or do you say you should make the tariffs always make sense? The world is imperfect. So go ahead and work on tariffs because people have done it in the past.
Tariffs are a secondary policy instrument at best, not the main one 00:06:01:04
No, I think as a general rule, tariff policy cannot be the main one, or one of the main instruments of economic policy because at the end of the day you have to ask, what do I want to achieve? If I want to encourage production, then subsidize production. Use your tax system, your subsidy system. If you want I want to discourage consumption, then use the tax policy… at the end of the day, why should the American consumer pay a higher price? Only because the government wants to encourage the producer, then focus on the producer. So let me just go on and say that as a general rule, tariffs cannot be the main policy instrument.
A world too complex to be ruled by simple tariffs 00:06:56:00
Our world is very interdependent. We got used to supply chains that are very complex. If you are imposing a tariff in order to encourage your domestic producers, don't forget many of their raw materials and inputs are also imported. And on them there are tariffs and therefore you are actually taxing them rather than subsidizing them. And likewise, water flows.
Tariffs do not stay where they are put 00:07:23:18
If you are imposing a tariff on China, they will send it to you indirectly through another country. We are in a multilateral world. Bilateral policies do not solve multilateral issues. The US has indeed large current account deficit and this is chronic. It's over the years every student out of undergraduate will tell you that from national income accounting. If a country has a deficit in its current account with the balance of payments it reflects it in fact is equal to the excess of spending over income.
A better world based on comparative advantage 00:08:34:03
Well, it will be like if there were no tariffs on anybody's part, no tariffs at all, what would the world be like? I think it would be a better world. It would be a better world. You know, from the 19th century, when David Ricardo discovered and I articulated what is called the principles of comparative advantage, the principle said, you produce what you are best at and you don't need to produce everything because somebody else will produce the things that you are not the best, but you want to consume.
Let markets work: that is the essence of trade 00:09:05:21
That's the essence of trade. And at the end of the day, trade will be balanced if you allow the market mechanisms to work, including exchange rates. So I think that it is a problem to have to have a tariff policy. And the point is that countries, as we have seen already, are going to retaliate. And when you retaliate and if those are the rules of the game…. I feel in I in this world you have a lot of blind people…
The China problem at its inception 00:10:09:01
Well, the China problem continues if you know, and many people would say they're not a fair trader, they're not a free trader, they ignore things that the WTO World Trade Organization tells them. The Chinese, the biggest critic, would say they do what they want and the US is just happy to bring all these cheap goods in, even if even if the manufacturing sector did start having a good deal with ‘60s & ‘70s when we had to go overseas and start investing in China, with much lower wages.
The China problem today 00:10:54:02
But there is no question that the real issue with China today has to do with technology, has to do with property rights, has to do with stealing technology and secrets like that. Then focus on this. Why should I across the board curtail trade <if this is the issue>?
What China is 00:11:26:02
Well, you know, China is the second largest trading partner or the fifth largest for all countries in the world. You cannot change it overnight and you don't want to change it overnight. You want to control it. You want to navigate it and focus on the key issues for you, which, as I said, it is technology.
End Trade—
Shocks and behavior 00:12:55:09
…we have two shocks very recently, the October shock. Oh boy, things are getting better. And then you get the trade. Trump shock. Don't forget, in between the war in the Ukraine. Oh, my gosh. Yes, that's the one I meant to say we are in because we've already talked about that. But with these kinds of things now, what is this going to mean geopolitically?
The Trump Vs Powell factor 00:14:48:10
If you look at how the government, the legal system is structured around the Fed Reserve, it's impossible < to fire Powell>, but it's still very upsetting to the markets <even to talk about it>. And I can't believe the number of pieces I'm seeing now where bloggers and reporters and all kinds of people are writing these articles about this because they feel investors are taking it seriously. So everybody's got to either take it seriously too, or at least explain why they shouldn't.
The theory and rationale for central bank independence 00:15:38:18
You realize there have been bad experiences with inflation and most countries have had it. The instrument and the mechanism by which we, the group of policymakers, including legislators, have enshrined that stability as important is by granting independence to the central bank. Independence does not mean that the central bank is doing whatever it wishes in a crazy, crazy, erratic way, but that the way in which it fulfills the government objectives is given and left to them to the professional decision.
Independence allows a longer time horizon for policy focus 00:16:19:13
It is called instrument independence. I can use the instrument in my position the way I believe as a professional. It is essential because the inclination of the political system and they are all good people, but the inclination is to focus more on the short term because that's the horizon that they look at, because they want to be reelected. But the economy needs to have a long term perspective with the wisdom of Congress and in of most policy of most legislators, the decision was that ‘we delegate’ the achievement of price stability and financial stability to bodies like the central bank, and we give them independence to choose.
The world needs a strong independent Fed 00:19:52:19
And that's what makes the US what it is. So in spite of all the ups and downs, the US is still the most attractive country in the world when it comes to stability and the rule of law. So I think this is where it is. But let me close by. Coming back to defend the Fed which is the largest central bank of the world. The central banking society community of the world needs to have a strong Fed. A strong Fed means a Fed that is not politicized and that is steady as you go. And I think that what the Fed is doing now, it is exactly doing this. And I think that if it yielded now to change interest rates to be low when that is not wanted, then it would be a mistake.
Post Script Breaking news during this interview
NEWS- Trade war with China said to be unlikely- Bessent
Bessent said that the trade war with China isn't going to be a problem and the markets love it. Well, he basically said that the trade war with China will not be sustainable. Yes. And first of all, he's right. Second, he's wise to have emphasized this point, which he believes in. And it's good that it was stated in the markets.
Markets are a referendum on policy
You know, markets are running referenda on an ongoing basis and markets immediately responded. And the Dow Jones is up by whatever, 800 points over, if not more, and the market likes it. What does it mean? The markets tell you that trade wars, we do not want to have them. And, Secretary of Treasury please conduct economic policy that allows the system to benefit from openness and trade because the world of an eye for an eye in trade.
Uncertainty is a serious problem policy should not amplify it
However, uncertainty is not something which is good for the market on an ongoing basis. Investors need to have a clearer picture about tomorrow, about the rules of the game, and not only investors, also consumers, everyone. So I think that the world, which is less volatile in which economic policy is designed to mitigate shocks rather than to amplify them is a better world than maybe we are.
IMF and World Banks are to be Treasured institutions
I think that the idea that the changing world requires a modified set of institutions is something which is noteworthy. But by the same token, I am afraid that the appetite today, the political appetite globally to create institutions of the type of the IMF and the World Bank, these there is no appetite for that. And therefore what one should be careful is not to destroy things before you have the next one in place, because the world can sustain imperfect institutions.
A world that is interdependent needs to remain interdependent 00:02:16:20
…A tariff story - You know, about in 1930, the US imposed an extraordinarily high tariff across the board, the initiative of senators and Congressmen Smoot-Hawley, and it is called the Smoot-Hawley Tariff Act, and it was designed in order, in quotation marks, to help American industry to help American label. A year earlier, in 1929, there was the large stock market crash and unemployment went up to 8%. And the question was what should the government do? And they unfortunately, in retrospect, it was a terrible policy. It was removed. Herbert Hoover, in fact, was the president at the time. He lost his presidency and Roosevelt came in and we went on. But this part of memory was part of our DNA. Hmm. Tariffs is not a healthy policy instrument. A world that is interdependent needs to remain interdependent and open. And it really proved to be a bad policy. That's why, in a way, when the current policy regime changed and President Trump imposed across the board tariffs and weaponized tariffs and economic policy to achieve other objectives, I was puzzled. And frankly, I was hoping that this was just a way to get countries to the table to negotiate because there are always stresses.
The art or the SHOCK of the deal? 00:04:07:03
And President Trump has a track record of making the deal. And so I was hoping this would not actually be implemented. Well, the jury's still out. We will need to see whether it is being removed or not. But markets do not wait to see things happen. They act on expectations of what would happen if those threats are implemented. And I believe the markets are telling us <beware>, I hope policymakers in the US think twice. It's not going to end well if you are going to do it that way <reciprocal tariffs>. And why? I come back to how it's going to end because we don't really know. But it all started by imposing tariffs across the board. The markets immediately shuttered and thereafter, the President decided to postpone it.
Gun still on the table 00:05:09:03
…Let's remember, postpone does not mean eliminate it. Right. And the markets indeed did not take this as a cancellation of the bad news, but rather as the gun is still on the table.
What is the real objective; what such an expedited process? 00:05:41:04
My first question. Is it more the way he has done it, the extent to which he has done it, the sort of the speed with which he's done it? What does he do when he first goes wrong? Or do you say you should make the tariffs always make sense? The world is imperfect. So go ahead and work on tariffs because people have done it in the past.
Tariffs are a secondary policy instrument at best, not the main one 00:06:01:04
No, I think as a general rule, tariff policy cannot be the main one, or one of the main instruments of economic policy because at the end of the day you have to ask, what do I want to achieve? If I want to encourage production, then subsidize production. Use your tax system, your subsidy system. If you want I want to discourage consumption, then use the tax policy… at the end of the day, why should the American consumer pay a higher price? Only because the government wants to encourage the producer, then focus on the producer. So let me just go on and say that as a general rule, tariffs cannot be the main policy instrument.
A world too complex to be ruled by simple tariffs 00:06:56:00
Our world is very interdependent. We got used to supply chains that are very complex. If you are imposing a tariff in order to encourage your domestic producers, don't forget many of their raw materials and inputs are also imported. And on them there are tariffs and therefore you are actually taxing them rather than subsidizing them. And likewise, water flows.
Tariffs do not stay where they are put 00:07:23:18
If you are imposing a tariff on China, they will send it to you indirectly through another country. We are in a multilateral world. Bilateral policies do not solve multilateral issues. The US has indeed large current account deficit and this is chronic. It's over the years every student out of undergraduate will tell you that from national income accounting. If a country has a deficit in its current account with the balance of payments it reflects it in fact is equal to the excess of spending over income.
A better world based on comparative advantage 00:08:34:03
Well, it will be like if there were no tariffs on anybody's part, no tariffs at all, what would the world be like? I think it would be a better world. It would be a better world. You know, from the 19th century, when David Ricardo discovered and I articulated what is called the principles of comparative advantage, the principle said, you produce what you are best at and you don't need to produce everything because somebody else will produce the things that you are not the best, but you want to consume.
Let markets work: that is the essence of trade 00:09:05:21
That's the essence of trade. And at the end of the day, trade will be balanced if you allow the market mechanisms to work, including exchange rates. So I think that it is a problem to have to have a tariff policy. And the point is that countries, as we have seen already, are going to retaliate. And when you retaliate and if those are the rules of the game…. I feel in I in this world you have a lot of blind people…
The China problem at its inception 00:10:09:01
Well, the China problem continues if you know, and many people would say they're not a fair trader, they're not a free trader, they ignore things that the WTO World Trade Organization tells them. The Chinese, the biggest critic, would say they do what they want and the US is just happy to bring all these cheap goods in, even if even if the manufacturing sector did start having a good deal with ‘60s & ‘70s when we had to go overseas and start investing in China, with much lower wages.
The China problem today 00:10:54:02
But there is no question that the real issue with China today has to do with technology, has to do with property rights, has to do with stealing technology and secrets like that. Then focus on this. Why should I across the board curtail trade <if this is the issue>?
What China is 00:11:26:02
Well, you know, China is the second largest trading partner or the fifth largest for all countries in the world. You cannot change it overnight and you don't want to change it overnight. You want to control it. You want to navigate it and focus on the key issues for you, which, as I said, it is technology.
End Trade Discussion on to the Fed
Shocks and behavior 00:12:55:09
…we have two shocks very recently, the October shock. Oh boy, things are getting better. And then you get the trade. Trump shock. Don't forget, in between the war in the Ukraine. Oh, my gosh. Yes, that's the one I meant to say we are in because we've already talked about that. But with these kinds of things now, what is this going to mean geopolitically?
The Trump Vs Powell factor 00:14:48:10
If you look at how the government, the legal system is structured around the Fed Reserve, it's impossible < to fire Powell>, but it's still very upsetting to the markets <even to talk about it>. And I can't believe the number of pieces I'm seeing now where bloggers and reporters and all kinds of people are writing these articles about this because they feel investors are taking it seriously. So everybody's got to either take it seriously too, or at least explain why they shouldn't.
The theory and rationale for central bank independence 00:15:38:18
You realize there have been bad experiences with inflation and most countries have had it. The instrument and the mechanism by which we, the group of policymakers, including legislators, have enshrined that stability as important is by granting independence to the central bank. Independence does not mean that the central bank is doing whatever it wishes in a crazy, crazy, erratic way, but that the way in which it fulfills the government objectives is given and left to them to the professional decision.
Independence allows a longer time horizon for policy focus 00:16:19:13
It is called instrument independence. I can use the instrument in my position the way I believe as a professional. It is essential because the inclination of the political system and they are all good people, but the inclination is to focus more on the short term because that's the horizon that they look at, because they want to be reelected. But the economy needs to have a long term perspective with the wisdom of Congress and in of most policy of most legislators, the decision was that ‘we delegate’ the achievement of price stability and financial stability to bodies like the central bank, and we give them independence to choose.
The world needs a strong independent Fed 00:19:52:19
And that's what makes the US what it is. So in spite of all the ups and downs, the US is still the most attractive country in the world when it comes to stability and the rule of law. So I think this is where it is. But let me close by. Coming back to defend the Fed which is the largest central bank of the world. The central banking society community of the world needs to have a strong Fed. A strong Fed means a Fed that is not politicized and that is steady as you go. And I think that what the Fed is doing now, it is exactly doing this. And I think that if it yielded now to change interest rates to be low when that is not wanted, then it would be a mistake.
Post Script: Breaking news during this interview
NEWS BREAKS - Trade war with China said to be unlikely- Bessent
Bessent said that the trade war with China isn't going to be a problem and the markets love it. Well, he basically said that the trade war with China will not be sustainable. Yes. And first of all, he's right. Second, he's wise to have emphasized this point, which he believes in. And it's good that it was stated in the markets.
Markets are a referendum on policy
You know, markets are running referenda on an ongoing basis and markets immediately responded. And the Dow Jones is up by whatever, 800 points over, if not more, and the market likes it. What does it mean? The markets tell you that trade wars, we do not want to have them. And Secretary of Treasury please conduct economic policy that allows the system to benefit from openness and trade because the world of an eye for an eye in trade.
Uncertainty is a serious problem policy should not amplify it
However, uncertainty is not something which is good for the market on an ongoing basis. Investors need to have a clearer picture about tomorrow, about the rules of the game, and not only investors, also consumers, everyone. So I think that the world, which is less volatile in which economic policy is designed to mitigate shocks rather than to amplify them is a better world than maybe we are.
IMF and World Banks are to be Treasured institutions
I think that the idea that the changing world requires a modified set of institutions is something which is noteworthy. But by the same token, I am afraid that the appetite today, the political appetite globally to create institutions of the type of the IMF and the World Bank, these there is no appetite for that. And therefore what one should be careful is not to destroy things before you have the next one in place, because the world can sustain imperfect institutions.
Dr. Jacob A. Frenkel is Chairman Emeritus of the Group of Thirty (G-30), a private nonprofit Consultative Group on International Economic and Monetary Affairs, he is also Chairman of the Board of Directors of the financial firm Plus500 and the Global Advisory Board of the Financial Advisory firm Value Base.
Dr. Frenkel served as Chairman of JPMorgan Chase International (2009-2020), as Chairman and CEO of the G-30 (2001-2011), as Chairman of the Board of Trustees of the G-30 (2012-22), as Vice Chairman of American International Group (2004-2009), and as Chairman of Merrill Lynch International (2000-2004). During (1991-2000) he served two terms as the Governor of the Bank of Israel. He is credited with reducing inflation in Israel and achieving price stability, liberalizing Israel’s financial markets, removing foreign exchange controls, and integrating the Israeli economy into the global financial system.
During (1987-1991) he was the Economic Counselor and Director of Research at the International Monetary Fund, and during 1973-1987 he was on the faculty of the University of Chicago where he was the David Rockefeller Professor of International Economics and Editor of the Journal of Political Economy.
He is a Fellow of the Econometric Society, a Foreign Honorary Member of the American Academy of Arts and Sciences, a Distinguished Fellow of the CEPR, a member of the Board of Directors of the National Bureau of Economic Research, of the Institute for National Security Studies (INSS), of the Peterson Institute for International Economics, of the Aspen Institute Italia, and is a Global Member of the Trilateral Commission. He was a member of the G20 Eminent Persons Group on Global Financial Governance, a member of the G20 High Level Independent Panel on Financing of the Global Commons for Pandemic Preparedness and Response.
Dr. Frenkel served as Chairman of the Board of Governors of Tel Aviv University (2013-21), where he is Chairman of the Frenkel-Zuckerman Institute for Global Economics. He previously served as Chairman of the Board of Governors of the Inter-American Development Bank (1995-1996), as Vice Chairman of the Board of Governors of the European Bank for Reconstruction and Development (1999-2000), as a member of the Economic Advisory Panel of the Federal Reserve Bank of New York (1986-2014), and as Chairman of the Cabinet of Economic Experts of the Minister of Finance, the State of Israel (2022-23). During 2009-19 he served on the Board of Directors of Boston Properties, and of Loews Corporation.
Dr. Frenkel is a Laureate of the 2002 Israel Prize in Economics, and is a recipient of several Honorary Doctoral degrees and other decorations and awards from various universities and governments. Dr. Frenkel is the author of numerous books and articles in the fields of International Economics and Macro-Economics. He holds a B.A. in economics and political science from the Hebrew University of Jerusalem, and an M.A. and Ph.D. in economics from the University of Chicago.
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