Bank of Israel governor David Klein spread panic and confusion on the capital and foreign currency markets two months ago, when, after a marathon meeting with the prime minister and minister of finance, he announced a dramatic 2% slash in interest rates, swerving sharply from Bank of Israel's conservative and careful policy of recent recent years.
A few weeks after Klein lowered interest rates, it began to sink in that while he had come up with the goods in a "package deal", the prime minister and finance minister can't or won¿t come up with their part of the bargain ¿ there's a good chance for a much larger than planned budget deficit in 2002.
But not only the cabinet planned a surprise for the governor: the capital and foreign currency markets also cooked up phenomena the likes of which hadn't been seen in years. It became clear that many Israeli investors panicked at the rate cut and subsequent dollar gain, and began feverishly seeking investments with higher yields or "protection" from the dollar.
Banks immediately recognized the public panic and invented new, creative solutions. Within days they launched marketing campaigns for new mutual funds, calling them "dynamic" and "active", pretending to protect the public in an age of low interest rates and a sky-rocketing dollar.
Behind these fancy names, hide fairly run-of-the-mill funds investing in the two simplest instruments, namely dollar and index-linked bonds. The problem was that the huge demand for those bonds led to a sharp rise in price, rendering the investment dubious at best.