Finance Minister Silvan Shalom seems firmly convinced that the main obstacle before economic growth is the high Bank of Israel nominal interest rate. He really seems to believe that if only central bank governor David Klein would "give him" a 1% or 2% rate cut, color would return to the pallid marketplace cheeks.
But Shalom overestimates the importance of interest rates.
First of all, real interest is close to its lowest point in years. Israel has seen double or triple today's rate of growth at much higher interest rates.
Secondly, the damper of interest loses significance when compared with much chillier developments, such as the suspension of the peace process, terrorism, the global recession, and the technology crisis. Lower rates won't push most companies today into creating jobs until the business environment picks up.
Thirdly, the low inflation achieved by the Bank of Israel's policies is the very cause of the remarkable stability achieved in the foreign currency and money markets in the last year, despite the serial shocks arriving from all directions.
But since belief in the mystical power of interest rates, as well as loathing of the central bank and its governor, are so deeply ingrained in our Finance Ministry, perhaps we should take a more pragmatic view. Here are some suggestions how Finance Minister Silvan Shalom could bypass the central bank.
Detours around the Bank of Israel
If Shalom is so convinced that the economy's core problem is financing sources, the credit crunch or the price of money, then we can offer a few ideas how the Finance Ministry can bypass the detested governor and expand financing sources for the business sector, which is of course the only possible source of long-term growth:
• Separate the provident and mutual funds from the bank. More than NIS 150 billion are invested in these funds, most of which gets put into bank deposits, or short-term Bank of Israel notes and bonds.
The reasons why are clear. The banks don't want the funds to start lending money, which is why they haven't been developing ex-bank financial instruments such as debt notes, mortgage portfolios of acquisition funds.
If the funds were split off from the banks, Israel would develop a true ex-bank financing system. Companies would have more sources of funding and the risk inherent in the centralized banking establishment would diminish.
Go for it, Shalom. Let's see you stand strong against the combined might of Bank Leumi's Galia Maor and Bank Hapoalim's Shlomo Nehama, who will abhor this idea. Oh, and we have good news for you: Bank of Israel governor Klein will stand by your side, fighting the good fight to drive a wedge between the banks and the funds. He'll even give you the credit for his success.
• Stop issuing bonds to the pension funds. These funds have more than NIS 120 billion in hand, most of which has been put into government bonds carrying high interest rates. These funds are the longest-term, most stable investment option in Israel, but their money doesn't get into the capital market.
Go for it, Shalom. Let's see you stand strong against union leader Amir Peretz, who will terrorize the public to block the move. Again you'll find David Klein standing by your side, happily contributing the central bank's public-relations department (the one you love to lambast) to persuade the public that the change would be just and good.
• Don't let insurance company Migdal buy Bank Leumi. Even though Migdal studiously keeps a low profile, it's one of the biggest and most powerful companies in the capital market. A Migdal-Leumi merger would just increase the centralization of the Israeli capital market.
Migdal should compete with Leumi in money management and credit, while Leumi should compete with Migdal in insurance. They should be rivals, not affiliates.
• Take an ax to the budget, Shalom, based on a realistic estimate of tax revenues for next year. Declare your commitment to achieving zero government deficit within five years. Don't be swayed by sloganeering about "investment in education" ¿ it's all nonsense. Israeli investment in education has soared over the last decade, it's the education itself that has deteriorated. The problem isn't budgets, it's efficiency.
Cut the budget, Shalom, because the best way to ensure that the business sector gets the resources it needs is to reduce government fund-raising. Once the government steps out of the capital market, there will suddenly be vast space for the business sector.
• In short, Shalom, don't believe your consultants who advise you to focus on the PR war against the central bank. The Finance Ministry has more clout and the government more tools than anything the Bank of Israel could muster. Klein's only weapon is interest rates, a far weaker tool than is perceived. You are the one who possesses the real power to extract the economy from recession.