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Unlike some observers, Stanley Fischer doesn't think a bubble is developing in Israel's real estate market. The Bank of Israel that he heads keeps a close eye on property prices, which have not in fact risen much over the last 10 years, he says. Moreover, the central bank does what it can to keep bubbles in check, he says.

In an interview with TheMarker ahead of a trip next week to the annual conference of the International Monetary Fund and World Bank, which is being held in Istanbul, Fischer said property prices have been rising "a little" recently.

"That's natural when interest rates are low," he says. "I assume that demand for real estate will drop when interest rates rise. We are keeping track of asset prices."

In the past, central banks such as the U.S. Federal Reserve felt that their role was to wait for bubbles to burst. The Bank of Israel does not agree, Fischer says.

The Bank of Israel has also changed its position on another matter entirely: ownership of Israeli banks. Right now only one bank remains controlled by the state, Leumi. In the past, when selling its controlling interest in banks, the state aimed to sell to wealthy, liquid businessmen on the grounds that they would form a core controlling group with which the Bank of Israel could talk if liquidity or other problems threatened the bank's stability.

But after the experiences with banks Hapoalim and Discount, the Bank of Israel has reversed position. Fischer says the controlling shareholders of banks are not a good place to try to solve problems.

At Hapoalim, Fischer decided he had to oust the chairman, Danny Dankner, in the first such move in the annals of Israeli banking. He ran into fierce opposition from the bank's controlling shareholder, Shari Arison. She lost, and Dankner had to go - but she ultimately placed Dankner at the head of her holding company that owns her controlling interest in the bank.

At Discount, Fischer had asked controlling shareholders Bronfman and Schron to inject capital into the bank. It didn't happen, but ultimately the bank solved its capital problem itself.

In any case, now the central bank thinks the state should sell its stake in Bank Leumi through the stock market, not to a single entity. But, as Fischer says, it's the state's decision.

The crisis is over, but...

A year ago, Fischer canceled his annual trip to the IMF-World Bank convention. The dust was still settling from Lehman Brothers' collapse three weeks before and the world financial system was in upheaval. Banks collapsed before unbelieving eyes as central banks struggled to keep them standing. Fischer thought he'd be wisest to stay home and make sure Israel's financial system wouldn't crumple in his absence.

In the wearying months that followed, Fischer was the most active entity in the Israeli economic scene. The Bank of Israel reversed policy and intervened in the foreign-currency and government-bond markets. It adopted an expansionary monetary policy, as did other central bankers around the world.

The dramatic interventions by governments and central banks restabilized the system. They also shook faith in the merits of capitalism and the previous loathing of government interventionism.

"I have no doubt that the worst parts of the global crisis are behind us," Fischer says now. "The hardest part of the crisis was in the last quarter of 2008 and first quarter of 2009." Exports tanked and respected financial institutions collapsed, to the general shock. People feared that economic systems would implode.

"Then came April and May, and it was clear that something good was starting to happen .... "Is the crisis over? Yes. But we mustn't celebrate too much. The system still faces many dangers," Fischer sums up.

After economic theory won after all, Fischer has little patience for the doomsayers who wail that another downturn looms. Cutting interest rates to rock-bottom and huge cash injections are curatives, and when the time comes to reverse direction and adopt contractionary policy, it will work too. Indeed, he became the first central banker in the "West" to start raising interest rates again.

He doesn't see the big problem everybody talks about regarding the exit from the central banks' expansionary policy: "The solution as I see it is for central banks and their governments to make the decision to gradually exit expansionary policy."

A time and place for ethics

Fischer had predicted that one, maybe two big companies would founder. Africa Israel has since said it can't repay bondholders after 2010. Fischer refuses to expand on the real estate company, which is controlled by Lev Leviev. "Issuers should repay interest and principal on time," he says. "If one is reduced to Africa Israel's situation, because legal processes are protracted and complex, there's an advantage in reaching an accord."

Does Fischer agree that big corporations like Africa Israel and Israel Corporation have a greater responsibility than other companies because if they default, it will affect the whole market?

"Morally, yes," Fischer says. "Big companies have a role. But when [a big company] gets into trouble, first and foremost it will act to survive and only then will look at ethics."

And finally, Fischer trod where few dare and issued a prediction about exchange rates, albeit vaguely. Namely, that the dollar will strengthen if the American current account improves. The United States doesn't have to balance its current account to strengthen the dollar, just reduce its budget deficit. "The dollar won't stay low forever," Fischer says. "In any case, it's dangerous to make predictions about currencies."

The lessons of the crisis

What lessons did Stanley Fischer learn from the crisis? Mainly that when a country is in relatively better condition when the trouble begins, which Israel was, it will contend with the trouble better. "We entered the crisis with a stable financial system, a surplus in our current account... and low household debt. What we had done in the good years helped us, mainly as far as the stability of the financial system was concerned. Routine economic management is the most important thing, and that is the main lesson I learned."

He also says he learned a lesson about moral hazards after the American experience with rescuing, and not rescuing, banks in trouble. Whether to save a bank is a decision that must be made in advance, not on the fly, says Fischer. In any case, a bank must not be allowed to fail just to teach a lesson: "In any case the chairmen and CEOs of the banks that failed won't be there anymore in half a year. But the damage will be borne by the whole economy," Fischer says. "The lesson of Lehman Brothers cost the entire global economy a huge amount."

As for lessons regarding Israel, during the crisis, monetary policy was "very active," Fischer said. No hope could come from twiddling with fiscal policy: "We were in the middle of elections and there was no approved budget in place for 2009," the governor points out. The entire nation was being run until mid-year by the budget for 2008. By definition, when there's no budget in place, the government's activity for a given month is based on one-twelfth of the previous year's budget. No new spending may be authorized, and in this case, the result was favorable: even if it wanted to, the government couldn't squander money. (Sami Peretz and Moti Bassok)