Taking Stock / Agenda for the governor, II
Finance Minister Benjamin Netanyahu is going to need a lot of support from Bank of Israel Governor Stanley Fischer in the coming months.
Finance Minister Benjamin Netanyahu is going to need a lot of support from Bank of Israel Governor Stanley Fischer in the coming months. In the battle over banking reform legislation, the heads of the banking sector are planning ambushes, tricks, spin and surprises for Netanyahu and Joseph Bachar, the Finance Ministry director general.
The consultant the banks have chosen for the campaign, advertising executive Reuven Adler, has Prime Minister Ariel Sharon's ear; the latter did approve Bachar committee recommendations that the banks be forced to divest of provident and mutual funds, and publicly declared his support, but it is difficult to believe he would shed a tear if his political rival's big reform is a casualty of the banks' war of attrition.
When Fischer comes to talk with Netanyahu in the coming months, and they defend themselves against the banks' violent intimidation campaign, he can use the time to talk about the Bank of Israel's agenda for the coming years; for some of the things, the central bank will need the finance minister's cooperation and support:
l Updating the Bank of Israel law: Everyone supports amending the law, but nothing has been done about it in recent years. A law is needed that anchors and rivets agreements reached regarding the central bank's independence.
The new law should determine that the Bank of Israel's central goal is price stability, while supporting employment and growth, and that it also serves as an adviser to the cabinet. The Bank of Israel cannot limit itself only to monetary issues - it must also relate to fiscal matters that are the cabinet's responsibility. The method of, "You stay out of Bank of Israel stuff and I'll keep my grubby fingers out of the treasury" may be good for finance ministers - but it's no good for the economy.
The new law should grant the central bank independence in operating all its policy tools. No less important, it should end the Bank of Israel governor's dictatorship and create an independent board comprised of full-time professionals.
l Handling the quality of the Bank of Israel workforce: The former Bank of Israel governor waged a long battle against the central bank's workers over salary and employment terms. But the story behind the battle is much less complex: The quality of the staff has consistently dropped over the years as a result of promotion mechanisms and anachronistic salary updates, which make promoting and hiring talented staffers difficult, as well as hamstringing any effort to remove the less talented.
The battle against the workers exacted a heavy price from David Klein - huge quantities of management attention that detracted from his ability to focus on important subjects. It's much easier to ignore the matter, but in the long term, it will cause substantial damage.
l Advice to the cabinet: Two months ago, Netanyahu published his vision of Israel's economic future for the coming decade. That vision is now no more than a call to arms. In its role as an adviser to the cabinet, the Bank of Israel should prepare a thorough work on the necessary conditions to implement the vision: which tax, budget and reform policies are needed to reach it, and are the general steps the treasury has announced enough to create it.
The bank's research division needs to prepare, as adviser to the cabinet, research on the appropriate tax structure for Israel in the coming decade. A general declaration that taxes should be cut is not enough - it is critical to understand what tax structure we are striving to reach in the next 10 years.
The treasury declares the need to reduce government intervention, but what budgets should be cut and which ones increased to handle poverty and social gaps? The Bank of Israel needs to provide information on this, as well as tools for the treasury to handle those problems.
There is another long series of subjects the central bank can handle - in banking regulation, financial stability, a position regarding asset inflation and national debt. But the most burning matters are those we mentioned here yesterday and today, and more burning matters will arise in the coming years - because this is economics, and in economics surprises always come from unexpected directions.