In 1992 and 1993, the governor of the Bank of Israel, Jacob Frenkel, was the darling of politicians and the business world alike. The Finance Ministry loved him and MKs hung on his every word. Everyone agreed what an excellent governor he was, a real Renaissance man. And that was all because low interest rates are adored by politicians who believe they promote growth just like that - with no effort in the state budget and no negative backlash on inflation. They are also loved by stock exchange sharks and the business world who want to erode workers' wages. Nobody dreamed then of a monetary council.
But in 1994, the world turned upside down. Frenkel understood that if he didn't take a stand, then he would never control inflation, and there began the tight monetary policy, which immediately turned him into Public Enemy Number One. Politicians threatened to set up a monetary council to restrict his actions.
Ever since that day in 1994, we have seen many varied and colorful proposals to establish a monetary council that would damage the Bank of Israel's independence. While every Western nation takes further steps to grant more independence to their central banks, our finance minister, who as an ordinary MK objected to establishing a monetary council, is going in the opposite direction. So why the change? Because now Silvan Shalom knows he has to slash at least a further NIS 5 billion from the 2002 government budget, and that is a toughie. It won't be popular. It will lose him a point or two with those who will get less. And he is so eager to be liked so that he can run for the next job up the ladder, the higher one. And if he manages to pass a monetary council, it would force Governor David Klein to cut interest rates. This would somewhat jolly the economy along and lead to somewhat higher tax revenues - a situation that would not require slashing so many billions off the budget, thus improving his political standing. And if inflation rises a little? That's not a disaster. And if stability is a little shakier? There's no risk of that, he feels. And if there is a sudden rush of capital overseas? It won't happen, he hopes.
The straw that broke the camel's back was Klein's recent decision to raise the interest rate by 0.6 percent. Shalom believes that an interest rate of 4.4 percent is too high for the present state of the economy. So he doesn't want a council along the Levin Committee lines, but more like a council that will cut interest rates. And how will he manage that? Simple. The minister and prime minister will appoint six of the nine members of the council, and there will be a new law that would set the central bank's objectives as not only price stability, but also growth and employment.
And so prepare for some almighty battle that is to take place between Shalom and Klein. Shalom is convinced that a council will be up and running along his plans. Klein, meanwhile, is out to educate the government, the Knesset committees, and if necessary, the plenum itself. Whatever will be, for the sake of the Israeli economy, Shalom's bill should be quashed and a new comprehensive law should be passed according to the full recommendations of the Levin Committee.
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