Bank of Israel Governor Resigns / Analysis

Fischer Was the 'Responsible Adult' of the Israeli Economy

But timing of resignation of the BOI chief bodes ill, Israel grapples with a budget crisis that will outlast him.

When Stanley Fischer announced his resignation on Tuesday, 22 months short of his contract's natural end, it was a surprise, yet little surprise. For one thing, when he accepted a second term, he didn't promise to complete it. For another, in 2011 he applied for the post of managing director of the International Monetary Fund but was disqualified due to age.

Actually, Fischer had wanted to leave even sooner, in April.In his eight years as Governor of the Bank of Israel, Stanley Fischer has worked with five different finance ministers. By accepting Prime Minister Benjamin Netanyahu’s request that he stay on through June, to ensure stability in the early days of the new government, will boost that number to six.

The timing of his announcement was not fortuitous. It comes as the treasury is grappling with the need for massive cutbacks; it has no idea what sort of policy the next government will have; and it doesn't know who the next finance minister will be. It would have been better for Israel were this fiscal furor not accompanied by unrest at the Bank of Israel, which is responsible for setting monetary policy.

Fischer was actively involved in setting interest rates every month, but did far more. During these stormy years in local and global markets, he expanded the central bank's mandate from interest rates to the greater good of the economy as a whole.

Fischer also intervened in Israel’s foreign currency market (to protect Israeli exports) and in the housing market (where he sought to constrain  mortgage lending in order to cool down the raging market, where prices had skyrocketed due to the low interest rates set by himself). He also took an active role in keeping the banks clean, not least through involvement in the struggle to depose Danny Dankner as chairman of Bank Hapoalim.

His legacy

Fischer leaves behind a different central bank than the one he inherited eight years ago. The main change is the result of the new Bank of Israel Law, which would not have passed without Fischer’s pressure.

The law actually diminishes the governor’s power, taking from him sole decision-making over monetary policy and placing it with a six-person committee. This ensures that if a less successful governor follows Fischer, there will be checks and balances in place.

Fischer also had another significant role, as the unofficial foreign minister of the Israeli economy. When Prime Minister Ariel Sharon was rushed to hospital and Ehud Olmert took over the reins of government, it was Fischer who calmed foreign investors and assured them that the economy was in good hands.

Unlike some of his predecessors, Fischer did not quarrel with the finance ministers with whom he worked. Any criticism of his conduct is over his possible failure to exert more pressure on the government in order to avoid the 2012 state budget deficit.

The defense establishment was a major beneficiary of his support, since he tended to back it even when it failed to make the efficiency and costcutting measures recommended by the Brodet Committee.

The Israeli economy has had many ups and downs in recent years. Fischer was always seen as a stabilizing influence, the “responsible adult” who enjoyed tremendous public confidence. But monetary policies can do damage that outlasts a governor. This is evident in the United States, where the perception of the much admired former Federal Reserve Chairman Allen Greenspan has changed dramatically since the subprime mortgage crisis and the subsequent financial collapse.

Fischer leaves behind a housing market in which prices have increased by 50% in real terms over the last five years, triggering a cost-of-living crisis and jeopardizing the banking system.

Rising home prices

A vigorous and incautious policy on the part of the incoming government, many presumed members of which have promised to reduce housing prices, could greatly strain mortgage borrowers and lenders alike.

In such a scenario Fischer’s generous policies, which provided cheap money for homebuyers, could turn out to be very problematic if the housing bubble ever bursts.

Fischer will not leave his job lightly. One can assume that he will try to use his remaining months in office to resolve unfinished business in order to prevent the new government from acting foolishly.

On a personal note, he is expected to divide his time between Israel and his family in the United States. He cannot accept a job in business until the end of the obligatory one-year cooling-off period, although he would not be barred from political appointment.

Associates have said there are two positions he would not refused, if offered: foreign minister or president of Israel. In light of his reputation as the most popular and most recognized immigrant, he will have the public’s support in any role he assumes.

His departure at this time, with the ongoing mess in the Finance Ministry in general and the budget division in particular, guarantees several tense weeks in Israel’s capital and foreign currency markets, and probably in its housing market as well.

Tomer Appelbaum