Prime Minister Benjamin Netanyahu should be naming a new governor to the Bank of Israel this week. We can only hope that, after the scandals following the short-lived nominations of Jacob Frenkel and Leo Leiderman, there won't be any more hitches.
This time, the badly burned Netanyahu gave the vetting committee three names: Mario Blejer, Zvi Eckstein, and Victor Medina.
Netanyahu would find any of the three acceptable. Any would be a familiar type of economist, a believer in the free market and in minimal regulation, a governor who would set interest rates and fret about the foreign currency rate – not much more.
Stanley Fischer was a strong governor, perhaps too strong for some politicians. But even without exceeding its traditional range of responsibility, central bank policy affects every Israeli – particularly regarding social equality, at least according to Nobel Prize winner for economics Joseph Stiglitz.
In his Saturday column in the New York Times, Stiglitz fervently urges President Barack Obama to choose Federal Reserve vice chairwoman Janet Yellen over leading candidate Lawrence Summers.
Stiglitz has a message for us too, not regarding the personalities of the candidates, but regarding the impact of the central bank leader on the 99% - which means, just about everybody.
The functions of the central bank chief, says Stiglitz, start with averting crises, which always devastate the broad public of taxpayers through bank bailouts, rising unemployment, economic slumps and shrinking asset values – especially property.
In the United States, for example, median household wealth fell by a huge 40% in the last crisis and the median wage still hasn't returned to its previous level.
True, Israel suffered from the 2008 financial crisis much less than the United States and Europe, but a glance at the chart of mortgage creation in Israel over the last few years shows that an event akin to the sub-prime crisis isn't a far-fetched scenario.
The Bank of Israel knows this, and that's the reason for the latest regulation imposed by the banks supervisor, which bans mortgages on which payments exceed half the household income.
The second function is regulation. All too many people, from the Israel Securities Authority itself to businessmen, complain that Israel has too much regulation and that it's paralyzing the economy. Not per Stiglitz: What brought about the great crisis in the United States was a lack of regulation and supervision of the financial system, which enabled banks and investment firms to twist the rules of the game in their favor.
There are several convincing studies showing a correlation between the size of the financial system on one hand, and economic growth and social equality on the other: Past a certain point, the more bloated the financial system gets, the greater the damage to economic development and the wider the income gap between the rich and everyone else grows.
And what about in Israel? Here there was no problem of dodgy derivatives, but the high fees on pensions and savings, together with the banks and investment institutions going wild providing tycoons with cheap credit, constitute equally serious setbacks for the public's standard of living.
And since we, unlike the United States, didn't experience a "crisis," the distortions weren't dealt with. Competition in the financial market remains feeble, fees are still high, certain companies still obtain credit at interest rates that are too low, and the debt restructuring mess has never been so big. Current regulation is likely inefficient – with some parts even perhaps stifling – but the solution is to replace it with more appropriate regulation and certainly not to rescind it and allow the financial market to do as it pleases. We've already learned that this doesn't work.
Cheap credit to huge companies
Another way people are harmed is not from what the banks do but from what they fail to do. A case in point is the lack of mechanisms for providing small and mid-sized companies with credit.
Stiglitz claims the central bank needs to keep the banks away from financial speculation and market manipulation, and restore them to their place as credit providers. This is also true in Israel. Ironically, these days – outwardly at least – the banks are waging a marketing and public relations blitz aimed at small businesses, but many of these small businesses are in fact having a hard time finding financing while the large companies are getting cheap credit.
This is certainly a situation that widens the gap between owners and managers of large companies and everyone else. According to Stiglitz, the central bank head primarily damages the economy and harms the public in the way he deals, or doesn't deal, with the financial and banking system. If he doesn’t bring about the creation of credit and financing channels for anyone without a proven cash flow, he isn’t allowing the economy to grow and fulfill its potential.
For those who agree with Stiglitz's analysis, it provides no less than a "road map" for the Bank of Israel's new governor. Without any doubt, the new governor will do everything his predecessors did – from chairing the monetary committee that sets the interest rate every month to intervening in the foreign currency market on occasion when speculators drive up the value of the shekel too sharply.
But in order to improve the lives of Israelis and stem the growth in inequality, the new governor must do something else, something new, that even Fischer didn't touch: A large-scale reform of the financial system.
It won't be simple. Of the entire private economy, the financial system is perhaps the strongest and best connected sector. It is connected to the government and, even more so, to the media which influences the government.
Moreover, the bank unions are among the strongest in the economy and now play along with management. This was clear when Bank Hapoalim's union supported management and the ownership in opposing the removal of chairman Danny Dankner - going as far as organizing a symbolic "show of support" for management.
It's a good guess that as soon as the Bank of Israel submits a reform that cuts into bank profits and the salaries of the workforce, or a reform that promotes streamlining and the retirement of costly and redundant staff, the bank unions – together with the Histadrut labor federation and its chairman Ofer Eini – will apply their might. And their might is no less than that of the electric company workers, those with their "hand on the main switch." It's easy to imagine the damage to the country if the banks were to shut down for more than two days.
All these obstacles shouldn't slacken the resolve of the new governor. Filling the position this time was a long and painful affair, and the winner is entitled to 100 days grace to acclimatize himself and complete the transition. But if the chosen governor doesn't want to go down in the history books as a gray technocrat who took over after Stanley Fischer and allowed the continued growth of economic inequality, he will need to lead a revolution in the financial sector
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