Netanyahu's Economic Reform Outshines Bank of Israel

While the PM moves Israel forward, Fischer's plans will not only fail, it will only further weaken the dollar.

Both Bank of Israel Governor Stanley Fischer and Prime Minister Benjamin Netanyahu sprang surprises yesterday. Fischer's was his announcement that he would step up intervention in the foreign currency market to stop the dollar's slide against the shekel. Netanyahu's was the passage of his Israel Lands Administration reform by an impressive majority.

Netanyahu thus regained some of his lost status as a leader and reformer, and he deserves full credit: This reform will propel the economy and reduce unemployment.

Fischer, in contrast, is trying to do the impossible. He announced that the central bank would not only continue buying $100 million a day, but would buy even more, hundreds of millions of dollars, on days when the market, in his view, "isn't functioning properly." In effect, he is trying to control the exchange rate.

But that is something no Western central bank has ever managed to do. Only in communist China is it possible. Therefore, he will fail, just as he has failed to prop up the dollar to date, and just as he failed in his efforts to intervene in the bond market to lower long-term interest rates.

The problem is that Fischer will not merely fail; he will actually cause the dollar to weaken further - the exact opposite of his goal.

The dollar did rise after yesterday's announcement, but this is temporary because Fischer's policy is not sustainable over the long run. Israel's foreign currency reserves are already too high, over $50 billion, and maintaining these reserves is expensive. Moreover, buying dollars means printing huge quantities of shekels, which will spur inflation.

And since Fischer's main goal is to keep inflation low, he will soon have to stop intervening in the foreign currency market - at which point the dollar will sink like a stone. Thus all the traders and money managers are preparing for this day by selling dollars like crazy while the artificially high exchange rate lasts. These sales will send the dollar downward, turning the traders' expectations into a self-fulfilling prophecy.

The ILA reform, which allows 4 percent of state-owned lands to be sold instead of leased, is a very different kettle of fish. Critics say it will hurt the weak, enable wealthy contractors to take over state lands and send apartment prices soaring. But these claims are all lies.

What is so terrible about allowing 700,000 homeowners to own the land on which their houses sit? What is wrong with allowing Mrs. Cohen to enclose a balcony without having to pay an influence peddler to get her a permit from the ILA? What is wrong with allowing Mr. Levy to sell his apartment without wading through the ILA's bureaucratic minefield and paying the hefty sums needed to maintain its legions of superfluous employees?

Indeed, an objective study by an Israeli institute for economic planning revealed this week that Israeli housing prices are 60 percent higher than they should be due to the ILA's failure to market sufficient quantities of land.

The ILA is the king of Israeli bureaucracy, the last dinosaur. Israel is the only country in the world where the government still owns 93 percent of the land. So now the ILA will own only 89 percent. And the earth is shaking over that?

The reform also transfers responsibility for planning to the local authorities, which will speed the planning process and thereby spur the economy.

Contractors will not control the land; they will want to sell as many apartments as quickly as possible. Moreover, their purchasing power is limited. Nor will any Saudi prince buy up the land; he knows the law would enable it to be confiscated from him at any moment. The reform will have one consequence and one only: It will lower the price of land, and hence the price of housing.

If we lived in a normal country, "social welfare" organizations would be the first to support such a reform. But populism is always stronger than mere facts.