Are They Afraid of Inflation, or Just Jealous?

Ehud Olmert's government has been a lame duck for months, and this includes Finance Minister Roni Bar-On.

Ehud Olmert's government has been a lame duck for months, and this includes Finance Minister Roni Bar-On. When a finance minister is a lame duck, the entire treasury is also lame. There's a lot of potential, but very little action. And all this is happening during a major economic crisis, when the economy is crying out for leadership that is wise, effective and innovative.

But nature abhors a vacuum, and the Bank of Israel has entered the void left by the treasury. And for the past four years, the Bank of Israel has been a one-man show, featuring the governor, Stanley Fischer.

The relations between the central bank and the Finance Ministry have never been good. They have too many major disagreements. Nonetheless, both at the bank and in the ministry, they found it difficult to explain why anyone would want to make a big deal about this now, of all times.

At the Bank of Israel, the explanation is the treasury's jealousy over Fischer's success and status in the eyes of the public and media. At the treasury, they see the flare-up as an attempt to stop Fischer from dictating his terms for continuing as governor to the new prime minister and finance minister.

There are two types of disagreements between the two sides: long-term, continuing issues such as wages and the new Bank of Israel Law; and specific, ad hoc problems over more immediate issues, such as the economic crisis.

The present global economic crisis requires the two institutions to work together. At first, both agreed on passivity as the response, but last September when Lehman Brothers collapsed, the two realized they needed to go on the offensive and act, which is when the disagreements started.

The biggest bone of contention, for now, concerns the bank's purchases of government bonds in the markets. The bank is about to exhaust its two traditional, and main, weapons - interest rates and foreign currency purchases - and it needs new tools. In addition to questions of ego and jealousy, there are also serious economic issues involved, first and foremost inflation.

Will the bank's moves bring back inflation? At the treasury they think so, and believe Fischer is moving too fast to copy what the United States is doing.