Taking Stock / Fischer's First Mission

Welcome to Israel, Mr. Fischer.

The press is full of ideas for you, lists of your primary missions and the challenges you face, speculation about your monetary policies and about whether you're more likely to raise or lower interest rates next month.

But you know better than anyone, that in the very area where the Bank of Israel wields the most influence - interest policy - much of the work has already been done.

After fourteen years of the conservative regime Jacob Frenkel and David Klein imposed at the Bank of Israel, few doubt the importance of taming inflation. Doubters who asserted that Israeli inflation couldn't possibly be eradicated have been silenced, though they had been legion. Voices that creating jobs and growth requires "a little inflation" are abating.

The violent clashes the central bank governors had with politicians and certain industrialists over the policy to obtain price stability, are largely a thing of the past.

You reach Israel twenty years after the great financial reforms. The capital markets are practically free. The Bank of Israel today has excellent tools to act in the financial markets. The relative weight of the government's negotiable debt is rising fast and consistently, while the government's borrowing on the bond market is steadily dropping. The currency market is also almost entirely open, and you can easily eradicate the remnants of the shekel's fluctuation band, which has been drastically widened in recent years.

Oh, there is one thing

There's just one thing that remains to be done in the capital and financial markets, and this is where your first mission lies. It is the reform that should push the market a giant step forward. It is to divorce the big banks from the capital market.

As an American banker and economist, you surely abhor governmental intervention. You probably prefer to let the market act. You'd like the market to gradually vomit the banks from the system, and encourage the development of a non-banking system that flourishes by its own right and merit.

But you wonder: Why force Israel's banks out of the capital market? In the U.S., progress is happening in precisely the other direction: commercial banks are being allowed into every facet of financial activity.

Mr. Fischer, we too would prefer to let the market forces do the work. But we have been waiting 20 years for them to act, and have learned that when Israel's two biggest banks control two-thirds of all financial activity in Israel, the process is glacial. We would probably have to wait another 20 years to see real competition develop.

That is why we need government intervention, of the type that America doesn't hesitate to impose when facing monopolies or uncompetitive markets.

In Israel, Mr. Fischer, the banks have special status and hulking power over households. Israel's banks are also the only financial adviser to most citizens, and they are the main marketer of financial products.

The special today

We couldn't help remembering something you said three years ago, when asked for your opinion about analysts: you said you always laugh when your wife Rhoda asks for a recommendation at a restaurant. The waiter will always recommend the dish that is not moving, or that the restaurant makes the most profit from. The recommendation has zero real information.

Over here, sir, it is not only the waiters and analysts that have no real information to impart. Neither do the banks when marketing in the guise of providing objective financial advice.

You've said time and again that economies with weak banking systems face the greatest risk of financial meltdown. Three years ago, Israel's own financial system trembled on the brink of breakdown, since it was the source of almost all credit in the country. Yet to this day, our "free market" hasn't managed to create a financial system outside the banks, which not only kicks up the price of bank services and credit, but also threatens the very stability of the system in the event of trouble, even shocks coming from the outside.

Israel's banking leaders have pinned high hopes on you, Mr. Fischer. They hope that armed with your American views, you will undermine the conclusions of the Bachar reform that wants to drastically revamp Israel's capital market.

Your first mission is to stand by the Bachar commission members. Your first mission is to explain to the bankers and to the public what the differences between America and Israel are, and to wield your very considerable professional weight.

We are convinced you will be guided by your conscience and the best of your professional understanding. After all, unlike all the other candidates for the governorship, your status is uniquely independent. You need have no fear of Israel's tycoons and bankers.

But the window of opportunity is exceedingly small, Mr. Fischer. In Israel, governments rise and fall, and politicians are just waiting for an opportunity to escape this clash with the powerful bankers and the wealthy. Any hesitancy you show could make it tremendously harder to push the reform through the Knesset in the months to come.