Taking Stock / The Cost of Central Bank Sleaze

For 20 years, we have been reading the Bank of Israel's annual reports. Never before has its report been so amply peppered with the word "poverty," in various forms and formats. Clearly the bank has sprouted a social conscience, which is strikingly apparent in its 2005 accounts, published last week.

Though the central bank supports a policy encouraging work rather than government handouts, it repeats that in its opinion, the welfare cuts were too sweeping. Some of the money reduced should be restored, it says. One wonders: Why didn't the Bank of Israel warn about the cutbacks in 2002 and 2003? Why has it only become caring now?

Several possible explanations come to mind. For one, the welfare cuts significantly worsened poverty. For another, the Bank of Israel is a professional body that is not supposed to meddle in the essentially political matter of priorities. Third, the central bank's purpose is to uphold the principles of fiscal responsibility, and reduce the government's deficits: four years ago it could not sensibly object to cutbacks designed to halt the deterioration of Israel's financial situation.

Look whose talking

But none of those explanations is satisfactory. The sharp cuts to welfare stipends were unnecessary. The government had an alternative: slash at the public sector flab.

But would the Bank of Israel point out these layers of flab? Ahh. The solution to the mystery may be taking shape. What do you think would have happened in 2002 or 2003 had the bank called on the government to slash budgets at the massively overmanned ministries and public bodies, with their excessive salaries, outrageous pension terms and low productivity?

What would have happened is that officials at these ministries and public bodies would have bust a gut laughing. The Bank of Israel? It, of all institutions, is calling on us to streamline? That clumsy, bloated, corrupt institution, which barges on free of an overseeing eye, is telling us to cut back?

The grave State Comptroller Report published last week on the central bank, and the contorted ways its leaders found to pay themselves and their cronies gigantic salaries, compensation and sundry perks, may explain why central bank reports have studiously avoided mentioning one of the most important macroeconomic issues of all: corruption, bloat and rot in the public sector.

Going, going, gone

Don't think that the comptroller's findings are a blip, or something new. Don't think that the notorious NIS 50,000 a month pay slip for the Bank of Israel librarian is mere anecdote. For decades, the central bank has felt itself to be a special case where anything goes. If the comptroller had taken a hard look 10 years back, or 20 years ago, he'd have found equally hair-raising things.

For example, it's an open secret that in the 1970s and 1980s, the Bank of Israel chieftains gave themselves unlinked loans that eroded into oblivion as inflation raged. It seems that not a few houses and apartments were bought by Bank of Israel executives through scandalous financing deals they orchestrated without any supervision, disclosure or public debate.

But the true harm done by the corruption at the Bank of Israel isn't a few tens of millions of shekels milked over the years by its employees. It lies in their refusal to touch the ticking time bombs in their capacity as economic advisers to the government and as one of the most important elements in shaping the economic agenda.

Imagine what the public debate and economic policy in Israel would be like had the central bank devoted a quarter of the resources it spends on deadly dull studies, for instance about the money supply and adaptive inflation expectations, to issues such as productivity, efficiency, pensions and wages at fat-cat institutions in the public sector.

But as they say, people in glass houses can't throw stones.

The arrival of Stanley Fischer, a new immigrant from America who does not belong to the Jerusalem clique feeding off the central bank for decades, is a golden opportunity to cleanse the rotten institution of the Bank of Israel.

The results could be astonishing. They could appear in the Bank of Israel report of 2006. Instead of the usual 100 or so pages on monetary analyses, we might receive some practical suggestions for curing Israel's economic ills: how to devote more money to the poor without expanding deficits. Or, in English: Where to melt down flab for money to help the chronically impoverished people who are unable to work.