Taking Stock / The Tycoons' Road Show

The "Economic Leaders" troupe is on the road. Passing through the prime minister's office, it went on to perform before Labor leader Amram Mitzna, gave a show to Shinui chief Tommy Lapid, while from time to time trilling a little ditty for the press.

It would be hard to say that the troupe members know exactly what they want. Some carol slogans about a "new economic agenda," while others are satisfied with merely being called an "economic leader." Others constantly hum about establishing a national unity government, apparently based on the tremendous success of the outgoing unity government in the economic sphere.

Yet once the echoes die down, one is left with the sneaking feeling that they're nothing more than the warm-up band the prime minister shoves onto the stage when focusing his efforts on building a unity government. The "Economic Leaders" give the impression that they know exactly where their boundaries lie.

In conversations off the record, they lambaste the prime minister, his diplomatic and security policies, and his economic transgressions. Some claim that an economic upturn cannot be achieved without the evacuation of Jewish settlements in the territories. Others even place the responsibility for the crisis squarely on loss of confidence in the leadership.

Yet in their public performances, you'll hear not a peep of the above. With the exception of Teva Pharmaceuticals (TASE, Nasdaq:TEVA) chairman Eli Hurvitz, who last week clearly stated that Israel has never been subjected to such poor economic leadership before, most of the Economic Leaders troupe members continue to chirrup empty slogans about "priorities,""education" and "infrastructure."

Another thing the Economic Leaders and the prime minister have in common is terror of straightforward discussion of Israel's fundamental, urgent economic problems: poor budget management, preposterous tax revenue forecasts, allocations to the religious and cronies of the government, corruption and the bloated public sector. And, of course, the price of Israel's diplomatic performance.

Like their prime minister, the Economic Leaders prefer to cling to that tired old mantra about interest rates. For instance, in a press release on Sunday, they repeated that the Bank of Israel's "draconian interest rates are depressing consumption and demand, and therefore also production and trade, generating a vicious circle of recession and unemployment."

The prime minister apparently concurs, since his bureau bosses spent the last two weeks leaking about intentions to depose the central bank governor, based on his maintaining an interest rate policy that contravened government policy.

It is time to tell the sad truth about interest rates, a truth that most financial officers and economists working for the Economic Leaders know perfectly well, a simple truth that Israel's bankers and capital market people are aware of, a truth that even the Finance Ministry and maybe even the Prime Minister's Office recognize - though they wouldn't admit it for the world.

Yes, ladies and gentlemen, the truth is that even if governor David Klein were to be kicked out first thing tomorrow morning, and if he were replaced by Arik himself; even if the Bank of Israel were to be transformed into a department of the Finance Ministry; even if Klein is replaced by the leader of the Economic Leaders - Israel Corporation chairman Yossi Rosen - lending rates wouldn't so much as twitch. The chance that any of them would cut the interest rates is roughly zero.

The reason is painfully simple. The draconian rates the central bank charges on its sources are the sole source of stability left. It is the only thing preventing investors from chasing after foreign currency vehicles. It is the only thing between the shekel and massive devaluation. It is the only thing stopping an inflationary outbreak and financial spiral of the kind we saw last June.

The moment one of those Economic Leaders takes the central bank helm, he will be advised by all the central bank officers, the bankers and the capital market mavens of the real sad truth: The Bank of Israel hasn't been in control for a long, long time.

The crisis to which the economy has been reduced, the loss of confidence in economic policy and the elephantine budget deficit have deprived the Bank of Israel of most of its maneuverability regarding monetary policy. David Klein and the other Bank of Israel chiefs would love to lower interest rates, just as much as the prime minister and the Economic Leaders would. Maybe even more. But they are out of wiggle room. Any rating cut of more than cosmetic value could ignite a wave of demand for foreign currency, and nobody could predict how it might culminate.

Even worse - although the insanely high central bank rates did manage to stabilize the currency and financial markets in the last half-year, they may be losing their effect. If it weren't for widespread expectations of American intervention in Israel's economy, through guarantees or through imposing a diplomatic solution when Iraq is out of America's hair, even the currently vast gap between interest rates on the dollar and shekel wouldn't suffice to prevent a financial crisis.

The key to rate cuts isn't in the hands of the central bank governor. It is in the hands of the prime minister and finance minister. Only after they present a credible economic program, only after they convince the public that they have a clear plan to halt Israel's economic freefall, only then could David Klein start lowering interest rates.

In his monthly press release on interest yesterday, Dr. Klein offered several explanations for leaving the rates intact. But he knows the sad truth about the main tool the central bank possesses: that it is out of his control.